The Supreme Court’s role in the U.S. tax system is often quiet but powerful. In recent years, the Supreme Court has analyzed numerous cases impacting taxes, ranging from the jurisdiction of the Tax Court to the deference given to Internal Revenue Service (“IRS”) interpretations of tax laws. These decisions have impacts beyond the case presented, often reaching individual planning and corporate tax strategies. These decisions provide valuable insight into ever-changing tax laws and should warrant careful review by taxpayers. This article, and the subsequent articles in this series, overviews some of these Supreme Court decisions and their impact on the legal tax landscape moving forward.
Toth v. United States, 143 S. Ct. 552 (2023)
On January 23, 2023, the Supreme Court denied a writ of certiorari in Toth v. United States. However, Justice Gorsuch wrote a denial dissent that sheds light on the impact of First Circuit’s ruling in the case. This case concerned Monica Toth, an American citizen in her eighties, who received several million dollars from her father. Toth held these funds in a Swiss bank account and unknowingly failed to report the account to the IRS. Upon learning of her obligation to report the foreign bank account, Toth completed the necessary disclosures. Subsequently, the IRS charged Toth with willfully violating the reporting requirement and assessed a civil penalty of $2.1M and another $1M in fees and interest—over half the amount of money held in the bank account.
Toth’s counsel argued that the IRS assessment violated the Eighth Amendment’s Excessive Fines Clause, but the First Circuit rejected this argument, holding the Constitution’s protection against excessive fines was inapplicable because the IRS assessment served a “remedial” purpose and was “not tied to any criminal sanction.” In his dissent, Justice Gorsuch noted the Supreme Court had previously warned that the question under the Excessive Fines Clause is not whether a monetary penalty is civil or criminal, but rather whether the penalty is a punishment.
Because certiorari was denied, the First Circuit’s ruling stands, and the IRS assessment against Ms. Toth was not a violation of the Eighth Amendment.
Bittner v. United States, 598 U.S. 85 (2023)
On February 28, 2023, the Supreme Court decided Bittner v. United States, a case involving the Bank Secrecy Act (“BSA”). Under the BSA and its regulations, U.S. citizens with financial interests in foreign accounts must file annual FBAR reports—a Report of Foreign Bank and Financial Accounts. A non-willful violation of this reporting requirement results in a $10,000 penalty. Alexandru Bittner, a dual citizen of Romania and the U.S., returned to the U.S. in 2011 and, after learning of his reporting requirement, submitted the required FBARs covering all of his accounts from 2007 through 2011. Ultimately, the government asserted a $2.72M penalty against Bittner—a penalty for each account that was not timely reported.
Bittner argued that the BSA only authorized a maximum $10,000 penalty for each untimely FBAR, not each untimely account. The Fifth Circuit found in favor of the government and upheld the $2.72M penalty. However, on certiorari, the Supreme Court reversed, holding that the BSA’s $10,000 maximum penalty is per FBAR, not per account. The Court reviewed the statutory language, noting that the law spoke in terms of reports, not in terms of accounts.
This decision is one that taxpayers responsible for BSA reporting over multiple accounts should have in their arsenal. Should the government attempt to assert a penalty computed on each account, taxpayers can rely on Supreme Court authority to reduce the penalty to an amount based on each report.
As tax laws continue to change and develop through case law, taxpayers should pay careful attention to Supreme Court decisions that might impact their tax strategies. Additional articles in this series will review more decisions impacting taxes. Greenspoon Marder attorneys are available to assist with tax matters. Contact Nick Richards at [email protected] or Matthew Schiller at [email protected] for more details.
