33 F.4th 1
1st Cir.2022Background
- Monica Toth, a U.S. citizen, held a UBS Swiss bank account (since 1999) and did not file FBARs for years including 2007; IRS audited and assessed a willful FBAR penalty of $2,173,703 (50% of account) for 2007.
- Government sued to collect the penalty; service occurred 118 days after filing (after Rule 4(m) was amended from 120 to 90 days); default entered and later set aside.
- Toth proceeded largely pro se, missed discovery deadlines, and repeatedly violated court discovery orders despite warnings and earlier, lesser sanctions.
- District Court imposed Rule 37 sanctions: certain facts (including willful failure to file for 2007 and account balance for penalty calculation) were taken as established.
- District Court granted summary judgment for the government, rejected Toth’s regulatory and constitutional challenges to the penalty amount, and entered judgment for the assessed penalty plus interest and fees; Toth appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Timeliness of service under amended Rule 4(m) | Service after Dec. 1 amendment (118 days) violated new 90-day rule -> dismissal | Service was within old 120-day rule and applying the 90-day rule would reward evasion of service | Court applied old 120-day standard as it was not "just and practicable" to apply 90-day rule due to Toth's evasion; service effective |
| Rule 37 sanctions establishing willfulness | Sanction treating willfulness as established was extreme, tantamount to default | Repeated, deliberate discovery noncompliance justified strong sanctions including facts taken as established | Sanction did not abuse discretion; willfulness for 2007 taken as established; summary judgment on willfulness affirmed |
| Treasury regulation cap on willful FBAR penalty ($100,000) | 31 C.F.R. §1010.820(g)(2) limits willful FBAR penalty to $100,000; IRS exceeded its regulations | Statutory amendments increased the statutory maximum; the 1987 regulation merely mirrored the old statute and was superseded | Regulation was a parroting interpretive rule and was superseded by later congressional amendments; IRS may impose the larger statutory maximum |
| Constitutional challenges to penalty amount (Eighth and Fifth Amendments) | Excessive Fines and Due Process: the large penalty is punitive and excessive; regulation conflict exacerbates due process concerns | Civil FBAR penalty is remedial (recoup investigatory/tax loss) not a punitive "fine"; Sony/First Circuit standard applies to statutory penalties | Excessive Fines Clause not implicated (penalty remedial); Due Process argument waived on appeal; amount upheld |
Key Cases Cited
- Austin v. United States, 509 U.S. 602 (1993) (civil sanctions are "punishment" if they serve retributive/deterrent purposes)
- Bajakajian v. United States, 524 U.S. 321 (1998) (Excessive Fines Clause analysis of civil forfeiture/fines)
- One Lot Emerald Cut Stones v. United States, 409 U.S. 232 (1972) (early forfeitures treated as remedial)
- Helvering v. Mitchell, 303 U.S. 391 (1938) (tax penalties can be remedial and not "punishment")
- Accardi v. Shaughnessy, 347 U.S. 260 (1954) (agencies generally must follow their own regulations)
- United States v. Kahn, 5 F.4th 167 (2d Cir. 2021) (1987 FBAR regulation is a parroting rule superseded by statute)
- McNichols v. C.I.R., 13 F.3d 432 (1st Cir. 1993) (Eighth Amendment not implicated by certain tax penalties)
- AngioDynamics, Inc. v. Biolitec AG, 780 F.3d 429 (1st Cir. 2015) (sanctions review for abuse of discretion)
- Remexcel Managerial Consultants, Inc. v. Arlequin, 583 F.3d 45 (1st Cir. 2009) (severe discovery sanctions can be appropriate to address obstructionism)