Bittner, Farhy and Moore: Who Are They and Why Are They Important?

Stockholm Underground Train Station. Picture Courtesy pixabay

We were in Stockholm, Sweden for a family trip over summer this year and were mesmerized by the art in the Underground train stations. 

As stunning as these train stations are, the three important Court cases this year we are going to talk about are even more sensational in how far-reaching the consequences of the rulings might be to affected taxpayers. 

I. Bittner v. United States: 

As you know the Bank Secrecy Act {BSA}, requires that U.S. persons that own interest in or have signatory authority in foreign bank or financial accounts with an aggregate balance of $10,000 or more at any time during the year must disclose the existence and balances of these accounts to the U.S. government on Form 114 commonly referred to as the FBAR. Previous post with more details here. 

Even though the BSA is not a part of the Internal Revenue Code, the IRS is given the task of monitoring compliance. The FBAR is designed to be self-reporting, hence non-compliance for timely or proper reporting results in significant fines and penalties. Failure to comply is categorized as "willful" or "non-willful". Civil penalties exist for both and criminal penalties may be imposed for significant willful non-compliance. 

For non-willful violations, Bittner v. United States held that the BSA penalty of $10,000 for non-willful violations of FBAR reporting via Form 114 applies on a per report basis and NOT on a per account basis. 

This will definitely change how taxpayers with undisclosed foreign accounts can come into compliance, what process they can use, and how much will they owe in penalties. 

The Internal Revenue Service has changed it's guidance to reflect the Bittner case, the penalties will now be assessed per year in case of non-willful violations. However, earlier provisions available to Revenue Officers in the Internal Revenue Manual for penalty mitigation have been removed effective July 6th, 2023. 

II. Farhy v. Commissioner of Internal Revenue: 

Form 5471 is required to be filed by U.S persons with respect to certain foreign corporations under IRC Code §6038(b)(1). My blog post goes into detail here. 

Farhy had not filed Forms 5471 for tax years 2003 through 2010 when he owned a 100% of two Belize corporations. The IRS assessed penalties of $10,000/ year for non-compliance in November 2018 and almost immediately assessed an additional $50,000/ year for continued non-compliance. When Farhy filed a suit against the IRS, he argued that they did not have the statutory authority to assess penalties under §6038(b). He won this case. 

On July 12th, 2023, the IRS has filed a notice of its intention to appeal the Tax Court ruling. In the mean time, there are steps taxpayers who have already paid and who may have been assessed the penalty may be able to take. 

Please note the above case will not apply to Form 5471, category 2 & 3 filers; Forms 3520-Parts I, II & III and 3520-A; and Form 8865 in some cases. Also, most important- the requirement to file Form 5471 has not changed since it comes from §6038(a)(1) and this will also not change the requirement to file other international information forms. 

III. Moore v. United States:

The Supreme Court agreed to hear this case on June 26th, 2023. It challenges the constitutionality of the mandatory repatriation tax imposed under §965. This is unfolding at the moment and is up for hearing in October, 2023. 

Background about §965: The mandatory repatriation tax was created by the Tax Cuts and Jobs Act, 2017. Deferred foreign income of certain foreign corporations, was deemed to be taxable in 2017 & 2018. This tax applied to all deferred foreign income post-1986, with the tax payable in the current year. Taxpayers had an option to pay the tax over an eight year period beginning in 2017. 

In Moore v. United States, taxpayers were part owners of a controlled foreign corporation {CFC} located in India. In 2017, the CFC had earnings of $508,000, resulting in an increased tax liability of $15,000. The taxpayers have challenged the constitutionality of the tax. 

Experts predict there could be 3 possible outcomes: 

1. Court rules in favor of the government and holds the tax constitutional. 
2. Court rules in a narrow manner to restrict application of the tax either in favor for the government or the Moores. 
3. Court rules in favor of the tax being unconstitutional. 

If this tax was paid in 2017/ 2018, the statute of limitations has passed on being able to claim a refund for many taxpayers before this case. For those who opted to pay over eight years, they may still be able to claim a refund in some situations. 

If any of these situations affect you, you should reach out to a trusted tax advisor. 

Bibliography: Bittner v. United States; IRS Guidance Reg Bittner; Farhy v. Commissioner of Internal Revenue;  Farhy v. Commissioner Appeal by IRS; Moore v. United States; Section 965 Transition Tax. 

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Consult with an Enrolled Agent for your unique tax needs and make sure your questions are answered. Always remember to read my disclaimer here. If you have any more questions regarding this or other tax matters, contact me via my website www.mntaxbiz.com.