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Kentera v. United States

United States District Court, E.D. Wisconsin

January 30, 2017



          J.P. Stadtmueller U.S. District Judge

         Plaintiffs, Milo and Lois Kentera, filed a complaint against the United States, alleging violations of the Administrative Procedures Act (“APA”), 5 U.S.C. § 701 et seq., and their due process rights under the Fifth Amendment. (Docket #1). This action arises from Plaintiffs' failure to file a Report of Foreign Bank and Financial Accounts (“FBAR”) for several tax years despite having assets that should have been identified in that form. The Internal Revenue Service assessed civil penalties against Plaintiffs for these failures. Plaintiffs challenge those penalties, arguing that they are void because Plaintiffs had reasonable cause for their failure to file the FBARs. They further assert that the IRS' decision to impose the penalties was arbitrary and capricious, in violation of the APA. The government moved to dismiss the complaint, asserting that it has not waived its sovereign immunity with respect to Plaintiffs' claims and, even if it had, venue is not proper in this District. (Docket #15). The motion is fully briefed, and, for the reasons stated below, it will be granted on the basis of sovereign immunity.[1]

         1. APPLICABLE LAW

         1.1 Motion to Dismiss for Failure to State a Claim

         Federal Rule of Civil Procedure 12(b) provides for dismissal of complaints which fail to state a viable claim for relief or for improper venue. Fed.R.Civ.P. 12(b)(3) and (6). To state a viable claim, a complaint must provide “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). In other words, the complaint must give “fair notice of what the. . .claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citation omitted). The allegations must “plausibly suggest that the plaintiff has a right to relief, raising that possibility above a speculative level[.]” Kubiak v. City of Chicago, 810 F.3d 476, 480 (7th Cir. 2016) (citation omitted). In reviewing Plaintiffs' complaint, the Court is required to “accept as true all of the well-pleaded facts in the complaint and draw all reasonable inferences in favor of the plaintiff.” Id. at 480-81.

         1.2 Sovereign Immunity

         “It is axiomatic that the United States may not be sued without its consent and that the existence of consent is a prerequisite for jurisdiction.” United States v. Mitchell, 463 U.S. 206, 212 (1983). Waivers of sovereign immunity are narrowly construed because the immunity protects the public fisc. See West v. Gibson, 527 U.S. 212, 222 (1999); Nelson v. Miller, 570 F.3d 868, 883-84 (7th Cir. 2009). The court must strictly construe the scope of any alleged waiver in favor of the sovereign. Lane v. Pena, 518 U.S. 187, 192 (1996). A court may “not enlarge the waiver beyond what the language [of the statute] requires.” Library of Congress v. Shaw, 478 U.S. 310, 318 (1986) (internal citations and quotation marks omitted). Consent to suit cannot be implied, and ambiguities are construed in favor of immunity. See United States v. Nordic Village, 503 U.S. 30, 34 (1992). In this Circuit, a sovereign immunity defense, if sustained, shows that the plaintiff failed to state a claim; it is not a matter affecting the court's subject-matter jurisdiction. Collins v. United States, 564 F.3d 833, 837-38 (7th Cir. 2009). The plaintiff, as the party seeking to breach the government's sovereign immunity, bears the burden to show that a waiver exists. See Macklin v. United States, 300 F.3d 814, 819 (7th Cir. 2002); Cole v. United States, 657 F.2d 107, 109 (7th Cir. 1981).


         The relevant facts are drawn from Plaintiffs' complaint. The Bank Secrecy Act (“BSA”), 31 U.S.C. § 5311 et seq., requires U.S. citizens to keep records and file reports when they “mak[e] a transaction or maintai[n] a relation with a foreign financial agency.” 31 U.S.C. § 5314(a). The report must be made in an FBAR, which is IRS Form TD F 90-22.1. The FBAR must be filed on or before June 30 of the year following the calendar year for which the report is made. If the individual fails to comply with the requirements of Section 5314, the BSA provides that civil penalties may be imposed. Id. § 5321(a)(5). For non-willful violations, the penalty cannot exceed $10, 000. Id. § 5321(a)(5)(B)(I).

         In 1984, Plaintiff Milo Kentera inherited money located in a foreign bank account at Banque Cantonale de Geneve (“BCGE”). He added his wife's name to the BCGE account shortly thereafter. The balance in the account increased dramatically in 2007 due to the sale of Milo Kentera's parents' property in Montenegro, certain proceeds of which were distributed to Milo and deposited in the BCGE account.

         Plaintiffs have consistently disclosed the BCGE account on their federal income tax returns since 1984. However, in 2006 their accountant failed to prepare or file an FBAR in connection with their federal income tax return. Their accountant for tax years 2007, 2008, and 2009 made the same error, despite having information from which he could have discovered the existence of the BCGE account. In 2010, a third accountant acknowledged the existence of the BCGE account in Plaintiffs' return, but again seems to have failed to prepare or file an FBAR.

         In February 2011, the IRS announced a federal amnesty program for taxpayers with foreign bank accounts-the 2011 Offshore Voluntary Disclosure Initiative (“OVDI”). To participate, taxpayers were required to amend their tax returns and file FBARs for tax years 2003-2010. OVDI participants were required to pay all delinquent taxes, interest, and penalties, and, under this program, taxpayers were subject to a 25% penalty on the highest aggregate account balance on their previously undisclosed accounts during those years.

         In around September 2011, Plaintiffs applied to the OVDI program. They amended their tax returns for 2006-2010 to include omitted income and filed completed FBARs for 2005-2010. In August 2013, the IRS provided Plaintiffs with a Form 906, Closing Agreement on Final Determination Covering Specific Matters (the “Closing Agreement”). The Closing Agreement provided, in relevant part, that Plaintiffs would be liable under the tax code for a miscellaneous penalty of $90, 092. Plaintiffs withdrew from the OVDI program the next month.

         After Plaintiffs withdrew from the program, IRS agent Kimberly Nguyen (“Nguyen”), who works in Milwaukee, examined the matter and recommended that Plaintiffs be assessed non-willful FBAR penalties pursuant to 31 U.S.C. § 5321(a)(5). The amounts of the penalties were as follows:

(1) Lois Kentera: $500 for calendar year 2006; and $2, 500 per year for calendar years 2007, 2008, 2009, and 2010, for a total penalty of $10, 500; and
(2) Milo Kentera: $500 for calendar year 2006; and $10, 000 per year for calendar years 2007, 2008, 2009, and 2010, for a total penalty of $40, 500.

         On September 17, 2014, the government mailed each Plaintiff a letter advising that the IRS was ...

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