Two recent tax controversies demonstrate the authority of US courts in situations where a taxpayer's assets are held in a country different than the taxpayer's country of residence. In United States v. Kelly, a US person held assets in a Swiss bank account and failed to file a Foreign Bank Account Report (FBAR), and the court ordered repatriation of those assets to the United States. In Puri v. United States, an Indian taxpayer held assets in a US bank account, and the United States Supreme Court denied certiorari, finalizing the district court's order that denied taxpayer's motion to quash an administrative third-party summons issued by the IRS.
Can a court force the repatriation of funds?
In United States v. Kelly, the US District Court for the Eastern District of Michigan found that the taxpayer, a US person, had willfully failed to fulfil his FBAR reporting duties. In its ruling, the Eastern District Court noted that the taxpayer had liquidated most of his domestic assets and that it would be difficult to get a judgment against him. As such, the Eastern District Court ordered a repatriation to the United States of assets from his Swiss bank account.
The holding in Kelly is in line with previous judgments in which courts have ordered a taxpayer to repatriate foreign assets where the taxpayer (i) owes penalties to the US Financial Crimes Enforcement Network (FinCEN) for failure to file an FBAR, (ii) maintains significant amounts of money or other assets abroad, and (iii) does not have sufficient assets within the United States (see United States v. McNulty, 446 F. Supp. 90 (N.D. Cal. 1978); United States v. Ross, 196 F. Supp. 243 (S.D.N.Y. 1961)).
The decision in Kelly also follows a recent order in the US District Court for the Southern District Court of Florida, ordering the taxpayer to repatriate Swiss assets to the United States to satisfy debt related to willful FBAR penalties (see United States v. Schwarzbaum, NO. 9:18-CV-81147 (S.D. Fl., Mar. 29, 2023)).
The taxpayer in Kelly has appealed the decision, challenging whether the failure to file was willful.
Can a court uphold a "politically-motivated" IRS summons?
In early October, the United States Supreme Court denied certiorari in Puri v. United States. In Puri, the taxpayer moved to quash a third-party administrative summons issued by the IRS to a US bank for information related to her account. The IRS issued the summons at the request of Indian tax authorities pursuant to a tax treaty.
The court applied the two-step framework of United States v. Powell, noting first that the taxpayer did not challenge whether the IRS met its prima facie case that it acted in good faith in issuing the summons. The court then found that the taxpayer failed to establish any other grounds for challenging the summons. While the taxpayer suggested the summons was politically motivated, the court emphasized that the taxpayer cited no authority to support the argument that the court may look beyond a "facially proper" request to determine a foreign government's motivations.
In a concurring opinion, Circuit Judge Bumatay cited serious separation-of-powers concerns for "even raising the prospect that courts can look through the Executive branch's decision to comply with an international treaty and surmise the motives of a foreign government."