The Supreme Court has weighed in on two significant tax cases. One, the MoneyGram case, involves intangible property escheated to a state; the second, the Bittner case, determined that the $10,000 FBAR applies per return, not to each foreign account.
The MoneyGram case (Delaware v. Pennsylvania et al), which was taken by the Supreme Court by original jurisdiction, involves a dispute between Delaware and 30 other states over which state is entitled to escheat $300 million in uncashed checks issued by MoneyGram Payment Systems.
“It appointed a special master to hear the facts from both parties and come up with recommendations,” said Jamie Yesnowitz, SALT national leader in the Washington national tax office of Top 10 Firm Grant Thornton. “It’s interesting that the special master has changed its view on how the court should rule a number of times.”
The ruling Tuesday is in favor of the challenging states. The court cited the rule that the proceeds of abandoned financial products should escheat to the state of the creditor’s last known address. Because MoneyGram does not keep records of creditor addresses for the products at issue, it transmitted the proceeds to Delaware, the state of incorporation. The court decided that the proceeds should be governed by the Federal Disposition Act rather than the common law rule. The FDA provides that the proceeds would escheat to the state in which the instrument was purchased — the 30 states suing Delaware.
“Essentially, if the issuer of financial instruments does not have the last known address in its records, the property should go to the location of the purchaser,” said Michael Lurie, counsel at Reed Smith. “But the case is not over. Now the special master has to determine the amount owed by Delaware, and how to divide the money between the states. Delaware has argued that it would be unfair to have them give money over that has already been used for other purposes. It also made reference to the statute of limitations in a footnote in its brief.”
In Bittner v. U.S., the court held that the Bank Secrecy Act’s $10,000 penalty applies on a per report, not a per account, basis.
The Bank Secrecy Act requires certain individuals to file annual reports with the federal government about their foreign bank accounts. The statute imposes a maximum $10,000 penalty for nonwillful violations of the law.
Until the decision in Bittner, there was a split among the courts as to how the penalty should be applied. The court framed the question at issue in the following way: “Does someone who fails to file a timely or accurate annual report commit a single violation subject to a single $10,000 penalty? Or does that person commit separate violations and incur separate $10,000 penalties for each account not properly recorded within a single report?
For Alexandru Bittner, the answer made a difference of several million dollars. Fortunately for him, the court answered in his favor — the penalties are to be applied on a per report basis, not per account.
The court was divided, according to Reuben Muller, a tax attorney at Cole Schotz.
“Justice Jackson joined four conservative justices regarding the meaning of the statute,” he said. “But her questioning on oral argument shows a concern with the victim, so the liberal flank was not with Justice Jackson on this. The concern of the other four justices [Thomas, Alito, Gorsuch, and Barrett] was on government overreach — the government going over the line in penalizing more than the law intended.”
The application of the penalty per account has negatively impacted a number of individuals, Muller remarked.
“In most cases, the decision will enable them to file for refunds,” he said. “In fact, it would not be surprising if the government issues a procedure for them to do so.”