Know when to hold ’em (and when to report ’em)

A district court holds that online gambling and payment accounts managed by foreign companies are subject to FBAR reporting.

The U.S. District Court for the Northern District of California held that a taxpayer’s online poker and payment accounts with companies located overseas were subject to reporting on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

Facts: John Hom, a U.S. person, gambled online through internet accounts with PokerStars and PartyPoker. He used his account at FirePay, an online financial organization, to fund his online poker accounts in 2006. Sometime in 2006 and 2007 the aggregate balance in the online accounts exceeded $10,000.

Hom did not file FBARs for 2006 and 2007 until June 2010. In addition, he excluded his FirePay account from his 2006 FBAR. The IRS detected discrepancies in his tax returns for 2006 and 2007. As a result, it opened an FBAR examination and assessed a $30,000 penalty for 2006 ($10,000 for each of the three accounts) and a $10,000 penalty for 2007 based solely on his PokerStars account.

Issues: A U.S. person is required to file an FBAR on or before June 30 for the preceding calendar year if (1) the person had a financial interest in or signature authority over a bank, securities, or other financial account located outside the United States; and (2) the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. For a nonwillful violation, a civil penalty of up to $10,000 can be imposed, unless the violation was due to reasonable cause and the amount of the transaction or the balance in the account at the time of the transaction was properly reported (31 C.F.R. §103.24; 31 C.F.R. §1010.350; 31 C.F.R. §103.27(c); 31 U.S.C. §5321; and 31 U.S.C. §5321(a)(5)(B)).

Hom argued pro se before the district court that those accounts were not “bank or other financial accounts” for purposes of the FBAR rules. Hom also argued that “located in” refers to the geographical location of the funds and presented evidence that PokerStars had bank accounts in the United States in which his funds might have been held.

Holding: The court held that Hom’s accounts were foreign accounts subject to FBAR reporting. The court agreed with the IRS that the three companies functioned as banks and thus concluded that his accounts were reportable bank accounts. It cited Clines, 958 F.2d 578 (4th Cir. 1992), in which the Fourth Circuit found that by holding funds for third parties and disbursing them at their direction, an organization functioned as a bank.

Regarding the funds’ location, the court said it was irrelevant where the websites opened their bank accounts. FirePay was located in and regulated by the United Kingdom; PokerStars and its parent company were licensed and regulated by the government of the Isle of Man; and PartyPoker and its parent company were licensed, regulated, and based in Gibraltar. Those were the locations of Hom’s digital accounts, the court held. Accordingly, it granted the government’s motion for summary judgment.

– Hom, No. 3:13-cv-03721 (N.D. Cal. 6/4/14)

By Vani Murthy, CPA, M.S. (Tax.), a tax manager at Golbar & Associates CPAs, Los Angeles.