In an unpublished, nonprecedential opinion, the Ninth Circuit reversed a district court's decision that certain foreign companies that operated online gambling websites were foreign financial agencies with respect to which a taxpayer was required to report his accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
Facts: John Hom, a U.S. citizen, gambled online in 2006 and 2007 through accounts with PokerStars.com and PartyPoker.com, both owned by U.K. companies. In 2006, Hom also used an account at FirePay.com, also based in the United Kingdom, to transfer money to and from the gambling sites. At some time during each of the two years, his aggregate account balances exceeded $10,000.
Detecting discrepancies in Hom's income tax returns for the two years, the IRS opened an FBAR examination of Hom and assessed a $10,000 civil penalty under 31 U.S.C. Section 5321(a)(5) for failure to file an FBAR for each of the three accounts for 2006 and for the PokerStars account for 2007. When Hom failed to pay, the government moved for summary judgment on its complaint against him in the District Court for the Northern District of California. That court granted the motion, finding that the accounts were foreign financial accounts subject to FBAR reporting (Hom, 45 F. Supp. 3d 175 (N.D. Cal. 2014); see also "Tax Matters: Know When to Hold 'Em (and When to Report 'Em)," JofA, Sept. 2014). Hom appealed to the Ninth Circuit.
Issues: Under 31 C.F.R. Section 103.24 as in effect at the time (subsequently redesignated 31 C.F.R. Section 1010.350), a U.S. person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country must report such relationship to the IRS in the form and manner prescribed under 31 U.S.C. Section 5314 if the aggregate value of the financial accounts exceeds $10,000 at any time during the calendar year. The statute requires reporting of transactions or relations with "a foreign financial agency," defined under 31 U.S.C. Section 5312(a)(1) as "a person acting for a person ... as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold." A "financial institution" is defined in 31 U.S.C. Section 5312(a)(2) as any of 26 enumerated types of persons or entities, including a "licensed sender of money or any other person who engages as a business in the transmission of funds" (a money transmitter) (31 U.S.C. Section 5312(a)(2)(R)).
Holding: The Ninth Circuit concluded that FirePay was a money transmitter, since it transmitted funds between the poker sites and Hom's Wells Fargo bank account. Because it was also located in and regulated by the United Kingdom, FirePay was a foreign financial institution, and his FirePay account was subject to FBAR reporting, the court held.
The IRS argued that PokerStars and PartyPoker functioned as banks, making Hom's accounts with them financial accounts maintained with foreign financial institutions, but the Ninth Circuit rejected this argument. The court found that the accounts served no financial purpose other than playing poker, even though the PokerStars account allowed Hom to carry a balance. Under a dictionary definition, a bank is "an establishment for the custody, loan, exchange, or issue of money [or for the] extension of credit," the court said, quoting merriam-webster.com, and since PokerStars and PartyPoker were not established for these purposes, they were not banks. Therefore, the accounts with them were not financial accounts subject to FBAR reporting.
The court declined to address the government's argument that the sites were casinos, certain of which are included in the definition of financial institution (31 U.S.C. Section 5312(a)(2)(X)), since the government advanced that argument for the first time on appeal, after having disclaimed any reliance on it.
- Hom, No. 14-16214 (9th Cir. 7/26/16)
—By Paul Bonner, a JofA senior editor.