The Ninth Circuit held that a taxpayer's accounts with two foreign-based online poker sites were not bank accounts that a taxpayer must report on an FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts).
Background
John Hom gambled online through internet accounts with PokerStars.com and PartyPoker.com and used an account at FirePay.com, an online financial organization that received, held, and paid funds on behalf of its customers, to fund the other two accounts. At some points in both 2006 and 2007, the aggregate amount of funds in his FirePay, PokerStars, and PartyPoker accounts exceeded $10,000 in U.S. currency.
Under 31 U.S.C. Section 5314 and 31 C.F.R. Section 103.24, a person must file an FBAR if the person had an interest in, or signature or other authority over, foreign financial accounts, the aggregate value of which exceeded $10,000 at any time during a year. After conducting an FBAR examination of Hom for 2006 and 2007, the IRS assessed penalties against him for failing to file FBARs for his interest in his FirePay, PokerStars, and PartyPoker accounts for 2006 and a penalty for failing to file an FBAR for the PokerStars account for 2007. When Hom failed to pay the penalties, the IRS filed suit against him in district court.
The IRS claimed that FirePay, PokerStars, and PartyPoker were all financial institutions because they functioned as commercial banks. The district court agreed, noting Hom opened accounts with all three entities, controlled access to the accounts, deposited money into the accounts, withdrew or transferred money from the accounts to other entities at will, and could carry a balance on the accounts. The court further found that because all three entities were licensed and regulated in foreign countries, they were foreign financial institutions. Consequently, the court held that Hom's online accounts with them were reportable (Hom, 45 F. Supp. 3d 175 (N.D. Cal. 2014)). Hom appealed the district court's decision to the Ninth Circuit.
Ninth Circuit's Decision
The Ninth Circuit affirmed the district court's decision with respect to the FirePay account because FirePay qualified as a foreign financial institution. However, it reversed the decision with respect to the PokerStars and PartyPoker accounts, finding that they did not fall within the definition of a bank, securities, or other financial account under 31 C.F.R. Section 103.24.
The court determined that Hom's FirePay account fit within the definition of a financial institution for purposes of FBAR filing requirements because FirePay was a money transmitter under 31 U.S.C. Section 5312(a)(2)(R). The court noted that FirePay acted as an intermediary between Hom's Wells Fargo account and the online poker sites. Hom could carry a balance in his FirePay account, and he could transfer his FirePay funds to either his Wells Fargo account or his online poker accounts. It also appeared that FirePay charged fees to transfer funds. Thus, FirePay acted as "a licensed sender of money or any other person who engages as a business in the transmission of funds" and therefore qualified as a financial institution. The court concluded FirePay was a foreign financial institution because it was located in and regulated by the United Kingdom.
In contrast, the court found that Hom's PokerStars and PartyPoker accounts were not reportable because they did not fall within the definition of a "bank, securities, or other financial account." The IRS contended that the two entities were functioning as banks. Because neither the statute nor the regulations define banking, the court interpreted the term based on its ordinary, contemporary, common meaning. Thus, the court looked to the Merriam-Webster dictionary, which defines a bank as "an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds." Having no evidence that PartyPoker and PokerStars were established for any of those purposes, the court concluded that they were not banks and Hom's accounts with them were not reportable bank accounts.
Reflections
The Ninth Circuit here corrects an overreach by the district court. Although in ways they arguably act like a financial institution for players, neither PartyPoker nor PokerStars was established to act as a financial institution, and treating them as such does little or nothing to further the goals of FBAR reporting.
Hom, No. 14-16214 (9th Cir. 7/26/16)
