My readers may remember the Hom case holding that online gambling accounts were reportable on the notorious FBAR (FinCen Form 114). Part of this decision was reversed just yesterday on appeal to the Ninth Circuit! That is good news on FBAR reporting. While the case is limited to its facts and is not for publication nor usable as precedent outside of Ninth Circuit rules, I believe it stands for something a bit broader. One can possibly glean from the Ninth Circuit opinion (accessible here) that not everything the Internal Revenue Service (IRS) says is a "financial account" will be upheld as such by the courts.
Professionals struggle with many nuanced FBAR questions. Since the Hom case was first decided two years ago, a kind of paranoia crept in as to what might possibly be a "financial account" reportable on FBAR.
For example, is an attorney trust account located in a foreign bank such an account?
A recent conundrum in my own experience is whether an FBAR is required when a US taxpayer holds a debit card on a foreign bank account solely owned by a non-US individual (typically a non-US spouse). Is having the debit card the equivalent of having "signature authority" over the account such that FBAR reporting is required? If it is, what is the highest maximum balance to be reported? Is it the daily limit permitted on the debit card? (Not even the FBAR helpline could assist with these queries).
Many questions without easy answers arise in the FBAR context and maybe the Ninth Circuit decision in Hom will give us all some greater perspective.
In United States, v. John C. Hom the taxpayer was an avid and professional internet gambler with online gambling accounts maintained with overseas entities. PokerStars.com (based in Isle of Man), and Partypoker.com (based in Gibraltar) were online poker game website companies. Mr. Hom also had an account called FirePay.com (based in London) which was necessary to transfer money to and from the poker game website companies via a bank account he had at Wells Fargo. FirePay charged a fee for any transfer of funds and in essence, FirePay acted as an intermediary between Mr. Hom's account at Wells Fargo and the online poker websites. In addition to having the ability to transfer funds from the FirePay account to his online poker accounts or to his bank account, Mr. Hom could maintain a cash balance in his FirePay account.
Mr. Hom was assessed FBAR penalties with respect to all of the accounts and when he failed to pay, the IRS filed a lawsuit against him. The lower court granted a summary judgment against Mr. Hom, holding that the online gambling accounts were foreign financial accounts subject to FBAR reporting. Mr. Hom appealed, presenting the Ninth Circuit Court of Appeals with the issue whether his accounts with FirePay, PokerStars, and PartyPoker required the filing of FBAR forms.
Below are critical excerpts from the Ninth Circuit's determination which reversed the lower court in part (holding that Mr. Hom's accounts with PokerStars and PartyPoker are not subject to FBAR reporting), and affirmed it in part (holding that the FirePay account is subject to FBAR reporting):
"The key questions are whether Hom's accounts were 'bank, securities, or other financial account[s]' and whether those accounts were 'in a foreign country.' See 31 C.F.R. § 103.24 (2006). If both questions are answered in the affirmative, the accounts required the filing of FBAR forms.
'[F]inancial agency' is defined in 31 U.S.C § 5312(a)(1) as 'a person acting for a person . . . as a financial institution.' '[F]inancial institution' is in turn defined to include a number of specific types of businesses, including 'a commercial bank,' 'a private banker,' and 'a licensed sender of money or any other person who engages as a business in the transmission of funds.' 31 U.S.C. § 5312(a)(2).
Hom's FirePay account fits within the definition of a financial institution for purposes of FBAR filing requirements because FirePay is a money transmitter. [citations omitted]. 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 appears that FirePay charged fees to transfer funds. As such, FirePay acted as 'a licensed sender of money or any other person who engages as a business in the transmission of funds' under 31 U.S.C. § 5312(a)(2)(R) and therefore qualifies as a 'financial institution.' See 31 C.F.R. § 103.11(uu)(5) (2006).
In contrast, Hom's PokerStars and PartyPoker accounts do not fall within the definition of a 'bank, securities, or other financial account.' PartyPoker and PokerStars primarily facilitate online gambling. Hom could carry a balance on his PokerStars account, and indeed he needed a certain balance in order to 'sit' down to a poker game. But the funds were used to play poker and there is no evidence that PokerStars served any other financial purpose for Hom. Hom's PartyPoker account functioned in essentially same manner.
The Government argues that these entities were functioning as banks, but this argument lacks support. Neither the statute nor the regulations define banking. In discerning the plain meaning of the text, we interpret words in light of their 'ordinary, contemporary, common meaning' unless they are otherwise defined [citation omitted]. Merriam-Webster dictionary defines 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.' [citation omitted]. There is no evidence that PartyPoker and PokerStars were established for any of those purposes, rather than merely for the purpose of facilitating poker playing.
For the foregoing reasons, we REVERSE in part, AFFIRM in part, and remand."
A nice victory for taxpayers!
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Virginia La Torre Jeker J.D.
Virginia La Torre Jeker J.D., is based in Dubai. Virginia has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has over 30 years of experience specializing in the international aspects of US tax, including FATCA. She has been quoted in the New York Times and Newsweek, and is regularly quoted in many local news articles and publications."
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