Online Gambling Accounts with Offshore Sites Didn't Require FBAR Reporting

(Parker Tax Publishing August 2016)

The Ninth Circuit partially reversed a district court and held that because a taxpayer's accounts with two poker gambling websites were not "financial accounts" for which the taxpayer was required to file a Foreign Bank and Financial Accounts Report (FBAR), penalties for his late filing of those forms were not applicable. However, the court found that a money transmitter through which the taxpayer funded his online gambling was a "financial institution" for FBAR purposes, and affirmed the $10,000 penalty for his late filing of the FBAR for his account with that company. U.S. v. Hom, 2016 PTC 267 (9th Cir. 2016).

Background

During 2006, John Hom gambled online through internet accounts with PokerStars.com and PartyPoker.com. Both websites allowed Hom to deposit money or make withdrawals. Hom used an account at FirePay.com, an online organization that receives, holds, and pays funds on behalf of its customers, to fund his online poker accounts. In 2006, FirePay ceased allowing U.S. customers to transfer funds from their accounts to offshore internet gambling sites. In 2007, Hom continued to gamble online through his PokerStars account, and used Western Union and other online financial institutions to transfer money from his bank account to his poker accounts.

At various points in both 2006 and 2007, the aggregate amount of funds in Hom's FirePay, PokerStars, and PartyPoker accounts exceeded $10,000.

After the IRS detected discrepancies in Hom's federal income tax returns for 2006 and 2007, it opened a Foreign Bank and Financial Accounts Report (FBAR) examination. Individuals generally must file an FBAR by June 30 to report foreign financial accounts exceeding $10,000 maintained during the previous year. Hom did not file his 2006 or 2007 FBARs until June 26, 2010.

In 2011, the IRS assessed penalties against Hom for failure to submit FBARs regarding his interest in his FirePay, PokerStars, and PartyPoker accounts. The IRS assessed a $30,000 penalty for 2006, which included a $10,000 penalty for each of the three accounts, and a $10,000 penalty for 2007 based solely on Hom' PokerStars account.

In 2014, a district court upheld the penalties, finding that Hom's accounts with FirePay, PokerStars, and PartyPoker were reportable because they functioned as institutions engaged in the business of banking, they were located in a foreign country, and each account had an aggregate of $10,000 at some point during the years at issue. Hom then appealed to the Ninth Circuit.

Analysis

Generally, under 31 CFR Section 103.24, an individual must file an FBAR for a reporting year if:

(1) he or she is a U.S. person;

(2) he or she has a financial interest in, or signature or other authority over, a bank, securities, or other financial account;

(3) the bank, securities, or other financial account is in a foreign country; and

(4) the aggregate amount in the accounts exceeds $10,000 in U.S. currency at any time during the year.

For purposes of the FBAR requirements, "other financial accounts" include a "financial institution," which is defined under 31 USC 5312(a) as 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."

The Ninth Circuit determined that Hom's FirePay account fit within the definition of a "financial institution." The court noted that FirePay acted as an intermediary between Hom's bank 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 bank account or his online poker accounts, the court observed. The court also found that FirePay charged fees to transfer funds and as such, it 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." In addition, the court noted that Hom's FirePay account was also "in a foreign country" because it was located in and regulated by the United Kingdom. Accordingly, the court found that the FirePay account required the filing of the FBAR form, and affirmed the penalties for that account

In contrast, the court remarked, Hom's PokerStars and PartyPoker accounts did not fall within the definition of a "bank, securities, or other financial account." PartyPoker and PokerStars primarily facilitate online gambling, the court said; Hom could carry a balance on these accounts, and he needed a certain balance in order to "sit" down to a poker game. But, the court said, the funds were used to play poker and the court found no evidence that the accounts served any other financial purpose for Hom.

While the IRS had argued that the poker sites were functioning as banks, the court found that argument lacked support. Noting that neither the statute nor the regulations define "banking," the court turned to the plain meaning of the term. The Merriam-Webster dictionary, the court observed, 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." The court found there was no evidence that PartyPoker and PokerStars were established for any of those purposes, rather than merely for the purpose of facilitating poker playing.

Observation: The IRS also attempted to argue that PokerStars and PartyPoker were "casinos" and thus qualified as financial institutions, but because the IRS did not raise that argument before the district court and it explicitly disclaimed reliance on that theory, the Ninth Circuit declined to address it.

Finding that Hom's accounts with the online poker sites did not require him to file FBAR forms, the court reversed the penalties imposed for those accounts.

For a discussion of the information reporting requirements for foreign bank accounts, see Parker Tax ¶203,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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