No FBAR Reporting Required for Account with Offshore Gambling Operation, But Reporting is Required for Organization That Served to Transfer Funds to Such Organizations

The Ninth Circuit Court of Appeals dealt the IRS a blow regarding the types of accounts that must be reported on the Foreign Bank and Financial Account Report (FBAR) under 31 U.S.C § 5314 in the case of United States v. Hom, 118 AFTR 2d 2016-5057, CA9, albeit in a case that was not deemed suitable for publication (and thus of limited precedential value). Note that currently this report is filed electronically on FinCEN Report 114.

In this case the taxpayer had accounts with three entities which he used for online gambling. The IRS had asserted, and a US District Court agreed, that the taxpayer was required to report all of these accounts (which held balances in excess of the minimum reportable amount) on an FBAR report, something the taxpayer did not do.

The taxpayer appealed, arguing these accounts were not reportable accounts. As the appellate panel noted:

The issue before us is whether Hom's accounts with FirePay, PokerStars, and PartyPoker required the filing of FBAR forms under 31 U.S.C § 5314, which provides that the Secretary of the Treasury “shall require” U.S. persons to “keep records and file reports ... [when those persons] make[] a transaction or maintain[] a relation for any person with a foreign financial agency.” Under the regulation in effect at the time, 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).

The Ninth Circuit found that two of the accounts did not require reporting, reversing the District Court’s ruling as far it applied penalties based on these accounts:

...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.

But the panel did not agree with regard to the institution that served to transfer the funds from the taxpayer’s U.S. bank to those offshore gambling organizations. The panel notes:

Hom's FirePay account fits within the definition of a financial institution for purposes of FBAR filing requirements because FirePay is a money transmitter. See 31 U.S.C. § 5312(a)(2)(R); 31 C.F.R. § 103.11(uu)(5) (2006). 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). Hom's FirePay account is also “in a foreign country” because FirePay is located in and regulated by the United Kingdom.See IRS, FBAR Reference Guide, (last visited July 19, 2016) (“Typically, a financial account that is maintained with a financial institution located outside of the United States is a foreign financial account.”).

The IRS had relied upon a Fourth Circuit decision (United States v. Clines, 958 F.2d 578, 579 (4th Cir. 1992)) to argue that any institution holding funds for a taxpayer and disbursing them at the taxpayer’s direction is a “financial institution” for these purposes. The panel disagreed with that view, noting:

The Fourth Circuit's decision in United States v. Clines, 958 F.2d 578, 579 (4th Cir. 1992), is not to the contrary. There, the court, in upholding a defendant's conviction for failing to file FBARs, explained, “By holding funds for third parties and disbursing them at their direction, [the entity at issue] functioned as a bank.”Id . at 582. The Government seizes upon that single sentence to argue that holding funds alone is sufficient to qualify an entity as a bank, but this reading fails to consider that the entity at issue in Clines engaged in many traditional banking functions beyond merely holding funds. See id. at 580 (explaining that the services the entity provided the defendant and his business partners included “bookkeeping, accounting, and financial management responsibilities ... [as well as] investment of funds and management of accounts').

Advisers should take to not read this decision overly broadly. As the opinion itself notes, this case is not meant to generally serve as precedent, even in the Ninth Circuit, so anyone deciding to not report such accounts on FinCEN Report 114 does so at his/her own risk, as the IRS is likely to continue to assert such reporting is required. As well, most often the taxpayer will end up having to use an offshore entity to obtain the funds from the U.S. bank and then transfer them to the offshore gambling organization, thus taxpayers will generally have to report accounts that “point to” the gambling site.