United States v. Hom (FBAR Series)

United States v. Hom, 9th Cir. | May 9, 2016 | mem. op | No. 14–16214

Short Summary: United States brought action against gambler to recover penalty imposed for failure to file foreign bank and financial accounts report (FBAR). The United States District Court for the Northern District of California, William Alsup, J., entered summary judgment in United States’ favor, and gambler appealed.

Key Issue: First, whether money transmitters that act as an intermediary between a gambler’s bank account and online poker sites is a “financial institution” for purposes of FBAR reporting. Second, whether a gambler’s accounts with online poker cardroom are “financial accounts” for purposes of FBAR reporting.

Primary Holdings:

Money transmitter that acted as intermediary between gambler’s bank account and online poker sites was a “financial institution” for purposes of FBAR reporting.
Gambler’s accounts with online poker cardrooms did not fall within definition of “bank, securities, or other financial account.”

Key Points of Law:

Money transmitter that acted as intermediary between gambler’s bank account and online poker sites was “financial institution,” for purposes of determining whether account owner was required to file foreign bank and financial accounts report (FBAR), where gambler could carry balance in his account with transmitter and could transfer his funds to either his bank account or his online poker accounts, transmitter charged fees to transfer funds, and transmitter was located in and regulated by United Kingdom. 31 U.S.C.A. § 5312(a)(2)(R); 31 C.F.R. § 103.11(uu)(5).
Gambler’s accounts with online poker cardrooms did not fall within definition of “bank, securities, or other financial account,” and thus gambler was not required to file foreign bank and financial accounts report (FBAR) for his transactions in cardrooms, even though he could carry balance on his accounts, and needed certain balance in order to “sit” down to poker game, where funds were used to play poker, and there was no evidence that cardrooms served any other financial purpose for gambler. 31 U.S.C.A. § 5312(a)(2)(R); 31 C.F.R. § 103.11(uu)(5).

Insight:

For a bank account to fall within the reporting requirements of the FBAR, the account must be a bank, securities, or financial account that resided in a foreign country during the tax year.[1] When the court was assessing whether these institutions and accounts fall within the purview of the FBAR reporting requirements, they looked first to the definitions section of the statute from which the FBAR originates, 31 U.S.C. § 5312.[2] If the term is not defined in that section, the court looked to the plain language of § 5314.[3] Additionally, to determine whether an institution falls under the designation of “foreign,” the court looked to where the entity was located and regulated, using the IRS FBAR reference guide.[4]

Another important aspect of this case is the government’s argument that even though the poker accounts did not serve any financial purpose, they were functioning as banks and so should be regulated under the FBAR requirements as such.[5] The Ninth Circuit here rejected that argument, holding that the Merriam-Webster definition of “bank” requires that the entity performs some financial function, such as issuing loans or extending credit, in order to be defined as a bank.[6] Because the two poker accounts were not established for any function other than as a platform for poker play, the court found that they not fall under the definition of “bank” for purposes of FBAR reporting.[7]

[1] United States v. Hom, 657 Fed. App’x 652, 653 (9th Cir. 2016).

[2] Id. at 653–654.

[3] Id. at 654–655.

[4] Id. at 654

[5] Id.

[6] Id.

[7] Id. at 654-655.