On September 20, 2011, the IRS assessed defendant with civil penalties under 31 U.S.C. 5321(a)(5) for his non-willful failure to submit FBARs, as required by 31 U.S.C. 5314, 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 defendant's PokerStars account (Hendon Decl., Exh. 5, at 5). Interest and penalties continue to accrue until paid in full pursuant to 31 U.S.C. 3717.The two issues were: (1) whether the accounts with the three entities were "bank, securities or other financial account[s]" that must be reported on an FBAR; and (2) whether each of the three accounts was in a foreign country The Court answered both questions yes.
The Court's analysis of the first issue is probably most interesting for readers, so I quote in full:
The second element is whether defendant had a financial interest in, or authority over, a bank, securities, or other financial account in 2006 or 2007. Defendant does not contest in his opposition that he had a financial interest in his online FirePay, PokerStars, and PartyPoker accounts in 2006 and his online PokerStars account in 2007. Rather, defendant argues that those accounts are not a "bank or other financial accounts" for purposes of the applicable statute and regulations.
While our court of appeals has not yet answered what constitutes "other financial account[s]" under 31 C.F.R. 103.24, the Court of Appeals for the Fourth Circuit found that an account with a financial agency is a financial account under Section 5314. Clines, 958 F.2d at 582. Under Section 5312(a)(1), a "person acting for a person" as a "financial institution" or a person who is "acting in a similar way related to money" is considered a "financial agency." Section 5312(a)(2) lists 26 different types of entities that may qualify as a "financial institution." Based on the breadth of the definition, our court of appeals has held that "the term 'financial institution' is to be given a broad definition." United States v. Dela Espriella, 781 F.2d 1432, 1436 (9th Cir. 1986). The government claims that FirePay, PokerStars, and PartyPoker are all financial institutions because they function as "commercial bank[s]." Section 5312(a)(2)(B). The Fourth Circuit in Clines found that "[b]y holding funds for third parties and disbursing them at their direction, [the organization at issue] functioned as a bank [under Section 5314]." Clines, 958 F.2d at 582 (emphasis added).
So too here. Defendant admits that he opened up all three accounts in his name, 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 (Hom Dep. at 38, 40, 45-46, 110, 116). As FirePay, PokerStars, and PartyPoker functioned as banks, defendant's online accounts with them are reportable.
Defendant alternatively argues that his online accounts are not "other accounts" according to the current regulations. The current regulations define a reportable account as including "bank account[s] . . . [which means] a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking." 31 C.F.R. 1010.350. As explained above, FirePay, PokerStars, and PartyPoker function as institutions engaged in the business of banking. Accordingly, defendant's accounts are reportable even under the current regulations.Hom Represented Himself.
Hom, who apparently had resources for representation, chose to represent himself in the case. As noted in the quote above, the court apparently recognized that the issues were novel and important and perhaps not properly briefed from Hom's side. The court issued a general invitation for some attorney to brief the issues on a pro bono basis. No pro bone attorney came forward came forward, so the Court decided the case on the briefing it had from the U.S. and from Hom personally. The following is the Court's order seeking pro bono counsel.
Defendant John Hom is not indigent and therefore does not qualify for appointment of pro bono counsel with the Court’s federal pro bono project. This tax action, however, involves novel questions of law regarding the interpretation of the Bank Secrecy Act and related regulations. Accordingly, the Court seeks counsel to volunteer to represent defendant on a pro bono basis for the remainder of this action. Pro bono counsel will be allowed to re-brief the pending summary judgment motion, which is currently held under submission. In addition, a case management schedule has not yet been set.
If any counsel is willing to volunteer to represent defendant, please email the undersigned judge’s courtroom deputy, Dawn Toland, at whacrd@cand.uscourts.gov by JUNE 12, 2014.Scope of the Holding
The court based its holding upon a fair interpretation of the words of the statute. Of course, most of us would not think of an online poker company as being a financial institution or the like. But, certainly, it can be imagined that it could so operate. The Court applied the statutory construction iteration of the familiar duck test ("If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck,"). see Wikipedia, here),
Of course, online poker accounts are not marketed as the equivalent of financial accounts as we think of Swiss or other financial accounts where the main goal is the invest and protect assets (setting aside any tax avoidance goals). Rather, the online gambling accounts are there to facilitate gambling. But still, those accounts operated like financial accounts -- deposits, withdrawals, etc.
This raises a host of related questions. For example, when is an insurance policy issued by a foreign insurer a financial account? When is a lawyer's trust account in an offshore location a financial account?
According to 31 CFR 1010.350, an insurance policy with a cash settlement value is a financial account (one would hope that means that insurance policies without cash settlement values aren't financial accounts). A shame he didn't have proper representation, especially since the Court's conclusion that they are effectively banks seems a bit hasty (or at least, merited a consideration as to whether or not they were regulated as banks or under laws applicable to banks). Also interesting to see the Court's inclusion of the second leg of the "reasonable cause" exemption: "and the amount of the transaction or the balance in the account at the time of the transaction was properly reported." What does that even mean? What is a "transaction" for these purposes and, beyond that, to be "properly reported" doesn't it have to be reported on the FBAR form (an interpretation which would more or less obviate the exemption, since it is only necessary if the account wasn't "properly reported.)
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ReplyDeleteIt is unfortunate the Court didn't invite amicus briefs, rather than suggesting someone take up the pro bono representation of an online-offshore gambler (a pursuit I believe is illegal if you are a resident of the United States). I'm not blaming the court at all, but I personally would have been far more inclined to participate without having to undertake representing the defendant.
ReplyDeleteThe ultimate question seems to be what constitutes a foreign bank or financial institution? In my opinion, a business accepting "advanced payments" or "credits", that can only be disbursed to the business itself or returned to the customer and without any interest is not a bank or financial institution. In that case, the money simply is being provided for security.
I agree there are a host of related issues, many of which I have run into. The statutory definition is difficult, and one needs to assess it from both ends, as well as the unlikely to be successful "too vague" angle.
I was reading the OVDP FAQ, Holy cow!!
ReplyDeleteI think FAQ# 56 should be "If you have ever drawn Muhammad in last 5 years. Your penalties will be multiplies by 72 and IRS will hand over your information to Iran". i can't believe IRS can make such absurd rules.
Is there any legal way to challenge this? Can people request our supreme leader to look into this?
Two other issues that folks here should find of interest and that do not seem to have been raised (unless I missed it -- always a possibility!). First, if it was unclear whether an arrangement constitutes a "foreign financial account," such that it was reasonable for the defendant to have thought (incorrectly, per the court) no reporting necessary, is reasonable cause present so as to prevent imposition of the penalty? Second, where (as here) there was more than one account, is the maximum penalty (for non willful violations) $10,000 per FBAR or $10,000 per account? I believe Carolyn Ciraolo has argued it's the former.
ReplyDeleteoh yes we have raised these issues many times before with other cases. It is a turkish bazar (discretion) and $10K for NW per account ,per account holder and per violation is within the statue.
ReplyDeleteI can think of a ton of similar examples of a business holding money which is a refundable deposit, not just retainers in a trust account. Escrow accounts when buying property, security deposit when renting an apartment, a down payment on a car or hotel which is refundable if you change your mind, even buying an item on layaway at a store. These do not function as banks or equivalent financial institutions nor are they treated as such, for example they are not regulated by FDIC and other banking agencies, not insured etc.
ReplyDeleteNor can these accounts be of much use as a substitute for a bank account. I cannot go to a car dealer, pretend I'm interested in a car, put down a cash deposit of $1,000, come by the next day to ask for $50 from my deposit back, then return a few days later and say I want to increase my deposit by $2,000.
I don't gamble, but I suspect the case would be similar at a casino. Someone who puts down money and never gambles would likely soon see his account closed. And casino accounts are set up for good reason: gambling debts are legally unenforceable under Us law, so you have to pay in advance.
Follow up, when is a deposit with a Foreign Real esate broker or foreign real estate developer, for the purpose of purchasing foreign real estate (much in the future), a financial account per 5312(a)(2)(U)? I guess it depends, how similar one of these institutions closely mirrors a bank with respect to those trust & escrow accounts.
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