U.S. V. HOM: NON-WILLFUL PENALTIES ON VARIOUS POKER RELATED ACCOUNTS
/By Armin Gray
U.S. v. Hom[1] held that a taxpayer's accounts at an online financial company and at two online poker companies were F.B.A.R. reportable assets. As the assets were not reported on a timely filed F.B.A.R., the court upheld non-willful penalties that were assessed by the I.R.S.
The facts of the case can be summarized as follows:
During 2006, pro se defendant John Hom (“D”) gambled online through internet accounts with PokerStars.com and PartyPoker.com. In 2007, D continued to gamble online through his PokerStars account. Both poker websites allowed defendant to deposit money or make withdrawals.
D used his account at FirePay.com, an online financial organization that receives, holds, and pays funds on behalf of its customers, to fund his online PokerStars and PartyPoker accounts. He deposited money into his FirePay account via his domestic Wells Fargo bank account or other online financial institutions, such as Western Union. In 2006, FirePay ceased allowing United States customers to transfer funds from their FirePay accounts to offshore internet gambling sites, so D used Western Union and other online financial institutions to transfer money from his Wells Fargo bank account to his online poker accounts. D admitted that at some points in both 2006 and 2007, the aggregate amount of funds in his FirePay, PokerStars, and PartyPoker accounts exceeded $10,000 in United States currency.
After the I.R.S. detected discrepancies in D’s federal income tax returns for 2006 and 2007, the I.R.S. opened an F.B.A.R. examination. D did not file his 2006 or 2007 F.B.A.R.’s until June 26, 2010. Moreover, the 2006 submitted F.B.A.R. did not include his FirePay account.
On September 20, 2011, the I.R.S. assessed D with civil penalties for his nonwillful failure to submit F.B.A.R.’s regarding his interest in his FirePay, PokerStars, and PartyPoker accounts. The I.R.S. 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.
The critical issue was whether D had an interest in a “bank, securities, or other financial account” for F.B.A.R. purposes. The Court stated as follows:
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 … 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.” . . . The government claims that FirePay, PokerStars, and PartyPoker are all financial institutions because they function as “commercial bank[s].” … 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].” …
Thus, the court further held that “[a]s FirePay, PokerStars, and PartyPoker functioned as banks, defendant's online accounts with them are reportable.”
D also argued that even if he is liable, the amount of penalty assessed was too high because it might contravene the Internal Revenue Manual (“I.R.M.”). However, the court stated:
Our court of appeals, however, has foreclosed that argument by holding that “[t]he Internal Revenue Manual does not have the force of law and does not confer rights on taxpayers.” Fargo v. Comm'r of Internal Revenue, 447 F.3d 706, 713 [97 AFTR 2d 20062381] (9th Cir. 2006). Thus, defendant's argument fails.
The case is interesting for a number of reasons, which include the following:
· D did not argue that the penalty should be on a per form basis and the court allowed assessment of the penalty on a per account basis.
· D was liable for $40,000 for non-willful violations for playing poker by simply failing to report his poker related accounts. It is unclear from the case what aggravating circumstances existed for the agent not to give an F.B.A.R. warning letter.
The court states that the I.R.M. does not confer rights to the taxpayer. The I.R.M. provides mitigation guidelines in order to provide uniform consistency among examinations and also gives substantial discretion to the examiner to lower the penalty amount. It is not clear whether the examiner followed the I.R.M. or not; the court simply states that the I.R.M. does not provide rights to the taxpayer.
{C}[1] 113 AFTR 2d 2014-XXXX, (DC CA), 06/04/2014.