Short but sweet this week. We have posts in the hopper on many of the larger developments for the week of Sept. 26th, so SumOp is a little light this week. We do, however, touch on inversions, dealing with the media, informal abandonment of residence status, and if your online gambling problem is causing you and IRS FBAR problem…very international:
- The Service has issued a notice of proposed rulemaking to provide regulations that it hopes will curb inversions. Most folks seem to be against inversions. I had an inversion over the weekend, and it wasn’t that bad. Not the most flavorful IPA, but definitely drinkable.
- Sticking with the inversion notice of rulemaking, our former guest blogger, Professor Andy Grewal, has a terrific post on the in terrorem effect of the notice in the relatively new and exceedingly high quality Yale Journal on Regulation blog “Notice and Comment”. The post discusses how “under Section 7805(b)(1)(C) of the tax code, the Treasury enjoys the authority to issue regulations retroactive to the date on which any notice describing the anticipated regulations is issued. Consequently, a mere notice can alter taxpayer behavior, even in the absence of any actual rulemaking activity.”
- Frank Agostino’s firm’s October newsletter is out, and can be found here. Both are articles are good, but I particularly liked the article on the use of media (traditional and new) in the area of tax controversy. Most of my clients don’t want anyone to know they have an issue with the Service (even the ones who are not guilty), but for some clients a media strategy is a necessity.
- In Topsnik v. Comm’r, the Tax Court held that a foreign individual was a lawful permanent resident (LPR), and subject to tax on his worldwide income, even though he had sold his US residence, and only made infrequent visits to the United States during the year in question. The taxpayer could not “informally” abandon his status as a LPR, and instead had to follow the appropriate procedures. Here is an additional post on this case from the “Private Equity, VC, and Hedge Fund Taxation” Blog, which I was not familiar with. The post points out how this case highlights what the Court will look at in these residency cases, and shows how the IRS will obtain information about a taxpayer from a treaty country. Mr. Topsnik’s tax controversies have graced our pages before, with a Ninth Circuit opinion discussed in a February SumOp found here, discussing appropriate venue for a foreign individual’s refund claim.
- My ad (hom)inem commentary on Mr. Hom’s prior pro se efforts were somewhat tongue in cheek, as he seemed to make clever legal arguments, which didn’t prevail (I don’t actually think I was attacking Mr. Hom personally, but my bad pun generator is not working well). As previously mentioned , Joseph DiRuzzo of Fuerst Ittleman, has agreed to represent Mr. Hom in his appeal from the determination that his online poker accounts were bank accounts that had to be disclosed on his FBARs, which we covered here with a link to Jack Townsend’s far superior write up found here. The matter has potentially far reaching implications, and I am happy to see a quality lawyer assisting Mr. Hom on this matter. Mr. DiRuzzo shared his initial brief with me, and indicated I could share the same on PT. Instead of reproducing it in its entirety, I recreate the summary of arguments below. If you are interested in reviewing the brief, please let me know, and I will be happy to share. Any mistakes in the below content are almost certainly mine:
I. THE ACCOUNTS AT ISSUE ARE NOT “BANK, SECURITIES, OR OTHER
FINANCIAL ACCOUNTS” UNDER THE BANK SECRECY ACT. THEREFORE,
THE DISTRICT COURT ERRED IN GRANTING THE GOVERNMENT’S
MOTION FOR SUMMARY JUDGMENT…………………………………………………………. 13
A. The Report of Foreign Bank and Financial Accounts & Penalty
Regimes Under the Bank Secrecy Act and its Implementing
Regulations. ………………………………………………………………………………………… 13
B. PokerStars, PartyPoker, and FirePay are not engaged in the business
of banking nor do they function as banks. Thus, the accounts
maintained with each are not “bank accounts” under the BSA. ………………. 16
1. Construing undefined terms in accordance with their ordinary and
natural meanings, the accounts at issue were not “bank accounts”
because PokerStars, PartyPoker, and FirePay do not “engage in the
business of banking.” …………………………………………………………………………. 17
2. When the BSA is read in pari materia with other banking and tax
statutes, it is evident the companies do not engage in the business
of banking. Thus, Hom’s accounts were not bank accounts and did
not trigger a filing obligation. ………………………………………………………….. 21
3. The lower court’s reliance on Clines is misplaced. ………………………………. 25
C. The accounts at issue would not properly be classified as “other
financial accounts” because PokerStars, PartyPoker, and FirePay do
not act as financial agencies. ………………………………………………………………. 28
D. The accounts are not “bank accounts” or “other financial accounts”
under the BSA. ………………………………………………………………………………………. 31
II. THE GEOGRAPHIC LOCATION OF THE ACCOUNT, NOT THE NATIONALITY
OF THE FINANCIAL ENTITY INSTITUTION IN WHICH THE ACCOUNT IS
FOUND DETERMINES WHETHER AN ACCOUNT IS “FOREIGN” FOR FBAR
PURPOSES. THUS, THE DISTRICT COURT’S CONCLUSION TO THE
CONTRARY IS AN ERROR OF LAW AND NECESSITATES REVERSAL. ……………… 32
A. The preamble is irrelevant. …………………………………………………………………. 33
B. The preamble is consistent with the position of the IRS and FinCEN
and advanced by Hom in the lower court that it is the geographic
location of the account funds not the location of the host institution
which is determinative of whether an account is “foreign” under the
BSA. ………………………………………………………………………………………………………. 34
C. The preamble is not entitled to Chervon deference. ………………………………….. 37
1. The regulation is unambiguous. Therefore the District Court erred
in considering the preamble. …………………………………………………………. 38
2. Assuming arguendo that the regulation is ambiguous, the preamble
would not be entitled to Chevron deference. Thus, the District
Court erred. ………………………………………………………………………………………… 40
3. Under the appropriate level of deference, the Court erred in relying
on the preamble as it is an unreasonable interpretation of the
regulation. …………………………………………………………………………………….. 42
4. To the extent the Government relies on the preamble as its basis
for enforcement of the FBAR reporting requirements against
Hom, the preamble violates the APA as an improperly
promulgated legislative rule. ……………………………………………………………….. 43
III. AS A “FOREIGN” ACCOUNT IS DETERMINED BY THE GEOGRAPHIC
LOCATION OF THE ACCOUNT HOLDING THE TAXPAYERS MONEY, THE
DISTRICT COURT ERRED IN GRANTING SUMMARY JUDGMENT BECAUSE A
MATERIAL ISSUE OF FACT REMAINS AS TO WHETHER HOM’S FUNDS WERE
LOCATED IN A FOREIGN ACCOUNT. ……………………………………………………… 45
About Stephen Olsen
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