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The Tax Court in McNeill, 148 TC No. 23 (2017), held that it has jurisdiction under Section 6330(d)(1) to review a notice of determination when the underlying tax liability consists of a penalty relating to an adjustment to a partnership item excluded from deficiency procedures by Section 6230(a)(2)(A)(i).

The taxpayer was a partner in a partnership, which was used to invest in a distressed asset/debtor (DAD) tax shelter. The partnership was subject to the unified audit and litigation procedures of Sections 6221-6234, commonly referred to as the TEFRA provisions. The IRS issued the partners a notice of final partnership administrative adjustment (FPAA) for 2003, reflecting an $11.5 million adjustment to partnership items and imposing an accuracy-related penalty under Section 6662 in regard to a claimed loss from the DAD transaction.

The taxpayer filed a partner-level proceeding in the district court and made a payment satisfying the deficiency and interest but not the Section 6662 penalty. The proceeding was dismissed without a ruling on the partner-level defenses to the penalty.

The IRS sent the taxpayer and his spouse, as joint filers, a Form 3552, Corrections of Math Errors on Returns Involving Quick and Prompt Assessments, showing a penalty of $1.5 million plus accruing interest.

The IRS also later issued a notice and demand for payment, a notice of intent to levy, and a federal tax lien filing to collect the accuracy-related penalty.

Shortly thereafter, the taxpayers submitted a request for a collection due process (CDP) hearing challenging the Section 6662 penalty. The IRS sustained the collection actions against the taxpayers and the couple timely petitioned the Tax Court.

The Tax Court noted that, under the TEFRA rules, the court would not have jurisdiction to review the penalty asserted against the taxpayers where it was based on a partnership-level adjustment to partnership items. However, it found that, in 2006, Congress expanded the Tax Court's jurisdiction in CDP cases where it otherwise lacked jurisdiction over the underlying liability. Specifically, Section 6330(d)(1), as amended by the Pension Protection Act of 2006 (PPA), expanded the court's jurisdiction to review all notices of determination issued under Section 6330 (and Section 6320 via a cross-reference in Section 6320(c)).

The court concluded that, as amended, Section 6330(d)(1) provides it with exclusive jurisdiction over CDP cases. Further, the court noted that, on multiple occasions, it has addressed the expansion of its jurisdiction to include review of collection determinations regardless of the type of underlying liability. In each of those cases, the court concluded that although it lacked original jurisdiction over the underlying liability, nonetheless had exclusive jurisdiction to review appeals from the Service's lien and levy determinations.

The court also said that Congress created the CDP process to provide taxpayers who are confronted with a lien filing or a proposed levy the opportunity to contest that collection action before the IRS proceeds to collect the outstanding tax liability. The court stated that it follows that when Congress amended Section 6330 in 2006, making the Tax Court the exclusive venue for review of CDP cases, its intent was not to preclude from review certain issues not subject to the court's deficiency jurisdiction.

Thus, the court concluded that the taxpayers' accuracy-related penalty was another example of an item not subject to the Tax Court's deficiency jurisdiction under Section 6221 but, nonetheless, reviewable by the court in the context of its Section 6330 jurisdiction.

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Marini & Associates, P.A.  

 

 

Under the Bank Secrecy Act, U.S. citizens must file an FBAR with the U.S. Treasury disclosing any financial account in a foreign country with assets in excess of $10,000 in which they have a financial interest or over which they have signatory or other authority. (31 USC 5314)
 
IRS assessed Hom with 31 USC 5321(a)(5) penalties for his failure to submit FBARs regarding his interest in his FirePay, PokerStars, and PartyPoker accounts.
 

The district court found that Hom's accounts with FirePay, PokerStars, and PartyPoker had to be reported on an FBAR. (U.S. v. Hom, (DC CA 6/4/2014).
 
Hom admitted 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. Thus, the district court held that FirePay, PokerStars, and PartyPoker functioned as banks, and Hom's online accounts with them were reportable.
 
As to whether the accounts were located in foreign countries, the district court agreed with IRS,“located in” refers to where the financial institution that created and managed the account is located. It said that it was irrelevant where PokerStars, FirePay, or PartyPoker opened their bank accounts; these accounts belonged to them, not Hom. Rather, his accounts were digital constructs that these financial institutions, all located outside of the U.S., created and maintained on his behalf. The court said that the Treasury had reasonably interpreted the statute in finding that an account's location is determined by the location of its host institution, not where the physical money might be stored after it is sent to a financial institution.
 
Hom appealed and the Ninth Circuit, agreed with the district court, that Hom's FirePay account fit within the definition of a financial institution for purposes of FBAR filing requirements because FirePay was a money transmitter under 31 USC 5312(a)(2) .
 

 
The Court reasoned that 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 appeared 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 USC 5312(a)(2)(R), and so qualified as a “financial institution.”
 
Hom's FirePay account was also “in a foreign country” because FirePay was located in and regulated by the United Kingdom. The Court referenced IRS's FBAR Reference Guide (https://www.irs.gov/pub/irs-utl/irsfbarreferenceguide.pdf, (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.”

On the other hand, the Court found that PartyPoker and PokerStars primarily facilitated 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 was no evidence that PokerStars served any other financial purpose for Hom. His PartyPoker account functioned in essentially same manner.
 
The Ninth Circuit rejected IRS's argument that these entities were functioning as banks. Because neither the statute nor the regs defined banking, the Court looked to the plain meaning of the term.
 
It determined that there was no evidence that PartyPoker and PokerStars were established for any of the purposes of a bank; it defined “bank” as an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds.
 
Rather, accounts at PartyPoker and PokerStars were established for the purpose of facilitating poker playing.

 Contact the Tax Lawyers at 

Marini & Associates, P.A.