We get mail. Now, I don’t answer all of it, but this weekend I got quite a bit of interesting email. A reader asks,
“I caught your appearance on the Ante Up podcast last week, so I thought I’d take a look at your blog and subscribe to your feed. Both the blog and your appearance on the show was very helpful.
“I had a question. I remember when Jamie Gold won the WSOP main event in 2006 he waited to collect his funds for several weeks. Now, I don’t care to discuss the whole legal battle he had. I recall the reasoning for him waiting to collect his money had something to do with positioning himself for taxes and potentially creating some sort of corporation around this.
“We all dream of winning the big one. If one was to win the big one, what type of options around taxes and collection of your winnings would be smart to look into? I am curious if you could claim professional at that time or if you could have your corporation collect the funds.”
Good questions. First, the timing of income for most taxpayers is guided by the doctrine of constructive receipt. When you can access the money it’s income. In the case of 2006 World Series of Poker winner Jamie Gold, it didn’t matter if he waited to pick up his winnings until 2007—he could have picked it up in 2006. Thus, he clearly had 2006 income.
He of course had legal issues which as you noted delayed his receipt of the money. And he may well have wanted to get some advice from an accountant regarding the tax implications. Had I been advising him I would have told to make sure to put at least 40% of the money aside to pay California and federal taxes.
The question of whether an individual gambler is a professional or an amateur is one governed by the facts and circumstances of each case. For example, today Joe Hachem (the 2005 winner of the World Series of Poker) is a professional player. However, he wanted to be considered an amateur when he won because of Australian tax issues. Mr. Hachem won his case. Returning to your question, there is no one right answer.
You also ask whether you could assign your winnings to your corporation. This is an issue I’m often asked: Can an individual incorporate and be a professional gambling corporation and are there any tax advantages to doing that? I have significant doubts whether the IRS would accept a professional gambler without ancillary sources of income as a corporation. Gambling is a personal service, and this poses another problem. The Tax Code has a special type of corporation for personal service corporations; they are taxed at a flat 35%. And a 35% tax rate defeats the purpose. Most corporations are formed for liability reasons; that’s a non-issue for professional gamblers.
You could elect to be an S-Corporation. But an owner of an S-Corporation must pay himself a “reasonable” salary, so the savings is limited to the self-employment tax differential between a reasonable salary and $102,000. That’s if the IRS accepts it.
And there’s one last hurdle. Last year Harrah’s (the owner of the World Series of Poker) refused to honor correctly submitted Form 5754s and told anyone who submitted a Form 5754, “You have to deal with the tax problems,” and issued W-2Gs solely to the winner. That policy violated IRS regulations, but until the IRS stops Harrah’s I’m sure their illegal policy will continue.
An intriguing question, and one that I hope you have to ponder this summer.