Illinois’ Pension Problems Get Worse; Lottery Checks Bounce

Posted on February 27, 2013 by Russ

Two stories out of Illinois that are, perhaps, linked. First, the Illinois Lottery forgot to send some money to their bank. While a spokesperson for the Illinois Lottery said it was a mistake, one would think that balancing the checkbook is a high priority. While only $159,000 of checks bounced, and the Illinois Lottery will make good on the bounced check fees, it certainly can’t be considered good planning. (I do believe that this was an oversight.)

A far more serious issue for the Land of Lincoln is the growing backlog of bills. The Chicago-based Civic Federation says that unless pensions and Medicaid are cut, Illinois’ backlog of bills will triple to $22 billion in five years. The annual budget in Illinois is currently $24.3 billion. To put this in perspective, the total budget for the most recent fiscal year for Nevada is $4.9 billion.

Unlike the federal government which can print money, states can’t. Sooner or later Illinois will have to balance its books. The pension costs are not sustainable. So, do you increase taxes further, which drives business out of state, or do you cut pensions? Democrats control most offices in Illinois, and they don’t want to cut pensions. Yet tax increases won’t work in the long run, so cuts to entitlements on the state level will occur…sooner or later.

In the end, spending more money than you take in is a good way to go broke. If I were offered a government contract by the state of Illinois, I’d turn them down unless they’d pay me up-front. That’s the level that I think Illinois has fallen to.

Posted in Illinois, Pensions | 1 Comment

Hurry Up and Wait: What the New Jersey Online Gambling Bill’s Passage Really Means

Posted on February 26, 2013 by Russ

New Jersey Governor Chris Christie signed into law a bill authorizing online gambling in New Jersey. I’ve seen tweets from friends saying things like, “Great! Christie legalizes online poker in New Jersey.” Well, that’s not exactly what happened. While I’d prefer not to throw some cold water on the party, I’m afraid I have to.

What was signed into law is a bill authorizing the New Jersey Casino Control Commission to authorize licensees to run games online. The NJCCC will authorize which games can be run online. While it is virtually certain that poker will be allowed online, the NJCCC still has to vote for it.

Further, licensees of the Commission will need to put together proposals for running the games online. They’ll need to demonstrate that they have the systems in place so that everything works smoothly; that the games are fair; that appropriate measures are in place to prevent cheating and underage gambling; etc. Nevada legalized intrastate online poker nearly a year ago; the first real money virtual poker in Nevada has yet to take place. I suspect it will take at least twelve months in Nevada (fifteen is my guess). It may take slightly less time in New Jersey (companies with Nevada licenses will have more of the processes in place), but it’s a good bet that the first game of New Jersey virtual poker will occur in 2014, not 2013.

I’ve heard some say that New Jersey will be able to partner with sites that are in Europe, so that residents of the Garden State will be able to play poker against Europeans. That’s not going to happen–at least, for now. The US Constitution gives the federal government the sole right to make treaties with foreign countries. That’s in Article I, Section 8, Clause 3:

[The Congress shall have Power] To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes….

New Jersey can’t make a treaty with, say, Italy. That’s not happening.

It’s even debatable whether interstate poker would be legal. Must their be legislation before, say, Nevada and New Jersey can enter an interstate compact for online gambling? Congress has specifically allowed multi-state lottery compacts (such as Powerball). Must Congress specifically authorize the same kinds of compacts for online poker? It is clear that if Congress authorized such compacts they would be legal; without such legislation, it becomes a question of law.

I don’t know the answer to this question. I’ve heard both yes and no from people well versed in this area of law. It’s the kind of case that could be fought in the courts for years. Interestingly, the states where all gambling is required to be run by lottery commissions (such as West Virginia) could make online poker compacts with other such states; those have a higher likelihood of being legal.

Today’s signing of online gambling legislation is welcome news for American online poker players. It is, however, just one step among many that must be made before legal online gambling is available for all Americans (or even residents of New Jersey).

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Mailbag

Posted on February 24, 2013 by Russ

We get mail:

I moved to California in 2012, and earned just $5,000 while in California versus a lot of money outside of the state. Yet those robbers want me to pay based on my overall income. This can’t be right.

Each state has a different formula for part-year income tax. California calculates your tax based on all the income having been earned in California, and then multiplies this by the ratio of California income to total income. So if 5% of your income was earned in California, and the “total” tax would be (say) $100,000, your California tax would be $5,000. It’s not as simple as that–exemptions and deductions also figure into this–but that’s the general idea.

In any case, that’s how California determines the tax, so assuming your tax professional is doing it right you have to live with the results.

I am retired (70) & play poker as a hobby. I recently traveled to Oregon to play in Money added tournaments @ Wild Horse Casino. I won the first tourn played & received a W2G for just under $6000. This is a “first” for me (W2G). When paying my taxes, will I be able to write losses which are “not” proven w/ receipts (both online & casinos)? I am from neighbor Washington state (no state income tax).

Congratulations. If you keep a gambling log (a written gambling log should be kept for your live play; you can use an electronic log for online), you will be able to take your gambling losses up to the amount of your winnings as an itemized deduction on Schedule A. Note also that you may need to file an Oregon tax return for your winnings that are Oregon-source.

A written gambling log should contain the date, casino name, game played, table number (not needed for tournaments), start time, end time, and result. It should be contemporaneously written.

I play online poker from outside of the United States but will not qualify for the Foreign Earned Income Exclusion for 2012. I had over $60,000 in my Moneybookers account but never had $10,000 in any other account. Do I need to file an FBAR?

Moneybookers is considered a foreign financial account. Not only must you file an FBAR, it’s probable you will need to file Form 8938, too. This is a complex area of tax law; make sure you discuss this with your own tax professional. Note that the FBAR is filed separately from your tax return and is due by June 30th. There are no extensions allowed for filing an FBAR.

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The Goal of Profit Making Businesses Is to Make Profits

Posted on February 21, 2013 by Russ

I resisted the urge this morning to make another pun; besides, Tony Nitti already did with his headline, “Former NFL Tough Guy Bill Romanowski Gets Laid Out By Tax Court.”

Yesterday, the Tax Court decided two cases related to horse breeding. I’ve covered horse activities in the past; all forms of activities related to race horses are expensive, and profits are hard to come by. In both cases, the petitioners looked at breeding horses as a means to lower taxes. That’s not a good way to get the Tax Court on your side. In both cases, the petitioners were left out in the cold without their losses. The Romanowskis did avoid the accuracy-related penalty; however, the other couple (the Pedersons) did not.

The moral is clear: If you really have a business and your is making money, you have a good shot of coming out of the Tax Court with your losses intact. If your goal in a business is losing money, your losses will likely evaporate in Tax Court. Tony Nitti and Joe Kristan have more.

Cases: Pederson v. Commissioner, T.C. Memo 2013-54, Romanowski v. Commissioner, T.C. Memo 2013-55

Posted in Tax Court | Tagged , | 1 Comment

Israeli Film Mogul Charged with Tax Evasion

Posted on February 20, 2013 by Russ

Yoram Globus is perhaps best known for being behind Cannon Films. With his cousin Menahem Golan, Cannon produced such films as American Ninja, Superman IV, Delta Force One, and a long, long list of others in the 1980s. Now, Mr. Globus is making news a bit differently: He was accused by the Israel Tax Authority of evading tax on NIS 27 million (Israeli New Shekel), worth about $7.3 million.

The alleged tax evasion dates back to 2005. Mr. Globus supposedly withdrew the NIS 27 million from two of his companies…but the withdrawals apparently didn’t make his tax return. Oops.

Mr. Globus’ response was, according to the Los Angeles Times, “Ask my accountant.”

Mr. Globus was released on bail of NIS 1 million (about $270,000) and ordered to remain in Israel for six months.

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A Lowe Blow

Posted on February 20, 2013 by Russ

I know the headline is a bad pun, but I couldn’t resist. Former NBA star and current Utah Jazz assistant coach Sidney Lowe was arrested on Monday on state tax evasion charges. Lowe is accused of not filing North Carolina tax returns from 2009 through 2011. The charges are misdemeanors, but as Wesley Snipes can tell you, jail time is still possible with such charges. Lowe is a North Carolina resident, so his income is subject to North Carolina tax.

The Deseret News (of Salt Lake City) reports that Mr. Lowe will continue with his coaching duties. The Salt Lake Tribune printed Mr. Lowe’s apology to the team and fans: “This is a personal matter that I take very seriously. I am working very hard to get the issue resolved in a timely manner and I am cooperating fully with all parties involved.”

Mr. Lowe faces a March 19th court date in Winston-Salem, North Carolina.

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Could Tax Accountants Have Caused California’s Revenue Surge?

Posted on February 20, 2013 by Russ

California budget officials couldn’t figure out where the extra $5 billion in tax revenue came from in January. As this Los Angeles Times article asks, was this an accounting anomaly? Governor Jerry Brown’s administration now believes it was a timing issue.

Many businesses increased dividend payouts and other income into last year because of federal (and California) tax hikes. Many individuals (at the urging of tax accountants like me) make their fourth quarter estimated tax payment at the end of December rather than in mid-January to lower their tax bill; state income tax paid is deductible on federal income tax. The same is true for corporations (state income tax they pay is deductible on federal income tax).

While I do believe that some of the income isn’t timing related–Californians didn’t have time to make changes to their spending habits due to the late (in the year) passage of California’s tax hike–most likely much of it is just tax revenue coming in early. And there’s still the $500 million judgment in the Gilbert Hyatt case; that decision by the Nevada Supreme Court could come at any time.

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Jackson’s Fall Includes Tax Charge

Posted on February 17, 2013 by Russ

I was going to put in a line in this post, “Will the first Chicago politician who is honest, forthright, and not corrupt please stand up?” However, I realized that there must be some politician in the Windy City who is honest (at least some of the time). The last three governors of Illinois all went to prison (and it’s equal opportunity corruption: both Republicans and Democrats). Joining them will be former Congressman Jesse Jackson, Jr. and his wife, Sandi (a former Alderman in Chicago).

Mr. Jackson resigned last November from Congress; Ms. Jackson resigned in January from the Chicago City Council. Both are pleading guilty: Mr. Jackson to conspiracy and Ms. Jackson to filing a false tax return. They pleaded guilty on Friday.

The scheme apparently had them using “business” credit cards (here, business is their re-election campaign) for personal expenses. As this blog has highlighted numerous times in the past (and will likely do numerous times in the future), you can’t put personal expenses on a business return. And we’re not talking nickel and dime purchases; the total is $582,772.58. Add in filing false campaign reports and you have problems.

There’s even a tie to Las Vegas. Mr. Jackson has a greed to forfeit $750,000 plus a host of memorabilia; much of that memorabilia was purchased from Antiquities of Nevada, a store here in Las Vegas. If you follow US Treasury auctions, you soon will be able to buy a football signed by several presidents, an Eddie Van Halen guitar, Bruce Lee memorabilia, and a lot more. But I digress….

I’m a native of Chicago and love the city. I’m a fan of the Blackhawks and Cubs. That said, the corruption in Chicago is something I don’t miss.

Posted in Illinois, Tax Evasion | Tagged , | 1 Comment

Eight Years and Counting

Posted on February 17, 2013 by Russ

I’ve been writing this blog now for eight years. A lot has changed in tax since I started, some for the good and some for the bad. I’ve had fun writing this, and my goals remain the same for the next eight years: To enlighten readers about tax issues impacting my clients (generally, related to gambling and small business owners) and other tax issues that I think are interesting and/or important.

One of my favorite sayings about tax is that it’s a combination of common sense and arcane rules. I try to have fun with this blog because tax is, to be honest, a dry topic. It’s also not much fun for most individuals; tax separates money from your wallet. It may be the price of civilization, but it’s not a fun price to pay. Thus, I try to have fun with the topics I cover.

So at eight years and eight days, happy belated birthday to my blog.

Posted in Taxable Talk | 1 Comment

“There Is No Income Tax” Fails Again to Win in Court

Posted on February 17, 2013 by Russ

Charlie Brown, move over; we have a new “winner” for trying the same thing over and over again and expecting different results. Randy Barker doesn’t think that tax laws are constitutional. He claimed a refund on his 2008 taxes of almost $1 million after claiming that amount was withheld from his taxes. His 2008 return showed $1.48 million of interest income and that amount of withholding. According to the Department of Justice, “Randy Barker was able to conceal the fraudulent nature of the interest income by filing documents on a separate tax database.”

The Barkers got their refund and spent the money on a house in Chico, California (their home town), and other personal items. They got to enjoy it for about three years; they were indicted last July. Last week, Mr. Barker was convicted of filing a false income tax refund claim. He’s looking at up to ten years at ClubFed, restitution, and up to a $250,000 fine. If you’re looking for a home in Chico, I suspect I know one that will be on the market soon.

Yes, Virginia, there is an income tax and you must pay it…and it is constitutional.

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