DOJ Settles Civil Claims Against PokerStars & Full Tilt Poker; Full Tilt Balances to be Refunded to US Players; Settlement with Absolute/UB Also Referenced

Posted on July 31, 2012 by Russ

News came out this morning that the long-rumored deal that would have PokerStars acquire Full Tilt Poker, agree to pay the DOJ $731 million (the rumored amount was $750 million), and pay back players while settling the civil charges it faced came to fruition this morning. Press releases were issued by Full Tilt and PokerStars announcing the deal; a press release will be issued later today by the DOJ. The obvious questions are:

– Who will be repaying the Full Tilt players?
– When will players be repaid?
– What does this mean for US players’ taxes?
– Will PokerStars (or Full Tilt Poker) be returning to the US anytime soon?

Who will be repaying the Full Tilt players? If you are outside of the US, PokerStars will repay you. A fund of $184 million will be set up, and withdrawals will begin within 90 days of the completion of the transaction — likely by the end of October.

If you are within the United States, you will be repaid by the Department of Justice (the US Attorney’s Office for the Southern District of New York). You will have to apply through remission with the DOJ to be repaid. I assume (but am not certain) that the FTP site or client will be reopened so that US players can look to see what their balances were. A fund of $150 million will be set up for the repayment. The exact process will likely be revealed in the press release to come from the DOJ, but here is a sample remission petition (Hat Tip: Taxdood).

When will players be repaid? If you are outside of the US (and this is determined by your residence on June 29, 2011), you likely will be repaid no later than November. If you are in the US, this remains unclear, but I’d expect you to be repaid before Christmas.

What does this mean for US players’ taxes? That income that wasn’t constructively received in 2011 will likely be constructively received in 2012. That means you will need to report your Full Tilt income on your 2012 tax returns. You may need to adjust your fourth quarter 2012 estimated payment.

Will PokerStars (or Full Tilt Poker) be returning to the US anytime soon? No. While the agreement specifically allows for PokerStars to apply for licenses if and when online poker is legalized in the US, the criminal charges against PokerStars were not settled. As long as PokerStars (or any of its owners, executives, or managers) faces a criminal indictment, they will not be licensed in the US.

Most gaming licensing boards are extremely reticent about licensing anyone with any sort of criminal past. If PokerStars were found innocent of the criminal charges against it, then they would have a chance of obtaining a US (or state) license. Until then, it is extremely doubtful that US players will see PokerStars (or Full Tilt Poker) back in the United States.

Buried in the DOJ Press release is the following:

In a related matter, the U.S. Attorney’s office also filed a motion requesting that the Court enter a settlement agreement reached with Absolute Poker/Ultimate Bet that requires the company to forfeit all of its assets (the “Absolute Assets”) in order to fully resolve this action. The motion also requests that the Government be permitted to liquidate the Absolute Assets, with the net proceeds of that sale to be held pending the resolution of claims filed by other parties who have asserted an ownership interest in the Absolute Assets.

It appears that US players can also apply for remission on their AP/UB balances. However, it is likely they’ll receive pennies on the dollar (or perhaps a penny on the dollar) as it is unlikely the assets of AP/UB have much value.

Once the DOJ announces the remission process, I’ll post about that. I now return to my scheduled vacation.

UPDATES: It’s remission, not rendition; the date being used to determine US (or rest of the world) residency is June 29, 2011, not April 14, 2011.

Posted in Gambling | Tagged , , , | 7 Comments

Vacation

Posted on July 27, 2012 by Russ

It’s time for my annual vacation. If something earth-shattering in the tax world happens while I’m relaxing, I’ll take time out to post on it. Otherwise, enjoy the fine bloggers listed in the blogroll on the right. I’ll be back on Thursday, August 9th.

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El Monte Considering Sugary Drink Tax

Posted on July 26, 2012 by Russ

Many California municipalities face budget issues. One of these cities is El Monte, in the San Gabriel Valley east of Los Angeles. El Monte is looking at a $7 million deficit when a local sales tax expires in 2014. So is the city looking at cutting costs? Well, perhaps. But it’s doing the typical California thing: Asking for more tax revenue.

El Monte has declared a fiscal emergency. That allows for an off-year election this November. And the plan is to have on the ballot a measure asking for a penny-an-ounce tax on “sugary drinks.” So if you purchase a 32-ounce soda, you will owe an additional $0.32 in tax. Needless to say, the California-Nevada Soft Drink Association isn’t thrilled with the idea.

Personally, I think El Monte should consider the only real solution to the problem: Cuts in salaries. As this article in the Los Angeles Times mentions, El Monte has cut 100 employees, reduced salaries for city council members, and deferred wages for other employees. They should really look at cutting even more.

If El Monte voters approve the measure, this will be a huge boon…for neighboring cities such as South El Monte, Rosemead, and West Covina. Shoppers will end up heading to supermarkets and stores in neighboring towns to purchase their soft drinks. Consider someone who drinks 64 ounces of soda a day. He or she could save $4.48 a week by going to a neighboring town. And it’s likely those individuals won’t just buy their soda in West Covina; they’ll also get all their other groceries. That will lower El Monte’s sales tax revenues.

Yes, soda isn’t the most healthy of drinks. That said, using taxes to legislate morality is not a good thing. In this case, it will likely backfire on all concerned. Hopefully, El Monte voters will be wise enough to vote down this tax.

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Sales Factor to be Weighed Equally in California

Posted on July 25, 2012 by Russ

For business entities operating in multiple states, apportioning corporate tax can be difficult. Every state has different rules. This is especially true when dealing with California.

While California has a “single-factor” (sales) apportionment that can be used, there’s also a “three-factor” apportionment that uses sales, property and payroll. Back in 1993 the legislature said that when using the three-factor apportionment, the weight of the sales factor is doubled.

There’s a problem with that, though: California signed a multi-state compact that said the factors would be weighed equally. Several businesses sued the state. While the lawsuit was thrown out at the district court level, the 1st District Court of Appeal ruled unanimously that the businesses, led by Gillette, were correct. California must abide by the agreement because to not do so would be to break a contract.

I expect the Franchise Tax Board to appeal the case to the California Supreme Court.

Posted in California | Tagged | 2 Comments

The Grass Isn’t Always Greener on the Other Side

Posted on July 24, 2012 by Russ

Here in Las Vegas the local water district really, really tries for everyone to remove their lawns and replace them with “water-friendly” landscapes. Of course, this isn’t an issue in most of the US where rain happens far more frequently than here in the desert.

Most homeowners use sod for their lawns. It’s a big business (except where I live). Adrian Sod has been providing sod to the Sioux Falls, South Dakota region since 1966. Back in 2010, the owner of Adrian Sod, Jerome Adrian, allegedly told an IRS agent that he had no income because everything was in trusts. The IRS is alleging that those trusts are shams. The Department of Justice filed a 45-count indictment against Mr. Adrian, his son, and the ‘trustee’ of the trusts alleging conspiracy and various other tax evasion charges.

When I said sod is a big business I meant it. Allegedly Mr. Adrian has over $5 million in assets. Supposedly Mr. Adrian stopped paying taxes in 2001, allegedly started to fund the phony trusts in 2002, and sent a letter to the IRS in 2002 stating he was no longer a citizen. While it is possible to become an expatriate, it is not possible to do it in the manner that Mr. Adrian has apparently done.

Mr. Adrian is facing a lengthy term at ClubFed if found guilty on all the charges.

Posted in Tax Evasion | 1 Comment

Two Sets of Books Aren’t Better than One

Posted on July 22, 2012 by Russ

I’ve found that the one set of books I keep is plenty. Why would I want (or need) a second set of records showing my income and expenses? Of course, I don’t have a Bozo mind, and I don’t think I need to duplicate my efforts. (One time where you should keep a second set of books is when you change computer software. You want to run both software to make sure they both come up with the same amount of income.)

From New York comes word of a group of grocery stores in New York, New Jersey, and Connecticut that used two sets of books. They weren’t changing computer systems, though. Instead, the first set of books showed their accurate income and expenses; the second set of books allegedly didn’t include all of the income. The owners allegedly skimmed cash and used it for their personal use according to this story. The tax returns allegedly used the books that didn’t show all the income. Unfortunately for those allegedly involved in the scheme, the IRS apparently discovered that two sets of books were being kept for all the wrong reasons. Nine individuals face various charges including tax evasion, conspiracy, and obstructing the IRS. Given that the alleged tax fraud involves $56 million, those charged are looking at lengthy stays at ClubFed if convicted.

For one of those indicted, Adam Arici, this isn’t his first indictment. Mr. Arici and his attorney were indicted last December for allegedly violating the US-Cuba trade embargo and for witness tampering.

Posted in Tax Fraud | 1 Comment

Attorney Gets Tax Lien, Then Allegedly Commits Tax Evasion

Posted on July 22, 2012 by Russ

Lee Gottesman is a bankruptcy attorney in Toms River, New Jersey. He is also facing a heap load of tax troubles for some of the usual reasons.

According to the Department of Justice, Mr. Gottesman allegedly created a sub account within his attorney trust account after he had a tax lien filed against him in 2002. That account was for his wife…but his wife supposedly wasn’t a client. Then he allegedly ran all his expenses — both personal and business — through that sub-account. Adding to his troubles, from 2006 through 2009 Mr. Gottesman supposedly didn’t file tax returns…while allegedly earning more than $400,000. According to the indictment, Mr. Gottesman had a CPA prepare tax returns; he just couldn’t be bothered to file them. That’s tax evasion. The indictment noted that Gottesman, “…created and began to use the Sub Account to deposit business income and to pay personal expenses after the 2002 Tax Lien due to his belief that the IRS could not levy the Gottesman [Attorney Trust Account].”

But the reason he likely got into trouble is something that I’ve mentioned over and over again: Withholding payroll taxes but not remitting them. If you do this, you will be investigated. The indictment states, “He [Gottesman] knew that he was required to pay payroll taxes to the IRS, but that he had not.” Given that he allegedly collected (withheld) taxes on his employees but didn’t remit them, that’s a huge mistake. That’s another 15 counts to go with the four counts of tax evasion.

I look at the press release and the indictment and have to wonder. An attorney knows (or should know) the rules regarding taxes. He apparently had good advice from a CPA. He practices in bankruptcy, so he knows that there are alternatives to simply not filing and paying taxes. Yet Mr. Gottesman allegedly committed numerous felonies–and apparently admitted doing so to investigators.

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More Municipalities in Trouble in California

Posted on July 22, 2012 by Russ

Yet another California city may be joining Stockton, Mammoth Lakes, and San Bernardino in bankruptcy. According to the Huffington Post, Compton has $3 million on hand but must pay out $5 million in the next month. The problems are the result of lower property tax collections while labor costs (including pensions) continue to escalate.

Meanwhile, Democrats in Sacramento still push higher taxes as the solution. That “solution” will drive yet more businesses from the Bronze Golden State, and will only exacerbate the problems. Humorously, the state legislature gave raises to legislative aides of up to 10% and then cut the pay of other state workers by 4.62%.

A friend asked me what I thought it would take for California to rationally approach their problems and craft solutions that would work. That is an excellent question. I think the state will need to throw out all of the labor contracts and pension plans that have been negotiated in the past with state employees. California must also drastically cut taxes and regulations, and make the state a place that businesses want to locate in. The legislature’s example of the past week shows that California is still years away from solving their problems.

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Another FATCA Consequence: Sending 1042-S’s With No Withholding

Posted on July 19, 2012 by Russ

One of my clients who played in the World Series of Poker asked me to prepare his Form 1042-S’s to show the required withholding for some of his backers. The 2012 form is available, and it looks identical to the 2011 form. I always look at the instructions just to make sure that nothing has changed. Well, I noticed this instruction:

You must file a Form 1042-S even if you did not withhold tax because the income was exempt from tax under a U.S. tax treaty or the [Tax] Code, including the exemption for income that is effectively connected with the conduct of a trade or business in the United States, or you released the tax withheld to the recipient.

While there are exceptions for reporting, gambling proceeds subject to a treaty exemption is not one of the exceptions.

Let’s look at how this plays out. Suppose Russ is backed by Jon in a poker tournament. Jon is a resident of the United Kingdom, has an ITIN, and has provided me with a correctly completed Form W-8BEN. I play in the poker tournament and do well; Jon’s share of my winnings is, say, $100,000. While there is no withholding required under the US-UK Tax Treaty, I must still complete a Form 1042-S and submit that to the IRS. The 1042-S is due by March 15, 2013. It must be submitted with a Form 1042-T (Annual Summary and Transmittal of Forms 1042-S); the 2012 Form 1042-T is not yet available.

This appears to be yet another consequence of FATCA. Under FATCA, the IRS wants international banks and tax agencies to send information to the IRS on Americans. Well, turnabout is fair game; other countries want data on their taxpayers, too.

This is yet more paperwork being sent for no particularly good reason, and yet more work for tax professionals. Well, I keep telling my friends I have lifetime employment–this is yet another example of why.

Posted in Gambling, International, IRS | 1 Comment

Sigel Gets Two Years

Posted on July 15, 2012 by Russ

Philadelphia rapper Beanie Sigel pleaded guilty to tax evasion last year. He was sentenced to two years at ClubFed, and must make full restitution to the IRS. He must report to prison in September.

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