Casualty Losses, Constructive Receipt and Full Tilt Poker

Posted on December 21, 2011 by Russ

I’ve been asked numerous times over the past few weeks one question by poker players: “Can I take a casualty loss on the money I have tied up on Full Tilt Poker?” The answer is a definite maybe, but even if there is a casualty loss it will likely not be a 2011 event.

For those unaware, Full Tilt Poker was one of three business offering online poker to Americans before April 15, 2011. On that date, the US Department of Justice indicted Full Tilt, PokerStars, and Absolute Poker/UltimateBet. The companies were accused of bank fraud and violations of the Unlawful Internet Gambling Enforcement Act (UIGEA) and other statutes. Yesterday, Brent Beckley (one of the founders of Absolute Poker) pleaded guilty to conspiracy to commit bank fraud and wire fraud and conspiracy to violate the UIGEA. His sentencing is scheduled for April 19th.

Of the three businesses, PokerStars has fully repaid its customers. Absolute Poker/UltimateBet announced that the business is closing, with assets being sold in an attempt to repay customers. Full Tilt Poker, after being accused of being a Ponzi scheme, was sold to Group Benard Tapie (GBT). According to reports, GBT will repay non-US customers while the Department of Justice will repay Americans.

So let’s get back to the original question: Can an individual take a casualty loss on his funds at Full Tilt Poker? First, we need to determine whether there has been a casualty loss. A casualty loss is a sudden, unexpected or unusual event where an individual loses something of financial value. There is no doubt that the loss of funds from Full Tilt Poker’s collapse was “sudden and unexpected.” However, there’s a problem with this being a casualty loss. Given that the DOJ and GBT do expect to repay Americans, there’s no loss today. There may be a loss at some future date if funds aren’t fully repaid, but today the most likely possibility for Americans is full repayment sometime in late 2012. That means there is no casualty loss.

This is even true for Absolute Poker/UltimateBet. Given that AP/UB is attempting to sell their assets and repay players, we do not have certainty of what will be lost (or won’t be lost). And certainty of loss is another thing needed to claim a casualty loss. While I doubt that AP/UB will fully repay players, it’s probable players will get something. Until we know what that something is, it’s not yet time to take a casualty loss.

The other question that goes hand-in-hand with this is whether individuals need to claim money “won” on Full Tilt Poker (and Absolute Poker/UltimateBet) that they did not cash out before April 15th. Here we must look at whether individuals constructively received the funds.

The doctrine of constructive receipt governs when income is reported in the United States. If you receive a check on December 29th you can’t hold it until next year to defer the income. You had the funds in your possession (albeit as a check), and there’s no reason you couldn’t have deposited them in December. You constructively received the money and its income in this year.

The same principle holds in reverse. When there is substantial doubt as to the paying of the funds, you do not have constructive receipt. With Full Tilt Poker and Absolute Poker/UltimateBet, such doubt definitely exists. (Given that the Department of Justice has charged Full Tilt Poker as being a Ponzi scheme, even the US government sees this doubt.) I can’t see constructive receipt existing here. (Note: For anyone who received funds from Full Tilt Poker or Absolute Poker/Ultimate Bet in 2011, there is definitely constructive receipt.) Until the funds are repaid, there likely is no constructive receipt.

Finally, I’ve been asked, “Can’t I just deduct the money I had on Full Tilt Poker (or Absolute Poker/Ultimate Bet) as a gambling loss?” No. You clearly did not lose the funds in a wagering event. This isn’t a gambling loss. This may be a theft or loss of funds on deposit, but today all we know is that the funds are in limbo.

Posted in Gambling, IRS | Tagged | 8 Comments

Psychic Help Wasn’t Good for Clients, but Was Great for the Psychic…Until Caught

Posted on December 18, 2011 by Russ

I’ve been told that a psychic is supposed to know and foretell the future. Nancy Marks was a psychic in Lafayette, Colorado. She had a unique–and quite illegal–method of obtaining income.

She warned her clients that there was evil lurking in the money in their bank accounts. The only way to get rid of the “bad energy” was to withdraw the money and for her to hold onto the funds. There were too many instances of the number “6” in their accounts and credit cards. Why, there at least one in ten numbers on their statements was “6”. [I made that last line up, but it goes to show the ridiculousness of this whole line of thought.]

In any case, Ms. Marks did know what to do with the money that was withdrawn and given to her: She spent it. There’s another word for spending others’ money without permission: theft. Added to that is not paying tax on that money (tax evasion). Ms. Marks was convicted last week of 14 counts of theft and two counts of tax evasion.

Of course, I do have to ask the obvious question: If Ms. Marks was truly a psychic, didn’t she know that she’d get caught in the end?

Posted in Colorado, Tax Evasion | 1 Comment

We’re Back, But Will the Sales Tax Deduction Come Back in 2012?

Posted on December 18, 2011 by Russ

I’ve moved into my new office, and everything is more-or-less running correctly in my new office in Las Vegas. There’s a new fax number (yes, there’s a real fax machine in my office) for those who need to send me a fax. So I’m back in business.

However, now that I’m a Nevadan, there’s the issue of the deduction for sales tax. That’s not going to be an issue for 2011 (individuals can choose between deducting sales tax or income tax for this calendar year), but as of now the deduction for sales tax will vanish for 2012. It’s vanished before (most recently, in 2009) but was retroactively reenacted; this may happen again for 2012. We’ll have to wait and see.

Posted in Nevada, Sales Tax | Comments Off on We’re Back, But Will the Sales Tax Deduction Come Back in 2012?

Only $16,788 Per Phony Child

Posted on December 6, 2011 by Russ

The saga of the woman who did not give birth to nondecuplets is complete. Via Joe Kristan comes word that Norma Coronel made a plea deal and was ordered to repay the IRS $302,186.

Though the linked story states she gave birth to 20 phony children, earlier reports indicated it was just 19 (with one of them real). I’ll use the smaller number (erring on the side of caution, I suppose) which equates to a repayment of $16,788 per phony child.

As I said when I first reported on this story, claiming something that’s very newsworthy on your tax return that’s false is a sure way to get into trouble. This was truly Bozo.

Posted in Tax Fraud | Comments Off on Only $16,788 Per Phony Child

California Has Lost Over 720,000 Taxpayers & $48 Billion of AGI From US Migration From 1993-2008

Posted on December 6, 2011 by Russ

My move to the Silver State has gotten some comments from two other tax bloggers, Joe Kristan (Roth Tax Updates) and Paul Caron (TaxProf Blog). In the TaxProf Blog post, there’s a link to statistics on migration from within the US to and from California. The numbers are quite revealing.

In the most recent year for which statistics are available (2008), California gained 3,667 tax returns from migration but lost $829 million of Adjusted Gross Income from migration. (Note that this is income, not tax dollars, and is based on federal AGI, not California AGI.) What this clearly shows is that high-earning taxpayers fled California for greener pastures: Texas, Oregon, and Nevada gained the most AGI from California. (The numbers come from the Tax Foundation, and are available here.)

Net Increase/ Net Increase/
(Decrease) of (Decrease) of
CA Returns CA AGI
[$ in 000s]
1993 (138,251) $          (7,398,356)
1994 (111,940) $          (6,320,105)
1995 (73,660) $          (4,295,887)
1996 (28,611) $          (1,611,444)
1997 (8,583) $             (524,257)
1998 (9,676) $             (735,147)
1999 (6,273) $             (458,276)
2000 7,591 $                467,012
2001 (29,959) $          (2,805,962)
2002 (27,379) $          (2,671,237)
2003 (42,672) $          (3,247,756)
2004 (71,963) $          (5,093,362)
2005 (79,589) $          (5,659,718)
2006 (68,454) $          (4,774,491)
2007 (34,379) $          (2,524,154)
2008 3,667 $             (828,842)
Total (720,131) $       (48,481,982)

 

You may ask, hasn’t California’s population increased from 32 million in 1994 to 37 million in 2010? That’s absolutely correct; the increase is from births and deaths and immigration to California from outside of the US. Unfortunately, a large number of Californian’s who were earning good incomes have decided to enjoy their gold in places other than the Golden State.

Posted in California | 1 Comment

When Silver Is Better than Gold

Posted on December 2, 2011 by Russ

Today’s closing price for silver is $32.72 an ounce. Meanwhile, Gold is $1,749.35 an ounce. So how can silver be better than gold?

If you’ve been a reader of this blog, you’ve seen me write numerous times about California’s tax and economic policies. Bluntly, if California were a corporation, it would be delisted from the Pink Sheets. (For those unfamiliar with the “Pink Sheets”, that’s the home for stocks that get delisted from the NYSE, American Stock Exchange, or NASDAQ.) Meanwhile, the only recipe that Democrats in Sacramento have is to increase taxes.

My tax bite is roughly 10% to California. For every dollar I make, ten cents goes to Sacramento. (Yes, I get a benefit from that in that state income tax is deductible on federal tax. However, because of the Alternative Minimum Tax even that benefit is capped.) For the past few years I’ve considered if I could move my business to a friendlier environment. Earlier this year, I decided to do so.

I’ve sold my house in Irvine, and am in the process of purchasing a home in the Las Vegas area. I will be in a much friendlier business environment, with a lower cost of living. The home I’m purchasing is nearly double the size of my current home and costs almost 50% less than what I sold my current home for.

There comes a point where decisions are forced on you. With the growth of my business, I looked at possibly hiring another tax accountant in 2010. When I ran the numbers, I found that I would lose money by hiring a productive tax accountant. That’s because of all the regulations and costs that I would immediately incur if I had an employee. I’m not stupid: If I lose money by hiring someone, I’m not going to do it.

Yet my business was (and is) growing, and I had to do something. As you may know, I’m adding a partner (Aaron Lion, E.A.). He’s based near D.C. rather than California. As of a week from now, I will have executed my own Escape from California.

Democrats in Sacramento constantly say that with all of California’s advantages (and the state does have a lot: great climate, a large diverse population, and diverse industries) that increasing taxes doesn’t impact employment. That’s hogwash. It’s driven large companies (e.g. Nissan) to Tennessee. It’s driven me to the Silver State, Nevada. Sure, I’m just one job but the money I earn goes to support others’ incomes. That will still be the case, but not in the Golden State, California.

With the movers coming tomorrow, and everything that’s been happening with the move and with what will happen over the next two weeks, it’s likely that posting will be minimal until mid to late December.

Posted in California, Nevada, Taxable Talk | 12 Comments

Real Housewife Tax Cheats in my Backyard

Posted on December 2, 2011 by Russ

I’m a resident of Orange County (well, if you read the next post I write…), and I missed the Real Housewife Tax Cheats in Orange County. Luckily, Joe Kristan caught it.

The Orange County Premium Fraud Task Force, a collaboration of investigators from OCDA, DOI, EDD, FTB and the Contractors State License Board investigated the couple for two years and discovered that between 2000 and 2008, they fraudulently submitted 42 claims for uninsured injured workers and underreported $29 million in payroll to SCIF in order to avoid paying Workers’ Compensation Insurance premiums.

Yes, proceeds from illegal income are taxable.

Posted in Orange County, Tax Fraud | Comments Off on Real Housewife Tax Cheats in my Backyard

Illinois Couples in Civil Unions Will File Married Returns in 2011

Posted on December 1, 2011 by Russ

Illinois couple who are in civil unions will file married returns for 2011. They will, for state tax purposes only, file either married filing jointly or married filing separately. Note that they will still file single returns for their federal taxes.

While this may be a beneficial result, it will likely also be a more expensive situation for such couples. Tax professionals will have to prepare two separate returns: A single return for federal tax purposes, and then a joint (or married filing separately) return for state purposes. Impacted individuals should expect that the cost will increase because such returns will take more time to prepare.

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California Ranks High Again…And That’s Not a Good Thing

Posted on December 1, 2011 by Russ

Another survey of business, and another set of results that’s anything but golden for California. Claremont McKenna College’s Rose Institute of State & Local Government today released the 17th annual Kosmont-Rose Institute Cost of Doing Business Survey. The Rose Institute, in partnership with Los Angeles-based Kosmont Companies, gathers business fees and a variety of tax rates from 421 selected cities across the United States.

Of the 20 most expensive cities in the country to do business, five are in California: Beverly Hills, Culver City, Los Angeles, Santa Monica, and San Francisco. None of the 20 least expensive cities are in California. Eight are in Washington state (Yakima, Kent, Everett, Vancouver, Federal Way, Olympia, Spokane, and Bellevue) and five are in Texas (Austin, Abilene, Fort Worth, Corpus Christi, and Houston).

While some of the most expensive cities are ones you’d think of (Chicago, New York, and Philadelphia), a few are a surprise: Akron, Ohio (a retail business license fee of $112,500), Naperville, Illinois (a retail business license fee of $100,000), and Mobile and Birmingham (both Alabama cities have high sales tax rates).

Businesses do locate because of taxes, a fact that is lost on Democrats in Sacramento. A press release on the survey is available here. The full survey is available from the Rose Institute.

Posted in California | Tagged | 1 Comment

If You Fail Four Times, the Fifth Time Won’t be the Charm

Posted on November 23, 2011 by Russ

As I’ve said, there is an income tax and you do need to pay it. Today’s petitioner in Tax Court didn’t like that idea and filed case after case in Tax Court citing frivolous arguments.

In 2006, the petitioner received just over $45,000 in military retirement. He didn’t file a tax return, so the IRS prepared a Substitute for Return. A notice of deficiency was sent and the petitioner timely filed a Tax Court petition. That was about the only thing that was done correctly — the timely filing.

Unfortunately for the petitioner,

At no time before or during trial did petitioner attempt to substantiate any deduction or dispute the receipt of income that was included in the statutory notice. At all times petitioner has relied solely on frivolous arguments about tax return filing requirements, preparation of substitutes for returns, and procedures for determination of tax deficiencies and additions to tax.

It’s not good when the Court can cite a case you brought up as a precedent against you:

Petitioner continues to take up this Court’s valuable time and resources with frivolous and irrelevant arguments. To expand upon his contentions is simply not necessary. As this Court stated recently in Wheeler v. Commissioner, T.C. Memo. 2010-188: “To do so would be to encourage the dilatory conduct that * * * [petitioner] has employed throughout the history of this case and would neither dissuade petitioner nor provide useful guidance to taxpayers with legitimate cases.”

Not only did the petitioner lose the case, but the maximum possible frivolous penalty was awarded — $25,000. The Court also noted that his appeals (to the 10th Circuit Court of Appeals) have also started to receive sanctions (penalties). He escaped without penalty on his first appeal, was sanctioned $4,000 on the second appeal, and $6,000 on the third.

The only good news out of this case is that the petitioner is helping to reduce the budget deficit.

Case: Wheeler v. Commissioner, T.C. Memo 2011-278

Posted in Tax Court | Comments Off on If You Fail Four Times, the Fifth Time Won’t be the Charm