It Turns Out They Weren’t Brothers from Another Planet

It may be the High Holy Days for Jews around the world, but it appears that every day is a holy day for the Office of the Patriarch of the Gathering of the House of Israel. You never heard of that sect before? Strange, neither had I. But two Texans may be ruing the day they decided to invent it.

Timothy Patton and his wife Dawn didn’t like the federal income tax. (They’re Texans, so they missed out on state income tax.) They told their employer (a) they were single, and (b) they were exempt from income tax, and (c) to make their checks out to that sect. The Employer Identification of the sect was invalid, of course. Beginning in 2000, they stopped filing tax returns.

They were tried back in July and found guilty. During the trial they also insisted they be called “Brother T” and “Mimi” and weren’t the people named in the indictment. They asked for a new trial, and then “specifically stated that they had not filed a motion for [a] new trial.” It appears the rest of their motions were specious, and/or frivolous.

Well, Brother T and Mimi were sentenced last week: Timothy received 40 months at ClubFed and his wife got 36 months. They also must make restitution of $571,734.

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News Report: Full Tilt Sold

PokerFuse is reporting that Full Tilt Poker has been sold to Group Bernard Tapie. The deal is conditional on factors including a favorable resolution with the US Department of Justice. PokerFuse reports that the deal calls for repayment of all players…eventually.

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Draft Instructions Released for Son of FBAR; Gambling Accounts Will Not be Reportable

The draft instructions for the new Son of FBAR (Form 8938) were released today. (Here is a link to my discussion of the form itself.) Here are some highlights from a first skimming of the instructions:

  • For unmarried taxpayers living in the United States, the new form must be completed if you have either more than $50,000 in foreign financial accounts on the last day of your tax year (usually December 31st) or if you had more than $100,000 at any time during the tax year.  If you are married filing jointly, the amounts double (to $100,000/$200,000).
  • For unmarried taxpayers living outside of the United States who are either bona fide residents of a foreign country(ies) or passes the Physical Presence Test (Form 2555, the Foreign Earned Income Exclusion), you must file the form if you have more than $200,000 on the last day of the tax year or more than $400,000 at any time during the tax year.  If you are married filing jointly, the numbers increase to $400,000/$600,000.

As for the types of accounts and assets that are reportable:

  • Any financial account maintained by a foreign financial institution;
  • Other foreign financial assets, held for investment but not maintained by a financial institution, including stocks not issued by a US person, interests in foreign entities, and various financial instruments issued by non-US persons.
  • A foreign financial institution is a non-US financial institution that is a bank (or similar entity), hold financial assets for others, and is engaged in investing, holding partnership interests, or other financial roles.
  • Foreign mutual funds, foreign hedge funds, and foreign private equity funds are covered.
  • Online gambling accounts do not appear to be covered.

There is a transitional rule available for taxpayers who would have had to file this form in 2011 (generally, business entities filing on a fiscal year); they can file in 2012 without penalty.

The instructions are 11 pages long, and I don’t have time to delve into all of them at this point. Suffice to say that if you are covered by the new Son of FBAR, your tax return just became far more complicated and you will need to talk to your tax professional about this issue.

Posted in International, IRS | Tagged , | 2 Comments

Full Tilt Poker: $238 Million (54%) May Have Gone to Pay Taxes

As I noted last week, Full Tilt Poker allegedly paid their owners $440 million, much of that money supposedly coming from player deposits. One question I’ve been asked is, where did that money go?

Well, I don’t know where all of it went, but I do know where a large percentage of it went: The IRS and California’s Franchise Tax Board.

Full Tilt Poker has a complicated structure (to say the least) but it appears that the main vehicle for ownership was Tiltware LLC. That’s a California LLC, still active, with one Raymond Bitar listed as the agent for service. (You can look it up here.) There’s also a Tiltware Merchandise Services, LLC (another California LLC) whose agent for service is one Chris Ferguson. Mr. Bitar is under indictment in the original Black Friday (April 15th) accusations against Full Tilt; Mr. Bitar and Mr. Ferguson are among the accused in last week’s expansion of the civil claims against Full Tilt.

In any case, there were approximately 19 owners of Full Tilt. Assuming that the payments went through Tiltware, California income tax would be owed on the entire amounts of the payments. A California LLC must withhold state income tax on foreign (non-California) members (owners) of the LLC. The withholding rate is 7%. (Some of the members are Californians, and would likely owe up to 10.55% on their income. But I’ll be conservative and use 7%.) That’s a little more than $31 million into the California treasury.

Next is federal income tax. Unless the members had incredibly bozo tax professionals, they’ve paid federal income tax on all of the income they’ve received from Full Tilt. Interestingly, there were no tax charges filed with the original Black Friday indictments. Given that it is routine in allegations of financial crimes for the US Attorney’s Office to check with IRS Criminal Investigations, it’s fairly certain that Ray Bitar paid his taxes.

Using an average federal tax rate of 33%, that’s over $146 million collected in US income tax.

I assume Full Tilt is being taxed as a partnership. An LLC can elect to be taxed as either a C-Corporation or an S-Corporation. Given that Full Tilt has foreign owners, it cannot elect S-Corporation status. While it could be taxed as a C-Corp, it’s more likely that it’s being taxed as the default option, as a partnership.

That leaves self-employment tax. General partners in a partnership (those involved in the business) pay self-employment tax on their income from the partnership. Self-employment tax is at 15.3% on the first $106,800 and 2.9% thereafter. Now, not all of the Full Tilt owners would pay this, but it’s likely that the majority who received distributions did pay this. I’ll use 2% rather than 2.9% as an overall estimated rate for the effect of the limited partners. Still, that’s nearly $9 million more to the Treasury.

The total is $186 million, but that’s an understatement. And that’s probably a significant understatement. Still, even this figure represents 42% of the money distributed.

The problem with this analysis is that for federal tax purposes, tax is owed on the full amount earned, no matter what the distributions were! Suppose you have an LLC that earns $1 million, but you don’t take any withdrawals. You still owe tax on the $1 million!

At this point it’s impossible to know what this excess income was. This would be money plowed back into Full Tilt for development, etc. The estimates I’ve seen state that Full Tilt made on average $150 million a year during this time frame; that would equate to $600 million during the four-year period of 2007 – 2010. That might mean another $52 million in federal income tax and $3 million in self-employment tax have been paid. (There would also be some additional California income tax paid, by the California resident members of Full Tilt. I’ll ignore that for this analysis, but this could mean that I’m still understating the total.)

That gives a high estimate of $238 million in taxes paid, or 54% of the total of money distributed. That would leave just over $200 million for the Full Tilt owners to have actually received after taxes.

I was asked why didn’t the Full Tilt owners just loan the company money back so that they could pay the American players after Black Friday? (The Department of Justice estimates that the amount owed to US players is $150 million.) It’s simple: They don’t have the money. Much of the money has been spent or invested; it’s likely that only a small portion of the $200 million was actually sitting in cash or like funds.

What does this mean for the future? For Full Tilt, lots of legal problems and difficulties in selling the business. Yet there is a rumor that a French firm is looking at acquiring Full Tilt and contributing enough capital to pay all current customers (an estimated $300 million); Americans can only hope that this is true. It’s far more likely that Full Tilt will end up in receivership with the pieces being doled out to high bidders, and all customers receiving pennies on the dollar for whatever they had on deposit at Full Tilt.

Posted in Gambling, Scams | Tagged | 2 Comments

Tax Evader to be Head NBA Referee

Well, there might not be an NBA season, but if there is one I’m sure the NBA will have fair officiating this year….

Hat Tip: Joe Kristan

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Diamonds in the Fraud

There’s a new theory in the world of tax fraud promoters: Redemption. Joe Kristan had a post last week on some Kansas City fraudsters who used this method. The “idea” behind this is (as best as I can determine) that the federal government is holding money for you and all you have to do is send in various paperwork to get it.

The fraud in question was not confined to Kansas City. From Detroit comes the news of Diamond Tax Services. Damian Jackson, his wife Holly, and Tammy Daniels, are accused of promoting a tax fraud scheme. Mr. Jackson, a minister at a Detroit area church, used phony Form 1099-OID to obtain over $1.6 million in fraudulent refunds. The Department of Justice has asked a federal court to issue an injunction barring the three from preparing federal tax returns to others.

There may be a criminal prosecution in their future, too. The press release accuses the Jacksons of claiming $2.5 million in phony refunds on their tax returns. Those kinds of numbers tend to get IRS criminal investigation quite interested.

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In Regulators We Trust

That might be the state motto of California. An excellent article by Mike Perrault of the Desert Sun looks at what has happened to the entrepreneurial spirit in the Bronze Golden State.

It contains the news that:

  • A Vietnamese restaurant owner was required to install a $17,000 grease trap…though her cooking style makes that a complete waste of money;
  • It takes up to two years to get the permits to open a restaurant in California.  It takes 45 days in Texas; and
  • California lost 4,632 businesses in 2010, more than five times as many as in 2009.

There’s plenty more in this article on the decline of the Golden State, one regulation at a time.

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California Leads the Way: Worst State for Business

Another survey, another “winner” for California. Every three years Development Counsellors International publishes a survey: A View from Corporate America: Winning Strategies in Economic Development Marketing. Among the many results in the survey are the five best and worst states for business.

Here are the five best states for businesses:

1. Texas
2. North Carolina
3. South Carolina
4. Tennessee
5. Florida

And here are the five worst states for businesses:

50. California
49. New York
48. Illinois
47. New Jersey
46. Michigan

This survey shouldn’t shock anyone. The five worst states are known for high taxes, high regulations, and a miserable business climate. Meanwhile, the five best states are known for low taxes, low regulations, and a favorable business climate. Shocking, no?

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New Math: California Missed August Revenue Forecast

Just over one week ago, I wrote that California tax collections in August exceeded the budget. It turns out that California Controller John Chiang apparently had $75 million of insurance tax in August that was actually received in September. Thus, California revenues were under projections in August by $65 million.

Well, California is only $596 million under budget. What else could California do to help its cause? (My next post will deal with that.)

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Full Tilt Poker Alleged to be “Massive Ponzi Scheme”

The United States Attorney for the Southern District of New York this morning alleged that Full Tilt Poker is a “massive Ponzi scheme.” Back in April, the Department of Justice seized the domain names of the three largest US-facing online poker sites (PokerStars, Full Tilt Poker, and Absolute Poker/Ultimate Bet). Since then, PokerStars has refunded all money on deposit to US players, while Absolute Poker/Ultimate Bet has said basically nothing.

Full Tilt Poker continued to operate for just over two months, until the Aldernay Gambling Control Commission shut them down on June 29th. Full Tilt and the AGCC are having closed door hearings in London today regarding a re-start of Full Tilt Poker. It now appears likely that Full Tilt Poker will never restart.

In a statement, US Attorney Preet Bharara said,

Full Tilt was not a legitimate poker company, but a global Ponzi scheme. Full Tilt insiders lined their own pockets with funds picked from the pockets of their most loyal customers while blithely lying to both players and the public alike about the safety and security of the money deposited.

The owners of Full Tilt Poker are accused of pocketing $440 million since 2007.

Where does this leave players? Assuming the charges are true, its clear that players will not have any of the $150 million (the amount owed to US players; an estimated $300 million is owed to players worldwide) refunded to them voluntarily. The most likely case is that a receiver will wind down Full Tilt Poker’s business, and players will eventually receive pennies on the dollar (after filing claims).

From a tax perspective, this will likely become a casualty loss for players. There are special rules regarding Ponzi schemes and casualty losses (developed after the Madoff case in 2009) that may apply. The problem is that while these losses are definitely related to a Ponzi scheme, are they investment losses?

However, given the US Attorney’s description of the losses, it is possible that Revenue Procedure 2009-20 will apply. There are other possible methods of dealing with this (theft of money on deposit); impacted individuals should consult with their own tax professional as to the best method of treating this loss.

There is time to determine the best tax treatment, though. The losses clearly are 2011 events to be reported (probably) on 2011 tax returns filed in 2012.

One obvious remark: Buyer beware. When you are dealing with an offshore entity, you are going on faith and trust. Sometimes that trust is misplaced.

Posted in Gambling, Scams | Tagged | 3 Comments