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

Whistle Blown on Referees

A fundamental principal of US taxation is that all income is taxable unless Congress exempts it. If you’re a referee in a basketball game, you have to pay tax on that money.

Now, I wouldn’t have though that refereeing adult basketball leagues would be something that leads to alleged tax fraud. But I was wrong.

From Chelsea Piers, the sports complex in Manhattan, comes the story of some basketball referees. At $40 a game, this doesn’t sound like big money. That said, it can add up; one of the accused allegedly earned more than $10,000 in 2004. Chelsea Piers (like all businesses) had to issue Form 1099-MISCs to any referee who made more than $600 in a year. Whether or not you receive a 1099, the income is still taxable; however, the defendants likely felt that if the IRS didn’t receive a 1099, they’d earn the money tax-free. So what’s a good way of avoiding getting a 1099?

How about identity theft. Instead of all the payments going to each individual, they paid the stolen names. They allegedly obtained these names from a variety of sources: a youth baseball team, cases at the New York State Workers’ Compensation Board, a chamber of commerce, and friends and family.

Two of the four involved in the scheme pleaded guilty, while the other two were arrested.
The two remaining defendants face identity theft and tax evasion charges (one of the defendants also allegedly decided not to file any tax returns for four years).

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Canada Fights Back

Jim Flaherty is the Finance Minister in Canada. Mr. Flaherty (along with many Canadians) is not happy about FATCA and FBAR. FATCA will impose requirements on Canadian banks (and other financial institutions throughout the world) to report transactions to the IRS. Mr. Flaherty wrote a letter to several newspapers, including the New York Times, Washington Post, and Wall Street Journal regarding his displeasure. Here are some excerpts:

Many Canadians, however, have become concerned about the impact of a proposed piece of American tax legislation – the Foreign Account Tax Compliance Act, or FATCA. [See Note Below]

I share their concern.

We appreciate efforts to combat tax evasion. In fact, our two jurisdictions co-operate to prevent it. But FATCA has far-reaching extraterritorial implications. It would turn Canadian banks into extensions of the IRS and would raise significant privacy concerns for Canadians…

But put frankly, Canada is not a tax haven…[W]e share the same goal of fighting tax evasion and we already have a system that works.

To rigidly impose FATCA on our citizens and financial institutions would not accomplish anything except waste resources on all sides…

But the threat of prohibitive fines for simply failing to file a return they were unaware they had to file, is a frightening prospect that is causing unnecessary stress and fear among law abiding hardworking dual citizens.

We support efforts to crack down on legitimate tax evasion. These measures, however, do not achieve that goal.

Mr. Flaherty got one item wrong in his letter: FATCA is not a proposed piece of legislation; FATCA already passed Congress. What is in the future is the date of implementation of FATCA. FATCA passed Congress in March of 2010; the legislation goes into effect on January 1, 2013.

On everything else, Mr. Flaherty got it right. Congress wants to turn the world into minions of the IRS. And the IRS prefers to go after jaywalkers with shotguns (with regards to FBAR violations).

I expect lots more pushback worldwide as countries realize what Congress hath wrought. Canada (and every other country in the world) is, after all, its own sovereign country no matter what the United States Congress might think.

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Once Again, Telling that Prospective Purchaser About the “True Profit” of the Business Backfires

One method of increasing profit that’s been practiced since the first books and records have been kept is to keep two sets of books. One set shows the true profit and loss while the other presents a bleaker picture that’s used for tax returns. As long as you’re not caught it works great.

One problem is, of course, what you do when you sell your business? Prospective purchasers like to know what the business really makes. A business with a lower profit will sell for less, so the real books usually get shown. The IRS knows this, and so they do send undercover agents (with hidden tape recorders) to businesses that are for sale.

Take the owner of Club 7 in Fruitland, Idaho, Thomas Dale Overstreet. Mr. Overstreet decided to sell his business. In April, a prospective purchaser spoke with Mr. Overstreet and was allegedly told that the true profit was quite a bit higher than what was on the books. Yes, once again that was an IRS agent. But that wasn’t the only problem for Mr. Overstreet.

I’m sure the IRS then went to look at Mr. Overstreet’s tax records to see what was on his returns. The problem was that there were no returns filed for 2003 – 2010. Oops. Given that Club 7 supposedly made $1 million during this period, that’s a problem. It also appears that much of the profits came from hosting gambling at his club. Casinos aren’t legal in Idaho, so that’s yet another problem.

The IRS undoubtedly continued to investigate. They certainly looked at his bank records, but they apparently didn’t show much. It appears that the reason why is that Mr. Overstreet sent the profits from his business to Mexico, allegedly via money laundering and bulk cash smuggling.

All-in-all Mr. Overstreet has been accused of everything from tax evasion to money laundering, and he’s looking at spending decades at ClubFed if convicted of all the charges. If Mr. Overstreet had kept just one set of books and paid his taxes, its likely he’d still be making money from his illegal activities.

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Will Chicago Get a New Casino?

Illinois Governor Pat Quinn is not happy about proposed legislation that would add five casinos in Illinois. One of these would be in Chicago.

Among his complaints are that it would harm education, increase corruption, lower oversight, and add to organized crime. Included in the legislation would be a lowering of tax rates (the current tax on casinos is between 15 and 50 percent) to a maximum of 20, 30 or 40 percent.

Meanwhile, Illinois politicians and the governor (all Democrats) are playing a game of political chicken. While proponents trumpet the possible new revenues (potentially $1 billion from a Chicago casino) it looks as if this legislation may never get out of the Illinois legislature.

Posted in Gambling, Illinois | 1 Comment

It’s Official: Cellphones Mostly Nontaxable to Employees

In the wonderful world of fixed assets, there are some assets that are more fixed than others. No, I’m not talking about huge machines; rather, I’m talking about listed equipment. These are items that Congress has decided must always be delineated on tax returns. Paperwork requirements are stricter for listed equipment. Cellphones were listed equipment.

Back in 2009, the IRS attempted to enforce the law. This meant that if Acme, Inc. gave Joe Employee a cellphone, Joe’s personal use was income, taxed just like the personal use of an automobile. The public wasn’t happy, and Congress included a repeal of cellphones being listed equipment in a law passed in 2010.

Yesterday, the IRS finally issued guidelines that state that if an employer provides an employee a cellular phone for “noncompensatory business purposes” (that is, to do work), it will be an “excludible” (from income) fringe benefit.

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Third Quarter Estimated Tax Payments Due Today

Third quarter estimated tax payments are due on September 15th. If you make estimated tax payments, make sure you have either mailed your payment in today (using certified mail, return receipt requested) or by paying electronically using EFTPS or your state’s electronic payment system.

A reminder that most Californians who make estimated payments do not have to make a state estimated payment today. California switched to a 30% – 40% – 0% -30% scheme for estimated payments. The third quarter payment is 0%. However, if you use the annualized income method (that is, you make estimated payments based on your year-to-date income), you may need to make a payment.

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Calendar Year Corporation, Partnership, and Fiduciary Returns Due on the 15th

September 15th is the first of the extension deadlines: Today, calendar year corporation, partnership, and fiduciary tax returns are due. Make sure you mail them today (use certified mail, return receipt requested) or electronically file the returns.

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Eight Days a Month Not Enough

As I’ve said in the past, there are several states where being an amateur gambler is not a great thing. Wisconsin is one of those states. Yet another amateur gambler found that out the hard way.

Carol Kubsch reported $473,075 of gambling winnings and losses as an amateur, and discovered that on her Wisconsin tax return that led to $30,000 of taxes on phantom income. So she amended her returns, and tried to be considered a professional. As Taxdood reported, that didn’t work out well: “Unfortunately, a taxpayer can’t simply categorize oneself the type of gambler that produces the lesser tax bill. The professional versus amateur gambler status is a facts and circumstances determination.”

She might have gotten away with this if she hadn’t filed amended returns. Every amended return is looked at by a human.

Taxdood has more.

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Tax Increase to Pay for Tax Cuts? Yeah, That’s Gonna Fly…

President Obama released his jobs bill on Monday. You needn’t read it; it has no chance of passing the House.

Back in July, President Obama stated he’s all for compromising.

Either way, I’ve told leaders of both parties that they must come up with a fair compromise in the next few days that can pass both houses of Congress -– and a compromise that I can sign. I’m confident we can reach this compromise. Despite our disagreements, Republican leaders and I have found common ground before.

Well, it’s election time so who needs compromise? Apparently, not President Obama:

Obama’s top political adviser David Axelrod said Tuesday that the administration was unwilling to break up the president’s $447 billion jobs plan if Republicans were only receptive to passing certain elements.

“We’re not in a negotiation to break up the package. It’s not an a la carte menu. It’s a strategy to get this country moving,” Axelrod said Tuesday on ABC’s “Good Morning America.”

Meanwhile, how is this package (which won’t pass) be paid for? Tax increases! From Roth Tax Updates,

The President has released the tax increases he wants to see as part of his “jobs” bill. They should be familiar, because he keeps proposing them:

– Taxing partnership carried interests as ordinary income

– Repeal bonus depreciation on private jets

– Take away some deductions from the oil industry — including some that are allowed to all taxpayers otherwise, like the Sec. 199 manufacturing deduction

– Cap the tax benefit of itemized deductions at 28%

In the end, this is all irrelevant. The package isn’t going to pass. The House will take what’s been proposed and will put a few things out, a la carte. The Senate will ignore it, and nothing will happen. And if the package should somehow survive the House (which it won’t), the tax increases won’t.

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