Taxes and Online Gambling: General Presentation on June 15th

Posted on June 8, 2010 by Russ

I’ll be presenting a one-hour continuing education talk on Taxes and Online Gambling at the monthly meeting of the Orange County Chapter of the California Society of Enrolled Agents next Tuesday, June 15th. If you’re near the Phoenix Club (1340 S Sanderson Ave, Anaheim) come out and enjoy an introduction to this issue. I’ll also be inducted as the President of OCEA on Tuesday. Here’s the synopsis of my presentation:

Your client innocently mentions, “My son at college won $100,000 last year playing online poker. What do we do for his tax return?” It seems like a simple question; after all, we know the income is taxable. Yet what’s simple at first glance is anything but straightforward. Dealing with online gambling brings you into issues regarding the legality of online gambling, recordkeeping, constructive receipt, the Kiddie Tax, the Jock Tax, foreign bank account reporting, and many others.

Russell Fox, EA, MBA, brings a unique perspective in looking at these and other related issues. Russ was a professional poker player and is the author of three books on poker. His practice specializes in professional and successful amateur gamblers. He’ll discuss how to handle the client who dabbles in online gambling.

Before forming his own tax and consulting practice in 1999, Russ worked in private industry for 17 years. He held various finance and operation management positions in a diverse spectrum of companies, ranging from California’s largest grower of citrus to the dot-com that invented the pop-up advertisement. Russ is the incoming President of OCEA. He has a B.S. from the University of California, Berkeley, and an M.B.A. from the University of Southern California.

You can register here.

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2011 Doesn’t Look Bright

Posted on June 8, 2010 by Russ

Arthur Laffer, the noted economist, penned an op-ed in the Wall Street Journal. An excerpt:

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don’t work until they take effect. Mr. Obama’s experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

Dr. Laffer also notes something that I’ve been saying since I began this blog:

It shouldn’t surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.

In any case, the entire article is well worth your perusal; you can find it here.

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Election Day

Posted on June 8, 2010 by Russ

Today is primary election day in California, Nevada, and Arkansas. While Californians don’t have many tax-related propositions to vote on today, there are numerous individuals running for office in the primary: Every state Assemblyman, half of the State Senate, one US Senator, and the Governor are all on the ballot.

If you’re in Orange County, you can find your precinct here. Elsewhere in California, you can find your polling place here.

No matter what, get out and vote today!

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The Sky Is Not Falling (Yet)

Posted on June 2, 2010 by Russ

For online gamblers, yesterday was the day that banking regulations relating to the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 went into effect. The legislation itself passed in 2006 (it was attached to the Safe Ports Act). Kay Bell at her excellent blog, Don’t Mess With Taxes, stated, “Attention online gamblers. When you go to ante up today, your bet is likely to be refused.”

Not yet, anyway.

What changed yesterday is that banks are now required to have policies to prevent funds from flowing to purveyors of “unlawful internet gambling.” The law itself did not change what is unlawful internet gambling. Indeed, the UIGEA defines unlawful internet gambling as gambling that’s unlawful according to current state or federal laws. One of the complaints from financial institutions is that the law is vague as to what is or isn’t illegal.

The US Department of Justice considers all internet gambling to be unlawful. However, the courts haven’t agreed. In the only court case on point, the DOJ lost in Re: MasterCard that the Wire Act applies to non-sports betting. (Sports betting is clearly illegal under the Wire Act.) That doesn’t mean that a different US Circuit Court of Appeals won’t rule differently, or that the DOJ won’t attempt to apply some other law.

In any case, the sites offering sports betting are still offering those clearly illegal bets to Americans. For example, you can go to Bodog and make sports bets…and that’s definitely unlawful internet gambling.

Online poker operates in a gray area. Poker is a game of skill (in my opinion), though courts haven’t always agreed. That said, there’s a preponderance of evidence showing this to be the case. So whether or not poker is unlawful internet gambling today is debatable. (It is illegal in Washington state, though, where all online gambling is a Class C felony…the same as rape. The logic of that escapes me, but you’d have to ask Evergreen State politicians what they were thinking when they decided that.)

From a tax standpoint, though, nothing has changed. Illegal income is just as taxable as legal income. All gambling income is taxable, period. If you make money playing online poker you need to send some of that to the IRS and your state tax agency.

There is legislation circulating in Congress to legalize online gambling. The chance of passage this year is minimal as there is still significant opposition. While I do expect eventual legalization and regulation of online gambling, I suspect we are still a few years away from this happening. Until then, do remember to pay your taxes no matter if you operate in the gray or red areas of the law.

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Your Tax Return May Cost More

Posted on June 1, 2010 by Russ

Something that all economists know is that all tax increases on businesses are passed on to consumers. All of them. There is no such thing as a free lunch.

The Tax Extenders Bill, HR 4213, would impose a new tax on small S Corporations…like mine. If this bill becomes law, I will be forced to increase my rates. I’d guess the increase at somewhere around 10% (I’m in Las Vegas for the week, so I can’t run the numbers as well as I could in Irvine). Please call your Senators (you can find their phone numbers here) if you don’t like the idea of such a rate increase and a discriminatory tax against small S Corporations. For Californians, you can reach Barbara Boxer’s office at (202) 224-3553 and Dianne Feinstein’s office (202) 224-3841. You can also send emails to them through the contact page I linked to.

On the other hand, if you like the idea of only large tax firms and higher charges from small tax practices, do nothing. NASCAR, Iowa diesel biofuels, and other wonders are part of the tax extenders package. I’m sure they’re important (to those people) but I don’t think they need tax subsidies.

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Impure

Posted on May 29, 2010 by Russ

A couple of weeks ago I wrote about the coming crackdown on nightclubs, taxi drivers, and doormen in Las Vegas. One nightclub chain, Pure, yesterday took what they hope will be preventative action. Pure implemented a compliance program.

Of course, the cynic in me notes that (a) Pure’s corporate offices were raided two years ago by the IRS; (b) the IRS announced a few weeks ago that they would take action if the clubs didn’t clean up their act; and (c) Pure waited until after that announcement to implement their compliance program. It also remains to be seen if this will be a program that’s just down on paper or if Pure will actually start issuing 1099s to doormen and drivers delivering patrons to their nightclubs…not to mention the $100 bills that doormen receive so that individuals can avoid the lines.

In any case, I suspect the IRS may have some undercover investigators noting the payments made to drivers and others and then checking next year to see whether 1099s were sent. I think the IRS is serious about this, and if I were running nightclubs in Las Vegas I’d strive to be pure…in relation to the tax laws.

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Pop, Pop, Fizz, Fizz; Oh What a Relief It Isn’t!

Posted on May 27, 2010 by Russ

Only in California would Democrats in the Legislature get the “brilliant” idea of borrowing money from the deposits consumers make on plastic and glass soda bottles to balance the budget. The Democrats also want to increase oil taxes.

Of course, the idea of drastically cutting compensation and pension benefits to the public employee unions is far from Democrats’ minds. Of course, the public employee unions are the biggest supporters of Democrats, so perhaps I’m just adding two and two correctly….

In any case, there’s no doubt that this portion of the budget is DOA. Republicans won’t be voting for tax increases (especially in an election year). Meanwhile, the unstoppable force and the immovable object will soon collide….

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AB32 (California Cap & Trade) Is a Job Killer

Posted on May 27, 2010 by Russ

That’s not me talking (well, it is too); rather, it’s the non-partisan California Legislative Analyst that has called it that. The Wall Street Journal reports on the LAO’s study of the measure, noting:

“California’s economy at large will likely be adversely affected in the near term by implementing climate-related policies that are not adopted elsewhere.” While the long-term economic costs are “unknown,” the study finds that AB-32 will raise energy prices, “causing the prices of goods and services to rise; lowering business profits; and reducing production, income and jobs.”

Well, duh! California can’t change the laws of thermodynamics nor can they force business to pay above market rates. AB32, California’s cap & trade measure, significantly increases the cost of a business operating in the Bronze Golden State. There’s a solution, though: A ballot initiative on the November 2010 election would stop the implementation of AB32 until California’s unemployment rate falls to 5.5%. Given that California’s current unemployment rate is 12.6%, this initiative would effectively put AB32 on the ash heap of history.

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The Who Needs Small Tax Practices Act

Posted on May 27, 2010 by Russ

Call me bitter, but I’m unhappy with the new Extenders legislation. While it would extend several tax breaks, it would deal a blow to many entrepreneurs–myself included.

My practice is set up as an S Corporation. A 5% (or greater) S Corp owner must be paid a reasonable salary. He can take any additional profits as distributions. That’s exactly what I do, but perhaps not for long.

You see, the new Extenders bill would penalize businesses like me. Joe Kristan noted,

It would penalize the smallest personal service providers to the benefit of their larger competitors.. A sole proprietorship would pay taxes at a rate at least 2.9% higher than a competitor whose “principal asset” is the reputation of more than three employees.

The bill also will require businesses and the IRS to determine what the “principal asset” of a personal service corporation is. The bill obviously requires the valuation of intangible assets — reputation and skill — but in a way not elsewhere attempted in the tax law. How do you do this?

Joe notes that if I owned a building (through my business) that could be my largest asset, and that might make me exempt from this legislation.

I have a better idea: Dump this legislation. Why in the world does Congress want to penalize entrepreneurs such as myself? Could it be that larger service firms are annoyed that with the Internet smaller, more nimble competitors are driving away business? I saw that H&R Block’s business was down about 5% this past tax season.

Of course, Congress being what it is I doubt this legislation won’t pass as written. It’s stupid and penalizes people (remember the Health Care legislation?) so it’s passage is likely assured….

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California Election: Proposition 13

Posted on May 24, 2010 by Russ

Here’s the first of our series on the June 2010 propositions on the California ballot.

What?! Proposition 13 is on the ballot?! It’s not that Proposition 13. This Proposition 13 actually does impact property tax, but it has no opposition.

Proposition 13 would exempt building that are seismically retrofitted from reassessments. This impacts retrofits of unreinforced masonry buildings (these buildings are morel vulnerable to earthquake damage). Currently, these building are exempted from reassessment for 15 years. This would extend the exemption until the property is sold.

Don’t forget to vote on June 8th.

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