Louisiana Loves Gamblers

Posted on February 15, 2008 by Russ

And that’s not a good thing.

Assume you’re an amateur gambler. You add up your winning and losing sessions for the year, and find that you have $150,000 of wins and $100,000 of losses. You get to deduct the $100,000 of losses on your federal income tax.

But if you’re a resident of Louisiana, you can’t do that on your state return. Louisiana penalizes anyone who takes itemized deductions. The formula for calculating the LA itemized deductions is:

57.5% * [(Fed. Itemized ded’ns) – (Fed. Standard ded’n)]

This is especially bad for amateur gamblers, because gamblers must include all of their wins as part of their Adjusted Gross Income but none of their losses. At least Louisiana gives a deduction from income of the amount of federal income tax you pay…

So Louisiana joins my list of states where a gambler shouldn’t reside. Here’s the complete list:

Connecticut
Illinois
Indiana
Louisiana
Massachusetts
Michigan
Minnesota (because of its AMT)
Mississippi (Only MS gambling deductions are allowed)
New York
Ohio
West Virginia
Wisconsin

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Taxing the Virtual World

Posted on February 14, 2008 by Russ

Let’s suppose you’re playing an online role playing game such as Second Life. You’ve accumulated quite a bit of virtual property, and have a stash of virtual money. James Doe offers you $5,000 for your virtual money and virtual property—that’s 5,000 real U.S. Dollars—and you elect to accept them. Do you have a real taxable event that would interest the IRS or just a virtual event?

I’ve written about this in the past, and I came to the conclusion that sooner or later the virtual world would intersect with the IRS. An article in the New York University Law Review by Professor Leandra Lederman of Indiana University’s School of Law suggests that,

“…in virtual worlds that are intentionally commodified, such as Second Life, tax doctrine and policy counsel taxation of even in-world sales for virtual currency, regardless of whether the participant cashes out. However, as in game worlds, participants should not be taxed on purely in-world trades of non-currency items. This approach would allow entertainment value to go untaxed without creating a new tax shelter for virtual commerce.”

The good news? She doesn’t believe that pure virtual transactions in a virtual world should result in the IRS taking a bite (though a literal reading of the Tax Code could be interpreted that such transactions are subject to tax).

The IRS is aware of this issue and, sooner or later, it will be added to their priority guidance list. I suspect that sometime in the next few years if you trade virtual dollars for real dollars you will also receive a real 1099.

The abstract of the paper is available here. The full paper is not available online.

Thanks to the TaxProf Blog for the heads-up about this interesting subject.

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Strawberry Settles

Posted on February 13, 2008 by Russ

Darryl Strawberry, the former major league baseball player, has been in lots of trouble over his life. He’s battled drugs, cancer, ex-wives, and baseball players. Today he agreed to settle a tax dispute with the IRS.

Back in 1995 Darryl Strawberry was convicted of tax evasion. He still owes almost the whole debt—$430,000 (he’s paid $8,600). He has agreed to reimburse the IRS in full including interest and penalties.

News Story: Newsday (via AP)

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“The Tax Court Is Frivolous!”

Posted on February 13, 2008 by Russ

You have a small dispute with the IRS. The IRS alleges that you owe $554 and $1142 for the two years in question. You elect to file a Tax Court petition. When most people go to Tax Court, they work with the Court and the IRS (the respondent in a Tax Court action) so that their case can be heard and the judge can determine who is right.

However, today we look at what happens when a bozo petitioner brings a Tax Court action. Would he: (a) allege that respondent’s counsel has, “engaged in serious misconduct”; (b) allege that the “presiding judge has failed and failed again to show any semblance of impartiality”; (c) refuse to accept service of court documents (sent by certified mail); (d) send the IRS an ultimatum demanding settlement on his terms and not appear in any of the pre-trial hearings/motions; or (e) all of the above.

You already know the answer—we’re dealing with a bozo here. All of the above happened and is documented in this case.

The IRS moved for dismissal because of lack of prosecution (the petitioner never brought the facts out on his case), and as the Tax Court noted, dismissal was a “relatively simple matter.”

The IRS also asked that the petitioner face a penalty under section 6673. The Tax Court noted that in a different case the Fifth Circuit Court of Appeals held,

“it is difficult to imagine a lesser sanction that would vindicate the integrity of the court proceedings and deter * * * [taxpayers] from similar misconduct. Wasteful and dilatory appeals unjustifiably consume the limited resources of the judicial system: “While judges, staff and support personnel have expended energy to dispose of this meritless appeal, justice has been delayed for truly deserving litigants.” Foret v. S. Farm Bureau Life Ins. Co., 918 F.2d 534, 539 (5th Cir. 1990). [Id.; fn. ref. omitted.]”

As the Court concluded, “Petitioner’s attempts to delay and his belligerence must be sanctioned to vindicate the integrity of this Court’s proceedings and to deter petitioner from similar misconduct in the future.” He received $1000 sanctions for each of the two cases heard.

Cases: Mack v. Commissioner, T.C. (two cases), T.C. Memo 2008-29

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California to Mandate Gender/Orientation Reporting for Non-Profits?

Posted on February 13, 2008 by Russ

Apparently some of our legislators are unhappy with California’s low ranking as a place to do business. They’d like to make this just as bad a place for non-profits. AB624 would require foundations and non-profits in California to collect gender, ethnic and sexual orientation data on their board, members, staff and grant recipients. Yes, a non-profit would have to ask their Board members what their sexual orientation is.

This is, of course, ridiculous, but nothing surprises me about the Bronze Golden State anymore. Hopefully, the Legislature will realize that this is as ridiculous a measure as it truly is and it will die a quick death in some committee.

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Register Tax Help Call-In on Tuesday

Posted on February 11, 2008 by Russ

Every year the Orange County chapter of the California Society of Enrolled Agents and local CPAs donate their time to answer tax questions by phone for four hours. Tomorrow (Tuesday) you can call 714-796-5000 between 5pm and 9pm PST and get your tax question answered. It’s sponsored by the Orange County Register; I’ll be one of the volunteers answering your questions.

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Another Bozo Tax Preparer Caught

Posted on February 10, 2008 by Russ

Anthony Pendleton ran Payless Tax Services of Inglewood, California. Mr. Pendleton allegedly had an interesting way to ensure that his clients got refunds: He allegedly invented employers for his clients, generated phony W-2s, and fabricated educational expenses. It’s a trifecta of trouble, and it’s surprising that a former IRS employee wouldn’t realize that phony W-2s would certainly be investigated. Mr. Pendleton was arrested on charges of conspiring to defraud the government on claims (for tax refunds). Also under indictment but not yet arrested are two employees of Payless, Christopher Michael Edwards, Sr., and Asha Delilah.

IRS special agents interviewed found 21 witnesses (or almost certainly, clients of Payless) who hadn’t worked for the employers noted on their returns. The IRS also found eight ‘clients’ who, “…disclaimed any knowledge that Payless Tax Services and defendants Pendleton, Edwards, and Lenard were filing tax returns on their behalf with the IRS and stated that did not sign any of the documents relevant to the investigation, indicating that the defendants had stolen their identities.”

The defendants are alleged to have filed 185 false claims totaling $609,000. If found guilty, they’re looking at significant stays at ClubFed. Not surprisingly, when the Associated Press called Payless, “Staff at Payless could not be reached for comment, as the service’s phone had been disconnected.”

AP News Story
Government Press Release

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Wesley Snipes in Tax Trouble…Again

Posted on February 10, 2008 by Russ

Right after Wesley Snipes found out that he’ll be sentenced on April 24th, news came out that Wesley Snipes owes $70,000 in back property taxes for his home in Alpine, New Jersey (in suburban Bergen County). The home is in the name of his production company (Kymberlyte Production Services); Snipes sold it to them for $5.6 million in 2002.

The back property tax lien has been sold to Crusader Lien Services. I’d expect this problem to be taken care of, unless Mr. Snipes now also believes that property taxes are illegal….

Hat Tip: Don’t Mess With Taxes

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The New Standard for Preparers

Posted on February 10, 2008 by Russ

In years past, if I took a position on a tax return it needed “Substantial authority.” That’s equivalent to about a 30% chance of being upheld. Congress changed the law; now in order for me to take a position it must be “more likely than not” to be upheld. Joe Kristan has a great post on what this means for taxpayers.

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Sweden Goes After Poker Players

Posted on February 6, 2008 by Russ

The Swedish tax agency, Skatteverket, is targeting online poker players and affiliates. Skatteverket uses an online “spider,” or web crawler, to find web sites that appear to be income producing. They then investigate to see if they’ve reported income and/or paid their Swedish income tax. A report in Poker News says that Sweden has found 47 cases of unreported income totaling €44.5; poker players, according to Poker News, represented €5 million of this.

Sweden apparently, like the United States, taxes all gambling income. I’ve reported on spiders before, and noted that the IRS won’t confirm or deny whether they use such software. However, the IRS doesn’t need that sophisticated software to make some headway into determining who has and hasn’t reported their online gambling income. Neteller is cooperating with the US Department of Justice. What agency in the United States might want information about gambling income besides the Department of Justice? As I’ve said before, not reporting your online gambling income is not only a violation of US law, you’re now likely to get caught given Neteller’s cooperation.

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