The Tax Court decided an interesting case today. An individual receives gambling income, but has given the payee a Form 5754, stating that the income belongs to another individual. However, the other individual doesn’t claim the income. The IRS goes after the individual who picked up the money. Who owes the tax?
Willie Albert worked at the Los Angeles Turf Club, an off-track betting parlor. During 2003, Mr. Albert presented winning tickets worth $12,258. When he presented those tickets, he also presented Form 5754. Form 5754 is used to assign gambling winnings to others. For example, poker players use this when they are backed to show that instead of the player being responsible for 100% of the winnings, she is responsible for (say) 60%. In this case, Mr. Albert’s forms (which are signed under penalty of perjury) show that one Romeo Umali was responsible for 100% of the winnings.
That would be all and good if Mr. Umali claimed those winnings on his tax return. He didn’t. So the IRS went after Mr. Albert. The dispute ended up in Tax Court.
The key points of the case are summed up by the Tax Court:
In general, section 61(a) defines the term “gross income” to include “all income from whatever source derived” unless it is specifically excepted.
Under the claim of right doctrine, if a taxpayer receives money under a claim of right and without restriction as to its disposition, then he has received income that he is required to report even though it may still be claimed that he is not entitled to retain the money and may be ordered to restore its equivalent. N. Am. Oil Consol. v. Burnet, 286 U.S. 417 (1932). But under the conduit theory, if a person receives funds merely to enable him to act as a conduit of the funds to another, then he does not have a claim of right to the funds, and the funds received are not income to him to the extent that he passes them on to the person for whom the funds were intended. Goodwin v. Commissioner, 73 T.C. 215, 232 (1979).
The main problem for Mr. Albert was that his testimony was unconvincing. He was inconsistent on the stand, and the Court felt his testimony was self-serving. He also presented no corroboration of his testimony. He had no witnesses, his bank statements didn’t prove whether or not he received the income, and Mr. Umali’s tax return did not show the income. So the Court found that the gambling income came under the Right of Claim, and Mr. Albert owed the tax.
