Are Poker Tournaments Gambling?

Posted on February 20, 2007 by Russ

A very interesting case today from the Tax Court. A husband and wife play poker. The wife is a professional, playing in poker tournaments; the husband is not a professional. The wife wins some money playing in poker tournaments; however, her expenses exceed her income. Can she deduct the additional expenses and have her net income from playing poker professionally be a net loss?

In 2000, the wife earned $11,708, but she claimed a net loss of $29,933 on her Schedule C. Section 165(d) of the Internal Revenue Code limits deductions for gamblers to the amount of their wins. However, the petitioner claimed that tournament poker is not a form of gambling; instead, it should be looked at like a professional sporting event such as tennis or golf. Alternatively, they claim an equal protection argument.

The Court first examined tournament poker (and provided one of the best descriptions for the layman that I’ve ever read), and come to these conclusions about whether tournament poker is a form of gambling:

“Betting is so intrinsic to poker that it is nearly impossible to avoid using a word that implies gambling in any way when discussing the topic. Bets are placed on each hand, and each round of betting has consequences. Whether or not the chips being used to make these bets have immediate and tangible monetary value does not change the fact that the players are still placing bets, hoping to win. This is true even in a tournament setting.

Petitioners agree that the first poker tournaments held were, in fact, “wagering events”. For example, in those early games, “Each participant put up $10,000 and received $10,000 in chips.” The fact that the chips being used to place bets in tournament poker today only bear some fractional relationship to the dollar values of the prizes and/or entry fees does not change the basic nature of the game as a wagering activity.”

It’s hard for me to argue with this conclusion; while poker tournaments have become sporting events, poker is definitely a form of gambling.

The equal protection argument also fails.

“Petitioners argue that the benefits of being able to offset “exaggerated income” from very successful years by losses sustained in less successful years should be available to professional tournament poker players as much as they are to other professions.

Congress made a policy decision to treat businesses based on wagering activities differently. In the absence of Congressional action, we are not free to correct any perceived unfairness stemming from a rationally based policy choice. In Valenti v. Commissioner, T.C. Memo. 1994-483, the Court noted that treating businesses based on wagering and gambling differently from other businesses is a rational differentiation and not one that rises to the level of being violative of due process or equal protection.”

As I’ve written in the past, I believe the equal protection argument could succeed in the right venue. However, that venue is likely a District Court, a Court of Appeals, or the Supreme Court. That’s an expensive road to take to fight the IRS and the precedents that exist on this issue.

The Tax Court’s conclusion hints that they think the law should be changed:

“The moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many year ago. Not only has tournament poker become a nationally televised event, but casinos or lotteries can be found in many States. Further, the ability for the Internal Revenue Service to accurately track money being lost and won has improved, and some of the substantiation concerns, particularly for professionals, no longer exist. That said, the Tax Court is not free to rewrite the Internal Revenue Code and regulations. We are bound by the law as it currently exists, and we are without the ability to speculate on what it should be. Accordingly, we hold that tournament poker is a wagering activity subject to the limitations of section 165(d).”

The petitioner in this case loses out on being able to deduct additional expenses; poker tournaments are just another form of gambling. For all gamblers it’s just another reminder that the Tax Code isn’t fair, but you have to live with it or get Congress to change it.

Case: Tschestschot v. Commissioner (T.C. Memo 2007-38)

Posted in Gambling | Tagged | Comments Off on Are Poker Tournaments Gambling?

Stop Tax Haven Abuse Act

Posted on February 19, 2007 by Russ

Three Senators have introduced the “Stop Tax Haven Abuse Act.” Senators Carl Levin (D-MI), Norm Coleman (R-MN), and Barack Obama (D-IL) are targeting the 30+ offshore tax havens. Senators Levin and Coleman have led an investigation into these tax havens, and believe they shelter $100 billion in annual tax losses to the U.S. Treasury.

“It is simply unacceptable that some individuals are using offshore tax havens and secrecy jurisdictions to shelter trillions of dollars in assets from taxation,” said Coleman. “These tax schemes cause a massive revenue shortfall and, sadly, it is the honest American taxpayer who must bear a disproportionate burden of investing in areas like education and healthcare. We are introducing this bill to close these loopholes, shut down offshore tax schemes, and ensure that every American pays their fair share of taxes.”

I expect this bill has a good chance of passage this year. It may end up being tied to this year’s AMT relief act (whenever that’s introduced). The press release (from Senator Levin) lists the goals of the bill (available below).

Though this legislation targets the securities industry and the offshore trust industry, at least one other industry will be impacted by this bill (should it pass Congress): the offshore gambling industry. The Isle of Man and Gibraltar are two of those offshore tax havens, and they happen to be two of the main domiciles of offshore gambling firms. Depending on the actual text of the legislation (the bill is not yet available on the Thomas system) and any regulations promulgated by its passage, Americans might have even more difficulties in getting funds from the U.S. to the offshore gambling firms.

Thanks to the TaxProf Blog for the heads-up.

Posted in Legislation | Comments Off on Stop Tax Haven Abuse Act

Middle Class Tax Relief? From the Democrats?

Posted on February 18, 2007 by Russ

The Wall Street Journal on Friday headlines a possible attempt by the Democrats to enact middle class tax relief ($ubscriber pay link). With the Democrats now in control of Congress, they have enacted rules that require all tax legislation to be “revenue neutral.”

The big issue facing Congress is the extension of AMT relief. For the past several years, Congress has done one-year extensions of this relief. The Alternative Minimum Tax was designed to get 65 or so millionaires, back in the 1960s. If nothing is done, 25% of households will soon be paying AMT. If you’re unlucky enough to live in a high-tax state, and you have a large family (lots of dependents), you could be hit with the AMT even with an income of less than $100,000.

The Journal article suggests that the Democrats might enact long-term relief, but with corresponding tax increases to the wealthy. And the Journal hints that President Bush might go along with that idea.

I’ll keep you informed as the Congressional term continues.

Posted in Legislation | Comments Off on Middle Class Tax Relief? From the Democrats?

How Not To Commit Tax Evasion

Posted on February 14, 2007 by Russ

You’re a successful business owner, but you’re running a little short of cash. Do you cut back a bit on your expenditures? Of course not. Do you set up a trust, and write checks to cash, and pocket the money? Well, this is an entry on tax evasion, so I’m sure you know how this turned out.

Here’s the scheme, as the IRS figured it out: The business owner creates a trust. Nothing illegal so far. He stops paying himself wages, and writes checks to cash. He purchases cashier’s checks payable to the trust with the cash. Still nothing illegal, as long as the trust reports the deposits.

But the cashier’s checks are not deposited into the trust. They’re swapped for other cashier’s checks deposited into his bank account or used to pay his expenses. Well, we have a problem, especially if he doesn’t declare these checks as income. He didn’t. Even worse, the checks were listed as “subcontractor fees” and “loans to stockholders” on the corporate tax return. That’s falsifying a corporate tax return, another offense.

The business owner, Brian Troy Aberle, accepted a plea agreement and pleaded guilty to one count of tax evasion and one count of filing a false tax return. He faces up to eight years at ClubFed, though he’ll likely receive two years or so.

Posted in Tax Evasion | Comments Off on How Not To Commit Tax Evasion

Psychic Doesn’t See Upcoming Sentence

Posted on February 14, 2007 by Russ

Pity “psychic” David Guardino. We’ve written about Mr. Guardino of Cary, North Carolina twice before: when he threw some punches at his wife and when he was one of our nominees for the 2005 tax offender of the year. He was sentenced yesterday after being convicted of evading taxes on $1 million that he earned from his readings.

If he was psychic, shouldn’t he have known he would be convicted? But I digress….

As Joe Kristan noted in his lengthier report, Mr. Guardino attempted to influence the judge by showing the judge his legs. The legs of a 364 pound man. It didn’t work; he was sentenced to 21 months. But shouldn’t he have known that the legs wouldn’t work?

Posted in Tax Evasion | Comments Off on Psychic Doesn’t See Upcoming Sentence

Money Doesn’t Grow on Trees

Posted on February 13, 2007 by Russ

You know that. I know that. Does our leadership here in the Bronze Golden State know that?

Last week I got the chance to read. I was forced to—I was in bed with the flu. A very small blurb in the Register caught my eye: “State $1 Billion Behind in Collections in January.” California, for unknown reasons, collected $1 billion less in tax revenues than projected in January. Bureaucrats said not to worry; we think it’s a glitch and we’ll catch up soon.

I have my doubts.

Back in January I wrote about two stories. The first story is based on a Dan Walters column in the Sacramento Bee and examines the possibility that a single taxpayer led to a large increase in tax revenue collections in 2006. The second story examines the likely impact of the recent freeze.

I don’t think it takes a brain surgeon to see where we’re going. The talk out of Sacramento is all about new spending programs, new health insurance programs, etc. What they really should be talking about is cutting the current programs, because there isn’t going to be money to pay for everything on the Legislature’s wish list. Come May or June, when the impact of the collections from the 2006 tax season rolls in, this may become clear. This will be very clear in the fall, when estimated payments are collected at levels that will be much lower than the state anticipates.

Of course, one option is a tax increase. However, it takes a 2/3 vote of the Legislature for that to happen, and the Republicans have enough votes to block that.

California still has a structural deficit. I’m betting it’s going to be a lot worse at the end of 2007 than it is today.

Posted in California | Comments Off on Money Doesn’t Grow on Trees

Neteller, the DOJ, and the IRS

Posted on February 8, 2007 by Russ

One of my practice areas is professional gambling. Many gamblers maintained an account with the e-wallet firm Neteller. Neteller served as a financial intermediary between US customers and online gambling firms. In January, the Department of Justice arrested the two founders of Neteller and charged them with multiple offenses, including money laundering. Neteller then pulled out of the US market. Neteller announced today that they are cooperating with the DOJ, and that $55 million in funds had been seized by US law enforcement.

Neteller, in one swell swoop, lost over half of its business. Ignoring whether or not such business was legal, assume you were running Neteller. The Department of Justice has arrested your two founders, has decided to fight you, and you no longer have any means to make financial transactions to the United States. What would you do? Fight the US DOJ, or make the best deal you can? It’s clear from the Neteller press release that they are in negotiations with the DOJ, and that transaction records are being sent from Neteller to the DOJ.

Indeed, it’s clear what’s likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won’t indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It’s also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller.

What does the DOJ want with thousands of pieces of data? Well, Neteller required the customer’s name, address, and for many accounts, their social security number. The details of those transactions will undoubtedly be sent to a government agency that’s in the revenue collection business: the IRS.

So what does that mean for the customer who used Neteller?

If you complied with the law—you reported all of your gambling income and your foreign bank accounts—you have nothing to worry about. But probably fewer than 5% of taxpayers report their gambling transactions as income.

First, Neteller is considered to be a foreign financial institution. If you have a foreign bank account, and have $10,000 or more in a foreign bank account(s) at any one time, you are required to file Form TD F 90-22.1 by June 30th of the following year with the Department of the Treasury and check the box at the bottom of Schedule B. If you have a foreign bank account and don’t declare it, you can face civil and/or criminal penalties. Anyone who received $10,000 or more in one transaction from Neteller had a foreign bank account. I expect the Treasury Department to check their records and come after those who didn’t declare their Neteller account. A few individuals may even face criminal prosecution over this, if they had extremely large transactions from Neteller.

Second, the IRS will check their records and see if individuals receiving funds from Neteller declared gambling winnings. The IRS will almost certainly target those receiving large amounts. If an individual received large amounts from Neteller, and didn’t declare any gambling winnings, now is the time to amend your return, and pay the tax, interest, and penalties. It’s almost always better to come forward to the IRS than to have the IRS knock on your door.

The IRS’s first targets will be those with large (in dollars) transactions. But given the ability of the IRS to conduct computer matching, if you received funds from Neteller and didn’t declare any gambling winnings, you might receive a “letter audit” from the IRS. (“Dear taxpayer, we’ve added $xxx [the amount of money you received from Neteller] to your income. If you agree, pay the tax, interest, and penalties….’)

I believe that a few individuals will likely face criminal prosecution over this. If the IRS can find an online gambler who earned over $100,000 and didn’t declare his gambling income (and I think the IRS will have several to choose from, and might even find someone who earned over $1 million) that individual could find himself facing jail time for tax evasion.

But what if you used Neteller for non-gambling activities? Interestingly enough, I know of one firm that paid individuals through Neteller. If you declared the income on your tax return (and can show that), there’s nothing to worry about. You may have to spend some time responding to an IRS notice, but if you’ve paid your taxes, you’re fine.

However, I believe that many (if not most) online gamblers have thought that since Neteller was based on the Isle of Man (a known tax haven), the IRS would never be able to see their records. You’ve just lost that gamble. It will take some time, probably several months at a minimum, for the IRS to conduct their matching of records. If you’re one of those who just lost the first gamble, do you want to double-down and bet that the IRS won’t find you or do you want to amend your return(s) and pay the tax that you knew you owed…and the interest and penalties?

As I’ve said many times, gambling income is taxable. The Tax Code isn’t fair to gamblers, but the alternatives if you don’t pay your taxes are worse than paying the tax that you owe.

Posted in Gambling | Tagged | Comments Off on Neteller, the DOJ, and the IRS

Holes in the Tax Code

Posted on February 7, 2007 by Russ

With the 2008 Budget being sent to Congress, the Tax Foundation’s Tax Policy Blog shows the cost of ten famous deductions, credits and exemptions. Read the article for the full story.

Meanwhile, Roth Tax Updates has the full details of the proposed budget (as far as taxes goes). Joe Kristan correctly points out that the tax gap closures, which total about $30 billion, are what’s most likely to pass Congress, along with another year of AMT relief.

Posted in IRS | Comments Off on Holes in the Tax Code

Westinghouse and Sylvania

Posted on February 7, 2007 by Russ

Two famous electronics companies. In fact, I used to work for Westinghouse (“You can be sure if it’s Westinghouse”). But that’s not the story here. Instead, it’s the usual tax evasion, with a twist.

>From the Pittsburgh Post-Gazette comes the story of Soviet nuclear reactors, theft of over $9 million in aid money from many countries, and tax evasion.

Mark Kaushansky is a former Soviet refugee, having emigrated from the Ukraine in 1979. He landed in Monroeville, Pennsylvania and went to work for Westinghouse. In the 1990s he met up with renowned Russian atomic scientist Dr. Evginey Adamov. Dr. Adamov was arrested in Bern, Switzerland at the bequest of the US Department of Justice, but was extradited to Russia. According to Kommersant, Dr. Adamov hasn’t admitted guilt in his trial for “…grand fraud of the organized criminal group and with the office abuse that led to enormous offenses.”

Mr. Kaushansky, though, has pleaded guilty to nine counts of tax evasion. The government alleges that he’s bilked the IRS out of $5 million. Defense attorney Fred Theiman is quoted by the Post-Gazette as saying, “A lot of assumptions made by the government are perfectly rational, perfectly logical and perfectly wrong.” The IRS says that the pair used shell companies that never filed tax returns to hide money. A judge will have to decide how much Mr. Kaushansky’s companies didn’t pay. I’ll let you know more when Mr. Kaushansky is sentenced.

Meanwhile, a Sylvania, Ohio attorney was sentenced after being found guilty of evading $321,000 in taxes. Joseph Weisberg will have five months at ClubFed to think about the errors of his ways. Mr. Weisberg used his client trust account to hide his income, and that’s not a good idea at all.

Posted in Tax Evasion | Comments Off on Westinghouse and Sylvania

The Kanter Sage Continues

Posted on February 5, 2007 by Russ

I’ve written about the Kanter case before (here , here, and here). In that case, the Tax Court reversed the finding of the trial court judge, and didn’t release the findings of the trial court judge. The case made its way to the Supreme Court. The Supreme Court remanded the case, with an order that the trial court judge’s findings be made public. The trial court judge found that there was no tax evasion; however, the tax court ruled that there was. After an intermediate stop at the 11th Circuit Court of Appeals (which ordered the Tax Court to make a ruling by February 2nd), the Tax Court came out with its ruling.

Now, given my cynical view of the world, how do you think the Tax Court would rule the second time around? Would it come out with a ruling in line with the trial court judge or a ruling similar to its own ruling? Yes, the Tax Court ruled that there was tax evasion, and that the lawyer (Burton Kanter, now deceased) accepted kickbacks from the Pritzker family, and evaded taxes on those kickbacks. The Pritzkers own the Hyatt Hotel chain.

The New York Times reports that attorneys for the three plan on appealing the decision. Given the history of the case, expect a return trip to the Supreme Court in 2008 or so.

Posted in Tax Court | Tagged | Comments Off on The Kanter Sage Continues