The other shoe dropped on KPMG today. According to this story, KPMG will pay a fine of $456 million, accept an outside auditor, and shut down its tax practice for high net-worth individuals within six months. Additionally, seven former partners were indicted.
You can find full roundups on this story at Roth & Company Tax Updates and the TaxProf Blog.
George Skelton of the Los Angeles Times today says, “There’s a gleaming pot of gold within easy grasp of the governor and Legislature that would help them balance the state’s deficit-ridden books…It is an income tax increase on the wealthiest Californians — individuals earning more than $400,000; couples making above $800,000. That’s the top 1%. Their tax rate would be hiked from the current 9.3% to 11%….” Skelton says that “…[this tax increase is] a pot of gold that the Sacramento pols should have claimed long ago.”
The goal of the tax increase is to fund pre-school for all 4-year olds. It’s a laudable goal. Unfortunately, as I’ve written before it’s also very misguided.
Most smaller businesses (and these are the engines of growth in California and elsewhere) are taxed through personal income taxes, not corporate taxes, because they are structured as S Corporations and LLCs. If personal tax rates go up, business costs go up. California is already one of the worst places to do business in the country. This proposed income tax increase, expected to be on the June 2006 ballot, would be a disaster for the state’s economy, but a boon for our neighbors: Arizona, Oregon and Nevada.
Pity Mark Steven Miller, former CEO of Oakwood Deposit Bank in Ohio. Mr. Miller was convicted of fraud in 2003 for embezzling $49 million from his bank. He then took his profits and invested them in the Star Dancer Casino Boats—boats that sailed from Florida ports and offered casino games. Little did the bozo know that the owners of Star Dancer allegedly took the money they withheld from their employees and spent it rather than forward it to the IRS. The government apparently stumbled upon the second scam from the investigation of the initial embezzlement. The two owners of Star Dancer each face fines of $10,000 and five years imprisonment.
Links :Myrtle Beach Sun News and Toledo Blade
In this article, part 3 of probably 5 parts, I examine recordkeeping and professional status for online gamblers. Unfortunately, a lot of this material is, frankly, boring. But it’s necessary. Some of the material in this article is based on an article I wrote for Chuck Humphrey’s excellent website, http://www.gambling-law-us.com/. The original article can be found here.
First, let’s examine the situation for the casual (or non-professional) gambler. The Tax Code requires gamblers to record their wins and losses by session. You take all of your winning sessions for the year, add them together, and you come up with a result. Let’s assume that’s $12,000.00. Then you take all your losing sessions, add those up, and come up with a second number. Let’s further assume that’s $10,000.00. However, you cannot net those two numbers! The wins go as part of Other Income (line 21) while the losses are an itemizable deduction (Schedule A) not subject to the 2% AGI limitation on itemized deductions.
Well, you’re probably thinking that there’s no particular difference between netting and this result. That’s wrong, for three reasons. First, if you don’t itemize your deductions (because you don’t have enough deductions to itemize) you lose out on your gambling losses. In such a situation your gambling losses are presumed to be part of your standard deduction. Second, many items on the tax return are tied to Adjusted Gross Income (AGI). The prescribed method for handling gambling income and losses increases AGI (even if the taxable income remains unchanged). This can limit some taxpayers’ other deductions, including medical and miscellaneous itemized deductions. Finally, gambling losses can, in certain circumstances, trigger the dreaded Alternative Minimum Tax (AMT).
So you ask, why not declare myself a “professional” gambler. A few years ago that would not have been possible. Luckily a gambler named Robert P. Groetzinger fought the IRS on this issue. In a case that made it to the Supreme Court, the court held that you can legally be a professional gambler. The most relevant portion of the opinion reads:
…[W]e conclude that if one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business within the meaning of the statutes with which we are here concerned. Respondent [480 U.S. 23, 36] Groetzinger satisfied that test in 1978. Constant and largescale effort on his part was made. Skill was required and was applied. He did what he did for a livelihood, though with a less-than-successful result. This was not a hobby or a passing fancy or an occasional bet for amusement. [Commissioner v. Groetzinger, 480 U.S. 23 (1987)]
There are some caveats to this. Note the usage of full time, with regularity, and production of income for a livelihood. If you gamble in this manner, you can classify yourself as a professional. And, yes, you can be a professional gambler and lose.
Professional gamblers have a business. They file their gambling results on Schedule C. Their wins and losses are netted, they may deduct necessary and reasonable expenses (i.e. mileage and travel, computer ISP, books and other training materials, etc.). However, they are subject to self-employment tax (Schedule SE). That tax (equivalent to Social Security and Medicare) is 15.3% of the first $90,000 of income (2005 limits) and 2.9% thereafter. You do get to deduct half of your self-employment tax as an adjustment to income on line 30 of Form 1040. For some gamblers, it’s cheaper (for taxes) to be an amateur than a professional. Talk to a professional tax advisor before making the decision to become a professional gambler. There are several other caveats and limitations.
Finally, the IRS has fought some taxpayers who have declared themselves professionals. The IRS has been relying on the literal wording of the Groetzinger decision; that a professional must be a “full time” gambler. They have rejected that status for some gamblers who maintain other businesses. None of these cases have been decided in Tax Court (yet). I think this is a losing position for the IRS. Consider a hypothetical professional gambler, John Smith. Mr. Smith plays in only the biggest poker tournaments of the year. The remainder of the year he and his wife operate a successful jewelry store. He files two Schedule C’s on his return. Is he a professional gambler?
Of course he is, assuming that his goal is to earn income from gambling—”…[the] production of income for a livelihood….” There are many individuals who file multiple Schedule C’s. I believe that the IRS’s position is wrong. However, be forewarned. If you’re in this situation the IRS may fight you.
In conclusion, becoming a professional gambler should be decided on the basis of your skill (in gambling), not your tax situation. However, you must keep your tax situation in mind.
In part 4 (coming next week), I’ll take a look at some tax filing requirements for gamblers. The joy of estimated taxes, state taxes, and how some states treat (or mistreat) gamblers. I’ll also look at some legal realities of online gambling.
According to this story by Reuters, KMPG will face a fine of just under half a billion dollars. This story notes that eight former executives will be indicted.. However, KMPG will sign a “deferred prosecution” agreement so that the firm will not follow Arthur Andersen into the scrap heap of accounting history.
However, KPMG faces a host of lawsuits over the cause of their problems: tax shelters that have been found by the IRS to not be legal. The “BLIPS” tax shelter, sold to 186 wealthy individuals, was found by the IRS to not be a legal tax shelter. While it brought profits to KPMG during the years it was being sold, I’m sure KPMG regrets it ever being offered.
Ah, to live and breathe the fine air of the Golden State. Of course, we’re also known as the state with one of the highest (and probably soon to be the highest) personal income tax rates in the United States. And then I read about proposals to give the entertainment/film industry a nice tax break:
The California Film Commission has released a 25-page study, What Is the Cost of Run-Away Production? Jobs, Wages, Economic Output and State Tax Revenue at Risk When Motion Picture Productions Leave California, in support of proposed legislation to provide a California tax credit of 12% on wages and other production costs for movies and TV shows.
What happens when you give someone a lower tax rate? If you want total tax revenues collected to remain the same, someone’s (or everyone else’s) tax rates must go up.
There is no such thing as a free lunch. Unfortunately, the Governator has said that he supports the proposals.
Thanks to the TaxProf Blog for pointing this out.
Hugh Hewitt asked bloggers if they would be interested in reviewing one of 136 boxes released by the Ronald Reagan Presidential Library. Having some interest in history, and quite a bit of curiosity as to what might be in a box of old White House Counsel documents, I ended up looking at “Box 30: JGR/Judges (9)”.
The box contains two items. First, Daniel Popeo of the Washington Legal Foundation sent a paper titled “The President’s Power to Appoint Federal Judges: A Popular Check on Court Usurpations” by Bruce E. Fein (Fein was a Deputy Attorney General under President Reagan, and is now a constitutional lawyer and international consultant with Bruce Fein & Associates and the Litchfield Group). A quick Google search disclosed that Fein thinks Iraq will dissolve into a quagmire and that President Bush should appoint judges that are “philosophical clones of Justices Antonin Scalia and Clarence Thomas and defeated nominee Robert H. Bork.” But I digress…
Fein’s paper urges then President Reagan to examine, in depth, the qualifications of his judicial appointments and make sure that they match his philosophy. It appears that this paper was sent to John Roberts, but whether he read it or not there’s nothing here which will serve as fodder against his appointment.
Then there’s actually a memo written by John Roberts. Apparently it’s against either the law or policy for the White House to send “get well” messages to sitting judges. John Roberts responded to a request for a get well message to a Judge Wangelin of Missouri.
And that’s the box. There’s absolutely nothing here in this non-attorney’s view that could be used for or against Judge Roberts in his confirmation hearings.
A trumpeter who also operates a gospel ministry (MightyHorn Ministry) has been charged with tax evasion. According to a story in the Chatanooga, TN Chatanoogan, Phil Driscoll, his wife and his mother-in-law have been accused of evading taxes by failing to report over $1 million in income by disguising the sale of personal assets. The indictments allege that the evasion has been ongoing for over ten years.
Mr. Driscoll’s website notes that he has been playing the trumpet for over 20 years, won “Musician of the Year” from the CCMA in 1999, and won a Grammy Award in 1984.
My corporation’s annual renewal fee (mandatory fee of $25 to the Secretary of State of California) is due in September. So what comes in my mail today? A request from “State Corporate Compliance” so that I can pay an additional $100 (if I’m a fool) so that they will type out what the Secretary of State’s office has already printed on my renewal form!
Hopefully, there won’t be too many gullible victims out there. This year’s forms prominently state, “Not a government Document.” Still, we all know that one’s born every minute….
California continues to lose some of its luster. As reported by the TaxProf Blog, California athletes leave for brighter, er, cheaper (on a tax basis) pastures. For those who don’t remember, Californians passed Proposition 63 last November. This proposition added a 1% surtax to the state’s income tax (raising the top rate to 10.3%).
So you’re an athlete, making lots of money, and have a choice of living in beautiful Newport Beach or Del Rey Beach, Florida. Both have nice climates (perhaps Florida’s is a bit more tropical), and both are nice places to live. And then you look at the tax rates. California: 10.3%. Florida: 0%.
At least the Democrats have given up (for this year) at increasing the top tax rate to 11.3%….
Thanks to the TaxProf Blog for pointing this article out.
