Can a California or Massachusetts Professional Gambler Take a Business Loss on His or Her State Tax Return?

March 19th, 2019

The Tax Cuts and Jobs Act (TCJA) eliminated the ability of a professional gambler to take a loss on his Schedule C based on his business expenses; Congress specifically overrode the Mayo v Commissioner decision. But what about state taxes? Can a professional gambler who had a losing year take a loss on those returns?

First, no professional gambler can take a loss based on his gambling results. Internal Revenue Code Section 165(d) prohibits gambling losses in excess of wins. Every state with a state income tax conforms to this.

But state conformity to the TCJA is decidedly mixed. California does not conform to almost any part of the TCJA. The Franchise Tax Board produced a publication showing each change in law and the impact to California. At the bottom of page 89 is the beginning of the discussion on Section 11050 of the TCJA (which changed the rules for professional gamblers). The FTB publication notes:

California conforms, under the PITL, to the federal rules relating to the deduction for losses from wagering transaction[s] under IRC section 165(d), as of the specified date of January 1, 2015, but does not conform to the federal limitation on the deduction.

Thus, a California professional gambler can take a loss based on his business expenses on his state tax return.

Massachusetts also doesn’t conform to federal law in this area. However, Massachusetts does not allow losses from any business to be reported on its tax returns. Thus, a Massachusetts professional gambler wasn’t able to take a loss based on his business expenses in the past and cannot today.

State conformity on the provisions of the TCJA will vary among the states. If you reside in or must pay state taxes, this is a key issue that you must discuss with your tax professional.

March 15th Tax Deadlines

March 14th, 2019

Tomorrow, March 15th, is the first big tax deadline day. There are three tax deadlines on Friday:

First, partnership and S-Corporation returns are due. If your return isn’t completed, file an extension (Form 7004). If you file by mail, use certified mail, return receipt requested. You always want proof of your extension.

Second, Form 3520-A is due. This is one of the two forms for foreign trusts. Again, if your return isn’t completed there’s a simple solution: file Form 7004. You will almost certainly have to mail the extension for a Form 3520-A; you can find where to mail it in the instructions to Form 7004.

Finally, the Form 1042 series (Form 1042, Form 1042-S) are due. These are the information return series regarding payments to non-Americans. You can file Form 1042-S via the FIRE system (if you’re registered); Form 1042 generally has to be mailed to the IRS.

The deadline is a postmark deadline. If you mail your form via certified mail today or tomorrow and it takes a month to get to the IRS, it’s still considered timely (as long as it’s postmarked on or before March 15th). That’s why you want to use certified mail: You get proof (which is a good thing in dealing with the IRS).

Arizona Asks Supreme Court to Stop California From Imposing California Tax on Passive LLC Investments

March 12th, 2019

We’ve highlighted this issue before. Suppose you are an Arizona resident, and you form Primary LLC in Arizona. Its main purpose is owning a warehouse in Phoenix. But you have some extra money in the LLC, so you invest in Secondary LLC, a Nevada LLC. Secondary invests in various things, including Tertiary LLC, a California LLC. Would the Franchise Tax Board, California’s income tax agency, allege that Primary LLC is doing business in California? You bet. Would they come after you for California’s minimum $800 a year LLC tax? Absolutely. Would they then assess late filing penalties, filing fees, and interest if you don’t pay, and issue payment demands through banks? Of course they have and will do so.

Arizona’s Attorney General, Mark Brnovich, doesn’t like this. He alleges that California is illegally going after Arizona LLCs, and illegally demanding payments from Arizona banks. Mr. Brnovich is asking the US Supreme Court to allow Arizona to sue California at the Supreme Court, as there’s no other venue for such a lawsuit. The Supreme Court will likely rule on the first issue–whether the lawsuit can proceed–before the end of June. If the Supreme Court allows the lawsuit, it would likely be heard next fall or winter in Washington.

By the way, those entities who have fought the FTB in California courts have won their cases. The problem, though, is it costs just $800 to pay the LLC tax; it costs thousands of dollars to fight the FTB. Mr. Brnovich is absolutely correct that it doesn’t make sense for most companies to fight California.

No Man Is an Island

March 11th, 2019

On Saturday a superb editorial appeared in the Providence Journal, “When Taxpayers Flee a State.” Here’s an excerpt:

Despite its name, Rhode Island is not an island unto itself. People are free to come and go, including business executives who create jobs and pay high taxes. That is why the state has to be careful that its tax policies do not drive away too many investors or taxpayers…

In high-tax Connecticut next door, billionaires are already escaping. As Chris Edwards of the libertarian Cato Institute notes (“Wealthy Taxpayers are Fleeing These States in Droves,” Daily Caller, Oct. 2), Connecticut in recent years “has lost stock trading entrepreneur Thomas Peterffy (worth $20 billion), executive C. Dean Metropoulos ($2 billion), and hedge fund managers Paul Tudor Jones ($4 billion) and Edward Lampert ($3 billion).”

People can, and will, relocate no matter how nice the climate. I loved living in Irvine, California, but California’s business climate drove me (and I’m not a billionaire) to low-tax, low-regulation Nevada. Rhode Island has lost $1.4 billion of income over the last ten years. The solution for both a small state (Rhode Island) and a large state (California) is identical: low tax rates over a broad swath, rather than very high tax rates in narrow areas. Of course, California now has high taxes over almost everything and a regulatory climate that is the worst in the country.

Tax Help for Gamblers

February 23rd, 2019

Jean Scott, the proprietor of the website “Frugal Vegas” (she’s also known as the “Queen of Comps”) called me last year and asked if I would be willing to assist her with the fourth edition of her book, Tax Help for Gamblers. I agreed to do so, and if you’re a gambler looking for information on taxes I think you will be pleased with the effort. The book is due out shortly, and you can pre-order it on sale for $15 (including shipping) rather than the retail price of $24.95. The book is available from Huntington Press at this link.

No, Manny Machado Can’t Avoid Paying California Tax by Being a Florida Resident

February 21st, 2019

Earlier this week Manny Machado reportedly signed a baseball free agent contract to play with the San Diego Padres. He’s being paid $300 million over ten years…but that’s before taxes. An article on a website called “12up” says that Mr. Machado will be able to avoid California income tax through “creative posturing” as a Florida resident. The article is wrong.

Mr. Machado is one of many individuals impacted by the “Jock Tax.” This tax impacts entertainers, athletes, and professional poker players and requires income tax be paid based on the source of the income. Let’s assume Mr. Machado is a Florida resident; he would owe Florida income tax on his worldwide income. Since Florida has no state income tax, he owes nothing, right? Well, he owes nothing to Florida but the Padres play games in many states with a state income tax (including California); he will clearly owe California income tax on some of his income.

The Jock Tax is based on ‘duty days’ (not games played). Let’s assume out of the (approximately) 200 days in a baseball season 100 of those days are in California. He will owe tax on 100/200 of his salary (or half). He will avoid owing tax on all of his income to California, but to say he will completely avoid California taxation is dead wrong. While it’s true that California won’t gain $38 million a year, it’s probable that the state will collect over $20 million a year: Not only will Mr. Machado play half his games in San Diego, the Padres will play many games in Los Angeles and San Francisco–and those games will also cause Mr. Machado to owe California income tax.

Online Gambling and Offshore Cryptocurrency Exchange Mailing Addresses for 2019

February 5th, 2019

With the United States v. Hom decision, we must again file an FBAR for foreign online gambling sites. An FBAR (Form 114) is required if your aggregate balance exceeds $10,000 at any time during the year. (The IRS and FINCEN now allege that foreign online poker accounts are “casino” accounts that must be reported as foreign financial accounts. The rule of thumb, when in doubt report, applies—especially given the extreme penalties.) You also should consider filing an FBAR if you have $10,000 or more in a non-US Cryptocurrency Exchange.

There’s a problem, though. Most of these entities don’t broadcast their addresses. Some individuals sent email inquiries to one of these gambling sites and received politely worded responses (or not so politely worded) that said that it’s none of your business.

Well, not fully completing the Form 114 can subject you to a substantial penalty. I’ve been compiling a list of the addresses of the online gambling sites. It’s presented below.

I have made major updates on this list for 2019. Many, many addresses have changed. We went through the complete database and attempted to find new addresses for each entry.

FINCEN does not want dba’s; however, they’re required for Form 8938. One would think that two different agencies of the Department of the Treasury would speak the same language…but one would be wrong.

You will see the entries do include the dba’s. Let’s say you’re reporting an account on PokerStars. On the FBAR, you would enter the address as follows:

Rational Entertainment Enterprises Limited
Douglas Bay Complex, King Edward Rd
Onchan, IM31DZ Isle of Man

Here’s how you would enter it for Form 8938:

Rational Entertainment Enterprises Limited dba PokerStars
Douglas Bay Complex, King Edward Rd
Onchan, IM3 1DZ Isle of Man

You will also see that on the FBAR spaces in a postal code are removed; they’re entered on Form 8938. You can’t make this stuff up….

Finally, I no longer have an address for Bodog. If anyone has a current mailing address, please leave it in the comments or email me with it.

Note: This list is presented for informational purposes only. It is believed accurate as of February 5, 2019. However, I do not take responsibility for your use of this list or for the accuracy of any of the addresses presented on the list.

The list is in the cut text below.

If anyone has additions or corrections to the list feel free to email them to me.

When You Move, Do the Little Things

February 2nd, 2019

Something I tell my clients when they move is to do all the little things such as going to the DMV and getting a new driver’s license and re-registering your cars. Another thing that needs to be done is to register to vote in your new state (especially if you were registered in your old state).

A news story out of Salt Lake City highlights the issue. The Utah State Tax Commission is going after individuals who leave the Beehive State if they don’t ‘unregister’ to vote in Utah. (In theory, when you register to vote in your new state, the Registrar of Voters in your new state notifies your old state to remove you.) At least one individual who moved from Utah to Austin, Texas was assessed Utah tax when he was a resident of the Lone Star State. He’s fighting the assessment, and he does stand a good chance of winning. However, it’s a lot easier to not have to fight the battle so if you move, do all the little things.

When 35 Equals 365

January 29th, 2019

Yet another entry in the “Math Is Hard” file, again from our friends at the Internal Revenue Service. From the Washington Post comes the news that it will take the IRS between 12 and 18 months to catch-up on the backlog from the 35-day shutdown. The Post was quoting information from two House staffers who heard this from the National Taxpayer Advocate.

On January 16th, the IRS had a backlog of 2.5 million unanswered pieces of mail. That’s up to 5 million now. Two of those unanswered pieces of mail are from me on behalf of clients (both disputing CP2000 notices). They had to be mailed to the IRS because the IRS turned off their fax machines during the shutdown. I told my clients that they’ll get a response…eventually. My hope is that the IRS has turned off the automatic issuance of Notices of Deficiency. Once you have one of those, the only way to stop the process is to file a Tax Court petition. (I think that has happened, as neither client has received a follow-up notice or a Notice of Deficiency.)

So let’s see what we have. Millions of pieces of unanswered mail. New tax forms that most IRS employees haven’t been trained on. Computers that are, in some cases, older than I am. Add in new tax law and you have the recipe for…well, let’s not call it a masterpiece. Perhaps goulash or a stew, or one of those horrific casseroles that I remember from the dorms at Cal. Suffice to say this is going to be a trying Tax Season.

Oh, I shouldn’t forget: If Congress and President Trump don’t come to an agreement in about two weeks (and President Trump put the odds at less than 50-50) the whole shutdown may repeat.

Gilbert Hyatt Wins Again But…

January 17th, 2019

The California Office of Tax Appeals upheld the California Board of Equalization’s ruling that Gilbert Hyatt mostly doesn’t owe California income tax in 1991 or 1992. Yes, you’re reading that correctly: This is a case that is 27 years in the making.

This is the same case that reached the US Supreme Court for the third time this month. The Supreme Court will decide whether or not states have sovereign immunity in other state’s court systems. (Mr. Hyatt sued the Franchise Tax Board in Nevada over various torts committed by the FTB.)

Unlike Bloomberg Tax which noted that the “[case] appears to be over,” I strongly suspect that the Franchise Tax Board (California’s income tax agency) will appeal the ruling into the court system. The FTB’s normal strategy is to exhaust litigation opponents. Thus, I believe that an appeal into the court system is likely.