The Real Winners of the 2018 World Series of Poker

July 15th, 2018

Over the past two weeks 7,874 competitors (myself included) paid $10,000 to enter the main event of the World Series of Poker. Who would win the money? And how much of the winnings would they actually get to keep?

One important note: I do need to point out that many of the players in the tournament were “backed.” Poker tournaments have a high variance (luck factor). Thus, many tournament players sell portions of their action to investors to lower their risk. It is quite likely that most (if not all) of the winners were backed and will, in the end, only enjoy a portion of their winnings. I ignore backing in this analysis (because the full details are rarely publicized). Now, on to the winners.

Congratulations to John Cynn of Evanston, Illinois for winning the 2018 WSOP Main Event and a cool $8,800,000. After a mammoth 10-hour heads-up battle against Tony Miles (where the chip lead went back and forth), Mr. Cynn finally prevailed when his king-jack flopped trips and all Mr. Miles could muster was queen-high. Mr. Cynn will pay federal income tax, self-employment tax (all nine of the final players are professional gamblers), and Illinois income tax. Of his winnings he’ll lose an estimated $3,860,183 to tax (keeping $4,939,817), a tax burden of 43.87%. Mr. Cynn definitely benefits from tax reform; had he had the same winnings in 2017 he would have owed $4,094,676 so he saves $234,493. Another way of looking at this is his tax burden last year would have been 46.53%. Mr. Cynn has the second highest tax burden of the final nine.

The aforementioned Tony Miles finished in second place. A resident of Jacksonville, Florida, Mr. Miles benefits from Florida’s lack of a personal income tax. Mr. Miles, like all of the Americans at the final table, will owe federal income tax and self-employment tax; he’ll owe an estimated $1,939,341 (38.79%) of his winnings.

Finishing in third place and winning $3,750,000 was Michael Dyer of Houston. Mr. Dyer had the chip lead for the first part of the final table but ran into a full house of held by Mr. Miles. The Texan avoids state income tax but will still lose an estimated $1,449,275 to federal tax (38.65%). Mr. Dyer has the lowest tax burden of the six Americans at the final table (and the second-lowest tax burden overall).

Nicolas Manion of Muskegon, Michigan started the final nine with the chip lead but couldn’t make it through; he ended up in fourth place for $2,825,000. Mr. Manion is the only individual who will end up paying three taxes: federal, state, and city. Michigan has a flat income tax of 4.25% and Muskegon has a city income tax of 0.5%. Still, Mr. Manion is better off in 2018 than if he had won this in 2017; he’ll lose only an estimated $1,217,323 to tax (43.09%).

Joe Cada finished fifth for $2,150,000. If that name sounds familiar, it should: Mr. Cada won the Main Event in 2009. This time around Mr. Cada’s pocket tens lost a classic race against Mr. Miles’s ace-king. Thanks to tax reform, Mr. Cada loses only 40.59% of his winnings to tax ($872,635) compared to 42% back in 2009. Mr. Cada, a resident of Shelby Township, Michigan, owes federal and Michigan tax.

Aram Zobian of Cranston, Rhode Island, ended up in sixth place for $1,800,000. A professional poker player, Mr. Zobian will owe federal and Rhode Island tax. Rhode Island has marginal tax rates up to 5.99%, so it’s in the middle of the pack for states. Overall, Mr. Zobian will owe an estimated $721,821 in tax (40.10%).

Alex Lynskey of Melbourne, Australia finished in seventh place. While the US and Australia have a tax treaty, it does not cover gambling. Thus, of Mr. Lynskey’s $1,500,000 of winnings, he loses 30% off the top to the IRS ($450,000). Australia does not tax gambling winnings for amateur gamblers but it does tax gambling winnings of professional gamblers. The Australian tax system somewhat mirrors ours in that are marginal rates; however, Australia’s top rate is 45% compared to our 37%. The US-Australia Tax Treaty does specify that a foreign tax credit can be taken for taxes paid to the other country. Mr. Lynskey would have paid an estimated $666,296 to the Australian Taxation Office; given the US tax he’s paid that number is reduced to $216,296 (or $292,000 Australian).

In eighth place was Artem Metalidi of Kiev, Ukraine. Mr. Metalidi will pay the least tax of any of the final nine, both in dollars and by percentage. Ukraine has a flat tax rate of 18% plus a 1.5% military tax (a total of 19.5%). Mr. Metalidi will lose only an estimated $243,750 of his $1,250,000 to tax. None of that is going to the IRS: The tax treaty between the Ukraine and the United States exempts gambling winnings from taxation.

Antoine Labat, a professional poker player from Vincenna, France, finished in ninth place. He earned an even $1 million, but that’s before taxes. The United States and France have a tax treaty exempting gambling winnings, so he lost nothing to Uncle Sam. However, France is anything but a low-tax environment. While 2018 French tax rates have not been announced (they’re not announced until late in the year), based on 2017 rates Mr. Labat will lose $432,574 (€369,721) of his $1 million (€854,701) winnings to taxes.

Here’s a table summarizing the tax bite:

Amount won at Final Table $28,075,000
Tax to IRS $9,811,437
Tax to Illinois Department of Revenue $435,600
Tax to France Tax Administration $432,574
Tax To State Fiscal Service (Ukraine) $243,750
Tax to Australia Tax Agency $216,296
Tax to Michigan Department of Treasury $211,438
Tax to Rhode Island Division of Taxation $37,978
Tax to City of Muskegon Treasurer Department $14,125
Total Tax $10,953,198

That means 39.01% of the winnings of the final nine will go to taxes. That’s up from 2017 because last year four of the final nine faced no taxation (they were all residents of the United Kingdom which does not tax gambling winnings).

Here’s a second table with the winners sorted by their estimated take-home winnings:

Winner Before-Tax Prize After-Tax Prize
1. John Cynn $8,800,000 $4,939,817
2. Tony Miles $5,000,000 $3,060,659
3. Michael Dyer $3,750,000 $2,300,725
4. Nicolas Manion $2,825,000 $1,607,677
5. Joe Cada $2,150,000 $1,277,365
6. Aram Zobian $1,800,000 $1,078,179
8. Artem Metalidi $1,250,000 $1,006,250
7. Alex Lynskey $1,500,000 $833,704
9. Antoine Labat $1,000,000 $567,426
Totals $28,075,000 $16,871,802

Mr. Metalidi finished in eighth place but based on after-tax winnings he finished in seventh place. The Ukraine’s low flat-rate income tax gives him a benefit over the relatively high taxes in Australia.

But the true winner this year was the Internal Revenue Service. The IRS’s take of $9,811,437 exceeds the combined after-tax winnings of the first and second place winners ($8,000,476) and nearly exceeds the top three! Taxes may be what we pay for a civilized society, but we sure pay a lot of them. One truism this year (as usual) is that the house (the IRS) always wins.

The Amazing, Incredible, Expanding Postcard!

June 29th, 2018

When I was a child, people used postcards to save on postage. Postage for postcards ran a nickel. That was less than a phone call. Today, with the emergence of cellphones, the only postcards I receive are advertisements. But the IRS has a better idea! Let’s put Form 1040 on a postcard! [Insert groans from the tax professional community] “It’s so simple that a child can do it!” [Let’s add some groans from all the parents out there.]

Indeed page 1 of the draft Form 1040 is simple and straightforward. You enter your name, address, filing status, and you sign the return on page 1. Page 2 looks simple: You note your wages, other items of income, write in your tax, note some credits, and you’re done. But then you see some interesting words, like Line 6:

6. Additional income and adjustments to income. Attach Schedule 1.

That’s one way to make things fit on a postcard: Add more postcards! And it’s not as if most people will be skipping Schedule 1; it includes business income (Schedule C), capital gains (Schedule D), rental income and partnerships (Schedule E), and IRA deductions and all adjustments to income. And there’s not one of these schedules, but six of them. Here’s a link to the draft Form 1040 and all six of the proposed schedules.

It’s time to be honest: Nothing has gotten simpler. Indeed, I would argue everything about the 2018 tax return has gotten far, far more complex. Take line 9 of the draft Form 1040 (on page 2 of the form):

9. Qualified business income deduction (see instructions).

I pity those people trying to do that deduction themselves. I guarantee that most who try to do that line themselves will be joining me with gray hair next year. (The best explanation I’ve seen of that deduction runs 32 accountant-friendly pages. That is not a joke. Another tax professional used the line “Rube Goldbergesque” to describe the deduction.) It’s near a certainty that do-it-yourselfers are going to have issues with these forms. They’re not straightforward.

As I’ve told all of my friends I have lifetime employment. I think the IRS just gave me a second lifetime worth of employment!

The FBAR Is *Not* Due Tomorrow

June 28th, 2018

Most tax-related deadlines are on the 15th of various months. Income tax returns for individuals are due on April 15th; the extended deadline is October 15th. But just to have fun with us there are some exceptions. One of these used to be the FBAR—the Report of Foreign Bank and Financial Accounts (Form 114).

The FBAR used to be due on June 30th, and that was a receipt deadline. Almost every other deadline in tax is a postmark deadline; for example, if you mail your tax return on April 15th and it takes a month to get to the IRS it’s still considered timely filed. That wasn’t the case for the FBAR. Luckily, Congress changed the law.

Beginning with 2016 FBARs (those filed last year) the deadline was changed to be concurrent with the tax deadline (April 15th). There’s an automatic six-month extension until October 15th. A few years ago the FBAR changed and now must be electronically filed. It now also does not have to be accepted by the deadline to be considered timely; it only has to be filed by the deadline.

Every year I get asked by a few clients, “Russ, why haven’t you reminded me about the FBAR deadline at month-end?” I’m happy to tell them that’s simply no longer the case.

Wayfair and Economic Nexus

June 24th, 2018

Last week the Supreme Court ruled in South Dakota v. Wayfair that South Dakota’s law forcing Wayfair, an Internet retailer, to collect (and remit) sales tax to South Dakota (a state that it did not have physical nexus to) was valid. The decision overrides a previous Supreme Court decision called Quill Corp. v. North Dakota). There’s been plenty of excellent coverage on this ruling (see, for example, the Tax Foundation and Kelly Erb). But I’m wondering what this means for income tax and economic nexus.

A few states have passed laws stating that if you have economic nexus to a state you need to file a tax return to that state. California is one such state. Eventually, cases on economic nexus will go through the court system (and with a certainty the US Supreme Court will have the final say). While no one knows how the Court will rule on such cases, there are indications.

From a case called Complete Auto: “The Court will sustain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the State provides.” In Wayfair, the Court ruled that “Physical presence is not necessary to create a substantial nexus.”

The key point is noted by Justice Kennedy:

The Court has consistently explained that the Commerce Clause was designed to prevent States from engaging in economic discrimination so they would not divide into isolated, separable units. See Philadelphia v. New Jersey, 437 U. S. 617, 623 (1978). But it is “not the purpose of the [C]ommerce [C]lause to relieve those engaged in interstate commerce from their just share of state tax burden.” Complete Auto, supra, at 288 (internal quotation marks omitted). And it is certainly not the purpose of the Commerce Clause to permit the Judiciary to create market distortions. “If the Commerce Clause was intended to put businesses on an even playing field, the [physical presence] rule is hardly a way to achieve that goal.” Quill, supra, at 329 (opinion of White, J.).

So four questions need to be answered for whether a state can tax a service business conducting no services within that state. Let’s assume there’s a tax preparation business in Nevada that has customers in New York, and New York passes a law saying that if you have any sales to New York residents you must pay New York state income tax and register your business in New York. The questions that must be answered are: Is their substantial nexus to New York, is the tax fairly apportioned, does it discriminate against interstate commerce, and is the tax fairly related to the services that New York provides. We’ll assume the tax is fairly apportioned.

Consider a Nevada tax professional who has one client in New York out of one thousand total clients. Is there substantial nexus? Almost certainly not, and it would be hard to see such a tax passing muster. Thus, some sort of de minimis rule is necessary. Note that in the instant case that the South Dakota law has such a rule.

Consider now a Nevada tax professional who has 200 clients in New York out his one thousand clients. We’ll assume that passes the de minimis hurdle. The two other questions (and I think they’re linked) come into play: Is the tax fairly related to services that New York provides and does it discriminate against interstate commerce?

The first of these questions has two sides. All of the work done here (remember, this is a service business) is being done in Nevada, not New York. That leads to a conclusion that New York income tax is not related to services provided by New York. (However, if New York had a sales tax on services the business would likely need to comply.) On the other hand, the person contracting for the services is a New York resident.

I think the first argument is the better one. The income being earned is based off of work done in Nevada, not New York. Nevada, not New York, has the right to tax its residents on income earned in the state. Because of this, I think that if New York were to tax such income it would discriminate against interstate commerce. (There is an other side to this argument, though. New York can argue that there would be a tax credit available, and that would eliminate the issue. Still, the filing of the return adds to the burden of the Nevada taxpayer, and is an issue.)

That there are two sides to this argument shows that there is no one right answer. In the end, the Courts will end up making the decision about economic nexus and income tax. Indeed, sometime around 2021 I expect a Supreme Court decision on this issue.

Gambling with an Edge Podcast

June 22nd, 2018

I was the guest on this week’s Gambling with an Edge podcast. You can download the podcast here or on iTunes. The main point of discussion was the new tax law, but we covered some other topics such as bad tax states for gamblers, the Cincinnati Reds’ bobblehead case, and yesterday’s ruling in South Dakota v. Wayfair.

Battling for Tax-Free Bobbleheads: Will Reds Win in Court?

June 14th, 2018

This has not been a good year for the Cincinnati Reds. With just 25 wins in 68 games they have the worst record in the National League. While they have one of the best players in baseball–Joey Votto–the rest of the team leaves something to be desired. They’ve been outscored, out-pitched, and out-defended. And now they’re at the Ohio Supreme Court in a case about bobbleheads.

Yes, bobbleheads. The Department of Taxation conducted an audit of the Reds and determined (among other things) that promotional items were subject to Use Tax. Use Tax is the equivalent of sales tax when something is purchased without sales tax being applied. The Reds argued that a portion of the ticket price (for a Reds game) was for the promotional item; the Department of Taxation felt otherwise. The Reds appealed to the Board of Tax Appeals. The Board noted,

[W]e conclude that the promotional items given to patrons on specific game days were not “resold” to the patrons as part of the ticket price of admission, but were given away for free, primarily to increase interest in certain targeted games or generally increase interest among a broader audience. The evidence in the record supports our conclusion that the cost of the subject promotional items is not included in the ticket price. Specifically, the ticket price for each particular seat is the same throughout an entire season, regardless of whether a promotional item is being offered. Moreover,
patrons are not guaranteed that they will receive one of the promotional items, as there are limited quantities that are distributed while supplies last…[We] cannot conclude that the Reds’ patrons are actually “purchasing” a promotional item, especially when they are attending a game where there is no promotional giveaway.

The Reds have appealed the decision to the Ohio Supreme Court. The Reds argue,

“The issue, simply put, is whether the Reds were obligated to provide the bobbleheads,” [Reds Attorney Steven] Dimengo said.

“Applying fundamental contract law, there was consideration… the consideration of the patrons to purchase a ticket and attend a game, he said. “And the Reds were obligated to provide the bobbleheads, consistent with their pregame promises.”

You can watch the oral arguments (held yesterday) at this link. A decision should be released in a few months.

Hat Tip: How Appealing

IRS Interest Rates Unchanged for the Third Quarter of 2018

June 9th, 2018

The IRS announced yesterday that IRS interest rates will be unchanged for the third quarter of 2018:

The rates will be:

– 5 percent for overpayments, 4 percent in the case of a corporation;
– 2.5 percent for the portion of a corporate overpayment exceeding $10,000;
– 5 percent for underpayments; and
– 7 percent for large corporate underpayments.

As I tell clients interest works both ways: If you file after the April tax deadline, you owe interest to the IRS; if you file after the April tax deadline and receive a refund, you are paid interest. That interest is, of course, taxable.

IRS Offers Penalty and Filing Relief on New Transaction Tax on Foreign Earnings

June 4th, 2018

Individuals who own foreign entities typically have complex returns. I prepare returns for three such individuals; they’re all on extension. Yet one item needed to be prepared for these individuals by April 18th: the new Section 965 transition tax.

One of the key issues with the §965 tax is that you needed to make an election by April 18th to elect to make your payment in eight equal installments. If you didn’t make the election, you owed all the tax with your 2017 tax filing–ouch! This was a difficult deadline for many individuals due to the complexity of their returns.

Luckily, the IRS today announced penalty and filing relief on the §965 tax. As the IRS noted,

• In some instances, the IRS will waive the estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, as long as they make all required estimated tax payments by June 15, 2018.

• For individual taxpayers who missed the April 18, 2018, deadline for making the first of the eight annual installment payments, the IRS will waive the late-payment penalty if the installment is paid in full by April 15, 2019. Absent this relief, a taxpayer’s remaining installments over the eight-year period would have become due immediately. This relief is only available if the individual’s total transition tax liability is less than $1 million. Interest will still be due. Later deadlines apply to certain individuals who live and work outside the U.S.

• Individuals who have already filed a 2017 return without electing to pay the transition tax in eight annual installments can still make the election by filing a 2017 Form 1040X with the IRS. The amended Form 1040 generally must be filed by Oct. 15, 2018. See the FAQs for details. For more information about the transition tax and other tax reform provisions, visit IRS.gov/taxreform.

The FAQs noting this are available on the IRS website.

Do note this is not complete relief. Many taxpayers impacted by this will owe interest from April 15th; you also have to owe less than $1 million in transition tax. But it does allow many taxpayers to proceed in an orderly manner in determining what tax they will owe on Section 965 rather than rushing to meet a deadline. (Individuals outside of the US have until next Friday to timely file their returns. They can now file extensions and still, in many cases, elect the installment treatment for this tax.)

A Thriller of a Decision Upcoming

June 3rd, 2018

The Wall Street Journal yesterday highlighted Judge Mark Holmes of the United States Tax Court. Judge Holmes’s opinions are extraordinarily readable even to those who know little about tax law. I’ve noted Judge Holmes’s writings in the past (on the TurboTax defense, on strip clubs and hair bands, on human egg retrieval, and ‘substance over form’); luckily for tax nerds, it’s likely we will be getting lots more opportunities to read Judge Holmes’s writings (he was recently nominated by President Trump for another 15-year term on the Tax Court).

Why did the Journal spotlight Judge Holmes? Because he is the judge dealing with the estate tax case of Michael Jackson. As the Journal noted,

There’s also a biting side to his work. This year, in a dissent, he compared his colleagues on the Tax Court to the tyrannical Roman emperor Caligula and his practice of posting tax laws “in fine print and so high that Romans could not read them.”

“It is our custom to reconsider an issue when a circuit court reverses us. And today we have to choose either a well-reasoned opinion by a highly respected judge in America’s heartland, or Caligula,” Judge Holmes wrote. “We pick Caligula. I gingerly dissent.”

An estate tax return is based on the value of the estate on the date of death. When Mr. Jackson died, he was in financial trouble. True, today there’s a show here in Las Vegas that features his music and his estate is worth a lot of money, but was that the case on the date of death? Judge Holmes will let us know, and almost certainly in a way that will educate and elucidate at the same time. If you’re a Journal subscriber, I strongly recommend this article.

You Mean My Checking Account Became a Savings Account?

May 31st, 2018

In what is definitely an “Oops” moment, two tax software products from Intuit (Lacerte and Intuit ProConnect Online) incorrectly transmitted information for 2018 California estimated payments. Checking accounts became savings accounts in the transmittal and the payments were rejected:

As a result, electronically transmitted estimated tax payments (Form 540-ES) for tax year 2018 transmitted to us between January 23, 2018, and April 25, 2018, could have been rejected by your client’s financial institution. Future scheduled payments transmitted during this timeframe could be impacted as well.

We are collaborating with Intuit to identify impacted taxpayers and assist with resolution. Intuit sent letters directly to affected tax practitioners. We will waive FTB-imposed dishonored check fees on impacted taxpayers’ accounts and will give taxpayers an opportunity to submit first quarter estimated tax payment that will be considered timely.

We are not impacted by this, but if you’re a tax professional using either software package and are impacted by this you should have been contacted directly by Intuit (on or about May 9th). If you’re a taxpayer and your first quarter 2018 California estimated payment was not debited by the Franchise Tax Board and should have been, contact your tax professional immediately.

Kudos to the FTB in working with Intuit and giving impacted taxpayers time to get this resolved.