Hom Decision Reversed

July 26th, 2016

Back in 2014 the US District Court for the Northern District of California held that online gambling accounts are reportable foreign financial accounts for the FBAR. Mr. Hom appealed that decision. Today, the Ninth Circuit Court of Appeals reversed the decision in regards to online poker accounts. (Hat Tip: http://federaltaxcrimes.blogspot.com/2016/07/ninth-circuit-rejects-).

I’m not sure of how much this decision changes things. (Once the decision is published, I will post further on the decision.) From Jack Townend’s analysis:

FirePay was a financial institution, the Ninth Circuit held, because it met the definition of money transmitter. The other two were not money transmitters or otherwise financial institutions as defined. The Ninth Circuit rejected the Government’s argument that they should be treated as banks (a type of financial institution requiring an FBAR) because they functioned as banks, applying the plain meaning of the term bank to exclude these services.

Two caveats about the opinion. First, the panel described it as nonprecedential under Ninth Circuit rules. Second, the Government made an argument — which the Court declined to consider because too late (see p. 4 fn. 1) — that PokerStars and PartyPoker were casinos, another category of financial institution which, if foreign, requires FBARs for accounts.

The casino argument could be valid for the future. And as I said before, I want to read the decision before I tell people you don’t have to file an FBAR for online gambling accounts. Thus, I still recommend (for the moment) including online gambling accounts as reportable foreign financial accounts.

Fail, Caesar! A July Update

July 23rd, 2016

Since I last reported on the bankruptcy of Caesars Entertainment Operating Company (CEOC) there has been some news:

1. The junior creditors appear to be no closer to agreeing with the senior creditors on a restructuring of CEOC. The latest obvious strife was when Judge Benjamin Goldgar threatened sanctions against the junior creditors for objecting to CEOC employing the law firm of Kirkland & Ellis as bankruptcy counsel. Jones Day, the counsel for the junior creditors, then withdrew their objections.

2. A Chinese consortium is apparently bidding for the Caesars Interactive Entertainment Inc, a unit of Caesars Acquisition Company (CAC). CAC is not in bankruptcy (at least for now). Given the current acrimony in the bankruptcy it is almost a certainty that the junior creditors will object to this sale (unless the proceeds are funneled to them, and there’s no chance that the current owners of Caesars want that to happen) so this deal is very unlikely to move forward until the bankruptcy is settled. Reports are that the World Series of Poker is not part of the proposed sale.

I still believe that the most likely outcome is for all of Caesars to be forced into bankruptcy, and this is more likely to happen sooner rather than later.

Everything’s Back Up

July 23rd, 2016

We’ve completed our move into our new larger office. While the telephone and Internet were quickly moved and are working just fine, the fax line didn’t make it. It has finally made it’s way to our new office so we can now receive faxes.

We’re Moving

July 17th, 2016

Clayton Financial and Tax’s offices are moving this week. It is likely that phone and Internet will be down on Wednesday (July 20th) and Thursday (July 21st) during the move. Our new address is:

Clayton Financial and Tax
1919 S Jones Blvd, Suite G
Las Vegas, NV 89146-1299

While I’m hopeful that the phone and Internet come back up quickly, I’ve learned these things always run into unforeseen difficulties.

Dotting the I’s and Crossing the T’s

July 17th, 2016

Assume there’s a California LLC filing its final tax return, and it is owed a refund of (say) $900. You timely file the return and are surprised when you receive a check for $100 rather than $900. What happened?

Years ago this occurred with one of my clients, and I discovered that the Franchise Tax Board (California’s income tax agency) will automatically deduct $800 from a business refund and apply it to the following year’s mandatory $800 tax (if that has not been paid). But that was a final return, so that shouldn’t happen, right?

Checking the box “Final Return” is just one of the steps a California entity must do when filing a return; it must also close the business with the California Secretary of State. When this happened to my client, the Secretary of State’s office hadn’t processed the LLC withdrawal paperwork (they were running about 90 days behind then). About 30 days later the FTB sent a second check for $800 (once they were notified by the Secretary of State’s office that the entity had closed).

Spidell Publishing highlighted this issue in its weekly podcast on California taxation. I do recommend this podcast for any tax professional dealing with California taxation.

Is Cost of Goods Sold Included in the Calculation of the LLC Fee for a California LLC in Real Estate?

July 14th, 2016

The Franchise Tax Board, California’s income tax agency, today issued a legal opinion on how to calculate the Limited Liability Company (LLC) fee for a real estate company selling real property. This is an important issue because if Cost of Goods Sold is included the LLC fee would be significantly higher.

California charges LLCs two fees. The first is an $800 a year tax that any California LLC (or a foreign LLC doing business in California) must pay. The second is a gross receipts fee. Gross receipts is calculated by taking gross income and adding back cost of goods sold. So for an LLC selling real estate is COGS added back to determine the basis for the fee?

The FTB ruled that it should be added back.
The FTB looked at the history of the law, and whether COGS (which must be included in the calculation of the LLC fee) includes real property or not.

Accordingly, the term “cost of goods sold” as used by RTC section 17942, subdivision (b)(1)(A), includes real property held for sale to customers in the ordinary course of a trade or business. Therefore, LLCs that are dealers in real property must add the cost of goods sold (based on real property) back to gross income in calculating the LLC fee.

Do note that this is just the FTB’s opinion; courts could rule otherwise. However, a plain reading of the law would seem that the FTB is likely interpreting this correctly. This means an LLC may not always be the best choice of legal entity in California. (Do note that an LLC that elects a corporate form of taxation in California is treated as a corporation—either an S-Corp or a C-Corp—for tax purposes.)

Can a Non-Tax Treaty Country Resident Obtain a Refund of Gambling Withholding from the IRS?

July 10th, 2016

Every year during the World Series of Poker (WSOP) I receive several inquiries like the following:

I’m a resident of Brazil and I cashed in an event at the WSOP and won $100,000 (net). The Rio withheld 30% of that for your Internal [Revenue] Service. Can I get any of that back?

The good news is that a tax benefit is available. However, it’s not what you might think. Let’s look at the four methods of obtaining a tax benefit:

1. Tax Treaty. The US and Brazil don’t have a Tax Treaty, so there’s no way of getting the money back by claiming a Tax Treaty benefit.

2. Conducting a Business in the US. An individual conducting a business in the US must file a US tax return, and will owe tax based on the net income of the business. A poker player conducting a business in the US who has $100,000 of winnings and $100,000 of losses will have an income of $0 and not owe tax. Thus, that individual would be able to obtain a refund.

There’s a problem here, though: Is this individual conducting a business in the US? To be conducting a business in the US requires regularity: A business isn’t playing in one poker tournament or one event in one poker tournament. So is it possible for a non-American to be conducting a business in the US? Absolutely.

Consider a professional golfer from (say) Brazil playing on the PGA tour. That individual would almost certainly be conducting a business in the US, and be able to deduct losses and business expenses. (Indeed, that individual might even be considered a resident of the United States based on days in the US and have to file a Form 1040 rather than a Form 1040NR.)

Let’s go back to our Brazilian poker player. The IRS would almost certainly reject such a return at audit unless the person could demonstrate the regularity of a business. Playing in one tournament or one tournament series does not mean you’re conducting a business in the US. This means that for most non-Americans the conducting a business in the US method is not available.

3. Claim Gambling Losses on Form 1040NR. There’s a problem here: Only residents of Canada can claim gambling losses on a Form 1040NR. The IRS used to have a problem with this. However, the IRS redesigned Form 1040NR and put on the form that gambling losses can be taken only by residents of Canada and no longer issues incorrect refunds. This method will not work.

4. Claim a Foreign Tax Credit on a Brazil Tax Return. Almost every country has the ability on their tax returns to claim a foreign tax credit to avoid double taxation. It is likely that this method is available for a Brazilian poker player. It won’t be a refund from the IRS, but it will give you a tax benefit such that you will pay the higher of the two countries’ marginal tax rates. This is the only method that is available for most in this situation.

Yesterday I happen to be at the Rio and overheard someone saying that anyone can apply for a refund of the withholding. That is simply incorrect. The reality is that most individuals subject to withholding on their gambling winnings will not be able to obtain a refund of their withholding.

IRS Transcript Delivery System Down this Weekend

June 30th, 2016

The IRS’s Transcript Delivery System (TDS) will be down tomorrow beginning at 12:01am, and will not come back up until Tuesday morning. The IRS announcement indicates they will be performing maintenance during this period. TDS is supposed to be back up by 6:00am EDT on Tuesday, July 5th.

The Self-Employment Tax While Employed???

June 28th, 2016

One of my clients was quite upset this morning. She had received an IRS Automated Underreporting Unit (AUR) notice alleging that she owed about $4,000 in additional tax. She sent me a copy of the notice and I looked at the change: The IRS added self-employment tax to her return.

My client (and her husband) were both employees in the year in question. There was no self-employment tax on the original return because you have to be self-employed to owe self-employment tax. As I told my client, this ranks with the most ridiculous of IRS notices I’ve seen.

Still, my clients had to respond to the notice; if they didn’t tax would be assessed. My client completed the response form, included a short letter noting why they didn’t owe self-employment tax, and they mailed it off (certified mail, of course).

I don’t know why my client got “lucky” and got this notice. The only conclusion I can draw is the computer goofed. When I spoke to my client, I let her know that two-thirds of IRS notices are wrong in whole or in part. Yet the IRS keeps sending them out for a simple reason: People pay them blindly. “If it comes from the IRS it must be right,” they think. The reality is sadly different.

Most of the AUR notices I see (even those that are wrong) have at least a kernel of truth in them. Clients do forget to include 1099s, or they misclassify items on returns. This notice was one of the rarer ones where nothing on it made sense. Well, they did spell my clients’ names correctly….

A Train to Nowhere

June 22nd, 2016

I haven’t posted on California’s bullet train in some time (I’m no longer a resident of the Bronze Golden State), but it’s time to once more post about the train to nowhere. In theory, this train will connect Los Angeles and San Francisco. The first part of the route being built is between Shafter and Merced. Shafter is about 18 miles northwest of Bakersfield. How many riders do you think are interested in taking that segment when (or better put, if) it opens?

The whole idea of the train makes little sense given that airlines fly regularly between Southern and Northern California. The price-tag of the train has gone from about $10 billion to over $60 billion; meanwhile, funding from the federal government has dried up.

Yesterday the Los Angeles Times released a story that notes that almost every high-speed rail line needs taxpayer subsidies, a direct contradiction of what the high speed rail authority has stated. And this gem was noted from an April hearing:

Assemblyman Jim Patterson (R-Fresno) asked [rail authority Chairman Dan] Richard, “Do you know of any high-speed rail operations around the world that make substantial profit?”

Richard answered, “Actually all of them, virtually all of them, make operating profit.” He defined that as being able to cover costs after the expenditure of capital to build the systems.

“Ha, OK,” Patterson said.

The Spanish study showed that 3 of 111 high speed rail lines cover their costs, or 2.7%. Or better put, 97.3% do not cover their costs.

I’m glad I’m no longer a California taxpayer.