Archive for September, 2015

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How Should Multiple Buy-Ins for a Poker Tournament be Handled on a W-2G?

Wednesday, September 9th, 2015

Poker tournaments today have various forms. Some are “freeze-outs,” where you can only buy into the tournament once. Some have rebuys and add-ons, where if you lose all your chips you can rebuy into the tournament and if you’re in the tournament at a certain point you can purchase an “add-on” of additional tournament chips. A format that has grown in popularity is the multiple reentry tournament. Here, if you lose all your chips you can reenter the tournament. The difference between this and a rebuy tournament is that in a reentry tournament you pay the house fee for running the tournament; in a rebuy tournament, your rebuy goes exclusively into the prize pool.

The IRS Office of Chief Counsel issued an opinion back in July (but released last week) on how to treat multiple buy-ins for a poker tournament vis-a-vis issuing W-2Gs. Do note that this is solely the opinion of the Chief Counsel’s office; a court could make a completely different ruling. That said, the analysis looks correct to me.

The issue the IRS counsel needed to answer was, “Whether multiple buy-ins should be deducted as individual wagers or in the aggregate from winnings in a poker tournament for the purposes of reporting the winnings on a Form W-2G?” The conclusion the IRS came to is that multiple buy-ins are not identical wagers and should not be aggregated. Although this is a bad ruling for recreational gamblers, I think the IRS got it right.

So when a person rebuys is it an identical wager? “Of course it is, Russ; the person is paying the same amount for the entry into the tournament.” Yes, that’s correct but is his situation identical?

The IRS noted that the preamble to Treasury Decision 7919 explains the rule on identical bets.

…winning on identical bets must be aggregated to determine if the $1,000 floor has been exceeded. This ensures that bettors are treated the same, whether or not a wager is divided into several small components. Identical bets are those in which winning depends on the occurrence (or non-occurrence) of the same event or events. For example, two wagers on a horse to win a particular race general[ly] are identical. … [But] … wagers containing different elements, e.g., an “exacta” and a “trifecta” are not identical.

The issue is that the conditions when you reenter a poker tournament are not identical. Consider if you buy-in before the tournament begins, and there are 100 entrants. When you reenter, there are now 120 entrants. The prize pool is different, your chances of winning are different, and, most likely, the opponents at your table will be different. While the amount wagered is identical, the wager itself has a different chance of success.

The conclusion the IRS draws is correct:

Multiple buy-ins into a single poker tournament event are not identical wagers and therefore should not be aggregated for purposes of withholding and reporting requirements under section 3402(q) and the regulations thereunder. If a player wins a prize at the close of a tournament, only the buy-in that resulted in the win should be deducted from the winnings to determine the “proceeds from a wager.”

While I agree with the conclusion, this is not good for players (or for poker). First, for professional gamblers this is a non-issue. A professional gambler nets his wins and losses, so while a W-2G may have a larger win, the professional gambler can offset that by his higher losses. Nothing has changed for him or her.

However, the situation is different for amateur gamblers. An amateur gambler cannot not his wins and losses. Wins are Other Income (line 21, Form 1040) while losses are an itemized deduction on Schedule A. This ruling will cause an amateur gambler’s Adjusted Gross Income (AGI) to increase. An increased AGI has numerous deleterious effects, including (but not limited to):

  • You lose the value of exemptions;
  • You can lose certain itemized deductions both directly (2% AGI, 7.5%/10% AGI restrictions) and through the phase-out of itemized deductions (note that gambling losses are not impacted by this);
  • You can lose the ability to deduct student loan interest;
  • You may lose tax credits for health insurance; and,
  • Some states do not allow deductions for gambling losses, so if you’re a resident of one of those states you must pay tax on artificial “wins”.

Personally, I think that the reentry format is bad for poker. (A discussion of that has far more to do with the health of the poker economy than taxes.) This ruling from the IRS appears to be legally correct but is another blow to amateur players.

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Posted in Gambling | 2 Comments »

Ghost Hunter, Pheasant Hunter, or Deduction Hunter: No Matter, He Loses at Tax Court

Tuesday, September 8th, 2015

My favorite Tax Court judge, Mark Holmes, is out with an opinion where Ghostbusters makes an appearance. And once again keeping records would win the day but perhaps that would take a supernatural effort from today’s petitioner.

David Laudon is a chiropractor licensed in Minnesota. He made nearly $290,000 in bank deposits from 2007 to 2009 yet reported only a bit less than $210,000 in gross receipts on his returns. He deducted as business expenses for his chiropractic home office a Microsoft Xbox 360, Nintendo Wii, and numerous pieces of hair-salon equipment. He also claimed deductions for driving tens of thousands of miles throughout Minnesota and the Dakotas–both to treat patients and to perform an assortment of other services. The Commissioner thought this was a stretch and urges us to support his adjustments.

This doesn’t look good, especially when I see the words,

Some of Laudon’s stated reasons for making these trips strain credibility: for example, driving to a “schizophrenic” patient who was–on more than one occasion–“running scared of demons” down a rural Minnesota highway, or driving to a patient’s home in a Minneapolis suburb– expensing 261 miles–because he had received a call from police that she had overdosed on OxyContin prescribed by her physician. Laudon claimed to have driven hundreds of miles per day–sometimes without a valid license–to see patients, but several of these trips were for medical procedures he was not licensed to perform. Even his testimony about multiple entries in the logs where he wrote “DUI” was not credible: He claimed that these were not references to being stopped by police while under the influence, or driving while his license was suspended, but instead were his misspellings of a patient named “Dewey”–a supposed patient of his. [emphasis in original]

That’s just a taste of the decision. I won’t go into the minutiae, but I think you’ve got a taste of what’s going on. The details include unreported income (“But because he didn’t produce any evidence verifying that these amounts were deposited into the relevant accounts, Laudon hasn’t met his burden of proof.”), an automobile log that was “‘not a complete itemized thing'” led to those deductions being denied, and a home office that wasn’t exclusive (“We particularly disbelieve his claim that the Xbox, Wii, big-screen TVs, and other electronics in his basement were used exclusively for chiropractic purposes since this claim conflicts with his much more plausible admission to the IRS examiner during audit that his daughter and his girlfriend’s son would play these video games while he was on the phone.”) and had no substantiation led to that being denied.

As I’ve said in the past, keep a mileage log. Keep records of your deductions. Ask your tax professional about the rules to have a home office. And keep good records.

Case: Laudon v. Commissioner, T.C. Summary Opinion 2015-54

Posted in Uncategorized | 1 Comment »

The Family that Commits Tax Evasion Together Goes to ClubFed Together

Sunday, September 6th, 2015

You own a payroll company with your son. It’s been a good year, so you decide to give yourself a bonus from the corporation. There’s nothing wrong with that–it’s your company, and you certainly can pay yourself whatever you feel is appropriate. You do need to report that income on your tax return, of course. That last step was omitted by the subjects of this post.

William and Robert McCullough are a father and son who reside in Westborough, Massachusetts. They own a payroll company, Harpers Data Services, in Worcester, Massachusetts. There company did quite well from 2007 to 2012, as they deposited $11 million in two company bank accounts. They didn’t tell their company accountant about those two accounts. Well, the corporation only omitted $3.78 million from the corporation tax return.

Meanwhile, William McCullough wrote checks to himself, his son, and Gary Davis, a former owner of the business. One series of checks totaled $4.7 million; another was $2.7 million. That allowed the McCulloughs and Davis to avoid $1.7 million of personal income tax. The McCulloughs and Davis pleaded guilty to various tax evasion charges last week. William McCullough also pleaded guilty to wire fraud.

From 2009 through 2011, Harpers maintained client trust accounts and a client tax account. These accounts contained client funds, which were to be used to pay employees’ paychecks and employees’ federal and state taxes. From 2009 through 2011, William McCullough took approximately $1 million from the client trust accounts and deposited it into a Harpers account. In 2010, he took $750,000 from the client tax account and deposited it into a Harpers account. At the time William McCullough took this money, the funds belonged solely to the clients of Harpers Data Services. McCullough’s fraud resulted in a theft of approximately $1.8 million dollars.

The McCulloughs and Mr. Davis will almost certainly be heading to ClubFed. This is yet another reminder for everyone who uses a payroll service to join EFTPS and make sure your payroll deposits are being made. Trust but verify is excellent practice in payroll.

Posted in Tax Fraud | 1 Comment »

IRS Removes Social Security Number from Some Notices But…

Sunday, September 6th, 2015

The IRS has begun removing social security numbers from some IRS notices in the header (leaving just the last four digits, such as xxx-xx-1234). The reason for this is the problem of identity theft. And I give kudos to the IRS for this. Unfortunately, the IRS hasn’t executed this that well.

Today I opened an IRS notice that was sent to a client. The good: The social security number in the header had only the last four digits. The bad: Right below the header the IRS put in a bar code–presumably to make processing of the return mail easier. Below the bar code in relatively small print (but easily readable by me, and I wear glasses) was the deciphering of the code. Of course, it contained the social security number.

My helpful hint to the IRS: It does no good to remove the social security number from the header and then add it right below the bar code. Identity thieves can read it there, too.

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Posted in IRS | 2 Comments »

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