Taxable Talk

Earlier this week I posted on the tax bite that the top nine finishers at this year's main event of the World Series of Poker faced. This year's winner, Peter Eastgate, hails from Denmark. Assuming he is subject to Danish taxation he faces an effective tax bite of 72.27%.

I've been told that he has since moved to England, and as a citizen of the European Union (E.U.) he is now subject to British tax law. Others have told me that Britain doesn't tax professional gamblers, and that Mr. Eastgate will only have to pay tax on the first $900,670 of his winnings.

There are several flaws in this argument, though. Mr. Eastgate was a Danish citizen (and resident) when the tournament began. Couldn't SKAT, the tax agency of Denmark, argue that he moved simply to avoid the tax, and that he still owes the tax? Another argument that could be made is that it's the date he entered the tournament that matters, not the date of completion.

My suspicion is that Mr. Eastgate will get a bill from SKAT, and it's going to be big. The likely outcome is that this will end up in court. There's precedent for tax litigation involving the winner of the World Series of Poker; Joseph Hachem won the event in 2005 and had to fight the Australian Tax Office to avoid Australian tax on his winnings (he won).

Finally, if he doesn't owe tax in Denmark he likely will owe tax in Britain. The United Kingdom does tax professional gamblers on their winnings. I've received a couple of emails stating that Inland Revenue hasn't been enforcing tax on professional gamblers' winnings. Given the high profile nature of Mr. Eastgate's victory it's hard for me to believe that Inland Revenue won't notice if Mr. Eastgate ignores the British taxman. Still, the tax rate in Britain (about 40%) is far less than the 72.27% Mr. Eastgate would owe in Denmark. This may be a case where the taxman rings the bell twice.

California's Legislative Analyst is projecting that the budget deficit, currently pegged at about $11 billion, might grow to $28 billion. What does the Legislative Analyst, Mac Taylor, want to do to cure the problem? A 5% income tax increase.

I don't expect Republicans in the legislature to support the Legislative Analyst's proposal. Increasing California's income tax rate to 14.3% (15.3% on income above $1 million) will be welcome news to the development authorities in Nevada, Arizona, Oregon, and Colorado. If this tax increase were enacted—again, I doubt this will happen—and President-Elect Obama's probable tax increase were enacted, self-employed Californians would face marginal tax rates of above 72%. With such confiscatory taxation Californians will react by creating strategies to avoid taxation. Clearly one step would be to move. There's no doubt in my mind that actions like that would occur, and that California will be stuck in a cycle of ever-increasing tax rates.

The only way to cure this is to drastically cut spending. Spending needs to match revenues. Ideally, California should cut tax rates rather than increase tax rates. Cutting taxes would help encourage business to relocate here rather than elsewhere. Unfortunately, the odds of tax cuts in California are less than zero.

I have no idea where the Legislature will head on this issue. Smoke and mirrors won't work anymore. The Democrats won't cut spending. The Republicans won't vote for new taxes. Both sides need votes from the other side.

I'll keep you informed.

This year's World Series of Poker concluded early this morning at the Rio Hotel and Casino in Las Vegas. The winner of the main event won $9,152,416 but would he actually end up with all that money?

This year's winner was Peter Eastgate from Denmark. The United States and Denmark have a tax treaty. Because of the treaty Mr. Eastgate doesn't owe a penny to the IRS. That just leaves the Danish tax authorities.

Denmark's tax agency is called SKAT. Denmark, like the United States, does tax gambling winnings. For casino gambling (which is where I believe this will be classified) the tax rate is 45% on the first 4 million Danish Kroners; it's 75% on income above that. Today $1 is worth 5.88907 DKK; Mr. Eastgate won 53,899,250.70 DKK before taxes. Mr. Eastgate will owe about 39,224,438 DKK in tax ($6,660,545). Put another way Mr. Eastgate will keep 14,674,813 DKK ($2,491,871) of his winnings—just 27.23% of his prize. Yes, he faces an effective tax rate of 72.77%. Ouch.

Ivan Demidov of Moscow, Russia finished second and won $5,809,595. The United States and Russia also have a tax treaty and Mr. Demidov won't have any of his winnings withheld by the IRS. Russia has a 13% flat tax rate, so Mr. Demidov will owe about $755,247 to the State Taxation Service of Russia.

Third place went to an American, Dennis Phillips of Cottage Hills, Illinois. Mr. Phillips won $4,517,773 for his efforts. He's an amateur gambler so he won't owe self employment tax on his winnings. Still, he can expect to pay $1,568,950 to the IRS and $135,533 to the Illinois Department of Revenue.

Ylon Schwartz of Brooklyn, New York, finished in fourth place for $3,774,974. He is a professional gambler so he'll owe self-employment tax on his winnings. He'll also owe state and New York City income tax. His likely tax bite is $1,396,304 to the IRS and $387,966 to the New York Department of Tax & Finance.

Two Canadians finished in fifth and sixth place. Scott Montgomery of Perth, Ontario finished in fifth place for $3,096,768. The US-Canada tax treaty specifies that 30% of his win will be withheld to the IRS. Thus, $929,030 was withheld. Mr. Montgomery is a professional gambler so he will owe tax on his win to Revenue Canada. However, he will be able to take a credit on his Canadian tax return for the money withheld to the IRS. As Canada's tax rate is 29% he likely won't have to pay any additional funds to Revenue Canada. However, when provincial taxes are included the tax rate becomes 46.41%. Thus, Mr. Montgomery will owe tax in Canada: about $491,728 after the credit for the tax withheld to the IRS. [My thanks to the commenter who pointed out the impact of provincial taxes.]

The sixth place finisher was Darus Suharto of Toronto. Mr. Suharto is an accountant, so he won't owe tax to Revenue Canada on his won. However, of the $2,418,562 he won, $725,569 was withheld per the US-Canada tax treaty. He may be able to claim a credit on his Canadian tax return for years to come based on this withheld money and eventually get it back.

The Franchise Tax Board (FTB) was rooting for David Rheem or Kelly Kim to finish in first place. These two Californians finished in seventh and eighth place, earning $1,772,650 and $1,288,217 respectively. Mr. Rheem will owe about $651,262 to the IRS and $170,302 to the FTB; Mr. Kim will owe about $470,995 to the IRS and $121,074 to the FTB.

Craig Marquis of Arlington, Texas finished in ninth place. He is also a professional gambler, and of the $900,670 he won he'll have to fork over about $328,911 to the IRS.

Here's a table summarizing the tax bite:

Amount won at Final Table	$32,731,625
Tax to SKAT (Denmark)	$6,660,545
US Tax Withheld to IRS	$1,654,599
Add'l Tax Owed to IRS	$4,416,422
Total Tax to IRS	$6,071,021
Tax to State Taxation Service (Russia)	$755,247
Tax to Revenue Canada	$491,728
Tax to NY Dept of Tax and NYC	$387,966
Tax to California FTB	$291,376
Tax to Illinois Dept of Revenue	$135,533
Total Taxes	$14,793,416

That's a total tax bite of 45.20%.

So congratulations to the winners. Just remember that a winner—perhaps the biggest winner of all—is the taxman. As we all know the house always wins.

Two tales of Bozo tax preparers came out at week's end, and both come from Denver.

First, Kennedy Oduro liked to make sure his customers got refunds. He invented false deductions and credits, and saved his clients $283,000 in 2003 and $342,000 in 2004. There's just one problem with that—inventing false items on a tax return is quite illegal. Mr. Oduro left the country before he could be arrested. When he returned last December he was arrested at O'Hare Airport in Chicago. He pleaded guilty in August to one count of willfully aiding and assisting the preparation of false federal income tax return. He was sentenced last week to a year and a day at ClubFed and must make restitution of $21,000.

What Mr. Oduro did as one tax preparer is what the government alleges an Aurora, Colorado company did en masse. Eight individuals who worked at Olympia Financial and Tax Services are accused in two indictments of 66 counts of violating various tax and fraud statutes. “They created false deductions to generate fraudulent refunds and we are determined to stop these tax refund schemes,” said Christopher M. Sigerson, Special Agent in Charge of the IRS-Criminal Investigation, Denver Field Office. The scheme involved $2 million in allegedly phony tax refund claims against the IRS and the Colorado Department of Revenue. The eight are looking at lengthy stays at ClubFed if found guilty of all counts.

If someone tells you something that sound too good to be true remember that it most likely is.

It hasn't been a good year for the San Diego Chargers. Their best defensive player, Shawne Merriman, is out for the year. They've struggled on offense. Yet their only one game out of first place.

For one former Charger it's also been a very bad year. Benjamin Lee Coleman, an offensive lineman, played for the Chargers in 2000; his pro football career ran from 1993 to 2001.

Between 2005 and 2007 Mr. Coleman decided to borrow some money. There's nothing wrong with that, but there's a lot wrong when you obtain those loans using false information and other individuals' social security numbers. It's called fraud. And when you don't pay taxes on the money you borrow (and then used for personal expenses) it's called tax evasion.

Mr. Coleman pleaded guilty in December 2007. Last week he was sentenced to three years at ClubFed and must make restitution of $240,502.