Archive for the ‘Gambling’ Category

The 2016 Hom Decision: Do Online Gambling Sites Still Need to be Reported on the FBAR?

Wednesday, July 27th, 2016

The Ninth Circuit’s unpublished opinion in United States v. Hom is now up. It’s sort of a misnomer to use the word “published” for an unpublished opinion. Unpublished here means it cannot be cited as a precedent; the court doesn’t think it has sufficient precedential value. It doesn’t mean, though, that the opinion isn’t of value.

Back in 2014 Mr. Hom was convicted of not filing an FBAR (then, Form TD F 90-22.1) for accounts at FirePay, PokerStars, and Party Poker. The appeals court quickly upheld that FirePay is a foreign financial account.

Hom’s FirePay account fits within the definition of a financial institution for purposes of FBAR filing requirements because FirePay is a money transmitter…FirePay acted as an intermediary between Hom’s Wells Fargo account and the online poker sites. Hom could carry a balance in his FirePay account, and he could transfer his FirePay funds to either his Wells Fargo account or his online poker accounts. It also appears that FirePay charged fees to transfer funds. As such, FirePay acted as “a licensed sender of money or any other person who engages as a business in the transmission of funds” under 31 U.S.C. § 5312(a)(2)(R) and therefore qualifies as a “financial institution.”… Hom’s FirePay account is also “in a foreign country” because FirePay is located in and regulated by the United Kingdom.

This part of the ruling shouldn’t be a surprise. If it looks like a duck, walks like a duck and quacks like a duck, it might just be a duck. FirePay offered services that banks do. It looked like a financial institution; the court ruled it was one.

However, Mr. Hom prevailed regarding PokerStars and Party Poker.

In contrast, Hom’s PokerStars and PartyPoker accounts do not fall within the definition of a “bank, securities, or other financial account.” PartyPoker and PokerStars primarily facilitate online gambling. Hom could carry a balance on his PokerStars account, and indeed he needed a certain balance in order to “sit” down to a poker game. But the funds were used to play poker and there is no evidence that PokerStars served any other financial purpose for Hom. Hom’s PartyPoker account functioned in essentially same manner.

The Government argues that these entities were functioning as banks, but this argument lacks support. Neither the statute nor the regulations define banking. In discerning the plain meaning of the text, we interpret words in light of their “ordinary, contemporary, common meaning” unless they are otherwise defined. Merriam-Webster dictionary defines bank as, “an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds.” There is no evidence that PartyPoker and PokerStars were established for any of those purposes, rather than merely for the purpose of facilitating poker playing. [footnotes and citations omitted]

So are we done (again) with including online gambling accounts as foreign financial accounts? Unfortunately, the government made another argument: that online gambling sites are casinos. The Court rejected that argument because it was raised too late (it needed to be presented during the actual case). However, we need to examine it because nothing prevents the government from raising it in the future.

So let’s look at the law and the regulations promulgated under the law. 31 USC § 5312(a)(2)(X) defines a financial institution to include, “a casino, gambling casino, or gaming establishment with an annual gaming revenue of more than $1,000,000 which—
(i) is licensed as a casino, gambling casino, or gaming establishment under the laws of any State or any political subdivision of any State….”

Unfortunately, most online poker sites offer activities found in a casino. For example, PokerStars now offers casino games; other sites offer sports betting. A court could easily find that PokerStars meets the definition of an online casino and since it is clearly based outside the United States meets the definition of a foreign financial institution. Thus, the only safe course is to continue to report online gambling sites as foreign financial sites on the FBAR.

I would prefer (from a workload standpoint) to draw a different conclusion, but the safe course is that we must continue to recommend that individuals with funds on online gambling sites file the FBAR.

Hom Decision Reversed

Tuesday, 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

Saturday, 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.

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

Sunday, 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.

Taxes and the WSOP: 2016 Update

Monday, May 16th, 2016

I’ll be heading to the Rio Hotel and Casino tomorrow for three days of continuing education. In a little over two weeks, the poker world will be descending on the Rio for the annual World Series of Poker. (I’m probably one of the few individuals who is in both groups.) The 2016 WSOP consists of 68 “bracelet” events culminating in the championship event that begins on July 9th. There are also daily tournaments, satellite events, and cash games at the Rio. Other Las Vegas hotels run poker tournaments, so there are tournaments for almost any size of buy-in available.

I’ve been writing about the tax impacts of the WSOP for years. The first post, back in 2007, noted that the Rio refuses to follow the rules regarding issuing W-2Gs when a poker player presents a correctly completed Form 5754. In 2011 I looked at staking and the WSOP. I presented “updates” in 2014 and 2015 (though essentially nothing has changed).

And that’s still the case today. The Rio won’t issue multiple W-2Gs (though they’re getting closer to admitting the real reason: cost) and the IRS hasn’t come after them (yet). The onus remains on the player to issue required paperwork and withhold taxes when required when the player has backers. (See the 2011 and 2015 updates.)

I have received several inquiries from non-Americans who plan on playing at the WSOP regarding withholding of US taxes and if there’s any means of avoiding this. As noted in IRS Publication 515, withholding is required on gambling winnings (for poker tournaments, of $5,000 or more net) except for residents of these countries:

Tax treaties. Gambling income of residents (as defined by treaty) of the following foreign countries is not taxable by the United States: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.

Gambling income of residents of Malta is taxed at 10%.

If you’re from one of these countries, you should not have tax withheld from your winnings. My understanding is the Rio is authorized to issue Individual Taxpayer Identification Numbers (ITINs) to winners. (If you already have an ITIN, make sure you bring that number with you.) You may still owe tax to your home country for those gambling winnings; be aware that the IRS does share information with other countries’ tax agencies.

But what if you’re from a country that does not have a tax treaty with the US? Suppose you’re from Portugal, and you play in a WSOP event and are lucky enough to cash. Let’s say your net win is $100,000. Will you get the full $100,000 or not?

The Rio is required to withhold 30% of your net win, so you will receive $70,000 in my hypothetical. You will also receive paperwork showing the withholding (IRS Form 1042-S). If you owe income tax to Portugal on your gambling winnings, you should be able to claim a tax credit for the double taxation.


I’ve been writing about this for nearly a decade and almost nothing has changed. Eventually the WSOP will be called out by the IRS for their violation of the rules on issuance of W-2Gs (and 1042-S’s). It doesn’t look like that will happen in 2016, though.

1500 Full Tilt Remission Petitions Denied by Department of Justice

Sunday, May 8th, 2016

Most (but not all) of the remission payments for balances on Full Tilt Poker have been resolved. However, a notice appeared on Friday on www.fulltiltpokerclaims.com:

INFORMATION REGARDING DENIED PETITIONS

GCG has been informed that the Department of Justice Asset Forfeiture and Money Laundering Section has denied approximately 1,500 Petitions. Petitioners flagged for denial have been notified via email. Please be sure to check your email account’s spam or junk folder to ensure the message was not filtered. Denied petitioners have ten days to appeal the decision.

Impacted individuals have until Monday, May 16th to file appeals.

HatTip: Kevmath

Online Gambling Addresses Updated for 2016

Tuesday, March 8th, 2016

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.

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.

There is one major change for 2015. 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 addresses for Bodog or Bovada. 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 March 8, 2016. 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.

North Carolina Added to Bad States for Gamblers

Saturday, February 13th, 2016

North Carolina State Seal

North Carolina changed its tax law over a year ago. While I have professional gambling clients in North Carolina, I do not currently have amateur gambling clients. It’s likely I won’t be getting many of those, as North Carolina legislators have made the Tar Heel State a bad state for gamblers.

North Carolina eliminated many itemized deductions for the 2014 tax year while increasing the standard deduction. Overall, this simplification is likely a good thing for most residents. Gamblers, though, are severely penalized. There’s no longer a deduction for gambling losses, so an amateur gambler residing in North Carolina who has $100,000 of wins and $100,000 of losses owes tax on the $100,000 of wins.

So here is my current list of bad states for gamblers:

Connecticut [1]
Hawaii [2]
Illinois [1]
Indiana [1]
Kansas [1]
Massachusetts [1]
Michigan [1]
Minnesota [3]
Mississippi [4]
New York [5]
North Carolina [1]
Ohio [1]
Rhode Island [1]
Washington [6]
West Virginia [1]
Wisconsin [1]

NOTES:

1. CT, IL, IN, KS, MA, MI, NC, OH, RI, WV, and WI do not allow gambling losses as an itemized deduction. These states’ income taxes are written so that taxpayers pay based (generally) on their federal Adjusted Gross Income (AGI). AGI includes gambling winnings but does not include gambling losses. Thus, a taxpayer who has (say) $100,000 of gambling winnings and $100,000 of gambling losses will owe state income tax on the phantom gambling winnings. (Michigan does exempt the first $300 of gambling winnings from state income tax.)

2. Hawaii has an excise tax (the General Excise and Use Tax) that’s thought of as a sales tax. It is, but it is also a tax on various professions. A professional gambler is subject to this 4% tax (an amateur gambler is not).

3. Minnesota’s state Alternative Minimum Tax (AMT) negatively impacts amateur gamblers. Because of the design of the Minnesota AMT, amateur gamblers with significant losses effectively cannot deduct those losses.

4. Mississippi only allows Mississippi gambling losses as an itemized deduction.

5. New York has a limitation on itemized deductions. If your AGI is over $500,000, you lose 50% of your itemized deductions (including gambling losses). You begin to lose itemized deductions at an AGI of $100,000.

6. Washington state has no state income tax. However, the state does have a Business & Occupations Tax (B&O Tax). The B&O Tax has not been applied toward professional gamblers, but my reading of the law says that it could be at any time.

Can a Resident of a Non-Tax Treaty Country (With Respect to Gambling) Get His Withheld Funds Back?

Tuesday, February 9th, 2016

Today, I received an inquiry from a citizen of New Zealand (he is not a US citizen or permanent resident). He had done well in a poker tournament here in the United States–well enough to have had 30% of his net winnings withheld. Non-US citizens who are not from a country with a Tax Treaty with the US where gambling income is exempted are subject to 30% withholding on gambling winnings. The gentleman had gambling losses in the US that exceeded his win. He wanted to know if I could file a Form 1040NR for him so he could get his withheld funds returned to him.

The problem is that except for Canadians and residents from tax treaty countries, there is no way to get that withholding back. Canadians are allowed to file a Form 1040NR and claim gambling losses up to the amount of wins, and get a refund. New Zealanders are not.

But he produced an email he had sent to another accounting firm along with their response. He asked the same question he asked me, with the same facts, and was told by that firm he could get a refund. He also referred me to an Internet article where someone said it was possible.

Well, the IRS was wrongly giving refunds a few years ago but they figured out there was a problem. The IRS redesigned Form 1040NR a couple of years ago; line 11 of Schedule NEC now states,

Gambling Winnings—Residents of countries other than Canada. Note: Losses not allowed.

I know the law in this area, and my correspondent is out of luck. He cannot legally get back his withheld funds. (If he is a professional gambler and has to pay tax to New Zealand on his winnings, he likely can get a tax credit on his New Zealand tax return to prevent double taxation.)

What bothers me isn’t the incorrect information on the Internet (I’ve come to expect that) but that my correspondent communicated with a supposedly respected accounting firm that should have known the right answer but either didn’t know or didn’t care to find out. I don’t know tax law well with respect to, say, the banking industry. Of course, if a bank were to approach me about doing their tax returns I’d decline the engagement and refer them to someone who does know that industry. My mother taught me that if you don’t know the answer to a question, saying “I don’t know but I’ll find out” is a great answer, and it’s one I use today. I hope that firm tries that answer out in the future. Their Errors & Omissions insurance carrier will appreciate it.

A Tale of Three States

Wednesday, February 3rd, 2016

Hawaii, Indiana, and Mississippi are three states where daily fantasy sports (DFS) is being debated. The three states are representative of what is likely to occur in every state.

Last week, Hawaii Attorney General Doug Chin issued an advisory opinion that DFS was gambling under Hawaii law.

Gambling generally occurs under Hawaii law when a person stakes or risks something of value upon a game of chance or upon any future contingent event not under the person’s control…The technology may have changed, but the vice has not.

On Tuesday, Honolulu (Oahu County) Prosecutor Keith Kaneshiro sent letters to DFS companies FanDuel and DraftKings ordering them to cease and desist offering DFS to Honolulu residents:

Gambling is illegal in Hawaii, and on January 27, 2016, the state Attorney General issued a formal advisory opinion confirming what I have long believed: That daily fantasy sports contests are a form of gambling and violate Hawaii statutes.

It appears DraftKings will leave Hawaii.

Meanwhile, the Mississippi Attorney General also issued an opinion that DFS is illegal in the state. The opinion notes that DFS would be illegal both in a casino (there are casinos in Mississippi) and outside of a casino. Neither DraftKings nor FanDuel has left the Magnolia State.

Today, the Indiana State Senate sent legislation to the Indiana House that would explicitly legalize and regulate DFS. It is unclear whether or not the bill will eventually make it into law.


The wild cards that could both negatively or positively impact DFS are:

  • Will the current federal investigations of DFS in Florida lead to prosecutions?
  • Will New Jersey win the en banc appeal of New Jersey’s legalization of sports betting (the lower court and the Court of Appeals ruled that New Jersey was barred by the Professional and Amateur Sports Protection Act (PASPA))?  A loss by New Jersey could make DFS illegal nationally; one interpretation of PASPA is that it makes all sports betting, including indirect betting such as DFS, illegal (except for the states specifically exempted within the law).  A win by New Jersey might overturn PASPA.
  • Will the lawsuits and appeals filed by DFS companies in New York and Illinois succeed in anything but delaying DFS exits from these states?
  • Will the payment processors leave DFS making the industry financially unable to continue?
  • Will the IRS rule that DFS is or isn’t gambling?
  • Will Congress act on gambling in any manner?
  • Will an anti-gambling candidate become the next President of the United States?

A lot will happen over the next two to three months. Because it’s Tax Season, I won’t be following this as closely as I have been over the last couple of months. A great resource on DFS is the Legal Sports Report.

An observer might ask, what does this all mean? I believe that we will see a dichotomy within the states on how they treat DFS. I believe that about 20 states will explicitly ban DFS, another 20 states will legalize and regulate DFS, while a few states will ignore DFS and let it continue in its current unregulated state. But the wild cards noted above could drive the DFS industry under or make it wildly successful.