Archive for the ‘Gambling’ Category

Gambling With an Edge Podcast

Sunday, November 20th, 2016

I am the guest on this week’s Gambling With an Edge Podcast. We discuss year-end tax planning, Caesars’ bankruptcy, tax deadline changes for 2016 returns, and how the final table players of the main event of the World Series of Poker made out with taxes. This was my third appearance on Gambling With an Edge; my other appearances are available on their website or iTunes.

No Gambling Log, No Problem, Right?

Tuesday, November 8th, 2016

Two married poker players worked as house players (commonly called “proposition players” or “props”) in California. They were paid wages for their work, but they had gambling winnings that they didn’t include on their tax return. They state they lost money (more than their winnings) each month with their poker playing so the winnings needn’t be included on their returns. The IRS disagreed. The dispute made its way to Tax Court.

The petitioners worked at the Hustler Casino in Gardena, California (south of downtown Los Angeles), one of the card rooms (poker clubs) in the Los Angeles metropolitan region. They were hired by the Hustler to start poker games, and fill those games until other customers came. Such house players are common, and are used at off hours or to start games.

One of the petitioners happened to be at the right place at the right time and shared in a “Bad Beat” jackpot worth $16,800 (noted on a W-2G). Because their losses exceeded their wins, the petitioners simply ignored the W-2G. Although not specified in the Tax Court’s opinion, petitioners likely received an Automated Underreporting Unit Notice (probably a CP2000) noting the missing income. Eventually a Notice of Deficiency was issued, and the case made it to Tax Court.

Petitioners didn’t note what they won or lost. From the Opinion:

Petitioners assert that initially they tried to keep track of their poker winnings and losses by writing down the amount won or lost at the end of each day, but after a while they gave up that practice because it is “bad for your psyche * * * you need to be strong mentally” when playing cards.

The Opinion goes into how gambling losses for a proposition player should be noted (whether it’s an unreimbursed employee expense or a gambling loss), but the Court first had to determine the losses.

Regardless of whether petitioners were employees or independent contractors, they were engaged in a gambling activity and are required to substantiate their reported gambling losses. Accordingly we first look to the issue of whether petitioners substantiated their reported gambling losses.

Deductions and credits are a matter of legislative grace, and taxpayers must prove entitlement to the deductions and credits claimed. Taxpayers are required to identify each deduction, show that they have met all requirements, and keep books or records to substantiate items underlying all claimed deductions. To establish entitlement to a deduction for gambling losses the taxpayer must prove the losses sustained during the taxable year. The Commissioner has suggested that gamblers regularly maintain a diary, supplemented by verifiable documentation, of gambling winnings and losses. A taxpayer’s “contention that it was too difficult for him to maintain contemporaneous records of his gambling activities is without merit.”[citations omitted]

The “bad for your psyche” defense isn’t a good one at Tax Court. The petitioners didn’t provide any evidence of their losses. They could have used a phone app to note their gambling results or pen and paper. They provided no confirmation to the Court, so the Court was left with little choice but to affirm the Notice of Deficiency.

A helpful hint for props: Keep a gambling log! It’s not hard (there are even phone apps you can use). Yes, your psyche may be damaged by a bad day at the poker table but you won’t suffer a second loss in Tax Court if you keep that log.

Case: Pham v. Commissioner, T.C. Summary 216-73

The 2016 Real Winners of the World Series of Poker

Wednesday, November 2nd, 2016

Nine individuals came to Las Vegas over the last three days to compete for the championship at the World Series of Poker (WSOP). Who would be the lucky winner? And who really got to keep the money?

This year’s winner’s tax burden was nearly ten percent less than the second place finisher. Why? As my mother would say, “Location, location, location.” There are good tax states and bad tax states. Las Vegas may not have the beauty of the San Francisco Bay Area, but you sure do pay a lot in state taxes for living in California.

One other 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. Now, on to the winners.

Congratulations to Qui Nguyen of Las Vegas for winning the 2016 World Series of Poker Main Event. Mr. Nguyen won $8,005,310 for the victory. Mr. Nguyen defeated second place finisher Gordon Vayo after a grueling eight hour heads-up battle. Mr. Nguyen is a professional gambler, combining poker playing with baccarat; he’ll owe self-employment tax and federal income tax; because Mr. Nguyen resides in Nevada he doesn’t have to pay state income tax. I estimate Mr. Nguyen will lose only 41.51% of his win ($3,323,157) to tax. That’s the second-lowest tax hit of any of the Americans at the final table.

Gordon Vayo of San Francisco was in some ways the biggest loser. Yes, he finished in second place and earned $4,661,228. However, that was before taxes. Mr. Vayo may have left his heart in San Francisco, but because he resides there he’s leaving a lot of money to California’s Franchise Tax Board. Indeed, Mr. Vayo is losing an estimated 51.46% of his winnings to federal and state tax ($2,398,800); his net winnings are just $2,262,428. He will pay California’s top tax rate of 13.30%, on top of self-employment tax and federal income tax. Mr. Vayo is only the second individual since I’ve been writing these summaries to lose over half his winnings to taxes.

In third place was Cliff Josephy of Syosset, Long Island, New York. Mr. Josephy came into the final table with the chip lead, but fell to third place. Still, he takes home $3,453,035 before taxes. Unfortunately, New York is not a low-tax state; Mr. Josephy loses an estimated 48.50% of his winnings ($1,674,568) to federal and state tax. This isn’t as bad as California, but it’s certainly not as pleasant as here in Nevada.

Finishing in fourth place was Michael Ruane of Maywood, New Jersey. Mr. Ruane earned $2,576,003 for his placing fourth; however, that was before federal and New Jersey income tax. The professional poker player loses an estimated 45.75% of his winnings ($1,178,525) to tax. Because of the impact of taxes, Mr. Ruane finished in sixth place based on after-tax winnings.

Vojtech Ruzicka of Prague (Czech Republic) finished in fifth place. Mr. Ruzicka was one of the two luckiest players from a tax perspective: the US and the Czech Republic have a tax treaty exempting his winnings from withholding by the IRS and the Czech Republic has a flat 15% income tax. Only $290,293 of Mr. Ruzicka’s $1,935,288 in winnings will go toward taxes. While Mr. Ruzicka finished in fifth place based on pre-tax winnings, he ends up in fourth place based on after-tax winnings.

Kenny Hallaert of Hansbeke, Belgium was a big winner in spite of finishing in sixth place. Mr. Hallaert is a poker tournament director in Belgium. Belgium does not tax gambling winnings of non-professional gamblers, so Mr. Hallaert’s pre-tax winnings of $1,464,258 are also his after-tax winnings! Even better, the US-Belgium Tax Treaty exempts gambling winnings, so Mr. Hallaert doesn’t owe any US income tax. Even though he finished in sixth place, his after-tax winnings put him in fifth place.

Griffin Benger, a professional poker player from Toronto, Ontario, Canada, finished in seventh place. The tax situation in Canada for gambling remains fluid. The Canada Revenue Agency (the Canadian equivalent of the IRS) believes that gambling winnings for professional gamblers should be taxed. However, Canadian courts have generally disagreed; thus, today Mr. Benger does not owe any tax to Canada. However, 30% of his $1,250,190 in winnings ($375,057) were withheld for US income tax. Mr. Benger can file a US income tax return (Form 1040NR) to recover gambling losses up to the amount of his gambling winnings.

In eighth place was Jerry Wong of South Florida. The Brooklyn native earned $1,100,076, but that’s before taxes. He’s a professional gambler, so he will owe self-employment tax along with income tax. However, as a Floridian he avoids state income tax. I estimate he will lose $419,776 (38.16%) to tax.

Fernando Pons, an account executive who resides in Palma, Spain, finished in ninth place. Spain taxes its residents on their gambling winnings no matter where the winnings are won. And Spanish tax rates make the US look good: Mr. Pons will lose nearly 45% of his $1,000,000 of gross winnings to tax.

Here’s a table summarizing the tax bite:

Amount won at Final Table $25,445,388
Tax to IRS $8,108,024
Tax to Franchise Tax Board (California) $623,262
Tax to Agencia Tributeria (Spain) $449,584
Tax to New York Dept. of Taxation and Finance $422,752
Tax To Finanční Správa (Czech Republic) $290,293
Tax to New Jersey Division of Taxation $215,845
Total Tax $10,109,760

That’s a total tax bite of 39.73%.

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

Winner Before-Tax Prize After-Tax Prize
1. Qui Nguyen $8,005,310 $4,682,153
2. Gordon Vayo $4,661,228 $2,262,428
3. Cliff Josephy $3,453,035 $1,778,467
5. Vojtech Ruzicka $1,935,288 $1,644,995
6. Kenny Hallaert $1,464,258 $1,464,258
4. Michael Ruane $2,576,003 $1,397,478
7. Griffin Benger $1,250,190 $875,133
8. Jerry Wong $1,100,076 $680,300
9. Fernando Pons $1,000,000 $550,416
Totals $25,445,388 $15,335,628

While Michael Ruane finished in fourth place, he ends up in sixth place on an after-tax basis (passed by both the fifth and sixth place winners). While taxes may be the price of civilization, the price in the United States is high.

As usual, the IRS finished in first place: The $8,108,024 that the IRS will receive exceeds the first place prize of $8,005,310. That’s because we all know that the house (the IRS) always wins.

As The Caesars Turns, Episode 2

Tuesday, September 27th, 2016

Caesars Entertainment Operating Company (CEOC) today announced that they reached a restructuring agreement with its major creditors. The deal will likely allow CEOC to emerge from bankruptcy early in 2017. The settlement must be finalized and will require approval of the bankruptcy court.

“It’s important to recognize that a lot of work needs to be done in the next few weeks. Will there be bumps along the road? Yes. Is this a durable deal? Yes,” said Bruce Bennett, a lawyer for Jones Day representing junior creditors.

The deal will have CEOC merge with Caesars Acquisition Company, with first tier lenders getting about 115 cents per dollar, first lien holders getting 109 cents, and junior debt holders getting between 66 cents to 83 cents on the dollar.

But not everyone is settling. Trilogy Capital Management has $22 million of CEOC’s unsecured bonds and will pursue its lawsuit against the casino giant. The next hearing in Trilogy’s lawsuit against CEOC is scheduled for October 6th in New York. Trilogy is asking for $160 million in the lawsuit. The lawsuit, if it goes to trial, would likely confirm or deny whether Caesars truly split into a “good” Caesars and a “bad” Caesars (as Trinity and others claimed).

Tune in next week to see what happens with Trinity’s lawsuit and whether any other obstacles appear for the closure of the bankruptcy of CEOC.

As the Caesars Turns

Thursday, September 22nd, 2016

There have been more developments in the Caesars bankruptcy. First, Caesars Entertainment said it is offering an additional $1.6 billion for junior creditors of Caesars Entertainment Operating Company (CEOC) in the contentious bankruptcy. The stock market reacted favorably to the news Caesars stock went up 21% today.

The underlying issue in the bankruptcy is whether Caesars management deliberately created a “bad” Caesars (CEOC) and a “good” Caesars (everything else). Junior creditors are accusing Caesars of exactly that. Lawsuits on this issue are on hold but unless a court extends an injunction they’ll start moving forward in October.

Earlier this month Judge Benjamin Goldgar ruled that junior creditors are within their rights to have top management at Caesars complete financial disclosure statements. As Bloomberg reported,

Apollo co-founder Marc Rowan, company principal David Sambur and TPG co-founder David Bonderman must provide the information to a committee of dissident creditors who are fighting a reorganization proposal for Caesars, U.S. Bankruptcy Judge A. Benjamin Goldgar ruled. That plan would release the men from any legal liability related to the Las Vegas-based gambling company’s bankruptcy. The bondholders say the men shouldn’t be shielded from lawsuits related to the bankruptcy.

But is $1.6 Billion more enough? Given that an independent examiner said Caesars could be liable for over $5 billion in damages, I suspect junior creditors may be thinking “no.” Caesars management is threatening to put all of Caesars in bankruptcy, with the obvious implication that you might get a lot less if the bankruptcy expands. Perhaps the junior creditors are thinking that this is a sign of desperation; that they’ll get 100% of their debt back by either lawsuits or a full bankruptcy; or that Caesars will increase their offer yet again in the future.

When the bankruptcy began I asked and answered some questions:

How long will the bankruptcy process take? A long time…

Who will profit from the bankruptcy? That’s a question with a sure answer: the lawyers…

Why aren’t all of Caesars’ hotels included in the bankruptcy? If you look at the list, some of the hotels are merely operated by Caesars and won’t be included in the bankruptcy even if the second-tier debtholders win. However, it is definitely possible that the bankruptcy could expand and take in more of Caesars than just CEOC…

Could some of Caesars’ properties be sold?
Definitely. If this does not end up being a prepackaged bankruptcy, then each tier of debtors will propose a plan. One plan could be to auction various properties, so it’s definitely possible.

Nothing has caused me to change my opinions on any of these answers. The soap opera, er, bankruptcy began in January 2015; if you placed a bet on it reaching two years without resolution, your bet looks like a winner to me.

So stay tuned soon for the next exciting episode of “As the Caesars Turns.”

Caesars Gets Another Month

Wednesday, August 31st, 2016

Caesars Entertainment Operating Company (CEOC) appealed Judge Goldgar’s decision to US District Court (decisions in a bankruptcy court get appealed to the District Court). Judge Robert Gettleman gave Caesars until October 5th; Judge Gettleman will hold a hearing in Chicago then. As reported in the Las Vegas Review-Journal, Judge Gettleman “…warned CEOC that it faced an ‘uphill’ fight.”

The pause does give time for the two sides to negotiate. That said, the junior creditors who filed $11 billion in claims against Caesars appear unwilling to settle for what Caesars has offered. The claims relate to allegations that Caesars deliberately reorganized to create a “good” Caesars and a “bad” Caesars. A court appointed examiner has already said that the junior creditors are likely to prevail.

Fail, Caesar: The Bankruptcy May Grow

Sunday, August 28th, 2016

On Friday, Bankruptcy Judge Benjamin Goldgar ruled that an injunction against $11 billion in lawsuits over how Caesars split itself into various units will be allowed to expire on Monday, August 29th. Given that the first of several court rulings in the various lawsuits is due on Tuesday, August 30th there’s a definite possibility that the rest of Caesars will join Caesars Entertainment Operating Company (CEOC) in Chapter 11 bankruptcy.

The dispute is over whether Ceasars (and its private equity owners, Apollo Global Management and TPG Capital) created a “good” (or healthy) Caesars and a “bad” (or unhealthy) Caesars (CEOC being the unhealthy Caesars). CEOC offered $4 billion extra in its reorganization plan if the junior creditors (they’re the ones who were protesting and suing over this dispute) would agree to the offer. While one junior creditor accepted the offer, most did not. Judge Goldgar wondered why the private equity owners weren’t contributing any of their own money to resolve the dispute. My cynical belief is that Apollo and TPG wanted to have their cake and eat it, too.

While CEOC plans on appealing the ruling, that’s a long shot. Given that a bankruptcy court examiner felt that the lawsuits could succeed (with damages as high as $5.1 billion), one possible means out for Caesars is to put the rest of Caesars into Chapter 11.

This coming week will be very critical for the future of Caesars.

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.