Archive for the ‘Gambling’ Category

Yes, Online Poker Players Must Pay Taxes

Thursday, April 3rd, 2014

The Las Vegas Review Journal has a short article on the fact that online poker players must pay taxes. The article notes that winning players must pay taxes; of course, both winners and losers are supposed to include their winning sessions on their tax returns. There is one minor error in the article: Freeroll winnings of $600 or more should be reported on a Form 1099-MISC rather than a Form W-2G.

Both Brad Polizzano and I are quoted in the article. One point that I made with David Ferrara (the writer of the article) is that proposed legislation legalizing and regulating online poker in other states (than Nevada) explicitly requires reporting wins and losses to state tax agencies.

A Second Bite at the Apple? Yes, When You Don’t Read the Fine Print

Thursday, March 13th, 2014

I previously wrote about betonsports.com, a former Internet sports betting website. One of its executive, David Carruthers, made the mistake of changing planes at DFW. Unbeknownst to him, he had been indicted. His two-hour layover got extended…to 33 months at ClubFed. Sportsbetting on the Internet is generally against US law (though intrastate sportsbetting in Nevada is legal in certain situations).

Today, as I glanced through a Tax Court case on one Gary Kaplan, I saw the dollar amounts and did some math. Mr. Kaplan was assessed tax for two years totaling $24,369,493, and additions to tax totaling $12,358,596. That’s a total bill of $36,720,089, and certainly reason to petition the Tax Court.

Mr. Kaplan is the founder of betonsports.com. He took the company public on the London Stock Exchange in 2004. Mr. Kaplan transferred his shares of the business into trusts, and those trusts then sold shares. Mr. Kaplan never filed (or paid) tax returns, so the IRS created substitute for returns and assessed the tax and penalties noted above. This occurred after Mr. Kaplan was arrested and made a plea bargain on the criminal case.

Plea bargains are binding documents. They’re binding on the government, too. And that’s the major issue of the case: Did the plea bargain stop the IRS from assessing tax and penalties? Two excerpts from the plea agreement are quite on point:

[T]he Office of the United States Attorney for the Eastern District of Missouri agrees that no further federal prosecution will be brought in this District relative to the defendant’s participation in the BETONSPORTS ORGANIZATION, as described in the Third Superseding Indictment, of which the Office of the United States Attorney for the Eastern District of Missouri is aware at this time. In addition, the Office of the United States Attorney for the Eastern [sic] of Missouri and the Office of the United States Attorney for the Southern District of Florida, which has authorized the Eastern District of Missouri to enter into this agreement, agree that no federal prosecution will be brought in either District relative to the defendant’s involvement in a business venture known as Hope Mills Universal, of which said offices are aware at this time. In addition, the Office of the United States Attorney for the Eastern District of Missouri agrees that no federal criminal tax charges will be brought in this District relative to the defendant’s receipt of income from the BETONSPORTS ORGANIZATION, the sale of stock in BetonSports, plc and/or the investment of the proceeds in any such income or sale. [Emphasis added by the Tax Court.]

The second excerpt note that:

…[t]he defendant has discussed with defense counsel and understands that nothing contained in this document is meant to limit the rights and authority of the United States of America to take any civil, civil tax or administrative action against the defendant * * * except that the United States shall not seek civil forfeiture in connection with this case or any asset constituting or derived from the receipt of income from the BetOnSports Organization, the sale of stock in BetOnSports, PLC and/or the investment of the proceeds of any such income or sale. [Emphasis added by the Tax Court.]

The Tax Court noted that during the change of plea hearing the judge in the criminal case made sure that Mr. Kaplan knew that the government could initiate a civil tax proceeding:

[Court:] Do you understand, Mr. Kaplan, that there is a difference between a criminal tax proceeding and a civil tax proceeding?

[Petitioner:] Yes I do, Your Honor.

[Court:] And in this document, the U.S. Attorney’s Office has agreed it will not bring any criminal tax proceeding against you; however, that doesn’t preclude the initiation of any civil tax proceeding or administrative action against you.

[Petitioner:] I understand that. And we’ve agreed to that.

Mr. Kaplan argued that the statute of limitations barred the IRS’s actions. There’s an obvious problem with that: If you don’t file a tax return the statute of limitations never runs. Strike one.

The petitioner then argues that the plea agreement precludes the actions. The excerpts of the District Court’s questioning are particularly on point. The judge noted that this could happen; Mr. Kaplan said he knew it could. Strike two.

Mr. Kaplan’s last argument is that the IRS is precluded by judicial estoppel.

Under the doctrine of judicial estoppel, once “‘a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.’”

Unfortunately for Mr. Kaplan,

…because the plea agreement unambiguously reserved the Government’s right to bring a civil tax action against petitioner, petitioner suffered no detriment nor prejudice from any perceived “position” of the Government. For these reasons, petitioner’s judicial estoppel argument is without merit.

That’s strike three, and Mr. Kaplan owes the $36.7 million…plus interest.

If you ever make a plea deal with the government, you absolutely want to read the fine print. And if a judge points our that a civil tax proceeding could occur, you might want to inquire about that…especially if you have millions of dollar sitting around.

Case: Kaplan v. Commissioner, T.C. Memo 2014-43

The Moral Climate may have Changed but the Law Hasn’t

Tuesday, March 11th, 2014

Another professional gambler went to Tax Court seeking to stop Section 165(d) of the Tax Code–the section that stops a gambler from deducting losses in excess of wins. This ended up being a full decision of the Tax Court, so it’s worth taking a look at it.

Today’s taxpayer is a CPA from California who, in his off time, is also a professional gambler betting on horse racing. He filed his tax returns with two Schedule C’s: one for his tax practice and one for his gambling. He, though, took his gambling losses (in excess of wins) to help lower his accounting income. He also took a deduction for “Takeout” from horse racing. The IRS objected to both, and the dispute made its way to Tax Court.

Let’s deal with the more mundane “Takeout” issue. Horse race betting is a form of “pool” accounting. Individuals make wagers, they form a pool, the race happens with winners being declared, and the track pays out from the pool. The track deducts from the pool taxes and other business expenses. That’s the Takeout–it’s taken out of the pool. (It’s akin to the rake on a hand of poker).

The problem is that this isn’t an expense of the bettor; it’s an expense of the track. Thus, since the wagerer doesn’t pay it, he can’t deduct it. The Court succinctly came to that conclusion.

The more interesting part of the case is whether Section 165(d) is legal. The petitioner noted an excerpt from Tschetschot v. Commissioner (T.C. Memo 2007-38):

The moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many years ago. Not only has tournament poker become a nationally televised event, but casinos or lotteries can be found in many States. Further, the ability for the Internal Revenue Service to accurately track money being lost and won has improved, and some of the substantiation concerns, particularly for professionals, no longer exist. That said, the Tax Court is not free to rewrite the Internal Revenue Code and regulations. We are bound by the law as it currently exists, and we are without the ability to speculate on what it should be.

The basis of petitioner’s argument is:

Petitioner responds to the last two sentences of the quoted excerpt from Tschetschot with the hope that “the judiciary is at some time [presumably, meaning this Court in this case] going to take a bold stance and help to reverse section 165(d) of the Internal Revenue Code.”

A law can be held unconstitutional if it doesn’t have a rational basis. The Tax Court looked at the Congressional commentary from when Section 23(g) of the Revenue Act of 1934 (which has identical language to the current Section 165(d)) was passed and found there was, indeed, a rational basis. First, here’s the commentary:

Section 23(g). Wagering losses: Existing law does not limit the deduction of losses from gambling transactions where such transactions are legal. Under the interpretation of the courts, illegal gambling losses can only be taken to the extent of the gains on such transactions. A similar limitation on losses from legalized gambling is provided for in the bill. Under the present law many taxpayers take deductions for gambling losses but fail to report gambling gains. This limitation will force taxpayers to report their gambling gains if they desire to deduct their gambling losses.

The Tax Court’s conclusion is that Congress must change the law:

The basis for the enactment of section 23(g), as set forth in the last sentence of the foregoing committee report, still pertains to taxpayer reporting of gambling gains and losses. Therefore, it still constitutes a “rational basis” for the continued application of section 165(d) to the losses. There being no constitutional impediment to the continued application of section 165(d), we reiterate our admonition in Tschetschot that this Court “is not free to rewrite the Internal Revenue Code and regulations * * * [but is] bound by the law as it currently exists”. [footnote omitted]

Thus, until Congress changes the law a professional gambler cannot deduct gambling losses in excess of wins.

Case: Lakhani v. Commissioner, 142 T.C. No. 8

Taxes and Daily Fantasy Sports: The Duck Test

Sunday, February 23rd, 2014

If it looks like a duck, walks like a duck and quacks like a duck, then it just may be a duck.

So said someone (this quote has been attributed to Walter Reuther among others), and it’s one of those cliches that have an impact in taxes. When something has the elements that make it look like something, generally the Tax Code will make it into that something.

Why am I bringing this up? Because of the popularity of daily fantasy sports sites. These sites allow contests based on the outcome of a day’s games in a sports league. For example, you can take various players in today’s NBA games and play against others who select their own players. Should your ‘team’ do better than your opponents’ teams, you win the contest.

The sites consider themselves to be skill games and contests and not gambling. They issue Form 1099-MISC’s to the winners, and put the income on line 3 (“Other Income”). They do not issue Form W-2G’s (“Gambling Winnings”) to their winners. For individuals who partake in these contests, how should they treat the income?

First, it’s income and must be included on the tax return. All income is taxable unless Congress exempts it; Congress hasn’t exempted daily fantasy sports income. So it must be included on your tax return no matter if you receive a Form 1099 or not.

Let’s say you play three contests, win $2,000 and never lose. You receive a 1099 noting $2,000 of “Other Income.” In this simple case, just include the income as “Other Income” on your tax return (line 21, Form 1040). No mater what the flavor of Other Income is you’ve included it.

Let’s say you make a living playing daily fantasy sports sites. You win $250,000 from various sites, and have $50,000 of losses. With that kind of income you are probably a professional fantasy sports player and should include the income and associated business expenses on a Schedule C. It sure looks like you’re in the profession of daily fantasy sports player–the first instance of the Duck Test.

Now let’s consider Jane. She plays daily fantasy sports occasionally. She receives a 1099-MISC noting her $30,000 of wins. She also has $20,000 of daily fantasy sports losses. For the sake of discussion, we’ll assume she has records proving those losses. Can she take those losses?

If you were to ask the daily fantasy sports sites, they would say no. They operate under the sweepstakes/skill game laws; there is no such thing as losses with skill games.

However, we’re concerned with Jane’s taxes, not a daily fantasy sports site’s taxes. A fundamental principal of US taxation is to look at the activity itself to determine what it is no matter what it calls itself. Ah yes, another instance of the Duck Test.

The tax laws on wagering (aka gambling) are different. You are allowed to take wagering (gambling) losses up to the amount of your winnings (§165(d) of the Tax Code). So we need to determine if daily fantasy sports are a wagering activity.

This is more difficult than you might think; wagering isn’t defined in the Tax Code. However, there are plenty of IRS and Tax Court rulings on this, and all say basically the same thing. For something to be gambling, three elements must be present:
1. A prize;
2. Chance; and
3. Consideration.

Clearly daily fantasy sports have elements 1 and 3. There’s a prize and there’s a cost to enter each event. Is there chance?

Gambling does not have to be 100% chance to be considered gambling. For example, poker is considered gambling under US tax law yet there’s plenty of skill involved with it. (Indeed, I’d argue that skill predominates over luck; however, there’s absolutely an element of luck in poker.) Let’s look at what’s involved with a daily fantasy sports contest. You generally select a team to play in a day’s events. Let’s say you selected Carlos Boozer and Shane Battier for today’s NBA daily fantasy sports contest. Those players scored 8 and 3 points, respectively. On the other hand, had you selected Taj Gibson and Chris Bosh you would have done far better; they scored 20 and 28 points. Yet before a single game who know what each player will score? If you had selected NBA star Lebron James you would normally do quite well; however, he didn’t play today.

There sure looks to me to be at least some elements of chance involved with who you select. While Carlos Boozer averages 14.8 points a game, he had only 8 today. On the other hand, Taj Gibson had 20 while he averages 12.9. Is that skill (that is, against the opponent they faced those players would play differently than their average) or is it luck? It’s probably some of each.

So daily fantasy sports have at least some element of luck. Then from a tax standpoint they sure look to be a form of wagering activity. There’s a prize, chance, and consideration. The Duck Test again: If it looks like a duck, walks like a duck and quacks like a duck, it might just be a duck.

So can players on daily fantasy sports sites treat their play like gambling? That’s something worth discussing with your tax professional if you partake in daily fantasy sports.


There’s a corollary to this: Do daily fantasy sports sites violate various gambling laws? (I am not an attorney and the following is just my speculation and not legal advice.) While the Unlawful Internet Gambling Enforcement Act (UIGEA) provides a carve-out for fantasy sports, there are numerous other gambling laws. Additionally, most states have laws on gambling. The daily fantasy sports sites all state they’re legal but I suspect that they probably violate various laws, mostly on the state level.

I looked at two sites. The first stated that the US government and most states consider fantasy sports to be a game of skill (this site doesn’t allow residents of AZ, IA, LA, MT, and WA to play). The second site used basically the same language and prohibits players from the same five states.

Unfortunately, many states look at just an element of chance to determine if something is gambling. And there’s no doubt that daily fantasy sports have such an element. The problem is that these sites are starting to bring in large dollars. That attracts attention, and some state attorney general is going to wonder the same thing that I am. He or she will conclude that the Duck Test applies and that these are gambling sites in violation of his or her state’s laws.

What Are the Tax Impacts of the FullTiltPoker Remission Payments?

Friday, February 21st, 2014

In less than one week, many poker players will finally receive their balances that they had at FullTiltPoker when that online poker site was shut down as a result of “Black Friday.” According to the Garden City Group (the claims administrator hired by the US Department of Justice to handle the remission claims), the first payments will be made by the end of February. So how much of the money you receive will be income? Will 1099s be issued?

The answer to the first question–how much of the remission payment you receive is taxable–is “it depends.” This will depend on each individual’s facts and circumstances. I did an interview with CardPlayer last year and talked about some hypothetical cases. Some of this will be a repeat of that article while some of this will be new.

For most individuals, the amount of money you will pay tax on from the remission payments is the amount you receive less the amount you deposited less any money you receive that you’ve already paid taxes on. Let’s take three individuals, all of whom receive their full balances next week.

1. Joe receives $1,700. He earned it all in 2011, starting with a freeroll. He’ll have $1,700 of income that will need to be reported on his 2014 tax return.

2. Russ receives $1,700. He earned it all prior to 2011, and has already paid tax on all the money he’s receiving. He will not owe any tax on the remission.

3. John receives $1,700. He had a balance on January 1, 2011 of $500 (he paid taxes on this in previous years). He withdrew $500 during 2011 (and paid taxes on that). He’ll owe 2014 tax on the $1,200 he receives that he hasn’t paid tax on.

Those are all relatively simple scenarios. I can imagine far more complex ones; indeed, I spoke with someone today who has such a scenario. There are people with disputed balances, “Red Pros,” affiliates and others who still don’t know what they’ll receive. Anyone who doesn’t have a simple, straightforward scenario should consider speaking with a competent tax professional regarding their remission payments.

The other major question is whether or not GCG will issue Form 1099-MISCs to recipients. We don’t know the answer to this, and we likely won’t know until early February 2015. GCG hasn’t said they would (nor have they said they wouldn’t); they’ve been silent on this issue. It may be they simply don’t know. If 1099s will be issued, the deadline for mailing them out will be January 31, 2015.

The problem with issuing 1099s is that for most individuals the amount of money being received will not all be income. Almost everyone deposited something on FullTiltPoker; the return of those deposits is clearly not taxable. I could speculate on whether 1099s will be issued, but it would be just that: speculation. Until GCG makes a pronouncement or we’re one year from today (when 1099s would have been received), we just don’t know. My hope is that 1099s will not be issued because almost every one of them would be wrong. If there is official guidance on this from GCG I’ll update this post with that information.

So we are definitely nearing the end of the FTP remission process. That is definitely good news.

Mailbag: Can Gambling Income Transform to Ordinary Income by Moving It Through a Business Entity?

Sunday, February 9th, 2014

Back in the Middle Ages, alchemists attempted to transform base metals into gold and silver. If only one could change lead into gold. Unfortunately, lead is lead and gold is gold.

Why do I bring up alchemy? Because I received the following email:

I saw your post on [redacted's] [social media] regarding gambling income. You said, “Gambling income stays gambling income no matter if you run it through 10 LLC’s….”

But [redacted]‘s response basically said you didn’t know what you were talking about, and that it can be done, and that forming a business entity to transform gambling income is done all the time for casinos, hedge funds, venture capital firms and related entities.

I believe you are wrong, and that gambling income can be changed into normal [ordinary] income by running it through an LLC or corporation.

I’ve been asked this question many times. The devil that everyone wants to avoid is Section 165(d) of the Tax Code:

(d) Wagering losses
Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

So we first must look to the question, what is a wagering transaction? The Tax Code itself and the regulations promulgated under the code do not answer this question. The IRS, in Technical Advice Memorandum 200417004, does answer this (though the TAM cannot be used as a precedent). A transaction needs three things to be a wagering transaction: It must have a prize, the element of chance must be present, and the individual (who is doing the wagering) must be offering consideration.

There’s one other element: The transaction cannot be defined in the Tax Code as something else. For example, a securities trade has (at least to some) the exact same elements as a wagering transaction. However, the Tax Code says that securities are securities and aren’t wagers.

Section 165(d) holds for everyone under the Tax Code. Let’s say that you formed Acme Wagering as a C-Corporation, and you had the corporation place bets in Las Vegas. Let’s further assume you lost money on your bets. Section 165(d) prohibits Acme Wagering from taking the losses in excess of wins.

Well, what about an LLC? I’ll just note the gambling wins and losses as ordinary income on the Form 1065 I file and no one will know the better. There are two major issues with this:

1. You have gambling wins and losses. If you have a net loss, §165(d) applies to whomever is paying the tax.
2. Gambling wins and losses are not included as ordinary income.

A single-member LLC is a disregarded entity–it files a Schedule C (unless it elects corporate taxation–and that won’t transform gambling income into ordinary income). An LLC with multiple members files a partnership return (Form 1065). The instructions to Schedule K-1 for a partnership return note that gambling gains (wins) and losses are included on line 11 of Schedule K-1 using code F. (Ordinary income is included on line 1.) From the IRS instructions:

Code F. Other income (loss). Amounts with code F are other items of income, gain, or loss not included in boxes 1 through 10 or reported in box 11 using codes A through E. The partnership should give you a description and the amount of your share for each of these items…
Code F items may include the following…Gambling gains and losses.

So the IRS has told you not to report gambling income as ordinary income. And if you’re thinking you can get away with this in an S-Corporation, you can’t; the same instruction exists for the Schedule K-1 on a Form 1120S return; the only differences are the line number (10) and the code (E).

Alchemy has been tried in the past. Many have tried to change gambling income into capital gains income. This has been as successful as a lead balloon. For example, in Davis v. Commissioner (119 T.C. No. 1), the petitioner won a jackpot in the California lottery. He then sold the rights to future payouts and wanted to take the money he did receive as a capital gain (which is preferentially taxed) rather than as ordinary income. It didn’t work.

Well, why can hedge funds, casinos, venture capital firms and the like have ordinary income? Because they are not in the business of wagering. Hedge funds and venture capital firms invest; investments are not considered wagering transactions under the Tax Code. A casino does not wager; rather, it takes wagers. A wagering transaction for a gambler is ordinary income for the casino.

There is no Tax Fairy[1]. The Tax Code, no matter how unfair, is law. Until Congress rescinds §165(d), it holds for everyone. If the individual who sent me this email knows someone who is using a business entity to transform gambling income into ordinary income (so he or she can take gambling losses), this works well…until they’re audited. Bluntly, those individuals are playing audit roulette. Most partnership returns aren’t audited, so they’re hoping they sneak through. But if they’re audited they stand a 0% chance of prevailing. Additionally, they would be liable for potentially significant penalties (plus tax and interest, of course).

Finally, I strongly advise anyone to use some common sense when reading the Internet. If it sounds too good to be true, it probably is. Alchemy didn’t work in the Middle Ages; it doesn’t work today with the Tax Code.


[1] My thanks to Joe Kristan for the concept of the Tax Fairy.

Massages May Feel Nice, But Can You Deduct Them at the Poker Table?

Sunday, January 12th, 2014

Last week I had an inquiry that asked me about deducting massages at the poker table. At many poker rooms and major poker tournaments, you can get a massage; the cost ranges between $1 and $3 per minute (plus a gratuity). If you’re playing an event like the World Series of Poker, where the chairs are (to put it kindly) not the greatest, a massage might make you feel quite good and ready for a few more hours of play. The question arose whether a massage while playing is tax deductible for a professional gambler.

Porfessional gamblers, unlike amateurs, are allowed to deduct all ordinary and necessary business expenses; that’s codified in IRC § 162:

(a) In general
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business….

The Tax Court has looked at this many times; for example, in Lychuk v. Commissioner (116 T.C. No. 27),

The Treasury regulations specify that ordinary and necessary business expenses include “the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business”, sec. 1.162-1(a), Income Tax Regs., such as “a reasonable allowance for salaries or other compensation for personal services actually rendered”, sec. 1.162-7(a), Income Tax Regs. The Supreme Court has explained that a cash method taxpayer such as ACC may deduct an expenditure under section 162(a) if the expenditure is: (1) An expense, (2) an ordinary expense, (3) a necessary expense, (4) paid during the taxable year, and (5) made to carry on a trade or business…The Supreme Court has stated that a necessary expense is an expense that is appropriate or helpful to the development of the taxpayer’s business…and that an ordinary expense is an expense that is “normal, usual, or customary” in the type of business involved, [internal citations omitted]

So where does a massage lie? Well, a poker player could argue that massages make long sessions more bearable; that they help a player concentrate; and that they make a player feel better. Those are all true, of course, but it it helpful for developing a poker player’s business? What would happen to the player if he did not have the massage? And therein lies the rub.

The IRS would argue that most poker players do just fine without a massage; that it is a luxury; that it is not necessary for a poker player to play; and that they involve elements of personal pleasure making them nondeductible personal expenses. Unfortunately for poker players who like massages, the IRS would almost certainly prevail on one or all of these arguments.

It’s hard to imagine a massage that doesn’t involve elements of personal pleasure. Indeed, that’s the reason poker players get massages (to feel better during a long session). The problem lies in that the Tax Code does not allow deductions for personal expenses. I know the manager of a spa here in Las Vegas. She stated that her business is a “…luxury, one that is not necessary. We want our customers to feel good and better.”

So we come back to the original question: Can a poker player take a tax deduction for a massage at the poker table? The answer is that it is almost certainly a personal expense that is not deductible.

1099 Time

Thursday, January 2nd, 2014

As we finish the first week of January, we’re running some repeats of important issues.

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)

Otherwise, you need to send a Form 1099-MISC to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your computer (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing is easier than electronic filing.

Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-MISC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement.

“Unabomber” (Poker Player) Phil Laak Reportedly Hit With Tax Liens from California

Thursday, December 19th, 2013

Phil Laak is a very successful poker player. According to the Hendon Mob database, he’s won more than $3,136,000 in poker tournaments. He’s also a successful cash game player. The web site TMZ has stated that Phil Laak left out paying one interested party: California’s Franchise Tax Board.

Mr. Laak allegedly owes the FTB $24,874 for his 2010 and 2011 California taxes. Mr. Laak was (and I believe still is) a California resident; assuming that’s the case, he would owe California income tax on all of his earnings anywhere in the world. Hopefully Mr. Laak will be able to quickly resolve his California tax troubles.

FBI Agent Structures His Gambling Into ClubFed

Thursday, December 19th, 2013

Law enforcement officers are supposed to know the law. That’s obvious, but one former FBI agent remembered half the law about currency (cash) deposits to his regret.

Travis Wilson is a former Special Agent of the FBI. Agent Wilson liked to gamble, and played at the casinos in California, Arizona, Nevada, and West Virginia. There’s nothing wrong with that. He left the casinos some nights with more than $10,000. Agent Wilson didn’t want his superiors at the FBI to learn of his gambling habit. Of course, there’s nothing illegal about gambling. And if Agent Wilson was a poker player and kept a log, it might have made a nice supplement to his income. That said, DOJ Inspector General Michael Horowitz is correct:

When a law enforcement agent conceals ongoing gambling activity it risks creating a security vulnerability. The DOJ OIG will partner with prosecutors and other investigative agencies to ensure that such conduct does not go unchecked within the Department of Justice.

So what was Agent Wilson to do? Deposit his cash, let his superiors know about his winning gambling habits? No, that would cause Currency Transaction Reports (CTRs) to be issued, and he didn’t want them to know about the gambling. Perhaps stopping the gambling would have been a good idea. No, that didn’t happen. Well, why not make smaller deposits (less than $10,000) so that no CTR would be issued; that would stop all the problems. No CTRs and his superiors wouldn’t know.

There’s a problem here, and it’s one that Agent Wilson should have known about: 31 USC § 5324. That’s structuring, and that’s a felony. That’s when you deliberately make smaller deposits to evade financial reporting (such as CTRs). Banks are required to have programs in place to automatically generate Suspicious Activity Reports (SARs). You may remember that SARs led to the downfall of former New York Governor Eliot Spitzer. And that’s almost certainly what happened here.

Agent Wilson should have known about structuring. But apparently he missed that lecture at the FBI Academy; instead, he’ll get some remedial education at ClubFed. He pleaded guilty to structuring $488,000 of deposits; he’s facing up to five years at ClubFed when he’s sentenced next March. He’s also a late nominee for the Tax Offender of the Year.

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