Taxable Talk

One of the things that I am asked at least once a year is about question 8 at the bottom of Schedule B of Form 1040: “During 2012, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If ‘Yes’ you may have to file Form 3520….” Of course, most individuals don’t have foreign trusts so this question is usually answered no.

However, when you are a tax practitioner in Southern California (which I was until late 2011), you will come across fideicomisos. These are Mexican land trusts. Under Mexican law (at least, how it’s been explained to me), non-Mexicans cannot own property in many areas of Mexico. So if an American wants to purchase a home in Mexico, a fideicomiso is used as the vehicle.

The problem is that these are a trust, and they’re clearly foreign, so that means that individuals who have these have to tangle with Form 3520. In 2012 there was a private letter ruling on this; unfortunately, a PLR is only applicable to the exact situation involved. Today the IRS announced in Revenue Ruling 2013-14 that common fideicomisos are not trusts under Section 301-7704-4(a). Thus, for most individuals who use fideicomisios, a nasty IRS form is now in the trash heap.

This is excellent news for Americans who hold Mexican property through fideicomisos. Tax professionals who have clients in a fideicomiso should still read the Revenue Ruling; if the fideicomiso has any other property (besides real estate), it appears that the fideicomiso would be considered a trust.

When are tax returns due? For most individuals, its April 15th. However, if you are outside of the United States on April 15th for purposes of employment or self-employment you get an extra two months (until June 15th) to file your return. There are no penalties but interest is charged. As the IRS states (see the link), you simply attach a statement to the return and no penalties are supposed to be charged. I’ve been preparing returns for expatriates for years and never had any problem with this…until last year (the 2012 tax season for filing calendar year 2011 returns).

For whatever reason, I had several clients who were charged penalties who were outside of the United States on April 17, 2012 (last year’s tax deadline) for employment/self-employment purposes. I checked with my software vendor and they told me that nothing had changed with the software–the notices were attached to the filed returns. I believe them because I had two clients who paper-filed who were charged penalties! In all cases, a statement was attached to the return noting the taxpayer was outside of the US on the tax filing deadline.

In most of these cases, I was able to reverse the penalties with a phone call. However, I have had three clients where I have had to write letters to the IRS. Here’s how one case was resolved.

This client’s return was filed in early June. She took the automatic extension, with a statement attached to her return. She had a small balance due which was paid through electronic debit (with the filing of her return). In mid-July she received a CP14 notice noting that she owed late filing and late payment penalties. I obtained a Power of Attorney and called the IRS. The IRS refused to lift the penalties. I wrote a letter in early August explaining that no penalties should be owed. In mid-September, I received a response from the IRS that they hadn’t resolved the situation. In mid-December, the IRS denied removing the penalties.

We have carefully reviewed your case. However, the information provided did not establish reasonable cause. Thus we are unable to remove your penalties for failure to file and failure to pay.

Did the IRS even read the letter I wrote? I asked for the penalties to be removed based on the out-of-country automatic extension, not for reasonable cause. (And yes, it took the IRS over four months to give an answer to my letter.)

We then appealed the decision. The hearing was held in late March and was the shortest Appeals hearing I’ve ever had. The Appeals Officer stated that we were correct, and that no penalties should be charged. “I can’t remove the interest,” he noted. I told him that was fine–the client does owe the interest. The Appeals Officer told me that he had no idea why this couldn’t have been resolved at the Service Center level or by Service Center Appeals Screening. (All appeals are first screened for obvious cases where the appellant is correct. A few years ago, I filed an appeal on behalf of a client who was charged the late filing penalty when his efile return was rejected on October 15th; he had mailed the return the next day–and mailed it using certified mail, return receipt rejected. The screening staff granted our appeal.)

Well, I may be able to answer the question as to why this couldn’t be resolved at the Service Center. I suspect that staff answering the notices (generally, the automated underreporting unit, or AUR) have problems when it’s not something they’ve encountered before. (I cringe when I have a client who receives a CP2000 notice regarding, say, a W-2G. Most personnel at the IRS rarely see gambling-related tax issues and don’t understand the law.) Most likely, the individuals who reviewed the letters I sent had no idea that there’s an extended deadline when you’re outside of the US on April 15th. Since they didn’t know of it, it couldn’t exist.

Second, the sheer volume of notices being sent out is creating a huge volume of responses. This means the staff handling those responses have been overworked. Given that two-thirds of IRS notices are incorrect (in part or in whole), the IRS is likely getting lots of letters. Overwork leads to errors in responses.

I don’t know if I’ll actually have to go to Appeals on the other two clients whose cases have yet to be resolved. (These are both going through the same IRS Service Center which rejected my first client’s out-of-country extension.) In the end, I’m certain my clients are in the right. But consider the expense to my clients and the expense to the IRS. As Joe Kristan noted last week, the IRS could do a better job in spending the money it has. I would expect that basic training in the deadlines would be given (or at least, knowledge of the rules or a database of where to look).

Unfortunately, I don’t expect things to get better. The problem is that the AUR program is a huge moneymaker for the IRS. Far too many individuals see an IRS notice and blindly pay it. Most of my clients have been reading my newsletter (or this blog) and know the reality of IRS notices and don’t blindly pay IRS notices. Make sure you don’t either.

Uli Hoeness is the president of Bayern Munich. Who? Well, if you asked a resident of Bavaria this question, you’d get shocked looks–the same as you would get from a New Yorker asking about the Yankees. Bayern Munich is a soccer team in Munich. They’re very successful and already have clinched this year’s bundesliga. This New York Times story notes that the club just won their 13th straight game.

OK, I’m not a soccer fan. However, I am interested in cases of tax evasion and here’s one possible such case. Mr. Hoeness apparently has an issue with a Swiss bank account. Mr. Hoeness filed an amended tax return; the public prosecutor’s office is checking to make sure that the amended return is accurate. If the amended return is accurate, the penalties in Germany for filing the first ‘bad’ return can be lessened.

This is similar to US tax law in that the IRS (and Department of Justice) almost always take a much harder line on individuals that the government finds that have cheated on their taxes than on individuals who have voluntarily come forward.

Yoram Globus is perhaps best known for being behind Cannon Films. With his cousin Menahem Golan, Cannon produced such films as American Ninja, Superman IV, Delta Force One, and a long, long list of others in the 1980s. Now, Mr. Globus is making news a bit differently: He was accused by the Israel Tax Authority of evading tax on NIS 27 million (Israeli New Shekel), worth about $7.3 million.

The alleged tax evasion dates back to 2005. Mr. Globus supposedly withdrew the NIS 27 million from two of his companies…but the withdrawals apparently didn’t make his tax return. Oops.

Mr. Globus’ response was, according to the Los Angeles Times, “Ask my accountant.”

Mr. Globus was released on bail of NIS 1 million (about $270,000) and ordered to remain in Israel for six months.

Governments are looking far and wide for revenue, and high-profile poker players are certainly a target. I’ve previously reported on efforts by Germany; it appears Spain is joining the action.

The Spanish tax agency, La Agencia Tributaria, has reportedly looked at online databases of poker players to find individuals who have not reported all of their income. The agency supposedly used the Hendon Mob Database to find Spanish poker players who weren’t forthcoming with the agency.

No names were noted in the brief report on Spanish language poker website poker-red.com. Of course, if you happen to have been a winner and are a citizen of Spain, I’d talk to a profesional de impuestos soon.

Hat Tip: PokerNews

The Swedish tax agency, Skatteverket, sent police into some poker players’ homes across Sweden on Tuesday. Under Swedish law gambling winnings within the European Economic Area are not taxed; however, gambling winnings from outside the European Economic Area are taxable. It appears that many poker players were not filing their income tax returns. While some online poker sites are not taxable, many others are. It also can get confusing with some sites: PokerStars.com is outside of the EEA while PokerStars.eu is within the EEA. PokerStars.eu wasn’t formed until 2012, so many Swedish players playing on PokerStars likely owe back taxes.

This should not have been a surprise to any Swedish players. Back in 2008 I reported on Skatteverket’s use of “spiders” to find poker players. Governments move very slowly, so the fact that it took four years for results is not surprising.

Skatteverket sent a letter to poker players; a copy of it was published in Swedish in Poker Magazine. Players were given until December 10th to respond with documentation for 2008 – 2011.

Hat Tip: Pokerfuse

Is poker a game of skill or chance? Personally, I believe it is a skill game where there is an element of chance. For German poker players, this is more than an interesting debate; it’s a vital question that impacts their taxes.

German tax law is such that games of chance (e.g. roulette) are not taxed for players. If you are German and hit a lucky jackpot on a slot machine, you won’t owe German income tax. However, games of skill for professionals are taxed.

As I first reported on back in August, a German court was considering this. The decision came down on Wednesday in Cologne. Eduard Scharf has been an airline pilot with Lufthansa by profession. When he’s had time off, he’s become a pretty good poker player; he has won over $1.2 million, including two World Series of Poker bracelets. Mr. Scharf apparently didn’t include his poker winnings on his tax return. The German Tax Office stated he was a professional and needed to include the income on his return.

The 12th Senate Finance Court of Cologne agreed with the tax office that skill predominates over luck. That’s what most poker players believe, but it’s bad news for German players. While it appears that Mr. Scharf is appealing to the Federal Finance Court in Munich, the days of tax-free play in Germany appear numbered. The German articles I read note that other tax cases are pending.

Summary of Story in English
Newspaper Reports in German: Spiegel Online, WDR

After my last post on the Partouche Poker Tour electing to ignore a published guarantee, the people in charge either decided that the horrible publicity was bad or their attorneys let them know that French law on false advertising might lead to a term at ClubFrance. No matter, I’m happy to pass on the news that the 5 million Euro guarantee will be honored.

There’s a major poker tournament going on in France: The Partouche Poker Tournament Main Event. It had a €5 million guaranteed prize pool. Based on the actual number of entrants, the prize pool ended up being around €4.3 million. Normally when a prize pool is guaranteed, the host must cover any shortfall in the guarantee. Reports out of France are that’s not happening. The €700,000 shortfall is equivalent to $881,961 at today’s exchange rate.

In the United States, host casinos almost always make good on their word. Casinos are heavily regulated, and gaming commissions look askance when a casino starts lying. For example, the Commerce Casino in Los Angeles is running a tournament series right now. The second event of that series had a $250,000 guarantee. When the number of entrants caused the prize pool to not meet the guarantee, Commerce Casino added the $46,000 so that the guarantee was met.

Sometimes guarantees have to be removed. A couple of weeks ago a tournament series in Biloxi, Mississippi was running when Hurricane Isaac came calling. Clearly, people who were planning on traveling to Biloxi had to make other plans so the guarantees were dropped. An event like that is usually covered under a force majeure clause (basically, an act of God). Most casinos cover themselves by inserting a phrase in their advertising, “Management reserves the right to alter or cancel the tournament at any time.” (In the end, the Biloxi tournaments were cancelled because of Isaac.)

As for the situation in France, as of last report none of that is happening. The advertising clearly states a €5 million guarantee and there is no disclaimer. The prize pool has been announced at €4.3 million. Now the question becomes legal: Do the players who appear to be the victims of fraud have any recourse?

Well, the tournament is in France and presumably subject to French law. I’m not an attorney, and know just enough about US gambling law to be dangerous (and know less on French law). So can a lawsuit be filed? Maybe, but it likely has to go through the administrative side of the French regulatory agency, Française des Jeux first. (Unfortunately, French is not one of my languages so someone else will have to tell me about the regulatory rules on casinos in France. My understanding is that under French law a casino might be limited to adding €250,000 to the prize pool. Well, if that’s the maximum allowed, Partouche should do that and let the players know why they can’t do any more. It’s always the cover-up that gets you. But I digress….)

There is one other course of action player can take, and that’s already happening. Name players are rightfully annoyed with a company advertising a guarantee and then reneging on it for no reason. There are tweets and a thread on the poker website 2+2 complaining about this. While Partouche may think that all publicity is good publicity, trust me when I say that the bad words circulating in the poker community on Partouche will definitely have a future impact unless they restore the €700,000 to the prize pool.

UPDATE: This morning the head of the Partouche Poker Tour, Patrick Partouche, announced that this will be the last tournament ever in the series. Additionally, Mr. Partouche apparently denied that the tournament was ever guaranteed. (Here’s a helpful hint for Mr. Partouche–actually two helpful hints: First, if you deny something, make sure no one can prove you wrong within one minute. Second, it’s always the cover-up that gets you.) I don’t know what the laws on fraud are in France, but I suspect that Mr. Partouche and his legal staff may want to quickly investigate them.

For poker players, this does bring up some issues. Be careful regarding operators who are not well known or are in jurisdictions that aren’t well regulated. A tournament in the United States will rarely have any problems; American casinos are highly regulated. If someone duplicated the events of the Partouche debacle in the US, they’d likely be facing fraud charges. If you are playing online poker, make sure the company you play with is reputable.

Does the mean that all poker tournaments in France should be avoided? It certainly puts a black light on French poker, but the answer is no. For all of the issues that I have with Caesar’s, there is no way they would ever do anything like this with the WSOP-Europe (which will be in Cannes in October). Reputable operators–thankfully, most poker tournaments are run by reputable operators–would never do this.

UPDATE-2: The Partouche Poker Tour announced on Friday that the guarantee will be honored.

In 2011, Pius Heinz of Germany won the main event of the World Series of Poker and a nice tax-free $8,715,638. Well, maybe it’s not tax-free.

Via @Taxdood and @Taxnews1 comes word that a German court in Cologne will be hearing the appeal of a former professional poker player. The German tax agencies are claiming that the player was in a “commercial activity” and thus owes taxes on the approximately $1 million that this player won. The news story alludes to other German professional poker players receiving tax notices so the verdict in the test case will matter.

As Taxdood noted, “Ironically, in order to prevail the taxpayer must demonstrate success in poker relies mainly on luck, not skill.” Hopefully for German poker players the German court will not see the recent court ruling in New York that found poker to be a game dominated by skill, not luck.

Current German tax rates range are 14% (€8,005 – €52,881), 42% (€52,882 – €250,730), and 45% (€250,731 or greater). If Mr. Heinz owes tax on his winnings that would shave €2,993,502 off his winnings (he would have netted about €3,710,835, or $4,824,085). That’s not bad, but clearly $8.7 million is better.

I’ll report on the decision when it’s announced.