Taxable Talk

Somehow it's fitting on the day that the World Series of Poker champion is crowned that we find out that Neteller, the beleaguered Internet payment processor, has settled with the U.S. Department of Justice. According to the press release that Neteller issued:

• Neteller will forfeit $136 million to the US (inclusive of $60 million that the US seized from Neteller transactions earlier);
  
• US customers will be able to request withdrawals of their funds no later than July 30th;
  
• Neteller agrees to cooperate fully with the USAO [U.S. Attorney's Office/DOJ] in all matters relating to the ongoing investigation;
  
• Neteller agrees to fully implement procedures and controls to prevent illegal transactions between internet gambling merchants and persons located in the US; and
  
• The DOJ will dismiss a criminal information against Neteller in two years as long as Neteller fully implements this agreement and fully cooperates with the DOJ.

So what does this mean? US gamblers will get their money back, likely in August. Neteller's founders will get off with a slap on their wrist (a monetary fine). Neteller won't be operating in the United States any more. And the DOJ gets a big boost in its investigation of online gambling firms because Neteller will cooperate with the DOJ (including testifying in court against online gambling firms).

What's not in the agreement—but is almost certain to be happening—is any mention of taxes. However, anyone who thinks that the DOJ (and the IRS, by extension) will not be getting records of Neteller transactions should think again. Almost certainly that information will be finding its way to the IRS by year-end.

It's interesting to compare what happened with what I predicted back in January.

"Indeed, it's clear what's likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won't indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It's also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller."

And that's basically exactly what occurred.

Congratulations to this year's winners at the World Series of Poker, run by Harrah's, and hosted at the Rio Hotel & Casino in Las Vegas. The Main Event, the World Championship of Poker, has just been completed. This year, 6,358 contestants ponied up $10,000 each to enter the event. The total prize pool was $59,784,954 and is the largest prize pool in a sporting event held in the United States.

Jerry Yang, of Temecula, California won $8,250,000. That's what you will read on the Internet and in tomorrow's newspapers. But did he really win all of that money?

Well, that was his gross win. However, there's the matter of taxes. Tournament poker falls under other gambling in the tax regulations, so withholding is required if the win is both more than $600 and at least 300 times the entry fee. So first through third place must have 25% of the prize withheld for US taxes (unless a tax treaty overrides this provision).

Mr. Yang, hailing from California, had $2,062,500 withheld to the IRS right off the top of his prize. Given the marginal tax rate he will likely face, he will probably owe another $825,000 in federal taxes (a total of $2,887,500 to the IRS). He will also California tax, so the Franchise Tax Board figures to rake in $849,750 of the win. Mr. Yang's actual win is probably $4,512,750 or so. The Franchise Tax Board is especially grateful. This is the second year in a row that a Californian has won, and given California's budget issues, any and all revenues will be quickly spent.

Tuan Lam of Mississauga, Ontario finished second. He won $4,840,981 for his efforts. Under the US-Canada tax treaty, he had $1,452,294 withheld. He may be able to get some of that back, if he can show other gambling losses. He also faces Canadian tax on his win--as a professional gambler, his winnings are taxable under Canadian law. Luckily for Mr. Lam, he will likely not owe any Canadian tax because he will probably get a credit for the US tax paid (at 30%) on his Candian tax return (a tax rate of 29%).

Raymond Rahme of Johannesburg, South Africa, finished 3rd and earned $3,047,025. He's the luckiest winner. He faces no US withholding per the US-South Africa tax treaty. He's also an amateur, and it appears he does not owe any tax under South African law.

Alex Kravchenko of Moscow, Russia, finished 4th and walked away with $1,852,721. Like Mr. Rahme, the US-Russia tax treaty allows him to head home with all of his funds. Russia has a 13% flat tax, so he will probably owe about $240,854.

The other final table participants owe tax to Inland Revenue (United Kingdom), the IRS, and two state tax agencies (Virginia Department of Taxation and the New York Department of Tax & Finance). Here are the totals for the various agencies:

Amount won at Final Table	$22,019,901
US Tax Withheld to IRS	$3,514,794
Add'l Tax Owed to IRS	$1,611,510
Total Tax to IRS	$5,126,304
Tax to California FTB	$849,750
Tax to Inland Revenue (UK)	$712,402
Tax to State Taxation Service (Russia)	$240,854
Tax to NY Dept of Tax & Finance	$65,503
Tax to VA Dept of Tax	$40,198
Total Taxes	$7,035,011

That's a total tax bite of 31.95%.

So congratulations to the winners. Just remember that a big winner—perhaps the biggest winner of all—is Uncle Sam. Because we all know, the house always wins.

One of the two Neteller founders pleaded guilty on Friday to one count of conspiracy. Stephen Lawrence told the Associated Press, "I came to understand that providing payment services to online gambling Web sites serving customers in the United States was wrong." Lawrence faces up to five years in prison when sentenced on October 29th.

What does this mean for Neteller's future and its ex-customers in the United States? Almost nothing. Neteller is scheduled to announce its plan for returning millions of dollars in held funds on July 13th. As to Neteller's future, I said months ago,

"Indeed, it's clear what's likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won't indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It's also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller."

Nothing that has happened to date in this saga has caused me to change my opinion.

As a reminder, July 2nd is the deadline for filing Form TD F 90-22.1. Remember, mail the form to the Department of the Treasury, not the IRS. If you had more than $10,000 at Neteller (or any combination of foreign bank accounts), you are required to report it. Willful non-reporting is punishable by a fine of $100,000, or 50% of the funds in the foreign accounts, whichever is greater, and can also result in criminal penalties.