Taxable Talk

A reader asks,

"I'm currently studying in undergraduate university in the U.S., where I hold my only citizenship. I was thinking about studying abroad, probably in Australia. I was thinking about going from around Jan.1-December 31st of 2009, or from Sept.1 08-Sept.09. I receive financial aid grants from the university/government(?), but the school financial office says those are never taxed the way they do it, so presumably it's a non-issue for Australian as well as U.S. tax. I think if I study abroad everything is billed to my U.S. university account which is where the grants are credited to. So while in Australia I might want to focus on poker, both live and online. I was wondering what kind of liability I'd be looking at, I'm guessing I could get the U.S. exemption if I am there for the whole year as long as my income is less than ~82k? And after reading my understanding is that it's unclear but unlikely that people have liability for poker in Australia. If you can help elucidate the rough idea for the situation I'd be in I would greatly appreciate it."

There are several things you need to consider. First, Australia only taxes professional gamblers. So if you're not a professional gambler, your gambling income will not be taxed by Australia. However, if you are a professional gambler, and if you were required to pay Australian income tax, you would have to pay income tax on the gambling. (I don't know anything about whether your scholarships would be taxable in Australia; your university can probably answer that question. I also do not know if full-time students are exempt from Australian income tax.)

As a US citizen, you must file tax returns each year, whether you reside in the US or Australia. When you write about the "U.S. exemption," I assume you mean the foreign earned income exclusion. That will pose a problem for you, as gambling income is not considered earned income, and only earned income is eligible for the exclusion. (There are other requirements in order to take the foreign earned income exclusion.)

Now, a professional gambler living abroad (one who files a Schedule C) can take the foreign earned income exclusion ($85,700 in 2007). However, a professional gambler must pay self-employment tax on his net gambling income.

So without knowing more about your entire situation, it appears on the surface that you are not a professional gambler (as you are a full-time student). Thus, your gambling winnings will remain taxable whether you are studying here or in Australia.

A CPA likes to gamble, and shows his gambling activity as a second business (his other business activity is his accounting practice). The IRS challenges this, claiming that he's really an amateur gambler. The Tax Court has to decide who is right.

Ali Mohammadpour is a CPA who also likes to gamble. On his 2003 tax return, he shows his accounting practice on Schedule C. He also shows his gambling on another Schedule C. He won $84,730 while gambling. However, the petitioner lost at least as much as that, and reported a net gambling income of $0.

There's nothing wrong with an individual having multiple businesses. Indeed, many accountants have two (or more) businesses so that during their off season they can also earn an income.

Unfortunately for the petitioner in this case, there were several questions as to whether he really was a professional. To be a professional gambler, one must, "[engage] in the gambling activity with continuity and regularity and with the primary purpose of making a profit." This means gambling full-time, for your livelihood.

In contrast, the petitioner in this case "...dedicated approximately 900 hours to his gambling activity in 2003 (or approximately 17 hours per week on average), which appear to have been distributed over 136 days." That's definitely not full-time. The Court also noted that the petitioner did not show positive net gambling income in the two years prior to 2003 or in the year after (or, for that matter, the year in question).

More damaging to the petitioner's case was his lack of recordkeeping. The IRS expects a professional to keep records, no matter what the profession. Gamblers, whether professionals or amateurs, must keep a gambling log.

"Also in contrast to the taxpayer in Commissioner v. Groetzinger, supra, petitioners did not keep reliable records of Mr. Mohammadpour’s gambling activity. This was due in part to error, and also to the fact that Mr. Mohammadpour intentionally ignored, for record-keeping purposes, bets on which he won less than $600 and which therefore were not reported to the IRS by means of Form W-2G. These winning bets of less than $600 made up approximately 10 percent of all Mr. Mohammadpour’s bets. In other words, petitioners adopted record-keeping practices which would merely approximate Mr. Mohammadpour’s gambling performance. Such is inconsistent with a conclusion that Mr. Mohammadpour engaged in his gambling activity with the primary purpose of making a profit." [footnote omitted]

Mr. Mohammadpour was determined by the Tax Court to be an amateur. If you want to be considered a professional, you need to treat your business as a profession. Not only must you try to earn an income (a livelihood), but you need to keep complete and accurate records. In this case the petitioner was a CPA and should have known this.

Case: Mohammadpour v. Commissioner, T.C. Summary 2007-163

The Tax Court decided an interesting case today. An individual receives gambling income, but has given the payee a Form 5754, stating that the income belongs to another individual. However, the other individual doesn't claim the income. The IRS goes after the individual who picked up the money. Who owes the tax?

Willie Albert worked at the Los Angeles Turf Club, an off-track betting parlor. During 2003, Mr. Albert presented winning tickets worth $12,258. When he presented those tickets, he also presented Form 5754. Form 5754 is used to assign gambling winnings to others. For example, poker players use this when they are backed to show that instead of the player being responsible for 100% of the winnings, she is responsible for (say) 60%. In this case, Mr. Albert's forms (which are signed under penalty of perjury) show that one Romeo Umali was responsible for 100% of the winnings.

That would be all and good if Mr. Umali claimed those winnings on his tax return. He didn't. So the IRS went after Mr. Albert. The dispute ended up in Tax Court.

The key points of the case are summed up by the Tax Court:

In general, section 61(a) defines the term “gross income” to include “all income from whatever source derived” unless it is specifically excepted.

Under the claim of right doctrine, if a taxpayer receives money under a claim of right and without restriction as to its disposition, then he has received income that he is required to report even though it may still be claimed that he is not entitled to retain the money and may be ordered to restore its equivalent. N. Am. Oil Consol. v. Burnet, 286 U.S. 417 (1932). But under the conduit theory, if a person receives funds merely to enable him to act as a conduit of the funds to another, then he does not have a claim of right to the funds, and the funds received are not income to him to the extent that he passes them on to the person for whom the funds were intended. Goodwin v. Commissioner, 73 T.C. 215, 232 (1979).

The main problem for Mr. Albert was that his testimony was unconvincing. He was inconsistent on the stand, and the Court felt his testimony was self-serving. He also presented no corroboration of his testimony. He had no witnesses, his bank statements didn't prove whether or not he received the income, and Mr. Umali's tax return did not show the income. So the Court found that the gambling income came under the Right of Claim, and Mr. Albert owed the tax.


Case: Albert v. Commissioner, T.C. Summary 2007-162