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Full Tilt Poker Ponzi Scheme?

September 21st, 2011 Leave a comment Go to comments

Yesterday, the news of the Department of Justice amending its complaint against the Poker Companies to add three individual defendants made national headlines. Read the official press release from the U.S. Attorney’s Office here, and the amended complaint here. Preet Bharara, the U.S. Attorney for the Southern District of New York, asserts that Full Tilt Poker was “a global Ponzi scheme.”

The new allegations add much fuel to the already massive fire that has been burning Full Tilt Poker since Black Friday. Players still haven’t received any of their frozen monies back. It has not appeared as unlikely to happen as it does now. Authorities claim that Full Tilt was $330 million short in funds owed to players in March.

I’ve written before about possible tax consequences for U.S players who don’t receive their funds back. With the Ponzi scheme allegations surfacing, additional tax consequences may arise. In light of the Madoff investment scandal, the IRS created rules for taxpayers who experienced Ponzi scheme losses.

Whether or not players with Full Tilt balances qualify for Ponzi scheme losses is not immediately clear. Russ Fox agrees. Indeed, Full Tilt may not have been engaged in a Ponzi Scheme. Remember, we’re talking about allegations. So, let’s not jump to conclusions. I’ll be sure to revisit these issues when we learn more facts.

  1. Steven Chung
    September 22nd, 2011 at 21:38 | #1

    My question would be whether there has to be a ruling from the Court as to whether Full-Tilt actually engaged in a Ponzi scheme before the losses can be claimed.

    Fox suggested using the Safe Harbor procedure pursuant to Rev. Prov. 2009-20. However, I’m not sure if poker deposits are considered “investments” for this procedure.

  2. Will Lewis
    September 27th, 2011 at 15:43 | #2

    I have a suspicion that this was covered at some point, but I’m just too lazy to go back through your posts… Has the IRS issued guidance saying that online poker winnings are currently taxable before they’re transferred out of your online poker account? Couldn’t you argue that they’re just online payment chits which have no value until transferred into currency, and, as most individuals are cash-basis taxpayers, the winnings are not taxable until they are transferred into currency over which you have dominion and control? Could you make direct transfers from your poker account to other merchants in exchange for goods? This isn’t wholly reasoned out, but if the IRS has issued guidance I think that guidance is possibly ripe for litigation because the freezing of the accounts demonstrates that the poker winnings are not under the complete dominion and control of the person.

    By way of analogy (an analogy many hate because reducing stock investments to gambling raises all sorts of issues), if I invest a bunch of money in a stock and the stock price goes up astronomically, and then the company folds, I’m not taxed on the increase in that value.

    • September 27th, 2011 at 22:36 | #3

      As far as I know, there is no IRS guidance or Tax Court decisions addressing the timing of winnings from online gambling. Indeed, I have written about this issue here. Essentially, although a taxpayer may not have actually withdrawn his winnings, it’s still taxable income as long as the taxpayer had the power to withdraw the funds.

      That said, there are some possible arguments that taxpayers with funds on Full Tilt did not possess this power. For example, paragraph 105 of the amended complaint against Full Tilt (linked to above) alleges that on March 31, 3011, Full Tilt’s balance sheet reflected $390,695,788 of funds owed to its players, yet the company had only approximately $59,579,413 in its bank accounts. Another possible argument relates to some of the offshore sites imposing limitations on withdrawal amounts and frequency of withdrawals.

      As you note, this issue is ripe for litigation. Some taxpayers have six figures or greater in frozen funds. For those players, it may be worth the cost to litigate the issue of whether constructive receipt applies to funds frozen in Full Tilt accounts.

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