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Inadequate Gambling Records Lead to Foreclosure

June 8th, 2012 1 comment

Time after time after time I have emphasized the importance of maintaining a diary of gambling activity for tax purposes.

In a recent case out of Minnesota, the failure to do so by taxpayers Eugene and Brenda Rivetts has resulted in a nightmarish result: Home foreclosure.

Over the years the taxpayers regularly played slots at casinos in Illinois, Indiana, Minnesota, and Wisconsin. When you play slots regularly for an extended period, chances are you will win some jackpots. A casino is required to issue to you (assuming you are a U.S. resident) and to the IRS a Form W-2G each time you win $1,200 or more from a slot machine.

In 2001 and 2002, the taxpayers had some big slot machine wins, but they failed to file their income tax returns. So, the IRS prepared for them substitute for returns, and then sent notices for the balances due. Interest and penalties continued to accrue, and as of January 31, 2012, the taxpayers owed $200,066.34 for 2001 and $2,197.15 for 2002.

In court the taxpayers argued, among other things, that they incurred gambling losses during these years, but they were not reported to the IRS. The burden of proof to demonstrate such losses exist is on the taxpayer. Unfortunately, the taxpayers admitted to not maintaining an accurate record of gambling winnings and losses for each of the years in question (1999, 2000, 2001, 2002, and 2005). Although the taxpayers offered to provide the court an estimate of the losses, the court said a request to discount five years of tax documents implies they were not candid in filing their taxes.

The Government commenced the action seeking to reduce the tax assessments to judgment and foreclose tax liens on the taxpayer’s property in Minnesota. The court granted the Government’s motion for summary judgment. In other words, the Government now may take steps to order a foreclosure sale of their home in order to collect on the outstanding liabilities.

It’s extreme for the government to seek foreclosure on a home to collect on a tax liability. In general, the IRS has 10 years to collect on outstanding liabilities. The IRS typically won’t strongly consider foreclosure unless the 10 year period is close to expiring. Before the IRS may proceed with foreclosure, a court will exercise judicial discretion on such efforts by taking into account “both the Government’s interest in collecting delinquent taxes and the possibility that innocent third parties will be unduly harmed by the collection effort.”

In this case, the taxpayers share their home with several family members, including a son, a daughter, a granddaughter, and a niece. In addition, the husband taxpayer’s parents live nearby, and the family regularly helps attend to his father’s health problems. Despite these circumstances, the court held in favor of the Government, noting that “being removed from one’s home can carry with it an inherent indignity and inequity,” but “[t]hat indignity and equity, though, is not sufficient to tip the scales in favor of Defendants and their family.”

It’s not clear from the opinion what efforts the taxpayers took to address their outstanding liabilities before the foreclosure action commenced. An Installment Agreement, Offer in Compromise, or other collection alternative could have prevented this unfortunate result.

Had the taxpayers kept good records as required, this outcome possibly could have been avoided.

Case: United States v. Rivetts, Civ. No. 11-556 (RHK/LIB) (D. Minn. 2012).

Sometimes You Should Not Dispose Dirty Napkins

January 6th, 2012 2 comments

Last night I appeared on a taping for a poker talk radio show. At the end, the host asked me if I had any final words for the listeners. I said: “Keep very very very good records of your gambling activity.” Insufficient records is a losing bet for a taxpayer who claims gambling losses. Roy Rampadarat found out the hard way in a recent Minnesota Tax Court decision.

Mr. Rampadarat enjoyed playing slots at the Mystic Lake Casino from 2001 to 2005. On his Minnesota income tax returns for each year, he filed as a professional gambler. Under Minnesota Tax Law, a professional gambler includes gambling losses in the Alternative Minimum Tax formula, but a recreational gambler cannot. This rule differs from federal law, which allows an amateur to take the deduction for AMT purposes.

The Minnesota Department of Revenue audited Mr. Rampadarat, and took the position that he was not a professional gambler. The Department sought $53,723.15 in tax, interest, and penalties. Mr. Rampadarat appealed and took the Department to court.

Of course, the professional versus recreational gambler status is a facts and circumstances determination. The court recognized nine nonexclusive factors to make this determination, and found four of them relevant in this case:

  • The activity is carried on in a businesslike manner and taxpayer maintains complete and accurate books and records in which the taxpayer carries on the activity (e.g., keeping records in a businesslike way);
  • The time and effort that the gambler expended;
  • The amount of occasional profits, if any, which are earned; and
  • The financial status of the taxpayer.

Mr. Rampadarat’s system of recordkeeping included notes on napkins of his winnings and losses. At a month’s end, he compared these notes to his credit card statements, and if the numbers matched, he destroyed the napkins. He also kept some monthly totals to form the basis of his reported winnings and losses, but he destroyed these as well.

The problem with credit card statements alone is that cash withdrawals at a casino could serve a number of activities: food, entertainment, gambling, or simply putting it into one’s pocket. Without a diary of gambling activity, Mr. Rampadarat was unable to show how these withdrawals were actually used.

Mr. Rampadarat also offered a statement from the casino. The problem here was that the casino only kept records when he gambled with the casino’s club card, and that was on a limited basis.

When questioned about his time spent gambling, Mr. Rampadarat offered inconsistent testimony, and pointed to his ATM receipts from the casino as proof. Not surprisingly, the receipts failed to show that he spent 20-40 hours a week gambling, as he testified.

Additional evidence further indicated 20-40 hours a week didn’t add up. A win/loss statement prepared by the casino showed that he gambled for 106 days over the five years, or 21 days per year. His credit card statements showed some more activity, totaling 231 days over the five years, or 46 days per year. That amount of gambling activity is more akin to a hobby, and not continuous and regular, said the court.

Ultimately, because the taxpayer maintained insufficient records, the court was unable to conclude that Mr. Rampadarat gambled in a businesslike manner and with sufficient regularity and continuity to be considered a professional. Although we cannot say whether his napkins would have produced a different result, we can say he didn’t help his cause by destroying them.

Case: Rampadarat v. Comm’r of Revenue, Docket No. 8024 R (Minn. Tax Ct. Nov. 17, 2011)

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