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Taxation of Gambling Winnings in New Jersey

August 16th, 2011 No comments

Over the weekend I came across this “Biz Brain” article from NJ.com. It addresses the question whether New Jersey lottery winnings are subject to New Jersey income tax. The answer: Maybe.

For taxable years beginning on or after January 1, 2009, New Jersey lottery winnings are subject to New Jersey income tax only if the prize amount exceeds $10,000. The prize amount is the determining factor.

For example, in 2011 if you win the $25 million New Jersey PowerBall and score a $5,000 win from a Pick 4, only the PowerBall winnings are subject to New Jersey income tax. Of course, all $25,005,000 is subject to federal income tax.

What the article doesn’t address is the question whether the $10,000 minimum prize threshold applies to all gambling winnings in New Jersey. The answer is no. All other gambling winnings in New Jersey are fully subject to the state’s income tax. See this N.J. Technical Bulletin for more details.

Furthermore, as I’ve written before, if an out-of-state resident travels to Atlantic City and wins big playing blackjack, he may be on the hook for paying income tax to both his state of residence and New Jersey.

Money for Nothing

August 9th, 2011 5 comments

As much as we attorneys don’t like to acknowledge it, let’s face it: Some of us are crooked. Perhaps none are more crooked than Thomas Frey of Edison, NJ.

Frey had attempted to collect legal fees from various individuals, including two police officers, to handle an IRS investigation. What Frey didn’t tell them, however, was that he fabricated the entire matter. Last week, a federal grand jury indicted Mr. Frey with multiple charges. He’s now facing up to 140 years in prison if convicted on all counts. The Department of Justice press release is here, and the indictment is here.

Frey’s co-conspirator communicated to the victims that IRS agents approached him at a property owned by one of the victims as part of a criminal investigation. To corroborate the story, Frey showed to the victims business cards of the IRS agents, claiming he received them during the questioning. According to the indictment, Frey had obtained these cards while representing another client in an unrelated tax matter many years prior.

Frey set up the plot, and sought to score. He told the victims (again, who were police officers) that if they each paid him $10,000, he could utilize a “special relationship” with one of the IRS agents in order to have the criminal investigation converted to a mere desk audit. Frey also represented that a family member of his is an IRS employee who would enable Frey to obtain a more favorable outcome. Under the direction of law enforcement, one of the victims provided to Frey the $10,000 in a tape recorded meeting.

Frey’s alleged conduct is unethical on so many levels. First, fabricating a story to obtain funds for legal services is obviously grounds for immediate and permanent disbarment. Second, if the story were true, he’d be conspiring with a government employee to reach a more favorable outcome for his clients.

When I read a story like Mr. Frey’s, I find myself dumbfounded. Mr. Frey dedicated at least three years of his life to obtain a legal education, and earned the right to practice law after passing the New Jersey bar exam. He’d been practicing law since 1989.

Why risk throwing away all of the hard work for roughly fifty grand? There had to be another way out of whatever mess Mr. Frey got himself involved in. Whatever valuable experience and sound judgment Mr. Frey had accumulated over the years, if any, it certainly wasn’t on display here.

To my attorney readers, please don’t try this at home. To those who seek to hire an attorney, be careful whom you choose.

Jock Tax Strikes Big Blackjack Winner in Atlantic City

July 10th, 2011 No comments

High-stakes blackjack player Don Johnson recently walked away from Atlantic City casinos $15 million richer over a five month period. Before taxes, that is. A resident of Pennsylvania, he’s now well-aware how the Garden State’s jock tax leaves a large chunk of those winnings in the state’s coffers:

[Johnson] said the state’s reaction to his winning spree could put a chill on high-roller betting in New Jersey. He said he’s being told to pay New Jersey income taxes on his winnings even though he has never lived, owned property or done business there.

“That would be a precedent that might just kill off New Jersey gaming,” he said. “I can’t imagine any big player going there knowing that if he does hit them big, he might have a tax liability to them even though he’s paying taxes in his home state.”

He said he was being asked to pay under a provision tied to the introduction of gambling in New Jersey in the 1970s.

“It made sense when you had no other states surrounding New Jersey that had gaming,” he said. “Now you have all these competitors involved. It becomes a nightmare for a player who wins big and plays in multiple states. He has to figure out what his P&L is in every state. It’s ridiculous.”

Johnson explained further.

“Let’s say you won $1 million in New Jersey for the year, but you lost $2 million between Pennsylvania and Vegas. You had an overall net loss of $1 million. You lost money for the year, but the state of New Jersey may still come after you to try to require you to pay for what you won from them. That’s where this doesn’t work. The math doesn’t work on that.”

While the math may not “work,” he’s right about New Jersey imposing tax on the $1 million in his example. It’s a killer particularly because New Jersey has one of the highest income tax rates of all states. What Johnson doesn’t point out, however, is that as a resident of Pennsylvania, he may be able to take a credit on his Pennsylvania tax return for taxes paid on his gambling winnings to New Jersey. The significance is that he’ll pay only the higher of the two state’s tax rates (in addition to the federal rate, of course).

Despite the possibility of the credit, he makes a fair observation about how the state’s jock tax may hurt the New Jersey gaming industry, with casinos across the state border in close proximity. If Johnson won the $15 million in Pennsylvania casinos instead, he’d pay far less in state income tax because Pennsylvania’s personal income tax rates are much lower than New Jersey’s.

New Jersey Governor Christie Vetoes Intrastate Online Gambling Bill

March 4th, 2011 1 comment

As many of you have heard by now, yesterday New Jersey Governor Chris Christie vetoed a bill that would have enabled New Jersey residents to place bets through websites operated by Atlantic City casinos.  Many (including myself) saw this bill as a gateway to the legalization of online gaming in the United States.

The New Jersey State Constitution permits gambling only in Atlantic City, and placing servers to open up gambling over the internet threatened to violate the constitution, according to Christie’s veto message.  His message added:

In my view, the creation of a legal fiction deeming all wagers to have ‘originated’ in Atlantic City cannot overcome the clear and unambiguous language of the State Constitution.

But all hope is not lost.  Joe Brennan Jr., executive director of iMEGA (Interactive Media & Entertainment Gaming Association), admits the veto is a setback, but believes the Governor is willing to consider signing an amended version of the bill into law.  New Jersey Senator Raymond Lesniak will likely take the Governor up on this offer.  Further, Christie suggested the state legislature to ask voters to approve an online gambling measure by public referendum.

The New Jersey state legislature is not the only state legislature seeking implementation of intrastate online gambling.  California, Florida, and Iowa are also moving in this direction.

In the meantime, offshore unregulated online casinos will continue to recognize large revenues while the state and federal lawmakers battle it out.

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