Taxes in the Back

One week ago, the International Cycling Union took away Lance Armstrong’s seven Tour de France titles he had earned in successive years from 1999 to 2005. In addition, the ICU is requiring Armstrong to return up to $16 million he had received for winning the Tour de France over those years.

Armstrong is a U.S. citizen and thus was required to report and pay U.S. income tax on his winnings. Upon returning the winnings, is he entitled to any relief for the taxes already paid?

The answer is probably, but not necessarily entirely.

Samuel D. Brunson, Assistant Professor of Law at Loyola University Chicago School of Law, explains in this paper titled Lance Armstrong and the Race for Deductibility.

A draft bill for federal online poker said to come from the offices of Senators Harry Reid and Jon Kyl was leaked to the media earlier today. Read the full text of the bill, titled “Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening UIGEA Act of 2012,” here.

Gaming attorney Ian Imrich has offered his initial comments on the bill. I’ll post some thoughts after combing through its seventy-three pages.

You may have noticed a slowdown in the quantity of content here over the past few weeks. The reasons are twofold.

First, a family scare. Early last week my older brother (I’m the middle sibling) was hospitalized with a serious intestinal infection that ultimately required surgery. The surgeon informed us that had he gone untreated for a few more days, my brother could have went into septic shock.

I’ve looked up to my brother all my life. He’s the one person who I could say has been through more than me as a sibling. So when I first learned of his hospitalization and the seriousness of his condition, my world came to an abrupt pause. I couldn’t bear the thought of possibly losing him so prematurely. I was afraid of losing a part of me.

After the news settled in, I found myself stepping into his shoes in an effort to provide the immediate family the emotional strength we’re accustomed to seeing in him. Naturally, my mother did not take the news well. As my father said on the day of the surgery, “You can’t get your mom out of that hospital with a bulldozer.”

I hadn’t spent as much time in a hospital all my life as I have since my brother was hospitalized. This period of time has forced me to temporarily live outside of life’s daily routine. It has reminded me to always appreciate the time you spend with the people most important to you. We just don’t know what tomorrow brings, good or bad.

I’m happy to report he is recovering as well as expected to this point. There’s a long road ahead, and a better qualify of life awaits.

Second, I’ve been in the process of slightly shifting the blog’s focus. I will continue to highlight tax issues relevant to the gaming industry. Going forward, however, I plan to also write more about gaming law developments in general, and scale back a bit of the non-gaming tax pieces. Feel free to suggest topics of interest.

Yes, I am a tax lawyer. And as I continue to chart the path of my career, I further realize that my long-term place is likely somewhere in gaming. The gaming industry will continue to evolve and present challenging and stimulating legal issues. I’ve learned a lot from the many sharp and engaging individuals that the community has to offer. I also hope I’ve shared with you an interesting concept or two.

Now’s a perfect time to queue up a very cheesy 80s tune that, well, sort of captures the moment:

Today I received the following inquiry:

“[L]ooking for some info why 30% was tak[en] out of an $83 winning in poker at a NY state casino when most states tax after 5k.”

The casino in this case was the Seneca Niagara Casino, located in Niagara Falls, NY.

To evaluate the issue, we need to know whether the taxpayer is a U.S. resident. That’s because the rules for withholding and informational reporting of gambling winnings under the Internal Revenue Code depend on the residency status of the taxpayer.

It turns out this taxpayer is a resident of Canada. In general, gambling winnings paid to foreign individuals are subject to 30% withholding, assuming the income is not effectively connected with a U.S. trade or business. Proceeds from a wager placed in blackjack, baccarat, craps, roulette, or big-6 wheel, however, are not amounts subject to reporting.

Here, it seems that Seneca properly withheld thirty percent of the $83 winnings, as poker is not exempt from nonresident withholding.

Note that an applicable tax treaty between the United States and a treaty partner may reduce the amount withheld by Seneca Niagara. The United States-Canada Tax Treaty, however, offers no such relief.

Is there any other relief? Suppose the same taxpayer enters in only one other poker tournament during the year paying an $83 entry fee, and loses. Now the taxpayer has net $0 of gambling winnings for the year, yet approximately $25 was withheld on the $83 win. One shouldn’t pay $25 in U.S. tax on net zero gambling winnings. To possibly obtain a refund, the taxpayer could file a Form 1040NR to claim the winnings and losses for the year and the amount withheld.

Keep in mind that the withholding and informational rules discussed above are pursuant to federal law, not state law. Again, U.S. casinos are required to withhold 30% and issue a Form 1042-S to nonresidents unless an exception applies.

Of course, some states have their own separate informational and withholding rules for state income tax purposes. But they are not in lieu of federal law, which still must be followed, but are in addition.

The comment that “most states tax after 5k” is likely a reference to the federal rule that requires all U.S. casinos to issue a Form W-2G to U.S. residents who win more than $5,000 in a poker tournament, net of the entry fee. Note, however, whether a W-2G is actually issued has no bearing on whether the actual winnings are taxable, as all gambling winnings of U.S. residents are taxable, regardless of the amount.

A few months ago I received an e-mail from someone claiming to hold a Powerball ticket good for a seven figure sum. This someone, however, was seeking to claim the ticket anonymously, and wanted to know if I had any ideas.

I suspect this someone came across my post about an unclaimed winning lottery ticket in Iowa. In that case, the Iowa Lottery refused to honor the ticket unless the recipient came forward. In both situations, state law required the winner’s name and location to be made public information.

So I wrote back and said it could be considered fraud if someone other than the actual winner claims the prize. I added that I don’t have any viable courses of action to present, and thanked the person for the inquiry.

There are countless reasons why anyone would want to claim a lottery ticket anonymously. The primary reason, of course, is to avoid the public spotlight. Unfortunately, far too many times lottery winners have fallen victim to scam artists or physical harm.

New Jersey Assemblyman John Burzichelli believes lottery winners shouldn’t have to face the fame with their fortune. He recently introduced bill A2982, which would give New Jersey lottery winners the option of remaining anonymous for one year.

The NJ Lottery is likely to lobby against the bill as is. The State Lottery claims that “transparency gives taxpayers increased confidence that lottery games are fair and honest.” But I see a far more significant reason for its opposition: Lost publicity. No one is going to care about a press conference for a lottery winner a year after the fact.

Expect some sort of compromise, such as a prize amount threshold.

I don’t think we should preserve the publicity at the expense of continuing to expose lottery winners to evil. The states generate plenty of revenue from their lotteries and almost certainly could afford to take a small hit, if any. Plus, there are other ways to accomplish transparency.

The battle between New York and its federally recognized tribes over the taxation of cigarettes continues.

In the most recent development, other players involved were on the losing end of a recent ruling in federal court. The judge held that wholesalers failed to collect New York City cigarette tax on the sale of millions of cigarette cartons to tribal retailers located on reservations in New York. The New York Times estimates the wholesalers could have to pay penalties up to $15 million to New York City.

New York City brought this action alleging that the wholesalers violated federal law. The Contraband Cigarette Trafficking Act prohibits persons from selling “contraband cigarettes,” which are defined as “a quantity in excess of 10,000 cigarettes, which bear no evidence of the payment of applicable State or local cigarette taxes in the State or locality where such cigarettes are found, if the State or local government requires a stamp, impression, or other indication to be placed on packages or other containers of cigarettes to evidence payment of cigarette taxes.”

Defendant wholesalers Mauro Pennisi and Gutlove & Shirvint each sold from May 2008 to January 2011 more than 10 million cartons to Indian retailers mostly on the Poospatuck Reservation, where fewer than 500 people live. Although cigarette packs sold to tribal members on reservation are exempt from NY cigarette tax, packs sold off-reservation in NYS are taxable.

New York City asserted that the cartons sold by the wholesalers were trafficked into New York City without payment of the New York City cigarette tax and re-sold. The judge ruled that New York City met its burden of proof to establish that the wholesalers should have known the vast majority of the untaxed cigarettes sold to the tribes were re-sold to non-tribal members.

This case will only further encourage tribes located in New York to manufacture their own cigarettes. Whether or not NYS will again seek to stop such activity remains to seen.

Last October I wrote about operators of the Napa Valley Casino refusing to pay a $2 card room admissions tax. The city of American Canyon, CA, approved the measure in 2010, yet it has delivered exactly $0 in tax dollars to date, as Napa Valley Casino is the only entity subject to the tax.

The parties ended up in court after the city filed a criminal complaint against the casino’s operators, and the operators countered with a civil suit of their own.

Earlier this month a Napa County Superior Court panel decided in favor of the city, according to the Times-Herald. The operators are seeking review of the decision by the state Supreme Court, but the court is not obligated to hear the case.

The Superior Court panel upheld the constitutionality of the tax, noting that local governments have broad powers to regulate gaming establishments located within their jurisdictions.

I don’t see a reversal here. The operators are asserting that the tax is on private citizens entering into a private business. Problem is, it’s not that straightforward.

People like to say timing is everything. I’m often tempted to call out this remark by suggesting that the cliché is merely a reactionary observation. I try to consider myself a forward-thinker, so it’s not an adage that offers me any guidance in life.

I could say, for example, that my decision to enroll in law school in Fall 2006 was awful timing. Graduating in Spring 2009, my class was one of the first to enter the legal market following the burst of the U.S. housing bubble.

Far too many of my colleagues graduated without legal jobs. Far too many others begrudgingly accepted low paying positions just to have a legal job. It wasn’t what they signed up for.

The classes of 2010, 2011, and 2012 haven’t had it any better. Actually, it has probably been even worse for them. Yet, for the past few years, law school tuition around the nation has steadily increased. (UPDATE 8/21/2012: According to this article, the average tuition for law school this fall will rise by more than double the rate of inflation.) It doesn’t add up.

We’re looking at another bubble. Others intimately closer to the situation than I am have written extensively about it. University of Colorado Law School professor Paul Campos launched Inside the Law School Scam. Wash U. in St. Louis Law School professor Brian Tamanaha published Failing Law Schools.

Change to the system is coming. Good change, for example, that prevents schools from disguising employment statistics in order to convince naïve college seniors into believing that law school is a still a golden ticket.

Hopefully, these changes will generate a far higher overall utility for those involved in law school education going forward. Unfortunately, the classes of 2008, 2009, 2010, 2011, 2012, and likely 2013, 2014, and 2015 are left behind.

Wait, so timing is everything, right?

Wrong.

Accept the reality of the situation. We can’t give our degrees back. And we’re not getting our money back. Law school is no longer a golden ticket, simple as that.

Back to the first sentence of this post. Timing is something, but not everything. Those who often put themselves in a position to capitalize on seemingly fortuitous opportunities know that there’s much more to their success than timing.

Those struggling to find quality legal jobs need to consider approaching the matter more unconventionally. There are hundreds of others equally as qualified and jobless or underemployed. Continuing to follow the conventional methods will produce the same lack of intriguing opportunities.

Problem is, I haven’t come across substantial commentary on how the left behind can work towards creating these opportunities. I wrote some initial thoughts a couple of months ago. It’s a start, but much remains to be said.

No one has all the answers. Collaboration is key. Whether it commences here, on a far more popular blog, on Twitter, or at Reddit, it doesn’t matter. I’d be happy to share ideas with people willing to listen and offer critical insights. Let’s get this going.

Usain Bolt sprinted out of the United Kingdom as quickly as he sprinted in the sovereign state.

Today the Wall Street Journal is reporting that the Jamaican sprinter will forego future races in the UK in order to avoid a large tax bite on potential future winnings there.

The UK is unappealing to foreign athletes because of its tax base. Not only does the base include any winnings earned by nonresident athletes on UK soil, it also includes their worldwide endorsement earnings. Multiply the tax base by the proportion of days spent in the UK to days spent elsewhere, and that’s the tax bill.

Considering Bolt currently has a $9 million annual endorsement deal with Puma, I can’t say I blame him.

The UK tax base is not standard. Here in the States, the tax base includes endorsement earnings paid by American sponsors only. Endorsement monies paid by non-American sponsors aren’t included. France’s base mirrors that of the U.S.

This isn’t the first time we’ve seen an athlete limit appearances in the UK because of taxes. Rafael Nadal, for example, had said he would not play at the 2012 Aegon Championship at Queen’s because of its tax base formula.

I suspect Nadal had little to no reservations with his decision, as there’s an abundant number of other major opportunities to participate in each year. Not quite sure whether we can say the same about track and field. But if Bolt will continue to ink major endorsement deals without having to set foot in the UK going forward, it’s the UK’s loss in the end.

(Hat tip: TaxProf Blog)

Northern Ireland native Rory McIlroy dominated the field this weekend to capture the 2012 PGA Championship, held at Kiawah Island, South Carolina.

McIlroy became the first player to win the Championship by at least eight strokes, breaking Jack Nickalus’ previous record of seven set in 1980.

Finishing first, McIlroy collects a cool $1,445,000. Before taxes, of course.

McIlroy may be considered a U.S. resident and thus subject to U.S. income tax on his worldwide income if he meets the substantial presence test. To have substantial presence, he must (i) spend at least 31 days in the U.S. during 2012 and (ii) have a weighted average of 183 days spent in the U.S. over 2012 and the prior two years. But, if he spends fewer than 122 days in the U.S. during 2012, then he is exempt from substantial presence.

If McIlroy is not a U.S. resident for 2012, he still must pay U.S. tax on income that is “sourced” (earned) in the United States, unless there is treaty relief.

Section 1 of Article 17 of the United States-United Kingdom Income Tax Treaty reads:

Notwithstanding the provisions of Articles 14 (Independent Personal Services) and 15 (Dependent Personal Services), income derived by entertainers, such as theatre, motion picture, radio or television artistes, and musicians, and by athletes, from their personal activities as such may be taxed in the Contracting State in which these activities are exercised, except where the amount of the gross receipts derived by an entertainer or athlete, including expenses reimbursed to him or borne on his behalf, from such activities do not exceed 15,000 United States dollars or its equivalent in pounds sterling in the tax year concerned.

(Emphasis added.)

No treaty relief for the champion. McIlroy’s $1.44 million prize is subject to U.S. income tax.

At 23 years young, McIlroy has a very promising career ahead of him. It’s not far-fetched to speculate he will receive more attention than any other professional golfer from prospective endorsers over the next five to ten years.

The taxation of endorsement winnings of nonresident golfers in the U.S. has been a heavily litigated issue. Retief Goosen took his case to tax court last year, and the parties stipulated to dismiss the appeal of that case this past February.

Another significant case regarding the endorsement earnings of a professional golfer is still pending, however. Sergio Garcia is the taxpayer. I’ll write about that decision after we learn of it.