Poker and the Law

In one of the very first cases heard by the federal court in Las Vegas in 2011, Harrah’s (now renamed Caesars) once again won the right to kick out card-counters. Roger L. Hunt, Chief U.S. District Judge for Nevada, based his decision, in part, on a book I co-authored in 1998, Blackjack And The Law.

For those of you who engage in the business of gambling and have taxable winnings, a recent decision by the United States Tax Court should get your attention and that of your tax advisor.

There had been some confusion in the law concerning how and to what extent gambling expenses other than actual losses could be deducted from a gambler’s winnings. On July 25, 2011, in the case Mayo v. Commissioner, the court sought to clarify which expenses are deductible for those engaged in the business of gambling, and how those deductions may be made.

Last week a client asked me whether it’s possible to get a refund when you are audited by the Internal Revenue Service. I told him that it can happen: In the twelve years I’ve been practicing, I’ve had three individuals obtain refunds in an audit.

The stated goal of the IRS in an audit is for the taxpayer to be in compliance with the tax laws. When you send a tax return to the IRS, it is accepted at face value. In an audit, you have to prove that the numbers on the return are what they should be.

Opponents of legal gambling are notorious within the industry for making up numbers.

Robert Goodman, for example, is a discredited “anti” and founder of the grandly named, though now defunct, “United States Gambling Research Institute.” He is infamous for proclaiming, “The American Insurance Institute estimated that 40 percent of all white collar crime had its roots in gambling.”

‘ISILDUR1’ IDENTITY REVEALED

One of poker’s mysteries was recently solved when the identity of ultra-high-stakes cash-gamer “Isildur1” was confirmed to be Sweden’s Viktor Blom. The 20-something Blom had long been rumored to be the player behind the famed handle, with the “Isildur1” screen name figuring in all ten of poker’s all-time largest pots, some reaching seven figures. Blom’s brief career began with a $2,000 online bankroll and has already experienced several meteoric highs and lows, including overnight swings that exceeded $1 million.

We are in what I call the Third Wave of Legal Gambling. Twice before in American history, legal gambling spread across the nation, only to crash down in scandal and complete prohibition. The prior crashes left legal debris that is still on the statute books.

The November 2010 elections were historic, but not for the reason most people think.
 
The President’s party always suffers in mid-term elections during economic hard times.
 
Sure, the Democrats lost a lot. But not everything. The Republicans could not even gain control of the Senate. But 2010 did make history. It was the first time in American history that more proposals to expand legal gambling won at the polls then lost.
 

In a story appearing in The Hill, a publication that follows Congress closely, Rep. Barney Frank (D-MA), the author of the Internet Gambling Regulation, Consumer Protection, and Enforcement Act (HR 2267), said that the bill probably will not be enacted into law during the current congressional session. If enacted, Frank’s bill would negate the impact of the Unlawful Internet Gaming Enforcement Act (UIGEA) and create a system for regulating and taxing online gaming in the United States.
 

On March 25, 2010, Governor Steve Beshear of Kentucky launched his latest attack against online gaming companies. He previously tried to seize Internet domain names using ancient anti-slot-machine laws. Now he is suing Pocket Kings, operator of Full Tilt Poker, for all the money lost by Kentucky online poker players, times three.

This article is limited to the one or more Federal tax issues addressed in the opinion. Additional issues may exist that could affect the Federal tax treatment of the transaction or matter that is the subject of this article and the article does not consider or provide a conclusion with respect to any additional issues. With respect to any significant Federal tax issues outside the limited scope of this article, the article was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.