Debate On Rake/Rakeback Tax Treatment

[r1base14]

Hello all,
In searching through old posts I noticed that people sort of take it for granted and assume that rake paid is not eligible to be taken as a deduction and that rakeback is to be included in one's income. This is a position that I don't understand and theoretically does not makes sense. The way the tax laws are structured, it would makes sense that either one of the two following scenarios would be proper:

1. Take rake paid as a decudtion and include rakeback as income; or
2. Do not take a deduction for rake paid and do not include rakeback as income.

The inclusion of rakeback as income without deducting rake paid results in the worst case scenario for a taxpayer, and there is nothing else that is treated in such a manner.

I understand the argument that the rake is taken out of the pot before it is shipped to the winner, thereby reducing the winner's income automatically. The problem with this argument is that the winner SHOULD have had the extra 4 dollars in winnings (or whatever the rake was) and, because of the expense that the casino charges, now has less winnings than he/she should (Note that I am not saying the taxpayer should be entitled to the entire 4 dollar deduction, but rather just the amount that the taxpayer contributed to the rake). Rake should be treated just like any other expense that one incurs in the course of business, such as interest expense. There is no double counting here that would create an improper benefit to a taxpayer. Can someone please explain to me why this analysis is incorrect?

FYI - I am obvioiusly discussing a situation in which a player plays professionally, and not as a hobby.

Ryan

[Rainbow Warrior]

maaaaaaan..
Rake is ALREADY deducted from your winnings when you collect the pot.
You CAN NOT deduct it twice.

Rakeback is income because it's a partial refund of that previous deduction.

It's clear.

[StellarWind]

Step 1: Buy $1000 worth of chips and sit down at a poker table.

Step 2: Play poker.

Step 3: Leave table with $1500 in chips and cash out.

I don't think this could be any clearer. You have $500 in gambling winnings to declare. It doesn't matter whether there was no rake and the other players lost $500 or there was $1000000 in rake paid and the other players lost $1000500.

Step 4: The manager chases you as you walk out the door. He gives you $100 from the rake to express his appreciation for your patronage. You now have $1600 in your pocket.

It's still perfectly clear. Now you have $600 in gambling winnings to declare.

[redbeard]

somewhat along those same lines -- in stellar's example what if the manager tracks you down and give you a $50 meal comp. do you have to declare that $50 meal comp as income?

[jkpoker]

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somewhat along those same lines -- in stellar's example what if the manager tracks you down and give you a $50 meal comp. do you have to declare that $50 meal comp as income?

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Yes

[Niediam]

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somewhat along those same lines -- in stellar's example what if the manager tracks you down and give you a $50 meal comp. do you have to declare that $50 meal comp as income?

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No.

I forget what exactly the court ruling said but the gist of it was that if the casino gave the patrons consumable goods and/or servies (such a food, hotel, massages, etc) that they were not taxable. However, if the casino gave tangible good with resale value (watches, cars, etc) then those type of comps are taxable as gambling income.

[Wake up CALL]

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somewhat along those same lines -- in stellar's example what if the manager tracks you down and give you a $50 meal comp. do you have to declare that $50 meal comp as income?

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No.

I forget what exactly the court ruling said but the gist of it was that if the casino gave the patrons consumable goods and/or servies (such a food, hotel, massages, etc) that they were not taxable. However, if the casino gave tangible good with resale value (watches, cars, etc) then those type of comps are taxable as gambling income.

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You forgot because that ruling does not exist, the IRS regs are clear, it is to be declared as gambling income.

[Niediam]

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somewhat along those same lines -- in stellar's example what if the manager tracks you down and give you a $50 meal comp. do you have to declare that $50 meal comp as income?

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No.

I forget what exactly the court ruling said but the gist of it was that if the casino gave the patrons consumable goods and/or servies (such a food, hotel, massages, etc) that they were not taxable. However, if the casino gave tangible good with resale value (watches, cars, etc) then those type of comps are taxable as gambling income.

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You forgot because that ruling does not exist, the IRS regs are clear, it is to be declared as gambling income.

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I swear I read this in the Gamblers Guide To Taxes by Lewis. Does anybody own this book so they can confirm if I'm crazy or not? /images/graemlins/smile.gif

Actually found an excerpt to the book online at this web site. (http://books.google.com/books?id=p3utbO8hnGAC&pg=PA16&lpg=PA16&dq=are+casi no+comps+taxable&source=web&ots=2rQTNUPaQS&sig=54D oxpIAdmlJBeRGtt1apq5lsHM#PPA17,M1)

It appears to me that the court ruled that in order for the comps to be taxable the receiver has to have an "increase in wealth".

[Wake up CALL]

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somewhat along those same lines -- in stellar's example what if the manager tracks you down and give you a $50 meal comp. do you have to declare that $50 meal comp as income?

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No.

I forget what exactly the court ruling said but the gist of it was that if the casino gave the patrons consumable goods and/or servies (such a food, hotel, massages, etc) that they were not taxable. However, if the casino gave tangible good with resale value (watches, cars, etc) then those type of comps are taxable as gambling income.

[/ QUOTE ]

You forgot because that ruling does not exist, the IRS regs are clear, it is to be declared as gambling income.

[/ QUOTE ]

I swear I read this in the Gamblers Guide To Taxes by Lewis. Does anybody own this book so they can confirm if I'm crazy or not? /images/graemlins/smile.gif

Actually found an excerpt to the book online at this web site. (http://books.google.com/books?id=p3utbO8hnGAC&pg=PA16&lpg=PA16&dq=are+casi no+comps+taxable&source=web&ots=2rQTNUPaQS&sig=54D oxpIAdmlJBeRGtt1apq5lsHM#PPA17,M1)

It appears to me that the court ruled that in order for the comps to be taxable the receiver has to have an "increase in wealth".

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Are you accidentally editing your comments? Or intending to mislead? From your own link: It states that the comps do in fact cause an increase in wealth. Simply because Libutti used losses to offset those gains in comps does not imply nor can it be construed in any manner that the court ruled they weren't indeed gambling gains.

[Niediam]

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somewhat along those same lines -- in stellar's example what if the manager tracks you down and give you a $50 meal comp. do you have to declare that $50 meal comp as income?

[/ QUOTE ]

No.

I forget what exactly the court ruling said but the gist of it was that if the casino gave the patrons consumable goods and/or servies (such a food, hotel, massages, etc) that they were not taxable. However, if the casino gave tangible good with resale value (watches, cars, etc) then those type of comps are taxable as gambling income.

[/ QUOTE ]

You forgot because that ruling does not exist, the IRS regs are clear, it is to be declared as gambling income.

[/ QUOTE ]

I swear I read this in the Gamblers Guide To Taxes by Lewis. Does anybody own this book so they can confirm if I'm crazy or not? /images/graemlins/smile.gif

Actually found an excerpt to the book online at this web site. (http://books.google.com/books?id=p3utbO8hnGAC&pg=PA16&lpg=PA16&dq=are+casi no+comps+taxable&source=web&ots=2rQTNUPaQS&sig=54D oxpIAdmlJBeRGtt1apq5lsHM#PPA17,M1)

It appears to me that the court ruled that in order for the comps to be taxable the receiver has to have an "increase in wealth".

[/ QUOTE ]

Are you accidentally editing your comments? Or intending to mislead? From your own link: It states that the comps do in fact cause an increase in wealth. Simply because Libutti used losses to offset those gains in comps does not imply nor can it be construed in any manner that the court ruled they weren't indeed gambling gains.

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I'm not sure what you are trying to say... are you disageeing that the court said that the comps were only taxible if they increased the taxpayers wealth?

[Wake up CALL]

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I'm not sure what you are trying to say... are you disageeing that the court said that the comps were only taxible if they increased the taxpayers wealth?



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Not only am I disagreeing with that interpretaion the court did as well. Comps are all indeed taxable, period.

[Niediam]

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I'm not sure what you are trying to say... are you disageeing that the court said that the comps were only taxible if they increased the taxpayers wealth?



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Not only am I disagreeing with that interpretaion the court did as well. Comps are all indeed taxable, period.

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I seriously think you must be reading something wrong. I really don't know what else to say.

[CaptVimes]

What the article says, is that comps increase the wealth of the person who recieves them. They do allow it to be treated, however, as gambling income which can be offset by gambling loses. This is much better than treating as ordinary income with no deductions. No where in that article was there anything that said there was any difference between tangible and intangible comps. I think that is what your argument is about.

[Niediam]

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What the article says, is that comps increase the wealth of the person who recieves them. They do allow it to be treated, however, as gambling income which can be offset by gambling loses. This is much better than treating as ordinary income with no deductions. No where in that article was there anything that said there was any difference between tangible and intangible comps. I think that is what your argument is about.

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No, the case said that the comps in that specific case were taxable because they increased the wealth of the person who received them (the guy got several cars).

[CaptVimes]

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What the article says, is that comps increase the wealth of the person who recieves them. They do allow it to be treated, however, as gambling income which can be offset by gambling loses. This is much better than treating as ordinary income with no deductions. No where in that article was there anything that said there was any difference between tangible and intangible comps. I think that is what your argument is about.

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No, the case said that the comps in that specific case were taxable because they increased the wealth of the person who received them (the guy got several cars).

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Similarly, cash back and other such payments are taxable. Non-cash comps are also technically taxable, but it seems the IRS is treating them like frequent flyer miles; the government has shown little interest in forcing millions of people to declare these non-cash benefits. Thank heaven for small favors. The bottom line: If you get a Form 1099-MISC, then it goes on your tax bill, but don’t sweat the free hotel room (unless it’s your primary residence). As the IRS says in Publication 529 – Miscellaneous Deductions, “Your tax liability depends on your particular facts and circumstances.”

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From this article (http://www.casinoplayer.com/archive/0701cp/gambling_and%20_taxes.htm)

Your right but not for the reasons you think.

After dealing with the IRS as part of what I do for a living I know they would define a comp as income regardless of the form it comes to you. The problem for the IRS though is how to track this. You seem to be under the impression that an increase in wealth has to strictly be either cash or some other tangible good. Insurance agents frequently get free trips as bonuses for what they sold. Is it tangible? No. Do they get 1099'd for it? You bet and therefore have to pay taxes.

I still contend that the above case you cited is more about how to treat comps, as gambling income not ordinary income, rather than the taxability of a non-tangible comp.

One final thing, just because the IRS is not enforcing it now, doesn't mean they wont start trying to in the future. The IRS goes where the money is.

[StellarWind]

I own the book and I have read the relevant chapter.

The court found in favor of the taxpayer that comps are gambling winnings. It allowed the taxpayer to offset the value of the comps against his extensive losses. No distinction is made between different types of comps.

Quite the contrary, on P.18 the author says:

"... importance of proper documentation of losses is evident. Without it, the possibility of paying tax on what was thought to be a free room or meal becomes reality."

[dragonystic]

Ned Flanders: "Oh, golly, if that doesn't put the shaz in shazam. Oh listen, what's the cash value of those tickets so I can report it on my income taxes?"