[Poker CPA]

PokerReader and ChipLeeder

"Neteller and Constructive Receipt
As the saga of Neteller, the Isle of Man based financial intermediary, drags on, I've gotten many questions regarding the money that's tied up. For those who are unaware, some of the Neteller money was seized by the US government as it was moving over the wires between Neteller's banks and customers' banks, and some is sitting in customer accounts at Neteller. All of it, though, remains out-of-reach of American customers of Neteller. So the question is, do customers of Neteller have to pay tax on gambling proceeds won in 2006 that are stuck at Neteller?

Yes."

You are correct, but very misinformed as to the’ impact on the professional gamblers "tax liability". For a properly prepared pro's return, the issue of "constructive receipt" does not apply because he has not elected the "cash basis" of accounting. He has elected the "Accrual Basis" of accounting for his business. There is no reason for a pro to have the cash basis of accounting, NONE. For income recognition purposes both methods produce the same income amount. For example, if he wins $100 on Dec 31st, he has $100 in gross income on his tax return (Sch C) under BOTH methods. But under the accrual method, if he does not receive the $100, in this case, an "Accounts Receivable from Neteller" then it’s a bad debt as of Dec 31st and his taxable income nets to $0. The cash basis write-off occurs when he tries to get the cash, but can't. And in this Neteller situation that occurred after January 14, 2007, thus a 2007 write-off. Thus the "cash basis" method produces a mismatch of income and the related bad debt. The "accrual basis" does not. The election of the "accrual basis" is done on the first return filed by a pro and is a “no-brainer” for a competent tax accountant. Let me give you an example of an advantage of the “accrual basis”, outside the Neteller situation, for a professional poker player. Let’s say he has his returned prepared at a cost of $1,000 and pays his accountant on March 15th, 2007. Under the accrual basis he can take the tax deduction in 2006, while the cash basis allows only a deduction in 2007. I’m sure you can see the advantages of paying for expenses in 2007, yet getting the deduction in 2006. Again a “No-brainer”. On the income side on both methods produce the same income so no advantage either way. BUT the “cash basis” is governed by the doctrine of “construction receipt”, while the accrual basis is not. In other words the cash basis produces, in the IRS’s eyes, cash in your pocket while the accrual basis produces an “Account Receivable”. This receivable now has to collected and its write-off is based on “facts and circumstances” that occur subsequent to year end. Based on the “song and dance” professional players are getting from Neteller, a write-off is possible.

In my opinion the 2006 “bad debt” deduction can be taken with very little problem. Now if any recovery, from Neteller, is made after we file the 2006 return then the “recovery provisions” of the IRS code take over. We can now file an amended return for 2006 OR show the income in 2007. You obviously go with the year that produces the lowest liability. I have a feeling this could finally be resolved in 2008.
But you need the “Accrual Basis” of accounting. If your accountant elected “cash basis” then a great big “WHY” should be asked. This will be your accountant’s version of a “song and a dance”.

I hope you understand my comment of “misleading”.