Originally published on Forbes.com Aug 28th, 2014
The IRS Chief Counsel has ruled on a tax aspect of a program to help compulsive gamblers. CCA 201433015 discusses the “Voluntary Exclusion Program” (VEP) of an unnamed state.
The precise details of VEPs vary from state to state, but the essence goes something like this. A person, let’s call him Scranton Slim, wants help with his compulsive gambling problem. Slim registers with a state gambling regulatory agency, which makes his identity known to the casinos in that state. The casinos will not issue him a player card or send him promotional material. If he is caught in the casino, he can be arrested for trespassing. Slim can make his entry into the program irrevocable for a year, five years or life (Missouri changed the rules so that someone who signed up for life can get out after five years).
Also, and here is where the tax problem comes in, any jackpots won by Slim are confiscated and turned over to agencies that work on the problem of compulsive gambling. The confiscations are really happening. According to this story, Illinois groups, including the Illinois Council on Problem Gambling, have received over $1.5 million in forfeited jackpots.
The ruling does not indicate which state program is being discussed, so we’ll just call it the State of Sin, the capital of which is No Name City (NNC).
How VEP Works In The State Of Sin
Specifically, if an individual wins a slot machine jackpot of $1,200 or more, the machine stops and a slot technician comes to the machine to verify the prize. After verification, the slot technician obtains the individual’s personal information to complete a Form W-2G. If the individual is a VEP participant, the individual is informed that under the terms of the VEP agreement the individual will not be paid and he or she is escorted from the casino. If the individual is not a VEP participant, a Form W-2G is completed and the individual is paid.
In addition, if an individual wins reportable gambling winnings at a table game and seeks to cash in chips at a cashier, the cashier asks the individual for identification to compete a Form W-2G and consults the VEP participant list before making payment. If the individual’s name is on the VEP participant list, the individual is informed that under the terms of the VEP agreement the individual will not be paid and he or she is escorted from the casino. If the individual is not a VEP participant, a Form W-2G is completed and the individual is paid.
Does Scranton Slim Still Owe Taxes?
The Chief Counsel addressed two issues. One was whether it was OK for the NNC casino to pass on issuing the W-2G. The other question was whether Slim had taxable income from the jackpot. Although it might seem that it just would not make sense to tax Slim on the jackpot, well, as I always tell rookie tax staff, making sense is not a requirement.
The Chief Counsel concluded that at least in the State of Sin, Scranton Slim would not be taxed on his forfeited jackpot. The analysis is rather interesting if you are a tax geek. The rest of you can skip to my summary.
The assignment of income doctrine announced in Lucas v. Earl and applied in subsequent cases effectively prohibits attempts by taxpayers to shift the tax liability for income earned by the taxpayer’s own efforts. However, in certain circumstances, the assignment of income doctrine does not apply where the taxpayer disclaims, waives, renounces or otherwise abandons any and all interests in the right to receive the income before it is earned and the taxpayer does not direct, or retain the ability to direct, the disposition of the income after it is earned and payable.
For example, in Commissioner v. Giannini, 129 F.2d 638 (9 th Cir. 1942), the taxpayer was a corporate officer who did not receive compensation income for several years. In early 1927, the corporation’s Board of Directors resolved that they would pay the taxpayer a percentage of the corporation’s profits each year. After paying a percentage to the taxpayer in the first half of 1927, the taxpayer informed the Board that he did not wish to receive any future payments. Instead, he asked that the corporation use the money for a worthwhile purpose. In response to this request, the Board adopted a resolution under which they established a Foundation of Agricultural Economics at the University of California in the name of the taxpayer. The Service argued that, under the assignment of income doctrine, any amounts paid to the Foundation were taxable income of the taxpayer. The court, however, held that because the taxpayer never received payment, nor did the taxpayer direct the use of the money, the taxpayer was not required to include amounts paid to the Foundation in income. The court noted that there was substantial evidence to support the finding of the Board of Tax Appeals “that the taxpayer did not receive the money, and that he did not direct its disposition. All that he did was to unqualifiedly refuse to accept any further compensation for his services with the suggestion that the money be used for some worthwhile purpose. So far as the taxpayer was concerned, the corporation could have kept the money.”
We conclude that a State VEP participant resembles the taxpayer described in Giannini. By participating in the State VEP the gambler is repudiating his or her right to any of the winnings before any of the winnings are earned or paid. The fact that the winnings are surrendered to the State Commission is of no consequence because the participant is not directing the payment of the winnings to another person. Rather, pursuant to state law and as reflected in the terms of the State VEP agreement entered into before the winnings are realized, the renounced winnings must be paid to the State Commission.
Basically, you can’t get out of having income by telling the person who owes you to pay somebody else. You can, however, give up the right to the income before it ever accrues to you, which is what the Chief Counsel sees Scranton Slim as doing.
Is This The Best And Only Answer?
VEP programs have been around for nearly twenty years. They are not without controversy. In Canada a woman blamed the program for losing her life savings since she thought it meant that it would somehow make it safe to venture into the casino since they would be obligated to kick her out before she lost too much. I’m wondering it the Chief Counsel had answered the question differently if that would put even more resolve in the Scranton Slims of the world. Hey, if you win a jackpot, not only do you forfeit the jackpot, you still owe the taxes on it.
Well, in the interest of fighting gambling addiction, I offer this. The ruling was only on the program in one state and I don’t know which one. The program seems to be similar from state to state, but it is not identical. Subtle differences might make for different income tax answers. For example, the Indiana program indicates the forfeiture is in the “form of a fine”. In the Illinois program, the participant gets to decide which of the addiction services organizations the money goes to. So it might still be possible that in your state there would be a difference that would make you taxable on the forfeited jackpot. So stay out of those casinos.
Literary Reference
When somebody at the New York Times wrote about the VEP programs, they went classical and compared the programs to Odysseus having his men lash him to the mast so he could listen to the sirens without cracking up his ship.
Despite my two years of Greek, at Xavier High School, that’s not how my mind works. Now why is it when I think of a compulsive gambler I want to call him – Scranton Slim? Here’s why:
Tax bloggers and show tunes. It must be all because of the Cohan rule.