PD: Good Morning Jim, I am extremely happy you consented to this interview so that our readers can be brought up to date as to the recent turmoil going on involving federal taxes and poker tournaments.
JP: Thank you Gene for inviting me. Yes there are some major problems unfolding that if go undressed by the gaming industry could change Poker Tournaments as we know them today or do away with them altogether.
PD: When did the tax problems involving poker tournaments begin?
JP: The tax problems involving poker tournaments began when the Las Vegas Appeals Office of the Internal Revenue Service issued a letter during the middle of October 1992. The letter was a determination made by Appeals informing Jack Binion (Than owner of Binion’s Horseshoe) and Jim Albrecht (Former Binion’s Poker Room Manager & Tournament Director) of their following determination. AFTER the Hall Of Fame tournament that was to begin October 20, 1992, Binion’s would be required to withhold federal income tax from all tournament payments to players of $1,000 or more. The law has now changed and raised the dollar amount to $5,000. There were other considerations involving excise tax and back-up withholding but the key point of the letter was tax withholding involving poker tournaments. Rather than comply with the terms of the letter Jack Binion closed the Hall Of Fame tournament. It hit the newspapers and created a real public relations problem for the IRS
PD: Who else got involved?
JP: Maybe you should have asked who didn’t get involved. Everyone got involved from Senator Bryan to the than Commissioner of IRS, Margaret Richardson. The Nevada Resort Association and many other individuals and organizations. I remember Representative Bilbray calling the appeals letter “stupid” and guess what? He was right. The letter created some of the worst public relations for the IRS I have seen in the 25 sum years I have been here in Nevada. It got so bad that my boss told me that my number one priority was to “fix” this poker problem.
PD: With the bad press and our local politicians calling for a solution you knew you could work something out, right?
JP: No Gene, I honestly didn’t know if I could or not. With all the positive publicity on the side of the industry and the negative publicity pounding against the IRS I felt like no matter what I did wasn’t going to be good enough. The IRS is VERY receptive to changing negative publicity – but only to a point. I felt maybe the IRS was reaching that point where it would wash its hands and say “let them rant, we don’t make the law we just enforce it”. Thank goodness we never got to that point otherwise an agreement may not have been worked out.
PD: How did you go about obtaining the agreement.
JP: I spent many hours working out the “Binion’s Closing Agreement” with Jim Albrecht. Jim knew the position I was in but he also was aware that if no agreement was reached it would have an adverse affect upon poker in general and poker tournaments in particular. After many meetings, with give and take on both our parts, an agreement was reached. The agreement in my opinion as well as Albrecht’s would preserve poker tournaments, as we know them today for future generations.
PD: What were the main points of the agreement?
JP: The two main points were that first, there would be no tax withholding on any U.S. citizen who received a pay out from a poker tournament win. Secondly, a W-2G would be issued involving any pay out of $600.00 or more. There were other aspects of the agreement but they are not as important as the two I just stated.
PD: What are the benefits for card rooms in following this agreement?
JP: Gene there is many benefits. First of all let me make it clear that the Binion’s Closing Agreement IS NOT binding for any other establishment but Binion’s Horseshoe. However, if other gaming establishments were not allowed to follow it too these establishments would be put at a “competitive disadvantage” within the poker industry. Therefore in my opinion, the Government would be hard pressed not allowing the other establishments the benefits of the closing agreement if they wished to follow it. Now, issuing a W-2G for any pay out of $600.00 WITHOUT ANY WITHHOLDING is a benefit to the casino. The money is not taken out of the tournament and can be put back into action. It is a benefit to the player for the same reason. It is a benefit to the Government because the Government is made aware of who received the money. I cannot state it any clearer.
PD: The agreement seems simple enough. Why is it currently causing so much discussion? Why are some houses following it while others are not?
JP: In my opinion, NOT following the Binion’s Closing agreement if given the opportunity is not a wise business decision for a poker entity or establishment to make. Let me explain Gene as simply as I can. A gaming establishment that conducts poker tournaments is faced with three choices:
1) It can follow the Binion’s closing agreement. Issue closed!
2) It can follow the provisions of IRS Code Section 6041 that requires the establishment to issue a form 1099 to every player receiving cumulative payouts of $600.00 or more. What this does is shifts the “burden of proof” in an audit situation from the house to the player to show he/she received amount a gaming transaction. It also places a horrendous record-keeping requirement upon the gaming entity to keep track of each player so as to determine when the $600.00 requirement is met.
3) It can follow the provisions of IRS Code Section 3402(q) and withhold 28% of each poker tournament pay out of $5,000 or more. No W-2G would have to be issued under a $5,000 pay out. A concept that Jim Albrecht and I both found unacceptable for poker tournaments. Since any form of withholding would destroy tournaments as we know them today with players refusing to play under those conditions.
PD: Well what about the 300 to 1 requirement? Doesn’t that exempt poker tournaments from the withholding provisions you just stated?
JP: No Gene, I’m sorry it doesn’t. The 300 to 1 provision applies to pari-mutuel pools, and general gaming transactions NOT PREVIOUSLY covered within the law and regulations. Wagering pools are specifically covered and do not require any 300 to 1 odds to apply.
PD: Well what if a poker tournament is not a wagering pool?
JP: My response to that question would be partially in the form of another question. Does the poker industry really want to go to court with the IRS for a determination on that issue? Let’s say the industry wins it isn’t a wagering pool. The poker tournament would still be covered under the 1099 provisions since poker tournaments do not come under the W-2G provisions. You see Gene, it is a no win situation for the poker industry. Either way the end result is not good. Why not just follow the Binion’s Closing Agreement? To me it seems much easier.
PD: How familiar are you with what is happening involving poker tournaments right now?
JP: Very familiar. I understand an individual poker tournament player is trying to convince various poker establishments and entities not to follow the Binion’s closing agreement. He has received a letter from some individual within the IRS that states something to the effect no W-2G needs to be issued. By the way the IRS has with drawn that letter. He points to the directions written for issuing W-2Gs and claims the 300 to 1 odds requirement has not been met. I believe this individual is sincere in his efforts but is uninformed and misguided. He doesn’t understand the law in this area and if he continues with his efforts may do serious damage to poker tournaments. I believe the IRS will react to this individual’s complaints and may issue an official opinion the poker community will not like. Similar to that infamous letter from middle October 1992. Only this time there will be no agreement – court case, yes; agreement, no. You know Gene; often it is better to leave things alone.
PD: Well Jim on behalf of Poker Digest and myself I want to thank you for sharing your knowledge and opinions involving poker tournaments. I hope everyone who reads this interview will have an appreciation of what happened in the past and what is taking place now. Thanks again
