The latest gambling saga to come our way involves mostly NHL athletes, including former Philadelphia Flyers Rick Tocchet and Jeremy Roenick, as well as former great Wayne Gretsky’s wife, Janet Jones. While Tocchet has been fingered as being a ringleader in the multimillion-dollar racket, Roenick and Jones have been identified as merely being “involved.”

But wait, isn’t this a tax blog?  What do the NHL and gambling have to do with taxes anyhow? Tocchet, Roenick, and Jones may well be asking themselves that same question very soon.

The answer is simple:  gambling, even illegal gambling is still subject to tax.
Yes, you don’t have to read that twice. Gambling winnings, no matter whether the source of your winnings is legal, are fully taxable and must be reported on your tax return. Winnings include proceeds from lotteries, raffles, horse races, casinos, cash winnings (just ask Richard Hatch) and the fair market value of prizes such as trips and cars (remember Oprah’s infamous Pontiac giveaway tax flap?).

And if you lose? Hopefully, you won something along the way.  You can only deduct gambling losses if you itemize deductions on your tax return and the amount of losses cannot be more than the amount of gambling income that you reported on your return. To prove this, it’s important to keep accurate records of your gambling winnings and losses, which makes sense – unless you later become the target of a criminal investigation. Then, you’re in a tricky spot because you have provided the investigative authorities with a “road map” of sorts to your illegal activities.

The IRS actually has a program, the Illegal Source Financial Crimes Program, that attempts to enforce taxation rules on income obtained through illegal operations, including gambling, which would otherwise be part of the “untaxed underground economy.”  As a result, money laundering and currency violations are often intertwined with tax violations.
How often does it happen?  More than you think.  Check out these examples from the IRS web site:

On July 25, 2005, in Cleveland, OH, David L. Hammon, Sr. was sentenced to 87 months in prison, followed by three years supervised release and was ordered to pay restitution to the IRS in the amount of $2.39 million. Hammon pleaded guilty to possessing approximately 443 grams of cocaine with intent to distribute, operating an illegal gambling business, evasion of payment of taxes, and money laundering. From November 1988 through September 26, 2004, Hammon attempted to evade and defeat the payment of a large part of the excise tax due and owing by him by transferring title of real estate he owned into the name of a nominee, by purchasing a condominium in the name of a nominee, by cashing checks at a bar rather than at a bank, and by transacting business in cash rather than by using bank accounts. With respect to money laundering, Hammon admitted that in 2002 and 2003, he cashed four checks totaling $29,000 that were proceeds of his gambling business with the intent to promote the carrying on of the business. Last week, Hammon’s son, David Hammon, Jr., and Hammon’s nephew, Howard Hammon, III, both pleaded guilty to related charges.

On July 14, 2005, in Fargo, ND, Susan Bala, former CEO, president, and sole shareholder of Racing Services Inc. (RSI), was sentenced to 27 months in prison and 2 years probation for her conviction on charges relating to a conspiracy to conduct an illegal gambling business and money laundering. A $19.7 million forfeiture judgment was also entered against Bala and RSI was ordered to forfeit $99 million. Between approximately October 2002 and April 2003, the illegal gambling business unlawfully took in nearly $100 million in wagers and paid out over $12 million in “rebates” to high-volume gamblers.

On June 13, 2005, in Houston, TX, Robert Angleton was sentenced to 87 months in prison and ordered to pay a $125,000 fine for evading more than $1 million in federal excise taxes on gambling wagers of over $64 million related to his bookmaking business. Angleton admitted he prepared, signed and filed false monthly wagering excise tax returns with the IRS from January 1995 through April 1997. The gross wagers reported on the original false returns totaled only $2.64 million on which Angleton paid a total of $52,010 in wagering excise tax. In July 1998, Angleton filed false amended excise tax returns covering the same periods of time. The gross wagers reported on the three false amended returns totaled $22.4 million on which he paid a total of $448,571 in wagering excise tax. All of the original monthly returns and the three amended returns were false in that Angleton owed substantially more excise tax than he reported for those time periods because he intentionally failed to report the total amount of wagers — $64 million – accepted by his bookmaking business.

On February 7, 2005, in Fargo, ND, Susan Bala was ordered to pay $19 million and Racing Services, Inc. (RSI) was ordered to pay $99 million in the wake of their convictions on all 12 counts relating to a conspiracy to conduct an illegal gambling business in North Dakota and money laundering. Bala is the former CEO, president, and sole shareholder of RSI.  Co-conspirator Raymundo Diaz, Jr., the former vice president of RSI and former president and sole shareholder of Global Contact, Inc., pleaded guilty on January 18, 2005, to charges of conspiracy to conduct an illegal gambling business, conducting an illegal gambling business, and transmission of wagering information.  According to court documents, between approximately October 2002 and April 2003, the illegal gambling business unlawfully took in nearly $100 million in wagers and paid out over $12 million to high-volume gamblers. The business was run so as to avoid tax liabilities and payments to a charity, as required by North Dakota law.

On October 18, 2004, in Ft. Myers, FL, John J. Rodney, Jr. was sentenced to 15 months in prison, two years probation and a $5,000 fine. Rodney pled guilty in June to conspiracy, operating an illegal gambling business and money laundering. Rodney was the owner of Players Edge, Inc. aka National Sports Consultants operating in Ft. Myers, FL.  Rodney offered his expertise in sports betting via internet websites, a syndicated radio talk show broadcast nationwide and through the telephone. Rodney, known as “Dan ‘the Man’ Wilson” on radio broadcasts in major markets throughout the United States, claimed extensive experience in sports betting to attract willing betters and to buy information from Players Edge. Fourteen other members of this gambling ring have also pled guilty in related investigations. This case was worked by a multi-agency task force which has seized more than $8 million in illegal profits including bank accounts, property, luxury automobiles, and sports memorabilia.

On October 7, 2004, in Chicago, IL, Joseph “Pooch” Pascucci was sentenced to 33 months in prison and 3 years supervised release. In June 2004, Pascucci pleaded guilty and admitted running an illegal bookmaking operation, and also admitted to hiding more than $1.2 million in earnings from bookmaking on his 1999 through 2001 tax returns.  Also as part of his plea agreement, Pascucci had to forfeit $935,000, the illegal proceeds from bookmaking.

So, if Tocchet and the others are sweating it out now, they might consider a review of their respective tax returns, as well.  I’m sure that the IRS most certainly is…

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Kelly Erb is a tax attorney, tax writer and podcaster.

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