Poker and The Taxman

"In this world nothing can be said to be certain except death and taxes."

You’ve probably heard this quotation before. It was written in a letter from Benjamin Franklin to Jean Baptiste le Roy on 13/11/1789, but is he right?

There has been much discussion recently about whether poker players should pay tax on their winnings, whether professional players or just recreational ones. Tax laws vary from country to country and you will see that we in the United Kingdom have it better than some of our friends from overseas. For starters how many lottery winners has the Inland Revenue gone after for a share of their jackpots? None here, but if somebody wins the lottery in America the taxman hits them very hard. In fact did you know that wins over a certain amount on fruit machines are also taxable in the States and jackpots are often paid in instalments? All of a sudden that $1,000,000 jackpot isn’t as good as it first seemed.

Shouldn’t someone who earns an income as a professional poker player pay tax though? The Inland Revenue are in a difficult situation and are usually more concerned about money laundering. The most difficult part for a poker player is to prove where the money came from.

There is also the point that if playing poker is taxable then it should also be tax deductible. Can you imagine the headaches that would cause the revenue? They would probably also get people trying to offset against roulette losses or money lost at the craps table !

There are several cases in law that would suggest that betting and gaming (and poker, as a game of skill) are tax free occupations. In the Inland Revenues Inspectors Manual (only publicly available in recent years) it states;

IM132 Sch.D C1/C11

Case I

"Betting and gambling, as such, do not constitute trading but an organised activity to make profits out of the gambling public will normally amount to trading."

In Partridge v Mallandaine 2TC179 a professional bookmaker systematically attended race courses for the purpose of carrying on that activity; he could not legally recover amounts due to him. He was held to be carrying on a vocation and hence assessable.

Case II

In Graham v Green 9TC, a case which concerned a man whose sole means of livelihood came from betting on horses at starting prices, Rowlatt J says at page 313

"Now we come to betting, pure and simple…It has been settled that a bookmaker carries on a taxable vocation. What is the bookmaker’s system? He known that there are a great many people who are willing to back horses and that they will back horses with anybody who holds himself out to give reasonable odds as a bookmaker. By calculating the odds in the case of various horses over a long period of time and quoting them so that on the whole the aggregate odds are in his favour, he makes a profit. That seems to me to be organising an effort in the same way that a person organises an effort if he sets out to buy himself things with a view to securing a profit by the difference in what I may call their capital value in individual cases.

Now we come to the other side, the man who bets with the bookmaker, and that is this case. These are mere bets. Each time he puts on his money, at whatever may be the starting price. I do not think he could be said to organise his effort in the same way as a bookmaker organises his. I do not think the subject matter from his point of view is susceptible of it. In effect all he is doing is just what a man does who is a skilful player at cards, who plays every day. He plays to-day and he plays tomorrow and he plays the next day and he is skilful on each of the three days, more skilful on the whole than the people with whom he plays, and he wins. But I do not think that you can find, in his case, any conception arising in which his individual operations can be said to be merged in the way that particular operations are merged in the conception of a trade. I think all you can say of that man … is that he is addicted to betting. …There is no tax on a habit. I do not think “habitual” or even “systematic” fully describes what is essential in the phrase “trade, adventure, profession or vocation.”."

The principle in this case was followed in Down v Compston 21TC60 where a professional golfer attached to a golf club habitually engaged in private games of golf for bets of varying amounts and won substantial amounts. He was found not to be liable under Case II on the basis that the bets did not arise from the playing services and that there was no organisation to support the view that he was carrying on the business of betting on the games of golf.

Now the interesting part here is that the judge, Rowlatt J, recognises poker as a game of skill. He talks about ‘organising an effort’. Walking into the Victoria Casino and playing in the £500 pot limit Omaha or stumping up the £7,000 to play in the Poker Million are not ‘ organising an effort’ .You are not trading in these instances. The VC and the Poker Million organisers are doing that for you. It has been asked whether ‘private’ poker games change this situation in any way as the Ladbrokes Million has been classed as a ‘private game’ to get around the gaming regulations. The I R Inspector’s Manual continues;

Sch.D CI/CII: Betting and gambling – when gambling winnings assessable

It does not follow from the cases in IM132 that surpluses made from betting opportunities provided by a trade are always severable from that trade and not assessable. In Burdge v Pyne 45TC320 the proprietor of a registered club, which provided facilities including a card room for gambling, won considerable sums of money from three-card brag which he played regularly with members in the card room. Pennycuick J stated

`… the Appellant was carrying on the business of a club: upon the club’s premises he habitually played the game of three card brag with other members of the club: and at that game he was invariably successful. … Given those facts, it seems to me that the Commissioners came to the right conclusion in finding that the winnings of the Appellant from three-card brag did represent a receipt by him in carrying on the business of the club. He owned the club; he carried on this game upon the club premises as such; and, moreover, it was members of the club in whose company he played the game and from whom, it appears, he invariably won money. I see no reason to think that that particular activity on the part of a club proprietor is not an activity in the course of carrying on the business of the club, and consequently winnings from that activity fall into the receipts of the club for the purpose of ascertaining the profits of its business.

[The Appellant] … contended that these winnings should be treated as the fruit of a private activity … outside the business of the club, and accordingly should not be taken into account in computing the profits of the club.’

He went on to distinguish Graham v Green (see IM132) because

`… here there is a trade whereas there the person charged was not carrying on any trade at all.’

Of Down v Compston (see IM132) he said

`in that case the vocation afforded in some sense the opportunity for making the bets, in that Mr. Compston would not have had companions on his rounds against whom to bet if he had not been a professional golfer, but the bets did not arise out of his vocation. Again it seems to me that that case is wholly distinguishable [because] in the present case the club was not merely the occasion which enabled the Appellant to play private games of cards. The playing of cards was part of the activities of the club, and his winnings from those cards, it seems to me, arose in the full sense out of the carrying on of the club.’

A little confusing I know, but basically what it means is that if you run a card club (private poker game) from which you profit and you win money by playing in those games the money that you win is deemed to be part of the business and taxable. Does this mean that Barry Hearn will be hit with a big tax bill if he happened to fluke winning The Poker Million? That’s a very difficult question to answer but he would probably have less of a defence than Mr Poker Player who had nothing to do with the organising of the event.

Fran Lebowitz once said;

"…a dog who thinks he’s man’s best friend is a dog who’s never met a tax lawyer…"

It’s a different state of affairs for those poor Americans. If one of them should win The Poker Million, even though it’s being played in London in 2002, they will be liable for tax. We are even luckier because should we win The World Series of Poker in Las Vegas we have a tax treaty with the states and all we have to do is sign a form in order to collect our prize money in full. Certain other countries are not so lucky. Players resident in Australia or even Eire do not enjoy such treaties. This is why certain poker players ‘claim’ to be English when they play in Vegas. I guess dual nationality is worth a few quid ! The other countries to enjoy a similar treaty as us are, Czech Republic, Finland, France, Germany, Hungary, Italy, Malta, Netherlands, Russia, Spain and Tunisia. (Taken from the WSOP brochure 1997)

This, however, doesn’t get around the fact that the IR might be interested in anyone who has large amounts of unrecorded cash or cash balances in bank accounts. If you are a winning poker player it is suggested that you keep records and details of any wins that you have in tournaments.

Precedents in English law go a long way and for the time being it would appear that all professional poker players out there are pretty safe but you never know how things could change in the future.

George Bush once said, when he was going to power;

"Read my lips, No new taxes…"

Let’s hope the powers that be over here think the same way!

All the opinions expressed here are those of the author and are not considered to be tax advice. Should you require tax advice it is suggested that you contact a specialist and take appropriate legal advice.