View Full Version : Foreign Earned Income Credit
KaneKungFu123
09-03-2005, 07:13 PM
For those speculating:
Earned income. This is pay for personal services performed, such as wages, salaries, or professional fees. The list that follows classifies many types of income into three categories. The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. For more information on earned and unearned income, see Earned and Unearned Income, later.
Unearned Income
Dividends
Interest
Capital gains
Gambling
winnings
Alimony
Social security
Benefits
Pensions
Annuities
KaneKungFu123
09-09-2005, 12:53 PM
BUMP for MrMon...
that credit is only for money you earn providing "services" in another country.
If you file as a profesional, you can treat gambling winnings as earned income. Look at the list you wrote out and compare it to the earned income list. If you are a professional gambler, do you see why gambling winnings moves from one list to the other?
KaneKungFu123
09-09-2005, 03:23 PM
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If you file as a profesional, you can treat gambling winnings as earned income. Look at the list you wrote out and compare it to the earned income list. If you are a professional gambler, do you see why gambling winnings moves from one list to the other?
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you are missing the point. this thread is about the foreign earned income credit, which is allows the first 80K of your income to go untaxed... some people have speculated that you can live abroad, file as a pro and recieve this benefit.... you cannot do this... the credit is only for services you provide in another land... the list i show clearly excludes gambling.
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If you file as a profesional, you can treat gambling winnings as earned income. Look at the list you wrote out and compare it to the earned income list. If you are a professional gambler, do you see why gambling winnings moves from one list to the other?
[/ QUOTE ]
you are missing the point. this thread is about the foreign earned income credit, which is allows the first 80K of your income to go untaxed... some people have speculated that you can live abroad, file as a pro and recieve this benefit.... you cannot do this... the credit is only for services you provide in another land... the list i show clearly excludes gambling.
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You are wrong. I'm not going to bother looking for the authority for this, but you really should before you file. The IRC and tax law more generally isn't all just pigeon-hole type statutes. For the purpose of the Foreign Earned Income tax credit, "earned income" is differentiated from "non-earned income" based on whether it was "passively" earned income such as interest, dividends, capital gains etc. or "actively" earned income such as wages, salary etc. The "services performed" language in the statute is basically asking whether you worked for the money. The gambling winnings of a professional gambler are quite different than the gambling winnings of some guy who won the lottery.
Read 26 U.S.C. § 911 carefully.
KaneKungFu123
09-09-2005, 06:30 PM
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If you file as a profesional, you can treat gambling winnings as earned income. Look at the list you wrote out and compare it to the earned income list. If you are a professional gambler, do you see why gambling winnings moves from one list to the other?
[/ QUOTE ]
you are missing the point. this thread is about the foreign earned income credit, which is allows the first 80K of your income to go untaxed... some people have speculated that you can live abroad, file as a pro and recieve this benefit.... you cannot do this... the credit is only for services you provide in another land... the list i show clearly excludes gambling.
[/ QUOTE ]
You are wrong. I'm not going to bother looking for the authority for this, but you really should before you file. The IRC and tax law more generally isn't all just pigeon-hole type statutes. For the purpose of the Foreign Earned Income tax credit, "earned income" is differentiated from "non-earned income" based on whether it was "passively" earned income such as interest, dividends, capital gains etc. or "actively" earned income such as wages, salary etc. The "services performed" language in the statute is basically asking whether you worked for the money. The gambling winnings of a professional gambler are quite different than the gambling winnings of some guy who won the lottery.
Read 26 U.S.C. § 911 carefully.
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has there been a thread about this previously?
have you checked this with a CPA???
im really excited if this is true!!!
Holy [censored], Am I excited!!
Need to look into it!!
Here's some authority in addition to the statute:
26 CFR § 1.911-3
The treasury reg doesn't conatain any language that would exclude a professional gambler's winnings from foreign earned income. The only portion of the reg that might place a limit on you states that for businesses where income is attributable to both personal services and capital, no more than 30% of the gross income may be treated as earned income. You probably made enough where you'd hit the 80k cap before the 30% even if the limit is applicable which is questionable.
U.S. v. Van Dyke 696 F.2d 957 (1982)
Van Dyke states that it was the intent of Congress that all income not attributable to capital be considered earned income.
KaneKungFu123
09-09-2005, 07:24 PM
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Read 26 U.S.C. § 911 carefully.
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i am having a tough time finding this...reading publication 54 right now.
what do those numers stand for? did a yahoo search and came up blanks.
KaneKungFu123
09-09-2005, 08:16 PM
mmcd,
have you done this personally?
are you required to report your SE earnings (poker) to the authorities of the foriegn country inwhich you reside?
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Read 26 U.S.C. § 911 carefully.
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i am having a tough time finding this...reading publication 54 right now.
what do those numers stand for? did a yahoo search and came up blanks.
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It's Title 26 of the United States Code (The Internal Revenue Code) section 911.
The teasury regulations in my other post are in Part 26 of the Code of Federal Regulations, (The CFR numbering corresponds to the stautory numbering) section 1.911-3
KaneKungFu123
09-09-2005, 08:38 PM
http://straylight.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000911----000-.html
From my searches on the web it seems agreed upon that you are corect, but i still do not see where it is talks about "passive" vs "active" income.
thx for your help.
That passive/active was just me putting in my own words.
Passive= income attributable to capital
Active= income attributable to labor
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have you done this personally?
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No, never lived outside the U.S.
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are you required to report your SE earnings (poker) to the authorities of the foriegn country inwhich you reside?
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Depends on that country's tax law. I know absolutely nothing about Thai tax laws.
KaneKungFu123
09-09-2005, 08:50 PM
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have you done this personally?
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No, never lived outside the U.S.
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are you required to report your SE earnings (poker) to the authorities of the foriegn country inwhich you reside?
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Depends on that country's tax law. I know absolutely nothing about Thai tax laws.
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I was just curious if the US gov requires that you are paying taxes to another government in order to recieve the credit, ie. no double taxation.
KaneKungFu123
09-09-2005, 08:52 PM
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That passive/active was just me putting in my own words.
Passive= income attributable to capital
Active= income attributable to labor
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"(B) Taxpayer engaged in trade or business
In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income."
Hmmm... Does that mean only 30% of your income can be used?
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have you done this personally?
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No, never lived outside the U.S.
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are you required to report your SE earnings (poker) to the authorities of the foriegn country inwhich you reside?
[/ QUOTE ]
Depends on that country's tax law. I know absolutely nothing about Thai tax laws.
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I was just curious if the US gov requires that you are paying taxes to another government in order to recieve the credit, ie. no double taxation.
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No.
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That passive/active was just me putting in my own words.
Passive= income attributable to capital
Active= income attributable to labor
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"(B) Taxpayer engaged in trade or business
In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income."
Hmmm... Does that mean only 30% of your income can be used?
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If this part of the reg applies to professional gamblers, then yes, but as long as you made more than ~265k it's moot because you'll hit the 80k cap before you hit the 30%
MrMon
09-09-2005, 10:14 PM
mmcd has this well under control, but I'll just chime in this. PLEASE hire a tax professional for this. DO NOT attempt this on your own. At your income level, tax professionals will often save you more than they cost. They can also suggest ways to shelter even more income. They're +EV!
KaneKungFu123
09-09-2005, 10:25 PM
[ QUOTE ]
mmcd has this well under control, but I'll just chime in this. PLEASE hire a tax professional for this. DO NOT attempt this on your own. At your income level, tax professionals will often save you more than they cost. They can also suggest ways to shelter even more income. They're +EV!
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Thx for your help MrMon
KaneKungFu123
09-10-2005, 04:05 PM
link (http://archiveserver.twoplustwo.com/showthreaded.php?Cat=&Number=1572721&page=&view=&s b=5&o=&vc=1)
any merrit to this guys point?
KaneKungFu123
09-10-2005, 04:16 PM
mmcd,
btw, are you a CPA/tax attorny? if so, can i hire you?
KaneKungFu123
09-10-2005, 04:22 PM
[ QUOTE ]
Here's some authority in addition to the statute:
26 CFR § 1.911-3
The treasury reg doesn't conatain any language that would exclude a professional gambler's winnings from foreign earned income. The only portion of the reg that might place a limit on you states that for businesses where income is attributable to both personal services and capital, no more than 30% of the gross income may be treated as earned income. You probably made enough where you'd hit the 80k cap before the 30% even if the limit is applicable which is questionable.
U.S. v. Van Dyke 696 F.2d 957 (1982)
Van Dyke states that it was the intent of Congress that all income not attributable to capital be considered earned income.
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Are these a Judge's words or your words?
I am reading Title 26, CFR 1.911-3 (http://a257.g.akamaitech.net/7/257/2422/01apr20051500/edocket.access.gpo.gov/cfr_2005/aprqtr/pdf/26cfr1.911-3.pdf) but i cant seem to find any specific rulings.
Have filed taxes for pro gamblers before? what made you research this before?
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mmcd,
btw, are you a CPA/tax attorny? if so, can i hire you?
[/ QUOTE ]
Not yet. I'm in my 3rd year of law school.
TStoneMBD
09-10-2005, 04:28 PM
i wouldnt trust a tax consultant on this issue (although i would of course do so if i chose to follow through with this) and i believe that issues like this require one to research the information for himself.
TStoneMBD
09-10-2005, 04:33 PM
you may find this article extremely interesting:
http://cardplayer.com/poker_magazine/archives/?a_id=14882&m_id=65568
i wish that someone knew the definitive answer for whether one can avoid paying taxes on the first 80k. the irs does say on its website that gambling income is strictly considered to be unearned income, but it does not talk about people who gamble for a living. billy baxter took the irs to court and proved that his gambling income was earned.
KaneKungFu123
09-10-2005, 05:05 PM
web page (http://www.internettexasholdem.com/phpbb2/viewtopic.php?p=191578#191578)
TStoneMBD
09-10-2005, 05:58 PM
i just had a very interesting idea. since gambling winnings is not considered earned income, how about making it a service instead?
we could create an overseas foreign network. someone like natethegreat could hire poker players to play under his accounts and pay them an hourly rate. we would be providing him a service as we would not keep our own winnings. to me, this is actually moral and fair. there are beneficial reasons for doing this other than avoiding taxes as nate created a thread for this a while ago.
nate would then pay taxes on his own earnings and overseas employees of him would (should) be extempt.
Good link. This is pretty much right on point.
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In ruling, the judge said, "I find the government’s argument to be ludicrous"
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Kane,
If I were you, I'd just file for the 80k exclusion. I doubt the government would bother taking you to court over this, as it has already been estabished that for professional gamblers, gambling income is earned income. If the IRS decides to take issue with this, you won't be subject to any harsh penalties or prosecution since your position would be a reasonable one in terms of the statute.
If you are unsure and don't want to just do this, you should contact a competant tax attorney.
You could also write the IRS and request a private letter ruling (you'll have to look around to find the exact procedure for this).
When looking at IRS publications and the like, just keep in mind that the IRS doesn't make the tax laws in this country. In any grey areas, their interpretation will be one that is most advantageous to them.
The Baxter case, about which that TStoneMBD linked an article, does seem to establish that gambling income is earned if you are a professional, but a strange facet of tax law in this country is that the IRS isn't bound by the decisions of trial courts or intermdiate appellate courts. They can choose to "nonacquiesce" in the decisions and continue to litigate the issue in future cases. Judging by the tone of the article that TStone linked, it appears that the IRS has acquiesced in the fact that gambling income is earned income for professionals. Even if they haven't officially acquiesced, that doesn't necessarily mean that they will continue to litigate the matter, just that they reserve the right to do so. If they do litigate this, I am almost certain you would win (which means they probably won't bother litigating).
broiler
09-10-2005, 06:14 PM
The only thing that I would add is that you would want to also want to have your corporation pay little to no tax at the same time as qualifying for the individual tax benefits. All of the employees would have to reside in a foreign country to qualify for the foreign earned income exclusion. Also, you would want to check into the tax laws of that country as wages form that corporation might make you subject to their income taxes.
TStoneMBD
09-10-2005, 06:23 PM
mmcd, i am going to be filing my taxes this april correctly. if i move shortly after to another country (which i would love to do for other reasons then tax avoidance) would i be able to receive the tax credit on 2007 returns? how many days do i need to be out of the country? when counting the amount of days you need be out of the country, does the calendar year begin january first or april to april?
broiler
09-10-2005, 06:42 PM
The Baxter case was much more important at that time because it was the first time that gambling was ruled to be a professional activity. The difference in tax rates (20%, pre-1981 tax law change) made it important for a high earning professional gambler to fight for this treatment. The difference in tax rates no longer exists, so Baxter's main reason for fighting is moot now.
Tax court is also not as friendly as you might think in this area. The 2 cases that I have dealt with in this area did not go well for the gambler. The judge asked the CA (Canadian version of CPA - he prepared the return) and the taxpayer to pick from the treasury regulation that you cited earlier, which of the 3 reasons to claim the exemption that he qualified under. Option 1 and 3 were out because the income was not payment for services or professional fees and choice 2 was out because the judge determined that choice was merely an extension of option 1. A summary judgment was issued in favor of the IRS in under 30 minutes. The judge essentially said that earned income generated while you were in a foreign country is not the same as foreign earned income as defined in the treasury regualtion. The judge did admit that the area was vague and did not allow interest and penalties on the balance as he felt that the position was reasonable based upon the lack of guidance in this area.
A private letter ruling in this area would be nice, but you have to be very exact with the question that you ask and there is a fee involved in obtaining a ruling. The IRS will also tell you that the private letter ruling only applies to the individual receiving the ruling, just like court decisions.
broiler
09-10-2005, 06:47 PM
I would be interested in the details behind Hilger's foreign earned income exclusion and if he ever faced a challenge from the IRS. A person that has been successful against the IRS would be important in this area as an unchallenged exemption means nothing to you if you are audited.
broiler,
Take a look at Robida v. CIR 460 F.2d 1172
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Earned income is defined in § 911(b) as "wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered." The Commissioner emphasizes the commonly understood meanings of "compensation," "services," and "rendered" to arrive at his conclusion that Robida's income does not come within the definition. However, such a position misplaces the proper emphasis. The distinction Congress created is between income which is earned and income which is not earned. Congress made it clear when it devised the definition for earned income that it meant to include all income not representing return on capital. See H.R.Rept. 179, 68th Cong., 1st Sess., 1924, reproduced in Internal Revenue Cum.Bull., 1939-1, part 2, pp. 245-46. Income which accrued to the individual from application of his personal skills, whether received in the form of wages, salaries, professional fees or otherwise, was intended to be "earned" income. Income which accrued to the individual as return on capital was not considered "earned." The tax court labeled the two as active income ("income derived from the use of the taxpayer's personal expenditure of time, energy and skill") and passive income ("income derived from the use of his property").
[2] Gambling receipts have been considered in the latter category, more clearly akin to return on capital (i. e., money invested in an unusually risky venture) than earned compensation for services performed. [FN2] The Commissioner calls Robida's activities "successful gambling." We do not agree. The tax court found Robida's manipulation of slot machines to be "the diligent application of an unusual skill or knowledge gained during his previous employment with a manufacturer of slot machines which enabled him to extract money from these machines wherever he could find them." He did not "win" his income in a game of chance; he did not risk his capital, nor receive his income as a return on capital. He "earned" it by applying his personal and unique skills, for which he was handsomely recompensed.
FN2. Revenue Ruling 66-171, 1955-1 Internal Revenue Cum.Bull. 80, p. 87, section 7.01, lists "gambling gains" as a type of income which is not "earned income" within the meaning of § 911(b). Other items in the list include "dividends, other distributions of corporate earnings or profits, . . . interest, rents, or gains and profits from dealing in real or personal property."
[3] The Commissioner argues that Robida cannot be said to have "rendered services" to anyone, because there was no other person than himself who received his services or paid him for them. The fact that the payor was a machine, which was merely a conduit for the slot machine concessionaire, rather than a person who was grateful for the service
Robida rendered, makes no difference in determining whether Robida "earned" his income or not. While it is true that one normally renders services to another person, who pays for them, we need not quibble over whether Robida rendered services to himself or whether he rendered services to the slot machine concessionaires. The dichotomy which Congress established simply does not, and should not, turn on such semantic haggling. Congress meant income derived from labor, broadly defined, to be earned income and income derived from the use of property not to be earned income for the purpose of § 911.
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broiler
09-10-2005, 08:00 PM
I agree that the Robida case clearly shows that gambling income can be earned income. My point was to show that a tax court had ruled against the exemption.
The US tax lawyer in this case used the Robida and Baxter cases as the basis for the argument to allow the exemption. The judge (a former IRS attorney, according to the tax lawyer) said that because gambling was the source of the earned income and gambling is listed as not earned, the exemption was not allowed. I was stunned that there was a "look through" provision upon hearing the decision. Neither client chose to appeal the decision because the attorney and accountant fees had run up to alomst as much as the tax assessed.
I only bring up my points to show that the IRS has been successful in fighting the exemption in 2 cases that I know of. Personally, I think that the line of thinking that a professional should be allowed to take the exemption is reasonable. My personal experience is what makes me say that the IRS would not allow the exemption for gamblers.
It just seems that summary judgment is a ridiculous outcome in one of these cases. Especially given the clear statement of Congressional intent regarding the distinction between earned/unearned in the legislative history of section 911.
The OP has nothing to lose by filing for the exemption.
MrMon
09-10-2005, 08:52 PM
Hmmm. This is more complicated than I thought. Two comments:
1. Regarding the private letter ruling, remember it is easier to ask for forgiveness than permission. If you make a reasonable interpretation of the law, why stir up trouble? Wait for them to get around to you. Bureaucracies are hardly efficient institutions, you may be dead before they notice, unless you call attention to yourself.
2. If you are overseas, how does the IRS know how you made your money? I don't think foreign employers provide W-2s, do they? Can't you just call yourself a "probability consultant". Or incorporate, hire yourself, and pay wages exactly equal to your winnings, less a processing fee that as sole stockholder, you pay yourself as a dividend.
broiler
09-10-2005, 09:18 PM
1) I agree that it is easy to try and let things just slide by without detection. The problem is that a letter ruling is usually obtained in an area that has little direction and where the dollars are very large if a mistake is made.
2) The IRS really doesn't know that you made money, but they assume that you did. If you have been filing tax returns for years and then stop filing, they will send a notice asking about your situation. The thing about incorporating is that you might make yourself taxable to the foreign country.
broiler
09-10-2005, 09:23 PM
I agree that summary judgment is a ridiculous outcome in one of these cases. A summary judgment is usually reserved for obvious or simple matters, but the judge clearly stated that this was not a simple case in his reasoning for the waiver of penalties and interest. It was almost as if the judge didn't want to have a fully tried case that would set a simplified precedent in this area.
KaneKungFu123
09-10-2005, 11:17 PM
mmcd...is there a particular site where you are searching/reading about these particular cases?
KaneKungFu123
09-10-2005, 11:30 PM
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Neither client chose to appeal the decision because the attorney and accountant fees had run up to alomst as much as the tax assessed.
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I dont get this, why did he even bother to challenge if his attorny fees would equal his compensation? If he doesnt challenge he pays X. If he challenges and loses he pays 2X. If he challaneges and wins he pays X, or do you recieve compensation for attorny fees back if you win (seems unlikely because the best attorny charges more and is more likley to win then cheap attorny.)
KaneKungFu123
09-11-2005, 12:36 AM
http://www.irs.gov/pub/irs-pdf/p54.pdf
im not sure about your exact question. i ran though that part quick because my current situation is obvious.
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mmcd, i am going to be filing my taxes this april correctly. if i move shortly after to another country (which i would love to do for other reasons then tax avoidance) would i be able to receive the tax credit on 2007 returns? how many days do i need to be out of the country? when counting the amount of days you need be out of the country, does the calendar year begin january first or april to april?
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KaneKungFu123
09-11-2005, 12:42 AM
to recieve a private letter ruling, do i have to give my name/ss#?
id rather not commit myself to their ruling (which is likley to be in their favor if there isnt clear evidence otherwsie), however if the letter is not binding and can be anon. then it is obviously worth it.
KaneKungFu123
09-11-2005, 12:44 AM
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I would be interested in the details behind Hilger's foreign earned income exclusion and if he ever faced a challenge from the IRS. A person that has been successful against the IRS would be important in this area as an unchallenged exemption means nothing to you if you are audited.
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ive pmed him on his website.
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mmcd...is there a particular site where you are searching/reading about these particular cases?
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Westlaw is where I got the cases from. That and LexisNexis have pretty much everything, but they're both pay sites and pretty damn expensive from what I hear (I get them free through school). I don't know of any free sites that are comprehensive.
Just something to keep in mind: The IRS audits less than 2% of all returns. It's definately +ev to be aggressive with your taxes as long as what you are doing is a reasonable interpretation of the law.
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I dont get this, why did he even bother to challenge if his attorny fees would equal his compensation? If he doesnt challenge he pays X. If he challenges and loses he pays 2X. If he challaneges and wins he pays X, or do you recieve compensation for attorny fees back if you win (seems unlikely because the best attorny charges more and is more likley to win then cheap attorny.)
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What about next year and the year after? The ~25k in tax savings should easily cover the cost of a trial. Even if it costs more to go through the appellate process, assuming you plan on playing professionally outside the U.S. for the next several years, it will be well worth the expense. If you win thats about 100k over the next 4 years in tax savings.
broiler
09-11-2005, 08:10 AM
My understanding of the situation is that the CA and a Canadian attorney had helped the client set up a corporation for future years. The client was only being assessed for his first year in Canada where he tried to file as a Schedule C. All future years were going to have wages from the gambling corporation and therefore no problem with the exclusion. I will also add that the CA had done other things with the client's return that probably caused the audit in the first place.
We were stuck with what the Canadians had already done for the future and the client was well aware of that fact. They were running the show here and the US team was mainly for research and procedural purposes. He realized that if he lost on appeal, his interest and penalty waiver might not still stand. The other problem was the number of professionals that were present for various meetings and appearances. We had the CA and an assistant, the Canadian lawyer, a US tax attorney and assistant, and the US CPA and an assistant (me) who was also a CPA. The client was easily running at $750-$1000 per hour in this setup. I think that he saw that the possibility of paying 3X was a distinct possibility and chose to stay at 2X.
I think that the Canadian accountant and lawyer screwed up pretty bad in setting up a corporation. My understanding is that the wages from the new gambling corporation would be taxable in Canada, but I could be wrong about that since the last Canadian return that I prepared was at least 4 years ago.
broiler
09-11-2005, 08:28 AM
Every private letter ruling that I have seen has named the person receiving the opinion. If you chose to go against the ruling, I can't imagine a scenario where they would let you out of the penalties and interest because of the fact that you asked the question.
mchilger
09-13-2005, 12:38 AM
Very interesting discussion. I prefer not to elaborate too much as I am not a CPA. I do realize from this discussion that I probably ought to take the $80K exclusion out of my book as I am not qualified to say whether or not everyone can take this deduction for gambling.
There are a few things I can say on the topic with some level of confidence. Every country has different laws regarding taxes on gambling earnings. You should consider this if planning on moving. I can say that NZ taxed gambling earnings and their tax rate was high. This was offset by a low cost of living compared to the US. Whatever income taxes you pay overseas, these are deductible on your US taxes. Social security doesn't apply to this but there are a few countries which have agreements not to tax SSN twice. New Zealand is not one of them and there are only a few countries with this status.
Your foreign deduction is allocated based on how many days your are overseas. If you are home for 1 month or 3 months, your deduction would be lower than $80K.
Whether or not you are entitled to the deduction, you definitely must prove foreign residence first. I can't remember the exact rules but they aren't too hard to find. I can say you must be out of the country for an extended period to qualify.
My situation might be unique than others. I wrote a book while in New Zealand and also had other income. The IRS never challenged my return.
Matthew
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