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Multiple Poker Tournament Buy-Ins Aren't Aggregated for Form W-2G Reporting.

(Parker Tax Publishing October 9, 2015)

Multiple buy-ins into a single poker tournament event are not identical wagers and therefore should not be aggregated for purposes of reporting the winnings on Form W-2G. FAA 20153601F.

Under Code Sec. 3402(q)(1), a person making a payment of gambling winnings which are subject to withholding must deduct and withhold from that payment a tax equal to the product of (1) the third lowest rate of tax for an unmarried individual and (2) such payment. The total gambling winnings paid and the amount withheld is reported on Form W-2G, Certain Gambling Winnings.

The term "winnings which are subject to withholding" generally refers to gambling proceeds of more than $5,000 from a wagering transaction if the amount of such proceeds is at least 300 times as large as the amount wagered. In determining the proceeds, the amount of the wager is not included and property which is not money is taken into account at its fair market value.

The facts in FAA 20153601F indicate that a taxpayer hosts poker tournaments consisting of several events. Each event has a set grand prize amount for the winner. Each event has a set "buy-in" amount which a patron must purchase to participate in the event. In exchange for the buy-in, the patron receives a set amount of tournament chips. Tournaments begin at a set time, have limited seating, and alternates are taken through the first six levels of the tournament. Once players bet all their tournament chips, they are eliminated from game play. After being eliminated, a player can re-enter during the alternate period by purchasing an additional buy-in at the same price. Each additional buy-in increases the wagering pool and potential prize amounts. The last player with chips wins first place. Players in the top 10 percent of each tournament field are also awarded cash prizes.

The question arose as to whether multiple buy-ins should be deducted as individual wagers or in the aggregate from winnings in the poker tournament for purposes of reporting the winnings on a Form W-2G.

IRS Field Attorneys (IRS) advised that multiple buy-ins into a single poker tournament event are not identical wagers and therefore should not be aggregated for purposes of withholding and reporting requirements. If a player wins a prize at the close of a tournament, only the buy-in that resulted in the win should be deducted from the winnings to determine the "proceeds from a wager."

In coming to its conclusion, the IRS looked to Reg. Sec. 31.3402(q)-1(c)(1)(ii) which provides that if multiple wagers are identical wagers, they must be aggregated into a single wager for purposes of calculating the proceeds from a wager that is subject to the withholding and reporting requirements. According to the preamble to that regulation, identical bets are those in which winning depends on the occurrence (or non-occurrence) of the same event or events. For example, two wagers on a horse to win a particular race general are identical. However, wagers containing different elements, such as an "exacta" and a "trifecta," are not identical.

In the present case, the IRS noted, players are permitted to re-buy-in to the tournament as many times as they wish after they lose their initial buy-in, as long as the tournament has not advanced past the alternate period. Each time they purchase an additional buy-in, the game has advanced and the circumstances that must occur in order for them to win the pool have changed. When the tournament started, for example, there may have been 500 players participating and 50 different tables. When the player buys-in a second time, there might only be 200 players remaining to be eliminated, thus making the odds of winning different. Further, each additional buy-in increases the wagering pool and potential prize amounts.

The IRS observed that, unlike two identical bets placed on a single horse race which would depend on the identical event occurring and do not actually change the odds of winning, a second buy-in at a later time increases a player's odds of winning by giving them an additional chance, increases the wagering pool, and increases the potential prize amounts. An additional buy-in, the IRS concluded, is more like a wager on a different horse or an exacta or trifecta bet at the race track. Therefore, additional buy-ins are not identical wagers and should not be aggregated for the purpose of determining whether the reporting and withholding thresholds have been met. Instead, each buy-in should be treated as a separate wager and only the amount of the winning buy-in should be deducted from the amount of winnings when preparing the Form W-2G and determining withholding requirements.

For a discussion of the reporting requirements for Form W-2G, see Parker Tax, ¶252,597. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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