September 2008 Archives

Kelvin Morrin's  Impact of a Finite Bankroll on an Even-Money Game deals with gambler's ruin and other mathematical phenomena:

Calculating the average cost of playing a table game is usually equated to the product of the
house edge, the average wager and the number of hands played. A linear amount that is static, providing that the player has enough financial resources to play for the specified duration. However, in the twilight of a healthy wallet, the probability of survival creeps into the equation, creating the associated cost of not having enough capital to guarantee play for the intended length of the session.

  Download a pdf here.

Gambling and the Law®:

No Withholding Taxes on Poker Tourneys

 

            The IRS has decided that every poker operator in the United States will have to report anyone who wins more than $5,000 in a poker tournament. 

            To get around the fact that Congress never authorized this, IRS is pretending to require that 25% or more of these winners' prizes have to be withheld by the poker operators and forwarded to the IRS.

            That is only partially true.

            Buried in the IRS's published statement changing the tax treatment of poker tournaments is the following sentence: 

"The IRS will not assert any liability for additional tax or additions to tax for violations of any withholding obligation with respect to amounts paid to winners of poker tournaments... provided that the poker tournament sponsor meets all of the requirements for information reporting" under the tax code and regulations.

            What this means is the IRS has declared that poker tournament operators are absolutely required to withhold at least 25%, but that the IRS won't add any tax penalties or fines to operators who voluntarily turn in their big tourney winners.

            I hate laws like this.

            What apparently happened was that when word got out that the IRS was going to devastate poker tournaments, land-based casinos lobbied for a compromise.  This is exactly what lobbyists are supposed to do, assuming they cannot get the regulator to completely drop the idea.

            The result is better for players.  As one example:  If withholding were required, anyone who won a $10,000 buy-in to the WSOP would actually collect only $7,500.  Now, the player wins the seat, but is reported on a Form W-2G to the IRS.

            Of course, this is still bad news for winners.  A W-2G is practically an invitation to be audited.

            The compromise has created other problems.  Some land-based card clubs and casinos are withholding while others are not.  This is not just because this "waiver of liability," as the IRS calls it, is hard to find and decode.  Conservative lawyers and accountants might still advise their clients to send a chunk of big winners' prizes to the IRS.

            The problem is that the IRS says it is interpreting the Internal Revenue Code, which contains criminal penalties for non-compliance.  Notice that the IRS only promised not to impose "additional tax or additions to tax."

            Plus, the actions of the IRS are highly questionable.

            When people think of laws, they naturally think of statutes passed by legislatures, like Congress.  Every adult knows there is another set of laws that is at least as important in their everyday life: regulations from government agencies, like the IRS.  Both statutes and regulations require public input. 

            We know what happens when the public is not allowed its say.  You end up with statutes like the Unlawful Internet Gambling Enforcement Act, or this new rule on poker tournaments from the IRS.

            For the IRS did not propose a regulation.  Nothing was published.  There was no opportunity for card rooms, let alone players, to object.

            The IRS simply declared that it was reinterpreting a law passed by Congress in 1976, containing a term,  "wagering pool," which dates back to the 1950s.  Nobody, before now, thought "wagering pool" included poker or other games.  In fact, everyone knew it didn't, because it is exclusively lumped in with lotteries and bookmaking.

            The IRS has now declared that when Congress required withholding of  "wagering pools," it meant to include poker tournaments.  But, the IRS is giving a free pass to every card room and casino which openly violate a law passed by Congress, so long as they voluntarily turn in their big winners.

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#2007-18 © Copyright 2008, all rights reserved worldwide.  Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com..  Professor I Nelson Rose is recognized as one of the world's leading authorities on gambling law, and is a consultant and expert witness for governments and industry.  His latest books, Gaming Law: Cases and Materials and Internet Gaming Law, are available through his website, www.GamblingAndTheLaw.com.

Gambling and the Law®:

Europe Decisions Don't Open Doors to U.S. Players

 

            The European Court of Justice and the European Commission have issued dramatic statements calling for the end of barriers to internet gambling.  Some observers see these as the beginning of the end for America's Unlawful Internet Gambling Enforcement Act and the opening of doors to internet gaming, especially poker.

            These developments are certainly much needed good news for publicly traded online poker companies, like PartyGaming.  But I believe people are being way too optimistic in believing that changes in the law in Europe, or even direct challenges from Europe, will lead to any relaxing of U.S. federal prohibitions in the immediate future.

As a dramatic example:  The Unlawful Internet Gambling Enforcement Act (UIGEA) has devastated internet poker.  The UIGEA says that the federal government has to issue regulations requiring your bank to prevent you from wiring your own money to make a bet on the internet, if that wager violates some federal, state or tribal law.  The Democrats tried to prevent those regulations from being made.  But in this election year, in a straight, party-line vote, Republicans in Congress recently killed that attempt, issuing public statements about the evils of internet gambling.

            Things are different in Europe.  From this side of the Atlantic, it seems that the dispute over internet gaming is really about how independent the old nations of Europe will be in the new European Union.  In the U.S., we would call this a fight over "states' rights."

            But the E.U. is not the U.S.  The United States is a nation, a federation with a Constitution.  More importantly, it has a Supreme Court that can and will strike down any state law that offends that federal Constitution.

            The E.U. is only a treaty organization.  Yes, a very powerful one.  But the European Court of Justice will only declare a member nation's laws invalid in cases of clear conflict with the laws of the European Communities.  Instead, this High Court of Europe usually merely gives guidance and refers cases back to the courts of the nation involved to actually resolve the case.

            For years, the Court has consistently declared that a member state can only keep out legal gambling if it can show it is doing so for a high-minded reason, like protecting children and compulsive gamblers, preventing crime and fraud, or protecting local morality.  Giving local operators a monopoly to increase profits or tax revenue is not enough.

            The "Placanica" case finally pushed the European Court of Justice too far.  Stanley Leisure, the fourth biggest bookmaker operator in the U.K., has more than 200 agencies in Italy, called data transmission centres, where bettors can access Stanley's computers in the U.K.  Some of those operators tried to get licensed, but were ignored.  Until they were arrested.

            The High Court stated that when Italy excluded Stanley from applying, merely because it was a publicly traded company, it violated E.U. laws that guarantee freedom to establish businesses and freedom to provide services. The High Court also did not buy the argument that Italy wanted to shrink the opportunities to gamble, considering it announced that it was going to award more than 1,000 new licenses.

            The case had an immediate impact far beyond the actual decision.  Commentators declared that the case marked the end of all barriers inside Europe to internet gambling.  Word came out of Poland that it would begin licensing online operators. 

            E.U. Industry Commissioner Guenter Verheugen slapped down Germany when it said the case only applied to Italy.

            The most optimistic observers declared that the U.S. was next.

            The problems with this view are many:  The U.S. is not part of the European Union.  America does have similar treaty restrictions with the World Trade Organization.  But the long-running fight with Antigua shows how little the U.S. cares about violating W.T.O. rulings.

            Most importantly, look who would have to change the American law.  Only Congress can amend or revoke the UIGEA.  And any bill would have to be signed by President George W. Bush, since Congress would never have enough votes to override his veto.

            Can you imagine Pres. Bush signing a bill to bring back internet gambling that is not regulated or taxed by the United States?

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#07-20 Copyright 2008, all rights reserved worldwide.  Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com.  Professor I Nelson Rose is recognized as one of the world's leading experts on gambling law.  His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.

Rob Jay submitted a brief paper.  Here's an excerpt:

Online gambling on sports in America has surpassed the total handle of Las
Vegas casino-based sports books.
A December, 2002 Congressional Report by the US General Accounting Office stated
that online gaming reached new heights in 2002 as worldwide revenues topped $4 billion.
Of that amount, over $2 billion was wagered by US residents. Bear Stearns backed up
these findings by estimating the worldwide market would have been in excess of $5
billion had many American credit card providers not discontinued offering transfers to
offshore sports books. Meanwhile, the Nevada handle on sports books was less than $2
billion in 2002; this is the first time in a decade that the Nevada handle dropped below $2
billion.
Certainly, part of the decline in the Nevada handle can be blamed on less Americans
traveling and an overall downturn in the economy. Perhaps an even bigger factor,
however, is the proliferation of slot machines in Nevada casinos. Slots now represent
70% of the profits of Nevada casinos and offer a 6% hold while sports books have an
average 3% hold. Thus, it is not surprising that sports books are losing square footage
overall in casinos while slots are gaining in space allocated to them.

Click Profile of the Online Gambler (pdf) to read the whole thing

We've got a study guide posted for casino math.  Here's a sample:

This guide, written by casino math professor Robert Hannum, contains a brief, non-technical discussion of the basic mathematics governing casino games and shows how casinos make money from these games. The article addresses a variety of topics, including house advantage, confusion about win rates, game volatility, player value and comp policies, casino pricing mistakes, and regulatory issues. Statistical advantages associated with the major games are also provided.

To see the full guide page, visit the Casino Math study guide.

Gambling and the Law®:

What the Proposed UIGEA Regs Mean for Players

            Last October, Congress passed the unworkable Unlawful Internet Gambling Enforcement Act, which I call Prohibition 2.0.  It required federal regulators to write regs requiring money transferors, including banks, credit card companies and e-wallets, to identify and block funds for illegal Internet gambling.  Faced with an impossible task, the regulators punted:  They issued proposed regulations that tell the banks, etc., "It's your problem.  You shouldn't block legal online gambling transactions.  But if you transfer funds for an illegal bet, you will be fined, or worse."

            The immediate impact of these proposed regs for players is . . . nothing.  Nothing has changed, and nothing will change, for many, many months.

            The long-run impact is not as rosy.  There will be plenty of ways to get around whatever procedures are eventually put into place to i.d. and block funds transfers for unlawful gambling.  But all American financial institutions, and their large counterparts overseas, are not going to take chances:  They will block all gambling transactions, even legal ones.

            So, poker players will be forced to open foreign bank accounts, use foreign credit cards and e-wallets, or use slower and sometimes even less reliable means, such as snailmailing paper checks or using phone cards.

            The Act had been rammed through Congress by the failed politician, then Senate Majority Leader Bill Frist (R.-TN).  Frist attached it to the SAFE PORTS Act and told Democrats that if they didn't like it, they could vote against it, and be seen as being soft on Islamist terrorism.

            Although Prohibition 2.0 scared the bejesus out of publicly traded poker companies, it actually does only two things:  It creates one new crime, being a gambling business that accepts money for unlawful Internet gambling transactions, and requires new regulations for payment processors.

            What it doesn't do is make it a crime to play poker on the Internet.  It doesn't directly restrict players from sending or receiving money.  It doesn't spell out what forms of gambling are "unlawful."  Specifically, it does not do what the federal Department of Justice ("DOJ") wanted, which was to "clarify" that the Wire Act covers Internet casinos, lotteries and poker.

            The new felony it creates is greatly limited.  Only gambling businesses can be convicted, not players.  Bizarrely, for a law designed to prevent money transfers, the financial institutions involved in those transfers, including e-wallets, are expressly defined as not being gambling businesses and so cannot be convicted of this new crime.

            The proposed regs have finally been issued, four months late.  The general public now has until December 12 to make comments.  The agencies will then make changes in the proposed regs.  The final versions will then be published, supposedly giving everyone six months to set up their procedures.

            This is not going to happen.

            The proposed regs put the burden entirely on the payment processors to come up with procedures for identifying and blocking restricted money transfers.  But this can't be done in six months.  In fact, it can't be done at all.

            The problem is defining "unlawful Internet gambling."  Take, for example, poker.

            It is unclear whether online poker violates any federal law.  Some states, like California, do have specific prohibitions on unlicensed commercial poker, but it is unclear whether these apply to foreign operators.  And 157 years of bad cases and obscure statutes make it a crime to participate, as a player, in any poker game where the pot is raked more than four times.  How many payment processors even know what it means to rake a pot four times?

            The problem for players is there is no law forcing U.S. banks to transmit funds for legal gambling, while there will be penalties for transmitting funds for what turns out to be an unlawful bet.

I. Nelson Rose, 2008

#07-19 © Copyright 2008, all rights reserved worldwide.  Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com.  Professor I Nelson Rose is recognized as one of the world's leading authorities on gambling law, and is a consultant and expert witness for governments and industry.  His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.