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Tuesday, October 30, 2007

Store Tries to Make Red Sox World Series Victory Less Taxing

Red_soxI previously blogged the tax consequences of the latest example of refunds tied to a local sports team's success:  Jordan's Furniture in Boston ran a "Monster" promotion promising that customers who purchased furniture between March 7 and April 16 would have their entire purchase price refunded if the Red Sox went on to win the 2007 World Series.  Jordan's has said all along that any refund would be taxable to the customers:

Per IRS regulations, Rebate Claim Forms valued at $600.00 and above will be issued a 2007 1099 Form from Jordan’s Furniture and will be reported to the Internal Revenue Service.

The Boston Globe reports today that Jordan's is checking with its tax lawyers to find a way to avoid sending 1099s to their customers:

Jordan's ... is also trying to figure out if the deal can be sweetened even further. Tatelman said his lawyers are investigating whether the payments to customers are taxable. Jordan's had planned to report the payments to the Internal Revenue Service and send the customers federal 1099 tax forms, but Tatelman said that may not be necessary. "It's really a rebate. It's not a prize," Tatelman said, although some critics have argued that the Jordan's promotion is actually an illegal lottery.

Jordan's Knows Cost of Victory Full Well, by Bruce Mohl.  (Hat Tip:  Eric Lustig.)

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Comments

I wish the taxpayers here could avoid paying tax on their "rebates" but I see no way legally to do it -- even if Jordan's figures out a way to avoid sending 1099s. It is pretty clear when they bought their furniture they really bought the furniture and what pro gamblers call a "futures contract." Just like a non-gambling futures contract, it has a termination date which is the date of elimination (causing a gambling loss) or WS victory (win). The Red Sox Future has now paid off and the customers, in my mind, have a gambling win equal to the purchase price of the furniture. They can offset the win with gambling losses, but otherwise, they gotta pay.

That is uninteresting. What I DO find interesting is Jordan's tax position. I think it is VERY clear they were running an illegal lottery (the elements of payment, chance and prize are all there). The illegality of the lottery does not affect the patrons' tax position but it DOES affect Jordan's position. I would disallow the deduction for the (illegal)gambling expense. The interesting question is whether to disallow the "insurance premium" (which I think was probably placed with a book in Costa Rica because I know of know respectable insurance company that would insure such an event plus the "premium" would probably be lower at a book because they have offsetting risks and they don't have to charge an "ignorance premium" because their "actuaries" do this kind of work every day) or the payment of the winnings to the customers. I do not think you can fairly deny both -- but I think the IRS could if they wanted to. If they want to teach Jordan's a small lesson (and enforce the illegal business deduction rules), they would only disallow the premium. If they want to teach a really big lesson, they could disallow the deduction to distribute the winnings to the customers. I'd allow the premium deduction (even if placed in possibly illegal transaction with a book in Costa Rica) because I have no problem with a firm taking any business risk they see as profitable and it really was an advertising expense. Also, it is not clear that it is illegal (especially in Costa Rica where the book, if used, is legal).

The real problem is the distribution of the $30M to the customers. That is definitely illegal under Mass. law and I think the IRS could easily disallow that deduction as an illegal business expense. I'd find for the IRS and I am very liberal about just treating gambling like any other business -- where it is legal. But I hope I am wrong. (Jordan's only hope is to claim that illegal lottery laws are not "generally enforced" in Mass. -- I hope that is the case.) Either way, that is the truly interesting question in this case.

Posted by: Thomas B. Duffy | Oct 31, 2007 9:08:27 AM