There was groundbreaking news today.
In an appellate ruling in a lawsuit over whether the cost of losing horse-racing betting tickets can be included as an expense in an income-tax return, the Tokyo High Court ruled on the 21st that a man in Hokkaido had in fact engaged in economic activity in purchasing betting tickets. It overturned the Tokyo District Court's first-instance ruling, which had not recognized the expense, and ruled in the man’s favor on appeal.
The National Tax Agency cites the use of automatic betting-ticket-purchase software as a condition for recognizing the expense, but the man had not used it. This appears to be the first ruling to recognize the expense in a case without such software. (Omitted below.)
(Kyodo News, April 21, 2016)
It is a ruling likely to receive a range of assessments: that it is only natural, and that it is groundbreaking. As this is a High Court ruling, a Supreme Court appeal is still possible.
Taxation of gambling and similar activities
First, let us confirm the tax treatment of gambling, including horse racing.
For tax purposes, income from winning or hitting a bet in gambling such as horse racing is, in principle, classified as "occasional income."
For occasional income, only expenses directly incurred are recognized as deductible expenses. "Directly" means the money wagered directly on the winning bet.
For example, suppose you buy ¥1 million worth of betting tickets for each of 10 races, win one race with a payout of five times the stake, and receive ¥5 million. In ordinary terms, you would think that you had income of ¥5 million and expenditures of ¥10 million, and had therefore ultimately lost ¥5 million. For tax purposes, however, it is treated as ¥5 million in income from the winning ticket, ¥1 million in expenses, and ¥4 million in profit. The other ¥9 million in losing tickets is considered irrelevant. The special deduction for occasional income is then subtracted from that ¥4 million, and one-half is combined with other income to calculate income tax.
This treatment was ironclad until an exception was recognized in a Supreme Court ruling of March 10, 2015.
However, the system broke down in a case where an ordinary office worker made a large profit by applying scientific analysis to horse racing, was subjected to an enormous tax bill, and went to court.
Explanation of the huge tax-assessment case involving an Osaka male office worker who bought betting tickets at a business level
An Osaka-based male office worker conducted his own horse-racing analysis and, using ¥1 million as capital and automatic purchasing software, bought approximately ¥2.87 billion in betting tickets over the three years from 2007 through 2009. He received approximately ¥3.01 billion in payouts, making a profit of approximately ¥140 million on the difference from the purchase amount.
This Osaka male office worker had not filed tax returns for 2007 through 2009. As explained above, the National Tax Agency's view was that only "expenses directly incurred" were deductible. The prosecutor likewise calculated the income as occasional income, deducting only the cost of winning tickets, and in the facts charged put total income for the three years at approximately ¥1.46 billion and income tax at approximately ¥570 million. The approximately ¥1.46 billion was total income that combined one-half of the occasional income with employment income and the like; it is distinct from the approximately ¥140 million profit from all betting-ticket purchases. Moreover, the approximately ¥570 million was the income-tax amount in the facts charged, not the tax amount ultimately found by the court. Osaka High Court ruling, pp. 2 and 7 (Japanese)
It is truly an extraordinary situation: you think your side business (?) has been a great success and earned you about ¥140 million, only to be told to pay about ¥570 million in tax. This Osaka male office worker could no longer remain an office worker because of this matter and left his employer. He paid tax, retaining enough for legal fees, but the amount he could pay toward the remaining tax was just under ¥60 million. There was no way he could pay ¥570 million; late-payment taxes and the like caused it to swell steadily to more than ¥1 billion... Even personal bankruptcy would leave unpaid taxes outstanding. With no way out, it was literally a matter of life or death. To live... there was no choice but litigation!
And so it went to court. I am glad he chose to live.
Perhaps it had gone too far. The Osaka male office worker's case was litigated all the way to the Supreme Court, and the March 10, 2015 ruling became final: income from the purchase of betting tickets was miscellaneous income, and the purchase price of all betting tickets, including losing tickets, constituted necessary expenses. However, the conviction for violating the Income Tax Act by failing to file a tax return within the deadline also became final; it was not as though the taxes disappeared. Supreme Court ruling (Japanese)
The National Tax Agency, however, moved swiftly at this point.
It was not a law and thus not binding, but at the time the agency revised its circular as follows.
National Tax Agency Circular 34-1
Income relating to the following items constitutes occasional income. (Revised by 1974 Choku-Sho 2-23; 1980 Choku-Sho 3-19, Choku-Ho 6-8; 1999 Ka-Sho 4-1; 2005 Ka-Ko 2-23, Ka-Shi 3-5, Ka-Ho 8-6, Ka-Shin 4-113; 2006 Ka-Ko 2-18, Ka-Shi 3-10, Ka-Shin 4-114; 2011 Ka-Ko 2-33, Ka-Ho 9-9, Ka-Shin 4-46; 2015 Ka-Ko 2-8, Ka-Shin 5-9.)
(1) Prize money or goods from contests, winning money or goods from lotteries, etc. (excluding those received in connection with business.)
(2) Payouts from horse-racing betting tickets, payouts from keirin bicycle-race tickets, etc. (excluding those arising from continuous acts undertaken for profit.)
(Note) 1 Income from payouts on horse-racing betting tickets constitutes miscellaneous income as income arising from continuous acts undertaken for profit where a person uses software that automatically purchases betting tickets, makes comprehensive purchases via the internet over a long period, repeatedly and frequently, according to independently set conditions and formulas and without focusing on whether individual tickets win, receives payouts from winning tickets, regularly earns large profits, and it is objectively clear that the series of ticket purchases has the substance of a single economic activity.
2 Note that income from payouts on horse-racing betting tickets in cases other than Note 1 above constitutes occasional income.
In other words, except in cases such as that of the Osaka male office worker, the content was that the cost of losing betting tickets would not be recognized as an expense under occasional income. It would be recognized as an expense only where software that automatically purchases tickets was used, purchases were made via the internet, they were comprehensive rather than focused on individual winning tickets, and large profits were earned regularly. Many people must have been disappointed at this point.
What was groundbreaking about the Tokyo High Court ruling of April 21, 2016
After the Supreme Court rejected the argument in the Osaka male office worker's case that the cost of losing tickets should not be recognized, the National Tax Agency changed its circular and showed an eagerness to keep collecting tax going forward.
The groundbreaking point of the Tokyo High Court’s April 21, 2016 ruling involving the Hokkaido man introduced at the beginning was that it recognized the cost of losing tickets as an expense even though he did not use automatic purchasing software. He bought tickets via the internet, selecting them according to a pattern based on confidence in predictions and payout rates. That differed from the then-current circular’s conditions: using automatic purchasing software, buying via the internet, making comprehensive purchases without focusing on individual winning tickets, and regularly earning large profits. Supreme Court ruling, pp. 1–2 (Japanese)
There are probably quite a few people in the world who engage in gambling as a business.
By the way, what about the former Daio Paper chairman called the Emperor of Baccarat?
Ordinary people without money were subjected to large additional tax assessments and made to take their cases to court, but based on the same logic, the case of that former chairman, who lost ¥10 billion, should also be subject to an additional assessment. He did ultimately lose ¥10 billion, but as he continued gambling repeatedly through the night, could his winnings not have exceeded ¥100 billion...? Taxing that would be quite something.
People who gamble should be careful about taxes.
The reality of taxation on gambling
Those of you who have been to horse racing will understand, but when I made purchases at least 10 years ago, I did not have to use identification at the betting venue. Perhaps most people do not file returns. The Osaka male office worker's case involved being charged with violating the Income Tax Act for failing to file a return. By contrast, the Hokkaido man mentioned at the beginning filed after the deadline for 2005 through 2009 and within the deadline for 2010, and disputed the income classification and the treatment of losing betting-ticket costs. The filing histories differed, but I think it must have been difficult for them to litigate all the way to court.
Going forward, purchases can be made over the internet and the like, so the National Tax Agency will be able to trace movements of money easily. I feel that this case makes it desirable to establish clear standards.