Big winnings, tiny taxes
Several times a week, Clarance W. Jones does something most people can only dream of: He cashes in bunches of winning lottery tickets.
And even better, he has found a way to pay barely any taxes on the massive take.
Over the past decade, the 73-year-old from Lynn has redeemed more than 10,000 tickets from the state lottery — more than any other person — worth a total of more than $18 million.
He has also long fought efforts by the state to collect considerable taxes on his winnings, saying he is a professional gambler who spends millions of dollars betting on the lottery and other games, offsetting almost all his winnings.
And last month, the state Appellate Tax Board agreed with him, virtually wiping out any state taxes he owed on the prizes and allowing him to get back more than $200,000 that the lottery had withheld for taxes. Professional gamblers are entitled to deduct their losses under federal and state tax rules. The state doesn't plan to appeal.
The tax case is the latest setback to state efforts to crack down on a small group of people, including Jones, who the state believes aren't professional gamblers but professional ticket cashers who make their money redeeming winning tickets for others. They're called "10 percenters" because they are thought to keep 10 percent of the winning amounts for themselves.
The state suspects that these individuals are in the business of helping other people evade taxes, child support, and other debts — all accounts for which lottery proceeds could be tapped.
It is not illegal to cash in someone else's winning ticket, but it is illegal to do so to help them evade taxes or other legal obligations.
This is the first case of its kind to go before the Appellate Tax Board, revealingthe trouble the state and federal government have had collecting taxes from some of the lottery's most familiar customers.
Jones, who declined to be interviewed, has been in the state's sights for years. In 1999, then-auditor Joseph DeNucci included him on a list of suspected professional ticket cashers, and the state treasurer at the time, Shannon P. O'Brien, called him an apparent "10 percenter" after he claimed $844,626 in prizes during a three-year period.
But Jones has dramatically ramped up his lottery winnings since then. Last year alone, Jones claimed 1,131 prizes worth $2.2 million, more than any other frequent winner, according to the lottery. Ordinarily, lottery officials say, someone would have to spend millions of dollars on lottery tickets to win that many prizes.
"The odds are not in his favor," said Beth Bresnahan, a spokeswoman for the Massachusetts State Lottery Commission. "For the amount he is cashing, he would have to invest a great deal of money."
But Jones's attorney dismissed suggestions he cashed in other gamblers' tickets.
"What they're claiming is speculation," said attorney Domenic Finelli of Revere. "There's no proof."
State Department of Revenue spokesman Robert Bliss said the agency decided to audit Jones in 2004 after he recorded lottery winnings "far in excess of what seemed humanly, or mathematically, possible" and offset them with gambling losses scattered across the state.
The state wound up billing Jones for back taxes for years 2001 through 2007.
Jones first appealed to the Department of Revenue and then the state tax board in February 2009.
Jones, a former president of the NAACP in Lynn, told the board he is a professional gambler, spending 60 to 80 hours a week betting on everything from the lottery to casino games to racing.
He testified that he has gambled full time since he sold his industrial cleaning company in 1986 and used several strategies to gain an edge in the lottery, including buying scratch tickets in the middle of a packand visiting stores where patrons recently racked up wins, on the hunch that those outlets likely had other winning tickets to sell.
"He has a formula," said Finelli, Jones's attorney.
But Finelli said Jones has won only slightly more than he has lost in gambling. Indeed, Jones claimed so little net income in 2001 and 2002 that he paid no state income taxes. He rents a 680-square-foot condo in Lynn, according to his attorney and city records.
"He makes some money, but it's not huge," Finelli said. "He's not wealthy."
Jones, according to his lawyer, kept extensive records to document his gambling activities and expenses, including log books and 200 boxes stuffed with losing tickets, racetrack programs, and other records, which he kept in self-storage units in Lynn.
The Department of Revenue challenged Jones's losses, saying his records were incomplete and the totals in his logs did not match amounts he claimed on returns. The Department of Revenue said it even doubted he purchased all the losing gambling tickets kept in storage, because of the "sheer volume of tickets" from locations across the state.
But the Appellate Tax Board found that revenue officials "virtually ignored" Jones's own records, failing to visit Jones's storage facility in Lynn to sort through the boxes of losing documents or have Jones's attorney deliver the records to the agency's offices.
"The auditors never conducted a field audit to gain a better understanding of how thorough his records of losses were, nor even a desk audit," the board concluded.
The board also said the Department of Revenue raised the possibility that Jones was a professional ticket casher only at the "11th hour" and didn't provide any concrete evidence to back up their claims.
In the end, the board decided to allow Jones to count his gambling losses and wiped out more than $465,000 in taxes the Department of Revenue claimed he owed for 2001 through 2006. After factoring in withholding and refunds, Jones will wind up paying only about $2,600 in state income taxes for the period, despite collecting more than $7 million in lottery prizes in those years.
Boston attorney William J. Lovett, a former prosecutor in the US Department of Justice's tax division, said it is typically easier for tax agencies to show that ticket cashers do not have enough legitimate gambling losses to offset their winnings than to prove the winnings belonged to someone else. The burden is on taxpayers to keep records backing up their deductions.
But tax auditors must spend time sifting through those records to demonstrate the deductions are improper.
"The DOR has to do better than say 'No, they're not real,' " said Lovett, who handles civil and criminal white-collar crime cases for Collora LLP in Boston.
Jones's attorney said his client has been equally successful in using his gambling losses to minimize his federal tax bill. Indeed, Jones told the tax board he has consistently received refunds from the Internal Revenue Service since 1988.