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Aggrieved Gambler Cannot Recover Unauthorized Taxes Paid by Debtor

By Alexander Beeby posted 09-26-2021 14:45

Contributing Editor: David Tanabe

In PW Enterprises, Inc. v. Bala (In re Racing Services, Inc.), 854 F. App’x 777 (8th Cir. Aug. 3, 2021) (mem.), aff’g 617 B.R. 641 (D.N.D. 2020), the Eighth Circuit Court of Appeals affirmed the denial of claims for unauthorized taxes assessed on the claimants’ account wagering through the debtor. 

The debtor provided pari-mutuel horse wagering services. Out of the total amount bet, the debtor deducted a percentage for revenue and expenses called the takeout. In part, the takeout was used to pay rebates and taxes. In another decision, the Eighth Circuit determined the taxes on account wagering were unauthorized under state law. PW Enters., Inc. v. North Dakota (In re Racing Servs.), 779 F.3d 498, 507 (8th Cir. 2015). As a result, the state agreed to return millions in unauthorized taxes to the bankruptcy estate. Professional gamblers filed claims in the bankruptcy for unauthorized taxes on their account wagering. The debtor’s president objected to the claims, and the bankruptcy court held a trial on the dispute.

The bankruptcy court concluded the debtor’s oral rebate agreements with the claimants did not address a retroactive change in taxes. Further, if money otherwise allocated for taxes became available during the course of the contractual relationships, the parties would have renegotiated their deals. The bankruptcy court rejected theories of implied contract and unjust enrichment, including the argument that the bettors were the taxpayers and that the debtor simply collected and remitted sales taxes.

On appeal, the district court affirmed that the taxes on account wagering were distinguishable from sales taxes and that the debtor should be considered the taxpayer. In particular, the players did not bear the burden of the tax, the debtor paid the tax out of its takeout, and the players did not have to pay anything extra for the tax. The district court concluded it was harmless error for the bankruptcy court to add a wrongfulness element for unjust enrichment given a claimant failed to prove unjust enrichment for various reasons, including the failure to show it was unjust for the debtor to retain the money. The bankruptcy court’s application of the impoverishment element was affirmed despite the incorrect reference to bargained for benefit for unjust enrichment. No error was found in the bankruptcy court’s concern about equitable accounting. The district court determined the claimants failed to show a greater entitlement to the returned money than the debtor. As to contractual grounds, the district court rejected arguments including that the debtor agreed to not profit from or upcharge the taxes from the account wagering.

The district court found a claimant failed to preserve for appeal the argument the debtor could not legally keep any of the takeout as profit. The district court concluded that the bankruptcy court’s rulings on the claims were supported by sufficient evidence and that the claimants failed to demonstrate any legal or factual error that would merit reversal. The Eighth Circuit affirmed the judgment of the bankruptcy court for the “well-reasoned and thorough” reasons stated by the district court.

Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman
Kesha Tanabe, Tanabe Law