Patrick Michael Posted June 16, 2015 Report Share Posted June 16, 2015 I would like to bounce this off the tax pros on the board. Client owned a franchised convenience store which he bought from an individual 20 years ago. The purchase price was for inventory and goodwill which has been written off. The franchisor owned all the real estate, fixtures and other assets (other than inventory). The franchisor cancelled the contract in October of 2013, came in, threw my client out of the store and locked the doors. They seized the inventory and store bank accounts (apparently authorized in the franchise agreement). The inventory value and bank accounts were netted against liabilities (which franchisor assumed) and "fines" called for in the agreement. At the end of the day my client is personally liable for about $50,000 owed to the state lottery commission. My client said the $50,000 was for scratch offs inventory. I don't believe there is any gain/loss here since the dollar value of the tickets were included in the inventory amount used to offset the other liabilities that were assumed by the franchisor. Am I on the right track her? Please let me know if more information is needed.Thanks. Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted June 16, 2015 Report Share Posted June 16, 2015 Been awhile since I did c-stores but i think scratch off tickets are owned by the state until someone buys one, so unsold tickets should be returned by the franchisor to the state. I would inform the state and let them know what happened. Quote Link to comment Share on other sites More sharing options...
Patrick Michael Posted June 16, 2015 Author Report Share Posted June 16, 2015 You are correct jmdaviscpa. I clarified with the client that the $50K was for tickets sold. So I still think that the $50K does not give rise to loss as he would have already deducted the cost of the tickets on the P and L. Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted June 16, 2015 Report Share Posted June 16, 2015 Here in Maryland, the Lottery ticket sales and proceeds are usually deposited into a separate account, and not part of the P&L except for the amount that get returned to the business. . Scratch off may be different, but I am sure that when the Lottery guy hands you $100 in tickets, he gets paid $90... $50k would have had to have been for already sold tickets. Rich Quote Link to comment Share on other sites More sharing options...
jklcpa Posted June 16, 2015 Report Share Posted June 16, 2015 You are correct jmdaviscpa. I clarified with the client that the $50K was for tickets sold. So I still think that the $50K does not give rise to loss as he would have already deducted the cost of the tickets on the P and L. I don't know why you think there should be a loss from the lottery tickets. When the lottery allows a retailer to sell tickets, the retailer is given the tickets to sell. The retailer sells the ticket and earns a commission for selling the ticket that would be income to him. The amount that the retailer owes to the lottery is not an expense, and it does not create a loss on the P&L in any way. The liability that is created is because the cash collected from the sales of the tickets does not belong to the retailer because he is acting in an agency capacity on behalf of the lottery. Quote Link to comment Share on other sites More sharing options...
Patrick Michael Posted June 18, 2015 Author Report Share Posted June 18, 2015 Thanks Judy. I will have to get back with the client and see how he has been accounting for them. He is insisting that the $50 K should be a loss since the franchisor shut the business down and he has to pay the state. Either way I do not believe this gives raise to a capital loss. Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted June 18, 2015 Report Share Posted June 18, 2015 From my position outside looking in, the story your client is telling you does not pass the smell test. Before you get too involved, do some serious investigating. From here, all the parts of the puzzle are not being shown.Just be careful. Quote Link to comment Share on other sites More sharing options...
rfassett Posted June 19, 2015 Report Share Posted June 19, 2015 Late to the party here, but it sounds to me as if the franchisor captured the $50,000 when he did his grab and lock routine. Thus the franchisor is holding money that rightfully belongs to the Lottery. Most of the time franchisor will not do a grab and lock unless there is good reason. It sounds like this client gave them good reason. If your guy is personally liable for making the lottery whole, then I suppose there should be some sort of write off - but not before he has made legitimate efforts to retrieve the money from the franchisor. And I do not think you can look at this as an isolated issue. It sounds like your client was also relieved of some debt. Is he also willing to pick that up as debt forgiveness income? Quote Link to comment Share on other sites More sharing options...
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