Gambling

[Pacun]

Tax Court Accepts IRS Method for Determining Gambling Wins and Losses

December 29, 2009

The Tax Court held in a memorandum decision released Monday that taxpayers who were casual gamblers recognized wins or losses when they redeemed their tokens and that they could not net their wins and losses across the year (Shollenberger, TC Memo 2009-306).

In this decision, the court accepted the IRS’ methodology for determining wagering gains and losses, which the Office of Chief Counsel put forth in a legal memorandum in 2008 (AM 2008-011).

The taxpayers in the case were a married couple who gambled occasionally at a casino in the small town of Charles Town, W.Va. On March 29, 2005, the husband hit a $2,000 jackpot at a dollar slot machine. The couple continued gambling and lost $400 from the jackpot; they left the casino that day with $1,600 in winnings. They did not report any gambling income on their tax return for 2005, and the IRS issued a deficiency notice for $2,000 in unreported gambling winnings.

IRC § 165(d) states that “losses from wagering transactions shall be allowed only to the extent of the gains from such transactions” but does not provide a technical definition of the terms “gains” and “losses.” As AM 2008-011 explains, the term “transactions” in section 165(d) could mean every single play in a game of chance or every wager made. That interpretation would require a taxpayer to calculate the gain or loss on every transaction separately and treat every play or wager as a taxable event and also to trace and recompute the basis through all transactions to calculate the result of each play or wager.

Because that method would be “unduly burdensome,” the IRS legal memo allows a casual gambler to recognize a wagering gain or loss at the time he or she redeems tokens.

At trial, the IRS conceded that under that method, the taxpayers should have reported $1,100 in gambling winnings rather than the $2,000 in the deficiency notice. According to the court, the lesser amount would be calculated as follows: $2,000 in jackpot winnings minus $500 in wagering money originally brought into the casino by the taxpayers minus the $400 lost by the taxpayers after the jackpot that day.

The taxpayers argued that they should be allowed to offset their gambling winnings with $2,264 of other gambling losses that they claimed to have incurred in 2005. Because section 165(d) uses the term “transactions,” the court held that the taxpayers could not net their gains and losses throughout the year. Instead, the court accepted the IRS’ treatment of transactions as occurring when the gambler cashes in his or her tokens at the end of play and held the taxpayers to have $1,100 of unreported gross income for the year.

According to the court, to allow the taxpayers to net gains and losses throughout the year would defeat the purpose of IRC § 63, under which losses of casual gamblers are allowable only as itemized deductions.

[TAXBILLY]

http://www.ustaxcourt.gov/InOpHistoric/SHOLLENBERGER.TCM.WPD.pdf

taxbilly

[kcjenkins]

Thanks for posting this one. This is going to be a MAJOR issue for some of my clients. It's clearly going to require a 'trip diary', rather than a general diary, for all those who win occasionally, since many of them go several times with no winnings for every time they come home with extra money. It's not going to be at all popular, because it really is not fair, but we'll have to live with it.

[10SorTAX]

I thought gambling losses were taken on schedule A for casual gambler or schedule C for professional gambler. It seems to me these taxpayers were double-dipping by taking the standard deduction and also deducting gambling losses up to the amount of winnings, no? In which case the conceded amount of $1100 would be generous. Guess I don't have much experience with this scenario. My clients are losers, not winners. (Take that any way you wish.)

[Pacun]

Thanks for posting this one. This is going to be a MAJOR issue for some of my clients. It's clearly going to require a 'trip diary', rather than a general diary, for all those who win occasionally, since many of them go several times with no winnings for every time they come home with extra money. It's not going to be at all popular, because it really is not fair, but we'll have to live with it.

It is my understanding that you needed a log before this decision, NOT anymore. You just need the losses and winnings for the day the casino gets your social security number or when you want to comply with tax laws and report those $200 you won playing dimes and you won 5 dimes at a time.

I guess that anyone who goes to a casino to gamble violates the tax laws since you should report any winning. Let's say someone goes to the casino, puts a quarter and wins $100. Continues playing and losses $200. That person needs to report $100 winnings and if that person doesn't itemize, he/she will pay taxes on those $100 if that person follows the law. Am I correct?

What the wager ratio for it to be a taxable event in the eyes of the casino?

[Chowdahead]

It is my understanding that you needed a log before this decision, NOT anymore. You just need the losses and winnings for the day the casino gets your social security number or when you want to comply with tax laws and report those $200 you won playing dimes and you won 5 dimes at a time.

I guess that anyone who goes to a casino to gamble violates the tax laws since you should report any winning. Let's say someone goes to the casino, puts a quarter and wins $100. Continues playing and losses $200. That person needs to report $100 winnings and if that person doesn't itemize, he/she will pay taxes on those $100 if that person follows the law. Am I correct?

What the wager ratio for it to be a taxable event in the eyes of the casino?

Under your scenario, the person actually lost $100, which they can claim as a loss, since their winnings were also $100 at the end of the trip. If they had lost $500, they could only claim up to $100, because that was their total winnings on that particular trip.

Under this new interpretation, if they come back to the casino the next day they cannot factor those winnings and loses into their next day's transactions.

To make it really interesting is what if the person actually spend 2 or 3 straight days in the casino before cashing out? I have a client who actually slept in the casino.. I kid you not. Would this be considered 2 separate days or 1 trip?

[Jake]

When I read the case I understood that the taxpayer could net winnings and losses on line 21 of the 1040 for each time a taxpayer "settles" with the casino (i.e. cashes in his chips). I do not think that limits the taxpayers ability to deduct other unrelated gambling losses on the Schedule A to extent of all netted gambling winnings.

For example if a taxpayer goes to the casino with $500 and he wins a $5,000 jackpot and continues to gamble but only goes home with $2,500 his net winnings would be $2,000 for the day and that is what should be reported on line 21 of the 1040. If the taxpayer goes to the casino two more times during the year and looses $1,000 each time then I believe that the taxpayer would be entitled to an additional $2,000 deduction on Sch. A of the tax return.

I have several clients that are on SS and typically have W-2G's from the casino's if we can use the new rules to reduce AGI it will be very benificial to them.

[Pacun]

When I read the case I understood that the taxpayer could net winnings and losses on line 21 of the 1040 for each time a taxpayer "settles" with the casino (i.e. cashes in his chips). I do not think that limits the taxpayers ability to deduct other unrelated gambling losses on the Schedule A to extent of all netted gambling winnings.

For example if a taxpayer goes to the casino with $500 and he wins a $5,000 jackpot and continues to gamble but only goes home with $2,500 his net winnings would be $2,000 for the day and that is what should be reported on line 21 of the 1040. If the taxpayer goes to the casino two more times during the year and looses $1,000 each time then I believe that the taxpayer would be entitled to an additional $2,000 deduction on Sch. A of the tax return.

I have several clients that are on SS and typically have W-2G's from the casino's if we can use the new rules to reduce AGI it will be very benificial to them.

Jake, I don't think you are right. At no point the court said "since you cannot itemize, you cannot deduct any other losses".

[Pacun]

Under your scenario, the person actually lost $100, which they can claim as a loss, since their winnings were also $100 at the end of the trip. If they had lost $500, they could only claim up to $100, because that was their total winnings on that particular trip.

You are right the net result would be a loss, but you will need to report $100 on line 21 and if you do not itemize, you CANNOT deduct any losses.

[kcjenkins]

No, Jake, you can not, under the new rules, claim the losses from the days that had no gains. Read the ruling again.

[TAXMAN]

No, Jake, you can not, under the new rules, claim the losses from the days that had no gains. Read the ruling again.

kc? Then are we saying :net each days winnings against each days wagers and report this gain amount on line 21? Then what would be the purpose of the gambling loss line on Schedule A? Also in case where Casino reports on Form 1099 more than this amount. I may be confused but I also have many seniors on SS that have this problem also. If I won 1000 today and spent 1000 today and Casino reports 1000 on Form 1099, assuming I cannot file Sch A. What then?

[jainen]

>>assuming I cannot file Sch A. What then? <<

In my opinion, ANY taxpayer can file Schedule A. Then, if they don't choose to, I have observed that it is almost always because the standard deduction gives them even GREATER tax benefit.

As I read the final two sentences of the original post, the court said you can only net play action within individual sessions. If that "transaction" is a gain, you report gross income on Line 21. If it is a loss, you can deduct it on Schedule A to the extent of total net gains reported on Line 21.

10SorTAX calls this "generous," and I agree. In my opinion, it means that gamblers with good records may be able to report less than the total jackpots shown on W-2Gs. That might keep them out of AMT or phaseouts and have other effects related to AGI. In my opinion the ruling does not limit Schedule A deductions at all (except of course you can't deduct the same losses you have already netted). Gamblers now have an another way to claim losses, that's all.

We always knew you couldn't win a $2000 jackpot in March and not report it at all, even if you lost $3000 later in the year. That's what the taxpayers in this ruling wanted to do. The court reasonably said no, you have to go day-by-day. I guess that does catch some weekend players who win for a while on Saturday, cash in, and then come back on Sunday to lose it all. Perhaps they used to net gains and losses across the whole trip and so report nothing. In my opinion, now they are supposed to use Schedule A unless it was all one session.

[kcjenkins]

kc? Then are we saying :net each days winnings against each days wagers and report this gain amount on line 21? Then what would be the purpose of the gambling loss line on Schedule A? Also in case where Casino reports on Form 1099 more than this amount. I may be confused but I also have many seniors on SS that have this problem also. If I won 1000 today and spent 1000 today and Casino reports 1000 on Form 1099, assuming I cannot file Sch A. What then?

No, you do not net the amount on line 21. On line 21 you report all the winnings, and then on Sch A you report all the losses that relate to the winnings.

For example, say the client went to the casino 5 times in 2009. Each time he took $500 to gamble with. On trip 1, 3 and 4 he went home broke. That $1500 is NOT DEDUCTIBLE at all. On trip 2 he won $5000, but continued to gamble until he was down to $2000, then went home. On trip 5 he won $2000 but continued to gamble and went home with only $500. His line 21 would show the total winnings of $7000. His schedule A losses would be $1000 [original stake on both days] plus the losses those two days, $3000 and $1500. For a total of $5500. So although his total net gambling winnings was $7000 won less $7000 lost, his TAXABLE net was $7000 won less $5500 lost, for a net taxable gain of $1500.

[jainen]

>>On line 21 you report all the winnings, and then on Sch A you report all the losses that relate to the winnings.<<

Let's use the actual numbers from the ruling. As I read it, the taxpayers showed up on March 29 with $500 and won a $2000 jackpot, but then kept playing and lost $400. They got a W-2G for $2000, which is why IRS noticed, but even the IRS agreed they "should have reported $1,100 in gambling winnings rather than the $2,000." That's Line 21, the only place to report winnings.

Later in the year, the gamblers tried their luck again. This time they lost $2264, which they figured should offset the entire W-2G amount so they didn't report anything at all. The court said no, "to net gains and losses throughout the year would defeat the purpose of IRC §63, under which losses of casual gamblers are allowable only as itemized deductions." So that's Schedule A, the only place to deduct losses. In my opinion this specifically prohibits us from matching those later losses in any ways that, as you say in boldface, relate to winnings.

The article calls this the "methodology for determining wagering gains and losses." In my opinion that means the definition of "gain" and "loss" is not the individual spin of the slot machine wheels, even if one particular spin generates a W-2G. It's what happens over the entire session of play. Those daily gains go to Line 21, and the daily losses go to Schedule A (to the extent of Line 21, same as always).

[Julie]

I think I'm interpreting this the same way as jainen is.

This decision allows some of the loss to show up on line 21. I read this as saying they should put $1100 on line 21, and ($2264 limited to winnings) $1100 could have gone on Sch A.

"But because petitioners have elected the standard deduction, they are not entitled to itemize their deductions." (page 5)

Elected is a key word here. They could have elected differently.

I can't draw KC's conclusion from the decision. I tried.

[kcjenkins]

Please note that the IRS originally said that they had $2000 of unreported income, which in fact, they did. The fact that they allowed the netting here, while agreeing that they were not allowed to change to itemized deductions, is not actually logical at all. Still based on page 6, They did allow it to be netted to Line 21, which if that is allowed, would, in fact, eliminate the need for any entry on Sch A. Because if you have already netted the winnings and losses on line 21, there would then be no other deductible losses to go to Sch A, unless they were allowed to double-dip, which I do not think was what they meant. The ruling seems to have just decided to ignore the law that says the losses can ONLY be taken as itemized deductions, and decided to allow them to take them on Line 21 by netting them. But I really do not think that would be something that could stand up in every tax court, because it is contradictory to the actual law, which says the winnings [not the net winnings] goes on line 21 and the losses on Sch A. This is not a decision I'd rely on in any other circuit.

[Pacun]

I think I'm interpreting this the same way as jainen is.

This decision allows some of the loss to show up on line 21. I read this as saying they should put $1100 on line 21, and ($2264 limited to winnings) $1100 could have gone on Sch A.

"But because petitioners have elected the standard deduction, they are not entitled to itemize their deductions." (page 5)

Elected is a key word here. They could have elected differently.

I can't draw KC's conclusion from the decision. I tried.

You don't elect to itemize or not itemized. You make entries on sch A and if you don't have enough to itemize, you take the standard deduction. If the IRS takes away some from another part of my return, I should be allowed to go back to sch A and amend. I see the problem as KC sees it but again... that's why we have this forum to help us.

Let's say that I am single (tax year 2008) and my itemized deductions are only $4,500 and salary $45,000. I had education expenses for $5,000. By mistake I take the hope credit eventhough I already claimed it for 2 years in the pass. The IRS disallow my hope credit. I should have the opportunity to go back to schedule A and itemize.

[jainen]

>>You don't elect to itemize or not itemized.<<

In my opinion, this attitude misses a lot of opportunity for tax planning. First of all, there is the whole concept of bunching deductions, where you choose to itemize only in alternate years. And then there's the question of recapture of certain deductions like state income tax refunds, which are tax-free if you don't itemize. If you recognize that AMT or phaseout will negate itemized deductions anyway, you may elect to treat foreign tax as a credit instead of a deduction, or trace interest to a purpose other than principal residence. There's no end to the examples.

But to return to the question at hand, I'm troubled because I don't typically find myself more liberal than you, kcjenkins (of course I only mean in terms of taxation, not presidential politics). So I turned to page 6, which you cited, and found "gross income from a wagering transaction should be calculated by subtracting the bets placed to produce the winnings." In my opinion that means we are not "netting losses" as such. Just calculating gross income with a given formula. The foundation of this ruling is the definition of "transaction."

[Don in Upstate NY]

... So I turned to page 6, which you cited, and found "gross income from a wagering transaction should be calculated by subtracting the bets placed to produce the winnings." In my opinion that means we are not "netting losses" as such. Just calculating gross income with a given formula. The foundation of this ruling is the definition of "transaction."

That's how I interpreted the ruling. You go to the casino and play all day. When you check out you calculate your net for that day, which is either a gain (gross income) or a loss, but NOT some of both. At the end of the year you add all your daily gains (up to 366 of them) and put the total on line 21. Then you add up all your daily losses (for those days when you didn't have a daily gain) and optionally put that total on Schedule A (limited to the line 21 number.)

[strictly speaking, the ruling implies that you do the netting every time you visit the cashier's cage to settle up. Daily seems to be a reasonable assumption.]

[Pacun]

"At the end of the year you add all your daily gains (up to 366 of them) and put the total on line 21."

If it is up to 366 days, it doesn't go to line 21, it should go to schedule C or you need to call the gambler hotline for help.

[TAXBILLY]

Why 366?

taxbilly

[Pacun]

Why 366?

taxbilly

Leap year.

[TAXMAN]

It seems that IRS went along with the netting process on line 21 in this case and didn't bar its use in future cases like it sometimes does. I believe if form 1099's are issued, isn't IRS going to be looking for that number in their matching program? I see letters galore and interperdations if this be the case. Seems strange that the law reads one way and tax court read it the other way. Now who do we believe? Tax court and IRS or the Law? Is there a way to find out if this tax court ruling could be used in all juristictions or only in the juristiction in which it was handled?

[Bart]

"At the end of the year you add all your daily gains (up to 366 of them) and put the total on line 21."

If it is up to 366 days, it doesn't go to line 21, it should go to schedule C or you need to call the gambler hotline for help.

Just because you gamble every day does not mean you are a professional gambler.

[Pacun]

Just because you gamble every day does not mean you are a professional gambler.

That's why I used OR.