Gambling losses. One down for KC and Pacun

[Pacun]

This is a continuation of the "GAMBLING: Court accepts IRS Rules" post

"A taxpayer may change an election to claim the standard

deduction at any time before the period of limitations has

expired. Sec. 63(e). Insofar as the record shows, petitioners

have not sought to change their election to claim the standard

deduction. In any event, on the record before us it would not

appear advantageous for petitioners to do so."

Sorry KC, I go with Jainen et all after carefully reading the case again.

[kcjenkins]

See, that is exactly where I have the problem, Pacun. If they had itemized, and they took the losses on Sch A, then they would have had $2000 on line 21, and then $900 on Sch A, and they would have arrived at $1100 taxable. I have no problem with that.

BUT, since they did NOT itemize, how did the court justify letting them claim those $900 of losses as an offset to the $2000 win? The court made a big deal about not allowing the losses FROM THE DAYS WITH NO WINS but still counted the $900 from the day they won the $2000. EVEN THO THEY DID NOT ITEMIZE. And the code is clear that you can only take the losses as itemized deductions.

[BulldogTom]

KC, that is the point of this case being so important. If the IRS and the courts are going to allow daily netting based on the definition of a transaction, we will be able to get more losses through. If the definition of a transaction is not the individual pull of the handle, but the results of all the pulls of the handle during a gambling session, then the taxpayer nets his session wins and losses. And then on top of that, any other sessions that don't result in a net win go to sched A.

This is very taxpayer friendly, and I can't believe this is what the IRS wants. It will result in many mismatch letters for W2G not equalling line 21.

I would think this will require a good set of records to win on, but if you follow the rules and can show each session/transaction in a log and the results, you should be able to use this.

Tom

Lodi, CA

[kcjenkins]

If you are correct, and I hope you are, that would seem to be a real softening in the defining of what is deductible. So you are reading it the way Jainen did, as allowing the losses from the non-winning days to still go to Sch A? I hope you are right.

However, either way, it redefines what goes to Line 21, and that is sure going to lead to incredible reporting problems, so I foresee the IRS getting that changed by Congress, don't you? Because Congress already said that you could only take your losses on Sch A, and only to the extent of your gains. And that the winnings went to determine Total Income. [Thus Line 21] This court allowed some of those losses to, in effect, go to that determination of Total Income.

In Norgaard v. Commissioner, KTC 1991-107 (9th Cir. 1991), the 9th Circuit upheld the Tax Court's refusal to make an estimate because, among other reasons, there was no evidence presented (by the taxpayer) of winnings not reported on Forms W2-G. Claiming winnings only if they are reported on W-2Gs, while tying to net the losses of those days, seems to me to be asking for trouble.

[BulldogTom]

I think the way this reads is not a change to the law, but what the definition of winnings is. Winnings will be determined at the time the chips are cashed in. Everything that makes up the net from the day is considered "winnings" or "losses". All "winnings" still go on Line 21 and all "losses" still go on sch A subject to Line 21 limitations. So the law has not changed, the definition of what is "winnings" seems to have changed.

I think you are right. Airtight documentation is going to be needed. The first time the auditor gets a log that only has winnings on days that there is a W2G, I think the taxpayer will be in trouble.

Tom

Lodi, CA

[Jake]

I am going to jump back in here. As I outlined in a previous post I believe that a correct way, and in most cases a benificial way to report gambling activity is to net winnings and losses from a single gambling session on line 21 of the 1040. As KC and Tom have pointed out, this treatment is gauranteed to result in a CP2000 notice because line 21 will not match the W2-Gs that have been issued by the casinos. In addition it would be a difficult CP2000 issue to resolve. So my question is from a practical standpoint, how to report this correctly without having problems with IRS in the future. My thought would be on the detail schedule for line 21 is to report the gambling income like we normally do and then on a seperate line on the same schedule report the losses and title it something like "Netted Gambling Activity". I don't know if this would work because I don't know how much detail is trasmitted to the IRS. Any other thoughts?

[BulldogTom]

The only way to keep from getting the CP 2000 is to report the entire amount of issued W2G's on line 21. I think I will continue to educate my clients and let them decide how good their records are and what their tolerance for an inquiry.

HOwever, if it is me and I am so fortunate to have winnings from a casino in the future (that hasn't happened before, so I might be due), I am netting those bad boys out for the day. You bet I will have great records to prove it too.

Tom

Lodi, CA

[jainen]

>>You bet I will have great records<<

If I lose THAT bet, Bulldog, I'll deduct it on Schedule C. 'Cause I'm a professional.

Jake, in my opinion the right thing to do with inconsistent treatment of a 1099 is to disclose it the way the IRS expects, on Form 8275.

[TAXMAN]

TP just received a form letter from the casino showing winnings of $4000 and losses of $6000. what now? I have seen the w-2g forms and they show the $4000. At his point not sure TP will be able to itemize. Just adding some more fuel to the fire.

[TAXBILLY]

Have you actually seen the form letter?

I am curious as to how they knew how much he lost at their casino.

taxbilly

[TAXMAN]

Have not seen the letter yet. TP informs that as he plays he uses some type of card that keeps track of what he plays and the days. Not sure that this would work on the card tables or other plays where a card cannot be used. Seems that I read somewhere about 2 years ago IRS said these were acceptable for lines 21 and schedule A not exceeding Line 21. However in light of the way the court ruled unles TP actually had that particular days events I personally would hesitate to use a netting process. Do we inform TP and let him decide based on how good? his records are?

[jainen]

>>Do we inform TP and let him decide<<

Always a tough question. The answer is in Circular 230. A practitioner should have a reasonable basis for taking a tax position, which means at least a one in three chance of winning an audit. Within that standard of reasonableness, you can let the taxpayer decide how conservative he wants to be. If he kept contemporaneous notes such as receipts or credit card statements, and is willing to disclose the W-2G discrepancy, go for it. If he demands you take his bare word (while his wife is kicking him under the table) that it was all a business meeting with a new client, go for something else.

[Pacun]

The casinos provide players with a card under their name. When you play on the computers (slot machines), every penny counts.

On the tables, you have a dealer and a manager. You put your money down and your card. Dealear grabs your money and gives you chips. The card is given to the manager and he opens a tab for you based on your seat and name. On the tab, the manager writes down how much you started with. Every 15 or 20 minutes, the manager comes and checks how much you have on your chips and writes it down. If you run out of chips and put money on the table, the dealer or the player calls the manager and ask to write down the extra money. At this point the card is not needed because the manager has the tab with the card number and the name. When you color in, they write down how much you left with. These tabs are given to the office for record keeping and entered on a computer. If a player puts chips on his pocket, the dealer informs the manager discretely. They also keep track of how much you wager so that they can offer you rooms or dinners.

Of course the IRS will take the casinos word because it is a very consistent record.

[kcjenkins]

Yes, the casinos all send out a year-end report now, to any one who uses their cards. It has been accepted by every auditor I've known, because it is more accurate than any other method.