Recent Tax Court Case Goes Against Nonprofessional Gamblers

[Big_Leon]

Nothing really new here since the law is very clear on this subject. U.S. tax law really sucks as far as gambling is concerned. Still, I'm always interested to read things like this. What I'm really waiting to see is if a case will come along where a person that works a full-time job AND also files a Sch C as a professional gambler. I'd be interested to see if the IRS tries to take the position that you can't be both and thus force the taxpayer to report all gambling as nonprofessional.


Spencer, TC Summary Opinion 2006-95
In a Summary Opinion, the Tax Court has held that nonprofessional gamblers had to report their winnings as gross income and couldn't net (offset) this amount by losses from other gambling activity.

Facts. Janice Spencer and, her husband, Fred Egerton, filed a joint return (Form 1040, U.S. Individual Income Tax Return) reporting salary income of $30,314, and Social Security income of $7,728 (of which the reported taxable portion was $1,089). They also claimed a $395 tax credit on Form 8880, Credit for Qualified Retirement Savings Contributions. They claimed the standard deduction, rather than itemizing their deductions.

They didn't report on their return slot machine winnings of $13,400 from several casinos. They reasoned that they didn't have to include these winnings in income or report them on their return because their gambling losses exceeded their winnings.

While IRS agreed that their losses were at least equal to their winnings, it determined a deficiency of $2,525 for the year. It concluded that the $13,400 in gambling winnings was gross income. As a result, a larger amount of the Social Security benefits was determined to be taxable, and the $395 credit for qualified retirement savings was eliminated. IRS allowed the couple an itemized deduction equal to their gambling losses, instead of the standard deduction previously claimed.

The taxpayers' argument. The taxpayers contended that, because their gambling losses exceeded their gambling winnings, the winnings did not have to be reported as gross income. They objected to the fact that, under IRS's approach, they would be taxed on a greater amount of their Social Security benefits and lose the tax credit and the standard deduction, both of which were unrelated to their gambling activity. They argued that, if their gambling winnings had to be reported as income on their tax return, then the losses should be allowed as an “above the line” deduction, i.e., a deduction in arriving at gross income.

Law is clear. The Tax Court agreed with IRS's treatment of the gambling winnings. The law is clear that income from gambling is includable in gross income. ( Code Sec. 61 ) The Court noted that a professional gambler who is engaged in a trade or business of gambling reports his income and losses from his gambling activity on Schedule C, Profit or Loss From Business. Nonprofessional gamblers, like the taxpayers, report their gambling winnings as other income on their Form 1040.

Losses of a professional gambler who is engaged in a trade or business of gambling are reported as from a trade or business activity. That is, they are deductible as ordinary and necessary expenses paid or incurred in carrying on a trade or business under Code Sec. 162(a) , subject to Code Sec. 165(d) , which limits the loss deduction to the extent of the gains realized from gambling. Nonprofessional gamblers deduct their losses as an itemized deduction.

The Court thus rejected the taxpayers' arguments. To treat the income and losses in the way they wished would effectively remove any distinction between a professional gambler and a nonprofessional gambler. There is no authority to support their argument that unrelated income and credits are immune from the effects of the manner in which IRS treated their gambling winnings and losses.

RIA observation: The statutory approach of requiring casual gamblers to report their winnings as gross income and deduct their losses below the line can produce harsh results in a given situation. In the current case, the statutory approach caused an additional amount of social security benefits to be taxed and loss of a credit. The statutory approach also can result in reductions in deductions and other tax breaks geared to AGI. Affected items that could be reduced on account of gambling winnings include deductions for medical expenses, casualty losses, traditional and Roth IRA contributions; student loan interest; miscellaneous itemized deductions; itemized deductions affected by the overall limitation on itemized deductions; personal exemptions; the credit for child and dependent care expenses; the child credit; the earned income credit; the adoption credit; education credits; the exclusion for employer-provided adoption assistance; and the exclusion for interest on savings bonds used for education.

RIA observation: In the current case, IRS allowed the taxpayers an itemized deduction in the amount of their winnings. It is unclear whether they paid other amounts that would qualify as itemized deductions such as taxes or charitable contributions. If they did, as is likely, they should have asked IRS to increase their itemized deduction by such additional amounts.

[iceman5]

[Cactus Jack]