81

RONALD ANDREW MAYO AND LESLIE ARCHER MAYO, 

PETITIONERS v. COMMISSIONER OF INTERNAL

REVENUE, RESPONDENT

Docket No. 15527–03. Filed January 25, 2011. 

P–H was engaged in the trade or business of gambling on 

horse races during 2001. Ps attached a Schedule C, Profit or 

Loss From Business, to their 2001 Federal income tax return, 

on which they reported the results of P–H’s gambling business, including gross receipts of $120,463 and expenses of 

$142,728, consisting of $131,760 for wagers placed and 

$10,968 in expenses incurred in connection with the conduct 

of the gambling business. Ps deducted the excess of the 

Schedule C expenses over gross receipts, $22,265, as a business loss against their other income. R issued a notice of defiVerDate 0ct 09 2002 11:18 May 30, 2013 Jkt 372897 PO 20009 Frm 00001 Fmt 2847 Sfmt 2847 V:\FILES\MAYO.136 SHEILA
82 136 UNITED STATES TAX COURT REPORTS (81) 

1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986 

as in effect during the taxable year at issue, and all Rule references are to the Tax Court Rules 

of Practice and Procedure. 

2The foregoing reflected, among other adjustments, respondent’s determination that petitioner 

Ronald Andrew Mayo was not engaged in the trade or business of gambling and was therefore 

required to claim any gambling losses (but only to the extent of gambling gains) as itemized 

deductions. 

3Petitioner Leslie Archer Mayo signed a joint return for the taxable year at issue but had 

no active involvement in the gambling activity. 

ciency disallowing $22,265 of Ps’ claimed loss from gambling; 

i.e., the amount by which expenses from P–H’s gambling 

activity exceeded gross receipts from gambling. R contends 

that Ps’ allowable losses from P–H’s gambling business are 

limited to the reported gross receipts from the business pursuant to I.R.C. sec. 165(d). R further maintains that the ‘‘Losses 

from wagering transactions’’ for purposes of I.R.C. sec. 165(d) 

include both the $131,760 cost of wagers placed by P–H and 

the $10,968 in expenses he incurred in connection with the 

conduct of the gambling business. Finally, R determined that 

Ps are liable for an accuracy-related penalty under I.R.C. sec. 

6662(a) and (b)(2) for a substantial understatement of income 

tax. Held: I.R.C. sec. 165(d) applies to P–H notwithstanding 

his engagement in the trade or business of gambling and 

limits his allowable losses from wagering transactions to the 

extent of gains from such transactions. The holding of Offutt 

v. Commissioner, 16 T.C. 1214 (1951), to that effect followed. 

Held, further, trade or business expenses incurred by P–H in 

the conduct of the trade or business of gambling, other than 

the cost of wagers, are not subject to the limitation of I.R.C. 

sec. 165(d) but are instead deductible under I.R.C. sec. 162(a). 

The holding of Offutt v. Commissioner, supra, to the contrary 

will no longer be followed. Held, further, Ps are not liable for 

any penalty under I.R.C. sec. 6662(a) and (b)(2). 

Ronald Andrew Mayo and Leslie Archer Mayo, pro sese. 

Michael S. Hensley, for respondent. 

GALE, Judge: Respondent determined a deficiency of $9,732 

in Federal income tax and an accuracy-related penalty under 

section 6662(a) and (b)(2) 1 of $1,387 with respect to petitioners’ 2001 taxable year. 2 Respondent subsequently conceded that petitioner Ronald Andrew Mayo (petitioner) 3 was 

in the trade or business of gambling during 2001 and allowed 

petitioner’s gambling expenses (which totaled $142,728) to be 

deducted as trade or business expenses to the extent of his 

gross receipts from gambling ($120,463). The foregoing 

concessions resulted in a reduced deficiency and accuracyVerDate 0ct 09 2002 11:18 May 30, 2013 Jkt 372897 PO 20009 Frm 00002 Fmt 2847 Sfmt 2847 V:\FILES\MAYO.136 SHEILA
(81) MAYO v. COMMISSIONER 83

4Petitioner reserved relevancy objections to almost all of the stipulations and stipulated exhibits, including portions of the 2001 Federal income tax return, the notice of deficiency issued 

with respect to 2001, and the Notice CP2000 in which respondent conceded petitioner’s status 

as a professional gambler. We hereby overrule petitioner’s relevancy objections. Certain stipulations concerning petitioner’s professional education and employment appear germane only to the 

accuracy-related penalty for substantial understatement of income tax. Since we conclude that 

there is no substantial understatement of income tax on the 2001 return, these stipulations are 

not material in any event. 

related penalty of $6,993 and $1,387, respectively. The issues 

for decision are: 

(1) Whether petitioner’s engagement in the trade or business of gambling entitles him to deduct the losses from his 

gambling business from gross income without regard to section 165(d), which allows wagering losses only to the extent 

of wagering gains; 

(2) whether petitioner is entitled to deduct the expenses, 

other than the costs of wagers, incurred in carrying on his 

gambling business pursuant to section 162(a) without regard 

to section 165(d); and 

(3) whether petitioners are liable for an accuracy-related 

penalty under section 6662(a) and (b)(2) for substantial 

understatement of income tax. 

FINDINGS OF FACT 

Some of the facts have been stipulated and are so found. 

We incorporate by this reference the stipulation of facts and 

the exhibits attached thereto. 4

Petitioners resided in California when the petition was 

filed. 

The parties have stipulated that petitioner was engaged in 

the trade or business of gambling on horse races during 

2001. During that year he wagered $131,760 on the outcome 

of horse races and won $120,463 as a result of the wagers he 

placed. Petitioners attached a Schedule C, Profit or Loss 

From Business, to the 2001 Federal income tax return on 

which they reported the results of petitioner’s gambling business. On the Schedule C petitioners reported as gross 

receipts the $120,463 of proceeds from petitioner’s winning 

wagers and deducted as an expense the $131,760 in wagers 

petitioner placed (wagering expenses). Petitioners also 

claimed the following as expenses on the Schedule C (collectively, business expenses):

84 136 UNITED STATES TAX COURT REPORTS (81) 

5Petitioner’s gross income consisted of wages, interest, refunds of State and local income 

taxes, capital gain, pensions and annuities, royalties, Social Security benefits, and trust fees. 

Expense Amount

Car and truck .......................................................... $3,109

Interest ..................................................................... 91

Office ........................................................................ 256

Travel ....................................................................... 776

Meals and entertainment ....................................... 1,651

Telephone and Internet ........................................... 670

Admission/entry fees ............................................... 1,251

Subscriptions ............................................................ 1,056

Handicapping data .................................................. 1,960

ATM fees .................................................................. 148

Total ...................................................................... 10,968

Petitioners deducted the total of the wagering expenses and 

business expenses ($142,728) from the reported gross receipts 

from wagering ($120,463), resulting in a reported net loss on 

the Schedule C of $22,265. This figure was claimed as a business loss, which petitioners deducted from gross income. 5

On June 9, 2003, respondent sent petitioners a notice of 

deficiency for 2001 in which he determined that petitioner 

was not engaged in the trade or business of gambling and 

was therefore required to claim any gambling losses (but only 

to the extent of gambling gains) as itemized deductions 

(pursuant to section 63) and subject to the limitation of section 68, rather than as trade or business expenses under section 62(a)(1). On August 11, 2003, respondent sent petitioners a Notice CP2000 in which he conceded that petitioner 

was in the trade or business of gambling and that petitioners were therefore entitled to deduct petitioner’s 

wagering expenses and business expenses on Schedule C, but 

only to the extent of his gross receipts from gambling. Consequently, respondent allowed Schedule C expenses of only 

$120,463, the amount of gross receipts reported from gambling, thereby eliminating the $22,265 net loss from gambling that petitioners had claimed as a deduction from gross 

income. Respondent’s limitation of petitioners’ allowable 

deductions from gambling to $120,463 effectively disallowed 

both the excess of the $131,760 in wagering expenses over 

the $120,463 in gross receipts from gambling ($11,297) and 

business expenses claimed in connection with the conduct of 

the gambling business ($10,968). 

(81) MAYO v. COMMISSIONER 85

6Offutt v. Commissioner, 16 T.C. 1214 (1951), construed sec. 23(h) of the 1939 Code, a predecessor of current sec. 165(d) with identical language. The language first appeared in the Revenue Act of 1934, ch. 277, sec. 23(g), 48 Stat. 689, and has remained unchanged since. 

OPINION 

I. Application of Section 165(d) to the Trade or Business 

of Gambling

Section 162(a) generally allows a deduction for ‘‘all the 

ordinary and necessary expenses paid or incurred during the 

taxable year in carrying on any trade or business’’. Section 

165(d), however, provides that ‘‘Losses from wagering transactions shall be allowed only to the extent of the gains from 

such transactions.’’ The parties have stipulated that petitioner was in the trade or business of gambling on horse 

races in 2001 and that he ‘‘wagered’’ a total of $131,760 on 

the outcome of horse races and won a total of $120,463 as a 

result of this wagering during that year. Petitioner’s 

wagering expenses thus come within the description of both 

section 162(a) and section 165(d). See, e.g., Boyd v. United 

States, 762 F.2d 1369, 1372–1373 (9th Cir. 1985); Nitzberg v. 

Commissioner, 580 F.2d 357, 358 (9th Cir. 1978), revg. T.C. 

Memo. 1975–154 and T.C. Memo. 1975–228; Offutt v. 

Commissioner, 16 T.C. 1214, 1215 (1951); Crawford v. 

Commissioner, T.C. Memo. 2010–54; Valenti v. Commissioner, T.C. Memo. 1994–483. 

Petitioner contends that under Commissioner v. 

Groetzinger, 480 U.S. 23 (1987), the limitation of section 

165(d) on the deduction of gambling losses does not apply to 

professional gamblers. Citing the Supreme Court’s observation that ‘‘basic concepts of fairness * * * demand that * * * 

[gambling] activity be regarded as a trade or business just as 

any other readily accepted activity’’, id. at 33, petitioner contends that section 165(d) does not apply to an individual 

engaged in the trade or business of gambling since it does 

not apply to other trades or businesses. 

In 1951 this Court considered whether an individual 

engaged in the trade or business of gambling is subject to the 

section 165(d) limitation on wagering losses, holding that the 

limitation applied in these circumstances. Offutt v. Commissioner, supra at 1215–1216; 6 accord Skeeles v. United States, 

118 Ct. Cl. 362, 372, 95 F. Supp. 242, 246–247 (1951). In 

recent years we have repeatedly rejected the claim that 

86 136 UNITED STATES TAX COURT REPORTS (81) 

Groetzinger modified this settled law and should be read as 

confining the application of section 165(d) to casual or recreational gamblers and eliminating the section’s limitation 

on the deduction of the gambling losses of professional gamblers. See Crawford v. Commissioner, supra; Lyle v. Commissioner, T.C. Memo. 1999–184, affd. without published opinion 

218 F.3d 744 (5th Cir. 2000); Valenti v. Commissioner, supra. 

In Valenti we considered this claim regarding Groetzinger

at length. We observed that, even though the gambling losses 

of a professional gambler fall under both the section 162(a) 

allowance of deductions for trade or business expenses and 

the section 165(d) limitation on the deduction of losses from 

wagering, it is a well-settled principle that section 165(d), as 

the more specific statute, trumps the more general provisions 

of section 162(a). The former provision operates as a limitation on deductions otherwise allowable under the latter. See 

Nitzberg v. Commissioner, supra at 358; see also Boyd v. 

United States, supra at 1372–1373; Skeeles v. United States, 

supra at 247. 

Moreover, we reasoned, the Supreme Court in Groetzinger

did not consider the interplay between sections 162(a) and 

165(d) because the restriction in section 165(d) was not at 

issue in that case. Instead, the issue decided in Groetzinger

was whether the taxpayer’s gambling activities constituted 

engagement in a trade or business under section 162 ‘‘for 

purposes of treating his gambling losses as a tax preference 

item under the minimum tax scheme governed by sections 55 

and 56.’’ Valenti v. Commissioner, supra. In Groetzinger the 

Supreme Court held that an individual engaged in gambling 

for his own account—that is, not providing goods or services 

to others as would a casino operator or bookmaker—is 

engaged in a trade or business within the meaning of sections 62(a)(1) and 162(a), with the result that his gambling 

losses were not items of tax preference for purposes of the 

then-applicable alternative minimum tax. As for the suggestion that Groetzinger’s holding regarding the trade or business status of certain individual gamblers eliminated the section 165(d) limitation in the case of professional gamblers, we 

noted in Valenti the consistent line of cases holding the section 165(d) limitation applicable even where wagering activities were conducted as a trade or business, citing Boyd v. 

United States, supra, Estate of Todisco v. Commissioner, 757 

(81) MAYO v. COMMISSIONER 87

7 Although Nitzberg v. Commissioner, 580 F.2d 357 (9th Cir. 1978), revg. T.C. Memo. 1978–

154 and T.C. Memo. 1978–228, reversed two Memorandum Opinions of this Court, the reversal 

turned upon different views concerning whether the wagering transactions at issue were those 

of the taxpayers or third parties and not upon a different view of the applicability of sec. 165(d) 

to wagering activities conducted as a trade or business. 

8We acknowledge that the Court of Appeals for the Ninth Circuit, to which an appeal would 

lie, has voiced some doubts regarding this line of authority. In Kent v. United States, 185 F.3d 

867 (9th Cir. 1999), an unpublished opinion, the Court of Appeals stated that its decisions in 

Nitzberg v. Commissioner, supra, and Boyd v. United States, 762 F.2d 1369 (9th Cir. 1985), 

‘‘clearly hold that § 165(d) limits the deduction of gambling losses even of those who gamble 

professionally.’’ However, the Court of Appeals went on to note: 

It is true that the U.S. Supreme Court’s 1987 decision in Commissioner v. Groetzinger * * * 

casts some doubt on the continued vitality of the reasoning of Nitzberg and Boyd, but it did not 

overrule those decisions. Like the district court, a three-judge panel of this court is bound by 

our precedents. If Nitzberg and Boyd are not to be followed any longer, the court sitting en banc 

must overrule them. * * * [Kent v. United States, supra.] 

F.2d 1, 6–7 (1st Cir. 1985), affg. in part and vacating in part 

T.C. Memo. 1983–247, Nitzberg v. Commissioner, supra, 7

Skeeles v. United States, supra, Offutt v. Commissioner, 

supra, Ward v. Commissioner, T.C. Memo. 1986–237, and 

Kozma v. Commissioner, T.C. Memo. 1986–177. 8 See also 

Lyle v. Commissioner, supra. The section 165(d) limitation 

has been applied whether the professional gambler was an 

individual wagering for his own account, see Boyd v. United 

States, 762 F.2d 1369 (9th Cir. 1985); Crawford v. Commissioner, supra; Tschetschot v. Commissioner, T.C. Memo. 

2007–38; Praytor v. Commissioner, T.C. Memo. 2000–282; 

Lyle v. Commissioner, supra; Kochevar v. Commissioner, T.C. 

Memo. 1995–607; Kozma v. United States, supra, an individual or partnership engaged in providing gambling services 

to others, see Estate of Todisco v. Commissioner, supra; 

Nitzberg v. Commissioner, supra; Ward v. Commissioner, 

supra, or an individual engaged in both, see Skeeles v. United 

States, supra; Offutt v. Commissioner, supra. 

In Commissioner v. Groetzinger, supra at 32, the Supreme 

Court made the following observations regarding section 

165(d): 

Federal * * * legislation * * * [has] been reluctant to treat gambling on 

a parity with more ‘‘legitimate’’ means of making a living. * * * And the 

confinement of gambling-loss deductions to the amount of gambling gains, 

a provision brought into the income tax law as § 23(g) of the Revenue Act 

of 1934 * * * and carried forward into § 165(d) of the 1954 Code, closed 

the door on suspected abuses * * * but served partially to differentiate 

genuine gambling losses from many other types of adverse financial consequences sustained during the tax year. * * *

88 136 UNITED STATES TAX COURT REPORTS (81) 

9See Revenue Act of 1932, ch. 209, sec. 23(e)(2), 47 Stat. 180; Revenue Act of 1928, ch. 852, 

sec. 23(e)(2), 45 Stat. 800; Revenue Act of 1926, ch. 27, sec. 214(a)(5), 44 Stat. 26; Revenue Act 

of 1918, ch. 18, sec. 214(a)(5), 40 Stat. 1067 (1919) (allowing deductions for losses incurred in 

any transaction entered into for profit, though not connected with the trade or business). 

10The Board of Tax Appeals reasoned in Frey v. Commissioner, 1 B.T.A. 338, 340–341 (1925), 

that a loss from illegal gambling had not been ‘‘incurred’’ in any transaction entered into for 

profit (within the meaning of sec. 214(a)(5) of the Revenue Act of 1918) because the liability 

underlying the loss was not legally enforceable. 

Thus, contrary to petitioner’s contention, the Supreme Court 

acknowledged the congressional decision to treat gambling 

losses differently from other losses for purposes of the Federal income tax, even when incurred as a ‘‘means of making 

a living’’. This passage cannot be readily reconciled with petitioner’s contention that Commissioner v. Groetzinger, 480 

U.S. 23 (1987), removed the section 165(d) limitation on 

losses from wagering transactions when incurred in the conduct of a trade or business. 

The legislative history of the enactment of the Revenue Act 

of 1934 (1934 Act), ch. 277, sec. 23(g), 48 Stat. 689, the 

predecessor of section 165(d), also supports the conclusion 

that the limitation on losses from wagering transactions was 

intended to apply to all such losses, even if incurred in the 

conduct of a trade or business. Before enactment of 1934 Act 

sec. 23(g), there was no statutory provision specifically 

directed at wagering losses. The courts had determined the 

deductibility of losses from gambling on the basis of the 

predecessors of section 165(c)(2) that allowed deductions for 

losses incurred in any transaction entered into for profit, 

though not connected with a trade or business. 9 Caselaw and 

administrative rulings before enactment of 1934 Act sec. 

23(g) held that the deductibility of gambling losses depended 

upon whether the gambling was illegal or legal and whether 

it was undertaken for profit rather than merely for recreation. Losses from illegal gambling were deductible only to 

the extent of gains therefrom. Frey v. Commissioner, 1 B.T.A. 

338 (1925). 10 Losses from legal gambling were fully deductible against other types of income if the gambling had been 

entered into for profit, see G.C.M. 10873, 1932–2 C.B. 85; see 

also Cronan v. Commissioner, 33 B.T.A. 668 (1935) (construing law before enactment of 1934 Act sec. 23(g) as 

allowing deduction of losses from legal gambling against nongambling income), and not deductible at all if the gambling 

had not been entered into for profit, Beaumont v. CommisVerDate 0ct 09 2002 11:18 May 30, 2013 Jkt 372897 PO 20009 Frm 00008 Fmt 2847 Sfmt 2847 V:\FILES\MAYO.136 SHEILA
(81) MAYO v. COMMISSIONER 89

11Only later was the language of sec. 165(d)—to the effect that losses from wagering transactions ‘‘shall be allowed’’—interpreted as a liberalizing measure in the case of recreational gamblers, entitling them to deduct gambling losses to the extent of gambling gains without regard 

to profit motive. See Humphrey v. Commissioner, 162 F.2d 853, 855 (5th Cir. 1947), affg. in part 

and revg. in part a Memorandum Opinion of this Court; see also Winkler v. United States, 230 

F.2d 766, 774 (1st Cir. 1956). 

sioner, 25 B.T.A. 474 (1932), affd. 73 F.2d 110 (D.C. Cir. 

1934). 

Against this backdrop, Congress decided in the 1934 Act 

that the unlimited deduction for legal, profit-motivated gambling was inappropriate. Instead, Congress determined that 

the judicially developed rule for illegal gambling, which limited losses to gains, should be extended to legal gambling. 

The report of the Committee on Ways and Means explained: 

Section 23(g). Wagering losses: Existing law does not limit the deduction 

of losses from gambling transactions where such transactions are legal. 

Under the interpretation of the courts, illegal gambling losses can only be 

taken to the extent of the gains on such transactions. A similar limitation 

on losses from legalized gambling is provided for in the bill. * * * [H. 

Rept. 704, 73d Cong., 2d Sess. 22 (1934), 1939–1 C.B. (Part 2) 554, 570.] 

See also S. Rept. 558, 73d Cong., 2d Sess. 25 (1934), 1939–

1 C.B. (Part 2) 586, 605 (to same effect). Since existing law 

at the time of enactment of the 1934 Act allowed losses to 

be deducted in excess of gains only in the case of gambling 

entered into for profit, see Beaumont v. Commissioner, supra, 

the limitation on losses in the 1934 Act was directed at 

profit-motivated gambling only. 11 As noted, 1934 Act sec. 

23(g) survives unchanged as section 165(d). Section 165(d) 

was therefore from its inception intended to apply to profitmotivated gambling. While caselaw at the time of enactment 

of the 1934 Act had not addressed gambling rising to the 

level of a trade or business as opposed to gambling constituting a transaction entered into for profit, Congress’ clear 

intention to limit losses for profit-motivated gambling makes 

doubtful any claim that Congress did not intend the section 

165(d) limitation to apply to gambling conducted as a trade 

or business. See also Skeeles v. United States, 118 Ct. Cl. at 

370–371, 95 F. Supp. at 245–246 (to same effect); Offutt v. 

Commissioner, 16 T.C. at 1215 (finding no basis for distinguishing gambling conducted as a trade or business from 

gambling constituting a transaction entered into for profit for 

purposes of the section 165(d) limitation on wagering losses). 

90 136 UNITED STATES TAX COURT REPORTS (81) 

12 Respondent has not contended that the business expenses claimed are not ‘‘ordinary and 

necessary’’ expenses of petitioner’s trade or business within the meaning of sec. 162(a) or that 

they have not been substantiated. 

On the basis of the reasoning of Valenti v. Commissioner, 

T.C. Memo. 1994–483, and the additional reasons discussed 

above, we reject petitioner’s contention that Commissioner v. 

Groetzinger, supra, requires a holding that the section 165(d) 

limitation on losses from wagering transactions does not 

apply to persons engaged in the trade or business of gambling. Instead, following Offutt v. Commissioner, 16 T.C. 1214 

(1951), we hold that petitioner’s wagering expenses of 

$131,760 constitute losses from wagering transactions that 

are limited by section 165(d) to the gains he reported from 

wagering ($120,463), notwithstanding petitioner’s engagement in the trade or business of gambling. Accordingly, 

respondent disallowance of $11,297 of petitioner’s claimed 

loss is sustained. 

II. Definition of ‘‘Losses from wagering transactions’’

We must now decide whether the section 165(d) limitation 

on ‘‘Losses from wagering transactions’’ is confined to petitioner’s wagering expenses or extends to his business 

expenses, as the parties dispute the point. An implicit 

holding in Offutt is that a professional gambler’s ‘‘Losses 

from wagering transactions’’ for purposes of section 165(d) 

include amounts expended on wagers as well as other 

expenses incurred in carrying on the trade or business of 

gambling. Respondent, relying on Offutt v. Commissioner, 

supra, and Estate of Todisco v. Commissioner, 757 F.2d 1 (1st 

Cir. 1985), contends that ‘‘Losses from wagering transactions’’ covers both, so that petitioner may not deduct either 

the $11,297 excess of his wagering expenses over gambling 

gross receipts or the $10,968 in business expenses he claimed 

in connection with carrying on his gambling business. 12

Offutt and Estate of Todisco held that section 165(d) limits 

amounts expended on wagers as well as other expenses 

incurred in carrying on the trade or business of gambling, 

such as a bookmaker’s mailing, printing, and stenographic 

expenses (Offutt), or his State taxes on wagering (Estate of 

Todisco). Petitioner, while acknowledging Offutt, again 

argues that the subsequent opinion in Groetzinger requires a 

different result; i.e., that the expenses of carrying on his 

(81) MAYO v. COMMISSIONER 91

13We have expressed some subsequent doubts, however, whether the Offutt holding concerning the nonwagering business expenses of gambling is correct. See Kozma v. Commissioner, 

T.C. Memo. 1986–177 n.4 (quoting, with reference to the Offutt precedent, Justice Brandeis in 

Di Santo v. Pennsylvania, 273 U.S. 34, 42 (1927) (‘‘It is usually more important that a rule of 

law be settled, than that it be settled right.’’)). 

gambling business (other than direct wagering expenses) are 

deductible under section 162(a) without regard to section 

165(d). 

Neither the statute nor the regulations provide any definition of ‘‘Losses from wagering transactions’’ as used in section 165(d). The legislative history also provides no insight, 

as it does not address this specific point. Offutt offered no 

reasoning to support the conclusion that ‘‘Losses from 

wagering transactions’’ should be interpreted to cover both 

the cost of losing wagers as well as the more general 

expenses incurred in the conduct of a gambling business. 

Although Offutt’s interpretation of ‘‘Losses from wagering 

transactions’’ has generally been followed by this Court in 

the 60 years since the case was decided, see Praytor v. 

Commissioner, T.C. Memo. 2000–282; Kochevar v. Commissioner, T.C. Memo. 1995–607; Kozma v. Commissioner, T.C. 

Memo. 1986–177; 13 but see Meredith v. Commissioner,

T.C. Memo. 1984–651 (allowing deduction of professional 

gambler’s transportation expense where wagering losses 

exceeded gains), no Court of Appeals other than that for the 

First Circuit in Estate of Todisco has had occasion to directly 

address it. For the reasons discussed below, we conclude that 

reconsideration of Offutt’s interpretation of ‘‘Losses from 

wagering transactions’’ is warranted and that it should no 

longer be followed. 

While no Court of Appeals other than that for the First 

Circuit has directly addressed whether ‘‘Losses from 

wagering transactions’’ as used in section 165(d) encompass 

the business expenses of a professional gambler, various 

Courts of Appeals and this Court have considered the other 

side of the section 165(d) equation—‘‘gains from such transactions’’—and construed that phrase quite narrowly. The 

Courts of Appeals for the Fifth and Ninth Circuits and this 

Court have rejected arguments for an expansive reading of 

gains from wagering transactions and confined the phrase to 

the proceeds from a wager by the taxpayer where the taxpayer stands to gain or lose on the basis of chance. See Boyd 

92 136 UNITED STATES TAX COURT REPORTS (81) 

v. United States, 762 F.2d 1369 (9th Cir. 1985); Allen v. U.S. 

Govt. Dept. of Treasury, 976 F.2d 975 (5th Cir. 1992); Bevers 

v. Commissioner, 26 T.C. 1218 (1956); see also Williams v. 

Commissioner, T.C. Memo. 1980–494. But see Libutti v. 

Commissioner, T.C. Memo. 1996–108. 

In Boyd v. United States, supra, the Court of Appeals for 

the Ninth Circuit, in addition to finding that professional 

gambler Boyd’s losses from poker played as a casino 

employee to attract customers were losses from wagering 

transactions limited by section 165(d), was also faced with 

Boyd’s claim that his share of the casino’s ‘‘take-off ’’ from 

poker games conducted on the premises constituted gains 

from wagering transactions for purposes of section 165(d). 

Take-off was the fee the house charged card players for 

playing poker in the casino, computed either hourly or as a 

share of each pot, and Boyd was paid pursuant to his 

employment contract a portion of the take-off from the poker 

games in which he participated. 

Finding no statutory or regulatory definition of ‘‘gains from 

wagering transactions’’, the Court of Appeals reasoned that 

the words should be given their ‘‘ordinary meaning.’’ Boyd v. 

United States, supra at 1373. The court summarized the parties’ arguments and its conclusion as follows: 

The IRS argues that the phrase means gain from a wagering transaction 

entered into by the taxpayer. Boyd argues that it means gain flowing to 

the taxpayer from a wagering transaction, whether as a participant or as 

the house taking a table rental. While there is no controlling authority, the 

IRS position is more persuasive. [Id.] 

The Court of Appeals found persuasive this Court’s opinion 

in Williams v. Commissioner, supra, wherein we held that 

‘‘tokes’’ given to blackjack dealers by players were not the 

dealers’ gains from wagering transactions eligible to be offset 

by wagering losses. Tokes are chips placed as a separate bet 

by a blackjack player for the dealer. If the player’s hand 

wins, the winnings from the separate toke bet are given to 

the dealer. The dealer-taxpayers in Williams argued that 

their toke income constituted gambling winnings that could 

be offset by gambling losses. We rejected that claim, because 

the toke bet, under casino policy and State law, remained 

under the control of the player until the winnings, if any, 

(81) MAYO v. COMMISSIONER 93

14We noted that, for example, the dealer was not free to take the ‘‘toke’’ chip before the cards 

were played, and a player was free to take back a winning bet he had placed for a dealer. 

15 An exception is this Court’s Memorandum Opinion in Libutti v. Commissioner, T.C. Memo. 

1996–108, which held that complimentary goods and services provided to the taxpayer by a casino to induce gambling are gains from wagering for purposes of sec. 165(d). We nonetheless 

emphasized that the nexus of the ‘‘comps’’ to the placement of wagers was ‘‘close, direct, evident, 

and strong.’’

were given to the dealer. 14 Thus, we concluded, it was the 

player, not the dealer, who had entered into a wagering 

transaction, and any gain received by the dealer in connection with the transaction was not gain from a wagering 

transaction. The Court of Appeals in Boyd adopted our reasoning in Williams in holding that Boyd’s share of take-off 

income was not gain from a wagering transaction. While 

Boyd had contended that the take-off income was gain from 

a wagering transaction because it had ‘‘[flowed] to * * * 

[him] from a wagering transaction’’, the Court of Appeals 

concluded that the take-off income was not gain from a 

wagering transaction because it was not the result of a wager 

Boyd had entered. Boyd v. United States, supra at 1373. 

In Allen v. U.S. Govt. Dept. of Treasury, supra, the Court 

of Appeals for the Fifth Circuit reached the same result, on 

similar reasoning, as we reached in Williams regarding a 

blackjack dealer’s toke income. The Court of Appeals reasoned that since the dealer ‘‘has no part in deciding to make 

the wager, and stands to lose nothing by it’’, he does not have 

gain from a wagering transaction as contemplated in section 

165(d) when he receives the winning proceeds from a toke 

bet made on his behalf. Id. at 976–977; see also Collins v. 

Commissioner, 3 F.3d 625, 631 (2d Cir. 1993) (taxpayer who 

stole racing tickets that generated net gambling losses had 

theft income, not gain from wagering transactions under section 165(d)), affg. T.C. Memo. 1992–478. 

In sum, to the extent this Court and the Courts of Appeals 

have considered the question, they have generally held that 

‘‘gains’’ from ‘‘wagering transactions’’ within the meaning of 

section 165(d) must be the actual product of wagers entered 

by the taxpayer. Generally, it is not sufficient that the gain 

arise merely in connection with the conduct of wagering 

activities; the gain must be the direct result of a wager 

entered by the taxpayer. 15 By contrast, the holding in Offutt 

v. Commissioner, 16 T.C. 1214 (1951), is that ‘‘Losses from 

wagering transactions’’ extends to expenses incurred in 

94 136 UNITED STATES TAX COURT REPORTS (81) 

connection with the conduct of a wagering activity, such as 

a bookmaker’s mailing, printing, and stenographic expenses, 

even though such expenses are not the direct result of a 

wager by the taxpayer. Take-off and toke gains from card 

games have an equally close, if not closer, nexus to wagering 

transactions as do the mailing, printing, and stenographic 

expenses of a bookmaker. Yet the latter are treated as ‘‘from’’ 

wagering transactions in Offutt and its progeny when the 

issue is what constitutes a loss, while the former are not 

treated as ‘‘from’’ wagering transactions by this and other 

courts when determining what constitutes a gain. Section 

165(d) by its terms applies to losses and to gains ‘‘from’’ 

wagering transactions. The use of different principles for 

determining what constitutes a gain versus a loss ‘‘from’’ a 

wagering transaction finds no support in the statute. 

The narrower interpretation that has been applied to gains 

from wagering transactions, requiring that they be the result 

of a wager entered by the taxpayer, more closely reflects the 

ordinary meaning of the words used in the statute, which is 

the applicable standard. See Crane v. Commissioner, 331 

U.S. 1, 6 (1947); Old Colony R.R. Co. v. Commissioner,

284 U.S. 552, 560 (1932). Offutt’s more expansive interpretation of ‘‘Losses from wagering transactions’’ as covering 

expenses that are not the result of the taxpayer’s wager goes 

beyond the ordinary meaning of the statutory phrase. 

In addition, the Supreme Court’s opinion in Commissioner 

v. Sullivan, 356 U.S. 27 (1958), decided 7 years after Offutt, 

casts some doubt on the treatment of a professional gambler’s nonwagering business expenses as creating a loss from 

a wagering transaction limited by section 165(d). Sullivan

concerned the deductibility of the wage and rental expenses 

of the partners in an illegal bookmaking operation. The Tax 

Court had held that deductions for these expenditures were 

not allowable because the expenditures were illegal. The 

Court of Appeals reversed our decision, and the Supreme 

Court affirmed the decision of the Court of Appeals, holding 

that the bookmaking operation’s expenditures for wages and 

rent were ordinary and necessary business expenses deductible under section 162(a). 

The amounts paid as wages to employees and to the landlord as rent are 

‘ordinary and necessary expenses’ in the accepted meaning of the words. 

(81) MAYO v. COMMISSIONER 95

16The taxpayer in Offutt v. Commissioner, 16 T.C. 1214 (1951), was engaged in both bookmaking and gambling for his own account. 

That is enough to permit the deduction, unless it is clear that the allowance is a device to avoid the consequence of violations of a law * * * or 

otherwise contravenes the federal policy expressed in a statute or regulation * * * . [Id. at 29; emphasis added.] 

Absent from the Supreme Court’s analysis was any reference 

to the section 165(d) limitation on wagering losses which, 

under the reasoning of Offutt, would be applicable to wages 

and rent incurred in conducting a bookmaking business. 16

While, as indicated in the lower court opinions, the taxpayers 

in Sullivan had sufficient wagering gains so that section 

165(d) would not have operated to limit the deduction of 

wage and rent expenses, the absence of any analysis to 

establish this point suggests that the Supreme Court did not 

consider section 165(d) to apply to a gambling business’ 

expenses of this nature. 

Moreover, the Court of Appeals for the Ninth Circuit, while 

not expressly holding that the section 165(d) limitation is 

confined to direct wagering expenses, has nonetheless 

employed reasoning which strongly implies as much. In Boyd 

v. United States, 762 F.2d 1369 (9th Cir. 1985), Boyd had 

also sought to deduct as business expenses under section 

162(a) his tipping expenses and the take-off fees he paid in 

order to play poker at the casino. Boyd was a refund proceeding, and the Court of Appeals held that Boyd was not 

entitled to raise his claim for deductions for the tipping and 

take-off fees because he had not sufficiently identified these 

grounds in his refund claim filed with the Secretary, as 

required by the regulations under section 7422(a). The Court 

of Appeals distinguished between wagering losses and 

‘‘expenses incidental to gambling’’, observing that the latter 

‘‘would not be subject to the section 165(d) deduction limit.’’ 

Id. at 1372. The Court of Appeals reasoned as follows: 

In his claim, Boyd stated that he ‘‘incurred losses from participating in 

the [casino] poker games’’ and that ‘‘[t]his expense’’ was deductible under 

section 162(a). ‘‘This expense’’ plainly refers to the poker losses, and 

nowhere does the claim mention tipping or take-off fees. Taken at its face 

value, Boyd’s claim directed the IRS’ attention to losses incurred betting 

on poker hands, and nothing else. Moreover, the wording of Boyd’s alternative theory strengthens this impression. It refers to section 165(d), 

which provides that wagering losses may be deducted only up to the 

96 136 UNITED STATES TAX COURT REPORTS (81) 

17The Court of Appeals noted, for example, that lavish tipping might raise the issue of whether it was an ‘‘ordinary and necessary’’ business expense within the meaning of sec. 162(a), and 

that take-off fees raised the issue of whether they should be construed as a component of a wager’s cost rather than a business expense. 18See also Orr v. Commissioner, T.C. Summary Opinion 2010–55. We do not cite Orr as precedent, see sec. 7463(b), but merely to document the Commissioner’s concession in that case that 

gambling-related travel expenses of a professional gambler were deductible notwithstanding sec. 

165(d). 

amount of wagering gains, reinforcing by implication the claim’s express 

statement that the losses for which deduction was sought were actual 

wagering losses, not other unspecified expenses incidental to gambling 

which would not be subject to the section 165(d) deduction limit. [Id.; fn. 

ref. omitted; emphasis added.] 

If the Court of Appeals had thought that Boyd’s tipping and 

take-off fees were simply a component of losses from 

wagering transactions to which the section 165(d) limitation 

applied, then distinguishing them from Boyd’s ‘‘poker losses’’ 

would not have been necessary. Since Boyd’s poker

losses exceeded his wagering gains, the tipping and take-off 

fees clearly would have been nondeductible because they 

were likewise in excess of wagering gains. Instead, the Court 

of Appeals distinguished the tipping and take-off fees as 

raising different legal issues than the poker losses. 17 As a 

consequence, Boyd’s failure to adequately identify these other 

issues in his administrative refund claim precluded the tipping and take-off fees from being raised in the refund suit. 

A necessary premise of the Court of Appeals’ holding is that 

the tipping and take-off fees did not necessarily constitute 

‘‘Losses from wagering transactions’’ within the meaning of 

section 165(d). 

Finally, the Commissioner has applied the holding in 

Offutt v. Commissioner, 16 T.C. 1214 (1951), regarding the 

treatment of nonwagering expenses inconsistently. Since 

Offutt, the Commissioner has successfully maintained in 

many cases that the nonwagering business expenses of a 

professional gambler are limited by section 165(d), see Estate 

of Todisco v. Commissioner, 757 F.2d at 6–7; Praytor v. 

Commissioner, T.C. Memo. 2000–282; Kochevar v. Commissioner, T.C. Memo. 1995–607; Kozma v. Commissioner, T.C. 

Memo. 1986–177, while in other cases he has conceded their 

deductibility notwithstanding section 165(d), see Crawford v. 

Commissioner, T.C. Memo. 2010–54; Tschetschot v. Commissioner, T.C. Memo. 2007–38, 18 or failed to assert the section 

165(d) limitation on expenses of this type, see Meredith v. 

(81) MAYO v. COMMISSIONER 97

19Moreover, respondent’s reliance on Offutt in this case to deny petitioner’s business expenses 

incurred in gambling would result in an addition to tax for substantial understatement of income tax if respondent’s position were upheld. 20 Respondent has not argued that any of petitioner’s claimed business expenses were so integral to his wagers that they should be treated as part of the wagers’ cost. We leave any such 

issue for another day. 

Commissioner, T.C. Memo. 1984–651. After respondent had 

taken the position in this case that petitioner’s business 

expenses were limited by section 165(d), the Internal Revenue Service announced that it would no longer follow Offutt

or Estate of Todisco. See IRS Chief Counsel Attorney Memorandum, AM2008–013 (Dec. 19, 2008). However, our failure 

to address Offutt may invite further administrative inconsistency concerning a professional gambler’s entitlement to 

deductions under section 162(a) for the nonwagering trade or 

business expenses of engaging in gambling. 19

For the foregoing reasons, we conclude that the holding in 

Offutt v. Commissioner, supra, that ‘‘Losses from wagering 

transactions’’ include the trade or business expenses of a 

professional gambler other than the costs of wagers, should 

no longer be followed. We accordingly hold that petitioner is 

entitled to deduct under section 162(a) the $10,968 in business expenses claimed in connection with carrying on his 

gambling business. 20

III. Accuracy-Related Penalty

Respondent determined that petitioners are liable for an 

accuracy-related penalty under section 6662(a) and (b)(2) for 

a substantial understatement of income tax on their 2001 

Federal income tax return. Respondent’s determination was 

premised upon the disallowance of both the $11,297 excess of 

wagering expenses over gross receipts from wagering and the 

$10,968 in business expenses not part of the costs of wagers. 

Since we have sustained respondent only with respect to the 

former, the resulting understatement would not be a 

substantial understatement of income tax as defined in section 6662(d). Accordingly, respondent’s determination as to 

the section 6662(a) and (b)(2) accuracy-related penalty is not 

sustained. 

To reflect the foregoing, 

Decision will be entered under Rule 155. 

Reviewed by the Court. 

98 136 UNITED STATES TAX COURT REPORTS (81) 

COLVIN, COHEN, THORNTON, MARVEL, GOEKE, WHERRY, 

KROUPA, HOLMES, GUSTAFSON, PARIS, and MORRISON, JJ., 

agree with this opinion. 

HALPERN, J., concurring: I agree with the result reached by 

the majority and write separately only to question the 

vitality of our Memorandum Opinion in Libutti v. Commissioner, T.C. Memo. 1996–108, in which we held that $2.5 million in comps (including free cars and European vacations) 

that the taxpayer received from an Atlantic City casino are 

‘‘gains from * * * [wagering] transactions’’ for purposes of 

section 165(d). The majority describes Libutti as an ‘‘exception’’ to the general rule that ‘‘ ‘gains’ from ‘wagering transactions’ within the meaning of section 165(d) must be the 

actual product of wagers entered by the taxpayer.’’ Majority 

op. p. 93 and note 15. The majority reports that in Libutti

we emphasized that the nexus of the ‘‘comps’’ to the taxpayer’s wagering was ‘‘ ‘close, direct, evident, and strong.’ ’’ 

Majority op. note 15. Before that statement in Libutti, however, we stated: ‘‘Although petitioner’s receipt of the comps 

did not directly hinge on the success or failure of his wagers, 

he received the comps incident to his direct participation in 

wagering transactions.’’ (Emphasis added.) Compare that 

statement to what we say today: ‘‘Generally, it is not sufficient that the gain arise merely in connection with the conduct of wagering activities; the gain must be the direct result 

of a wager entered by the taxpayer.’’ Majority op. p. 93. 

Whether there is any material difference between ‘‘incident 

to’’ and ‘‘in connection with’’ remains to be seen. And whether 

the Libutti result can survive as an exception to the general 

rule in the light of our analysis herein also remains to be 

seen. 

GOEKE and HOLMES, JJ., agree with this concurring 

opinion. 

f