Source: http://www.professionalgamblerstatus.com/taxbits.htm
Timestamp: 2017-06-23 17:06:04
Document Index: 233884648

Matched Legal Cases: ['§165', '§1', '§165', '§165', '§23', 'art 2', 'art 2', '§165', '§165', '§165', 'art, 162', '§162', '§1', '§165', '§166', '§1', '§165', '§166', '§165', '§162', '§212', '§162', '§165', '§1', '§165', '§165', '§67', '§1', '§165', '§67', '§165', '§162', '§165', '§162', '§162', '§165', '§212', '§165']

Copyright© 2005 Colin M. Cody, CPA
and ProfessionalGamblerStatus.com, LLC, All Rights Reserved. Instructions for IRS forms W-2G and 5754:
http://www.irs.gov/pub/irs-pdf/iw2g_04.pdf
http://www.irs.gov/pub/irs-pdf/iw2g.pdf
http://www.irs.gov/pub/irs-pdf/fw2g.pdf
http://www.irs.gov/pub/irs-pdf/f5754.pdf
Withholding Very complex but basically they withhold federal income tax, at the rate of 25% (regular gambling withholding), from the amount of winnings less the amount wagered. They do this if the winnings less the wager exceed $5,000 and are from:
Lotteries, and Other wagering transactions if the winnings are at least 300 times the amount wagered. They do not withhold at the 25% rate on winnings from bingo, keno, or slot machines or any other wagering transaction if the winnings are $5,000 or less.
W-2G Reportable Gambling Winnings Backup Withholding Generally, gambling winnings are reportable if the amount paid reduced, at the option of the payer, by the wager is (a) $600 or more and (b) at least 300 times the amount of the wager. However, these requirements do not apply to winnings from bingo, keno, and slot machines. Gambling winnings for these games are reportable if: The winnings (reduced by the wager) are $1,500 or more from a keno game.
If you are paid reportable gambling winnings, they must file Form W-2G with the IRS and provide a statement to the winner (Copies B and C of Form W-2G).
Online Poker FAQ - Beginners' Guide:
http://www.onlinepokerfaq.com/guide/tax-links.html
Chuck Humphrey 's gambling laws website:
http://www.gambling-law-us.com/site-map.htm
IRS Private Letter Ruling PLR 200532025
Distinguishes between online tournament play as being wagering transactions or non-wagering transactions. Wagering must fall within the definition of a "lottery" or a "wagering pool." Non-wagering payoffs are first a return of capital invested, and then winnings.
IRS Code §165. Losses
165(d) Wagering Losses
IRS Regulation §1.165-10 Wagering losses. Losses sustained during the taxable year on wagering transactions shall be allowed as a deduction but only to the extent of the gains during the taxable year from such transactions. In the case of a husband and wife making a joint return for the taxable year, the combined losses of the spouses from wagering transactions shall be allowed to the extent of the combined gains of the spouses from wagering transactions.
Tokes as Compensation
L is a blackjack dealer for a major Las Vegas casino. Dealers are prohibited by casino rules from fraternizing or engaging in unnecessary conversation with players to prevent the dealer from overlooking cheating or showing any favoritism. As is the custom in the gambling industry, players are permitted to give casino chips to dealers or to place bets on their behalf. Most players do so in the belief that it will bring them good luck, although some do so in appreciation of courtesy shown by the dealer or because it is considered customary. Such chips are called "tokes" and are pooled by the casino and divided evenly among the dealers on a particular work shift. Although L and his fellow dealers argue that the casino patrons give the dealers tokes out of a sense of detached and disinterested generosity, the tokes are equivalent to tips and (as indicated by the way they are pooled and divided) can be regarded as a form of compensation. 29
/Footnote/ 29 See Olk v. U.S., 536 F.2d 876 (9th Cir. 1976), rev'g 388 F.Supp. 1108 (D. Nev. 1975) (Ninth Circuit noted that "[t]ribute to the gods of fortune which it is hoped will be returned bounteously soon can only be described as an 'involved and intensely interested' act [by the gambler].")
¶1620.02.C. Operation of Trade or Business
Property is excluded from capital asset status only if it is held for sale in the ordinary course of a "trade or business" conducted by the taxpayer. Although the term "trade or business" appears in many Code provisions, there is no statutory definition. The Supreme Court has broadly defined the term trade or business to include any activity engaged in with continuity and regularity with the objective of making a profit. 75 The focus on the substantiality and regularity of the taxpayer's activities is consistent with the intent of the capital asset provisions to distinguish between the "active" generation of profits and losses from the day-to-day operation of a business, and the "passive" realization of appreciation in value of property over a substantial period of time. 76 One court described the inquiry as whether the taxpayer "has engaged in a sufficient quantum of focused activity to be considered to be engaged in a trade or business." 77
/Footnote/ 75 See Groetzinger v. Comr., 480 U.S. 23 (1987), where the Supreme Court held that a gambler who bet on horse races solely for his own account on a full-time basis was engaged in the trade or business of gambling, despite the fact that he did not hold himself out as selling goods or services. The "goods or services" issue does not arise in the capital asset context because the fact that sales are made is not contested. /Footnote/ 76 See Malat v. Riddell, 383 U.S. 569, 572 (1966). /Footnote/ 77 Suburban Realty Co. v. U.S., 615 F.2d 171 (5th Cir. 1980).
Whether an activity constitutes a trade or business is a factual question that must be resolved on the basis of the particular circumstances of each case. Courts generally consider the following factors in determining whether a trade or business exists:
the nature and purpose of the acquisition of the property and the duration of ownership;
the extent and nature of sales efforts;
the number, continuity, and regularity of sales;
the extent to which the taxpayer attempts to increase sales by improving the property and advertising;
the use of a business office to facilitate sales; and
the time and effort devoted to sales by the taxpayer. 78
/Footnote/ 78 U.S. v. Winthrop, 417 F.2d 905 (5th Cir. 1969); Biedenharn Realty Co., Inc. v. U.S., 526 F.2d 409 (5th Cir. 1976); Adam v. Comr., 60 T.C. 996 (1973), acq., 1974-1 C.B. 1; Powe Trust v. Comr., T.C. Memo 1982-488. The application of the multi-factor facts and circumstances analysis for determining the existence of a trade or business is best illustrated in the context of the development and sale of real property, which is examined below. 79 The following discussion examines a number of recurring problems in determining the existence of a trade or business.
/Footnote/ 79 See ¶1620.02.E, below. Example - Full-Time Gambler
D is a full-time gambler who engages in gambling activity every day and relies on this activity as his means of earning a living. In 2000, D incurred $10,000 of gambling losses. D's gambling constitutes a trade or business, and the expenses are connected with the trade or business. If the ordinary and necessary test and the carrying on test are met, the losses are deductible trade or business expenses.
Example - Occasional Gambler
R is an accountant who likes to go to the racetrack once a month and bet on the horses. In 2000, R lost $500 gambling at the racetrack. R's casual gambling activity is not a trade or business. The $500 is not a deductible trade or business expense. Note, however, that R can deduct his losses as an itemized deduction to up to the amount of his winnings. 26
/Footnote/ 26 §165(d). Loss deductions and miscellaneous itemized deductions are discussed respectively in ¶2350 and ¶2910.
¶2350.03.E. Gambling or Wagering Losses
Gambling winnings are often paid in cash. In order to encourage reporting of this income, Congress created a limitation on the losses which a gambler may deduct. 677 A taxpayer's gambling or wagering losses for a year are deductible only to the extent that the taxpayer has gambling or wagering gains for that year. 678
/Footnote/ 677 The limitation on gambling losses contained in §165(d) was originally enacted as §23(g) of the Revenue Act of 1934, P.L. 73-216. The legislative history suggests Congress recognized that many taxpayers deducted gambling losses, but did not report gambling gains. The limitation of gambling losses to gambling gains is meant to encourage taxpayers to fully report gambling income. S. Rep. No. 558, 73d Cong., 2nd Sess. (1934) , reprinted in 1939-1 C.B. (Part 2) 605; H. R. Rep. No. 704, 73d Cong., 2d Sess. (1934), reprinted in 1939-1 C.B. (Part 2) 570. See also GCM 37312 (Examining legislative history behind the limitation on gambling losses).
/Footnote/ 678 §165(d). See TAM 9808002 (Annual payments received as a prize in a state lottery are §165(d) "gains from wagering transactions" in the years the payments are received for purposes of deducting gambling losses). But see TAM 200417004 (Winnings from "no purchase necessary" marketing sweepstakes are not gains from which §165(d) wagering losses may be offset because taxpayer was not required to buy product and postage and envelope costs did not constitute necessary element of consideration in order to qualify as wager).
Example - Gambling Losses Must Offset Gambling Gains
T visited the race track once during the year and lost $1,000 gambling on horses. T had no other gambling transactions for the year and no gambling winnings. The loss is not deductible.
Example - Gambling Losses Used as an Offset
T purchased a lottery ticket for $100 and won $50,000 for the taxable year. He paid $500 during the year for lottery tickets that did not win. The $500 loss can be used to offset the $49,900 ($50,000 minus $100, which is a return of capital) of income from lottery gambling for the year. 679
/Footnote/ 679 See Hochman v. Comr., T.C. Memo 1986-24. Gambling income is reported on the taxpayer's Form 1040, but the gambling losses must be reported as an itemized deduction on Schedule A. The limitation applies regardless of whether the taxpayer is a casual gambler 680 or a professional gambler who pursues gambling as a trade or business. 681 Thus, a gambling loss need not be incurred in a trade or business to be deductible to the extent of gambling gains. 682 Further, a gambling loss need not be incurred in a wager that is entered into for profit to be deductible. 683
/Footnote/ 680 See, e.g., Humphrey v. Comr., 5 T.C.M. 21 (1946), aff'd in part and rev'd in part, 162 F.2d 853 (5th Cir. 1947). /Footnote/ 681 Skeeles v. U.S., 95 F. Supp. 242 (Ct. Cl. 1951); Kent v. U.S., 185 F.3d 867 (9th Cir. 1999); Praytor v. Comr., T.C. Memo 2000-282. /Footnote/ 682 Boyd v. U.S., 762 F.2d 1369 (9th Cir. 1985). Section 165(d) overrides §162 so that gambling losses incurred in a trade or business are only deductible to the extent of gambling gains. Accord Miller v. Quinn, 792 F.2d 392 (3d Cir. 1985). /Footnote/ 683 Humphrey v. Comr., 162 F.2d 853 (5th Cir. 1947). The purchase of high risk debentures, such as so-called "junk bonds," does not give rise to gambling losses when sold at a loss. 684 Gambling is confined to the more traditional types of gambling, such as purchasing a raffle ticket. 685
/Footnote/ 684 See Jasinski v. Comr., T.C. Memo 1978-1. Similarly, the costs of transportation, meals, and lodging incurred by a taxpayer to appear on a television game show are not gambling losses and may not offset winnings from the show. See Whitten v. Comr., T.C. Memo 1995-508.
/Footnote/ 685 See Rev. Rul. 83-130, 1983-2 C.B. 148. For a more complete discussion of the tax treatment of certain types of wagering, see Prizes and Awards, ¶1320. In the case of a husband and wife who file a joint return, their combined losses from wagering will be deductible to offset their combined gains. 686
/Footnote/ 686 Regs. §1.165-10. Example—Joint Return May Combine Losses and Gains
During the year, H won $1,000 at a casino; while W lost $2,000 at the casino. If H and W file a joint return, H's $1,000 gain will be included in gross income and $1,000 of W's loss will be deductible.
A gain from a wagering transaction that can be offset by a gambling loss is one that arises from a wagering transaction in which the taxpayer participated. 687 Further, an individual partner can use a gambling loss incurred by a partnership to offset a gain from a wagering transaction in which he or she individually participates. 688
/Footnote/ 687 See, e.g., Libutti v. Comr., T.C. Memo 1996-108 (Comps received from casino to entice taxpayer to gamble are "gains from wagering transactions" that may be offset by wagering losses as the comps are sufficiently related to the gambling losses). But see TAM 200417004 (Winnings from "no purchase necessary" sweepstakes do not constitute wager because taxpayer was not required to purchase product at increased cost, or to purchase product at all, in order to win and postage and envelope costs are not sufficient consideration to qualify as wager).
/Footnote/ 688 Jennings v. Comr., 27 T.C. 1218 (1956). From the viewpoint of the casino, the settlement at less than face value of a casino marker for the purpose of preventing injury to a taxpayer-casino's gaming operations or for the purposes of protecting, promoting, retaining and preserving the goodwill of the business and the continued patronage of its gaming customers may be deducted as a business loss under §165 to the extent of the discharged repayment obligation. In contrast, the settlement of a casino marker at less than face value by reason of considerations of collectibility, worthlessness, or other similar factors relating to the probability of recovery is governed by §166. 689
/Footnote/ 689 See TAM 9707002. See also Rev. Rul. 83-106, 1983-2 C.B. 77 (Accrual method gambling casino must include gambling revenue derived from customers who gamble on credit in tax year obligations arise and the gambling occurs). 2. Trade or Business
Under the bad debt provisions in the Code and regulations, the term "trade or business" is not defined; however, the trade or business concept has a long history under various provisions of the tax laws and in extensive case law. 121 The fundamental requirement for being engaged in a trade or business is that the taxpayer engages in the activity with a bona fide profit objective. Innumerable controversies between taxpayers and the IRS stem from taxpayers' efforts to deduct expenses or losses from hobbies and recreational activities such as farming, animal breeding, boat charters, and stock car racing. Also, taxpayers' efforts to deduct losses associated with various "tax shelter" activities, the allowance of which hinge on the demonstration of a profit rather than a tax reduction motive, are often litigated. 122
/Footnote/ 121 See Regs. §1.166-5(b)(2) (Definition of trade or business under §165(c)(1) [i.e., losses] applicable to §166(d)(2)). /Footnote/ 122 A detailed discussion of the trade or business issue is beyond the scope of this section. See ¶2350. See also 538 T.M., Bad Debts, and 527 T.M., Loss Deductions. A profit motive alone, however, does not establish that an activity is a trade or business. The taxpayer's involvement in the activity must be active, regular, and continuous. For a number of years, the courts were divided as to whether the existence of a trade or business required that the taxpayer be engaged in the selling of goods or services. The Supreme Court rejected this requirement when it concluded that a gambler who bets on horse races solely for his own account, and on a full-time basis, is engaged in the trade or business of gambling. 123 The Court defined a trade or business as an activity engaged in continuously and regularly on a full-time basis with a profit objective.
/Footnote/ 123 Groetzinger v. Comr., 480 U.S. 23 (1987). Example - Disallowance of Double Deduction
G is an architect who also engages in substantial gambling activities including betting on horse races, dog races, jai-alai, and college sports. In 2002, he sustains some $43,000 in losses at gambling and has $12,300 in gambling income. Although he would like to take a trade or business deduction for his gambling losses, or deduct them under the theory that they relate to the production or collection of income, another section of the Code specifically limits the amount of deductible gambling losses to the amount of his gambling winnings, and therefore G will be denied the benefit of these deductions. 3
/Footnote/ 3 See, e.g., Gajewski v. Comr., 723 F.2d 1062 (2d Cir. 1984), in which a gambler unsuccessfully argued that he was engaged full time in the trade or business of gambling. The court held that the losses were, under §165(d), deductible only to the extent of the taxpayer's gambling winnings. This effectively precluded the taxpayer from using §162 or even §212(1) (deduction for the production or collection of income). A subsequent Supreme Court decision, Groetzinger v. Comr., 480 U.S. 23 (1987), held that a gambler could be engaged in the trade or business of gambling, which presumably opens the possibility of deducting under §162, if the taxpayer can prove that he is engaged in the trade or business of gambling. d. Casualty, Theft, and Wagering Losses
Taxpayers may deduct losses caused by casualties or thefts, even if the property damaged or stolen was held for their personal use. 38 The amount of the loss is measured by the decline in the property's fair market value as a result of a casualty, or the fair market value of the property as a result of a theft, but in each case is limited to the taxpayer's basis in the property. 39 The loss so measured is reduced by any insurance recovery, and then by $100 per casualty or theft. 40 Then, all of the losses for the year are combined, and the total is reduced by 10% of the taxpayer's adjusted gross income. 41 The deduction, thus reduced, is not treated as a miscellaneous deduction. 42
/Footnote/ 38 §165(c)(3).
/Footnote/ 39 Regs. §1.165-7(b)(1).
/Footnote/ 40 §165(a), (h)(1).
/Footnote/ 41 §165(h)(2).
/Footnote/ 42 §67(b)(3); Regs. §1.67-1T(b)(7).
Taxpayers may also deduct wagering losses to the extent of their wagering gains. 43 For a professional gambler, these losses are above-the-line deductions; 44 for everyone else, they are itemized deductions, but not miscellaneous ones. 45
/Footnote/ 43 §§165(a), (d).
/Footnote/ 44 Groetzinger v. Comr., 480 U.S. 23 (1987).
/Footnote/ 45 §67(b)(3).
State income taxes on a taxpayer's net income from all sources are too remotely connected with the taxpayer's wagering income to be subject to the wagering loss limitation, 153 but taxes specifically assessed on wagering income are included with other wagering expenses in determining the wagering loss limitation. 154
/Footnote/ 153 §165(d).
/Footnote/ 154 Todisco Est. v. Comr., 757 F.2d 1 (1st Cir. 1985).
May a professional gambler deduct the cost of wagers as an unlimited ordinary and necessary §162 expense? i.e. not be limited by §165(d) BNA:
A subsequent Supreme Court decision, Groetzinger v. Comr., 480 U.S. 23 (1987), held that a gambler could be engaged in the trade or business of gambling, which presumably opens the possibility of deducting under §162, if the taxpayer can prove that he is engaged in the trade or business of gambling. May a professional gambler deduct the operating expenses other than the cost of wagers as an unlimited ordinary and necessary §162 expense? i.e. not be limited by §165(d) May a non-professional gambler deduct the operating expenses other than the cost of wagers as an itemized deduction subject to the 2% limitation under §212? i.e. not be limited by §165(d) IRS Publication #17 "Federal Income Tax for Individuals"
Other Expenses (Line 22) You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income limit. These are expenses you pay: 1) To produce or collect income that must be included in your gross income, 2) To manage, conserve, or maintain property held for producing such income, or 3) To determine, contest, pay, or claim a refund of any tax. You can deduct expenses you pay for the purposes in (1) and (2) above only if they are reasonably and closely related to these purposes. Some of these other expenses are explained in the following discussions.
Rev. Proc. 77-29, 1977-2 C.B. 538
(Also Part I, Section 6001; 26 CFR 1.6001-1.)
The purpose of this revenue Procedure is to provide guidelines to taxpayers concerning the treatment of wagering gains and losses for Federal income tax purposes and the related responsibility for maintaining adequate records in support of winnings and losses.
Income derived from wagering transactions is includible in gross income under the provisions of section 26 USC 61 of the Internal Revenue Code of 1954. Losses from wagering transactions are allowable only to the extent of gains from such transactions, under section 26 USC 165(d) of the Code, and may be claimed only as an itemized deduction.
Temporary regulations section 26 CFR 7.6041-1 (T.D. 7492, 1977-2 C.B. 463), effective May 1, 1977, require all persons in a trade or business who, in the course of that trade or business, make any payment of $1,200 or more in winnings from a bingo game or slot machine play, or $1,500 or more in winnings from a keno game, to prepare Form W-2G, Statement for Certain Gambling Winnings, for each person to whom the winnings are paid.
In determining whether such winnings equal or exceed the $1,500 reporting floor and in determining the amount to be reported on Form W-2G in the case of a keno game, the amount of winnings from any one game shall be reduced by the amount wagered for that one game. In the case of bingo or slot machines, the total winnings will not be reduced by the amount wagered. Forms W-2G reporting such payments must be filed with the Internal Revenue Service on or before February 28 following the year of payment.
Winnings of $600 or more, unreduced by the amount of the wagers, must also be reported for every person paid gambling winnings from horse racing, dog racing, or jai alai, if such winnings are at least 300 times the amount wagered.
Winnings of $600 or more, unreduced by the amount of the wagers, must also be reported for every person paid gambling winnings from state conducted lotteries.
Under Section 26 USC 6001 of the Code, taxpayers must keep records necessary to verify items reported on their income tax returns. Records supporting items on a tax return should be retained until the statute of limitations on that return expires.
An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, the diary should contain at least the following information:
.1) Date and type of specific wager or wagering activity;
.2) Name of gambling establishment;
.3) Address or location of gambling establishment;
.4) Name(s) of other person(s) (if any) present with taxpayer at gambling establishment; and
.5) Amount(s) won or lost.
Verifiable documentation for gambling transactions includes but is not limited to Forms W-2G; Forms 5754, Statement by Person Receiving Gambling Winnings; wagering tickets, canceled checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to the taxpayer by the gambling establishment.
Where possible, the diary and available documentation generated with the placement and settlement of a wager should be further supported by other documentation of the taxpayer's wagering activity or visit to a gambling establishment. Such documentation includes, but is not limited to, hotel bills, airline tickets, gasoline credit cards, canceled checks, credit records, bank deposits, and bank withdrawals.
Additional supporting evidence could also include affidavits or testimony from responsible gambling officials regarding wagering activity.
The Service is required to report to the Congress by 1979 on the issue of whether casino winnings should be subject to withholding. In the absence of legislation requiring withholding on casino winnings, the instructions for preparing Form 5754 will not be applicable to winnings from keno, bingo, or slot machines. However, all other items of documentation to verify gambling losses from casino winnings are applicable.
With regard to specific wagering transactions, winnings and losses may be further supported by the following items:
.01 Keno--Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment, copies of the taxpayer's casino credit records, and copies of the taxpayer's casino check cashing records.
.02 Slot Machines--A record of all winnings by date and time that the machine was played. (In Nevada, the machine number is the number required by the State Gaming Commission and may or may not be displayed in a prominent place on the machine. If not displayed on the machine, the number may be requested from the casino operator.)
.03 Table Games: Twenty One (Blackjack), Craps, Poker, Baccarat, Roulette, Wheel of Fortune, Etc.--The number of the table at which the taxpayer was playing. Casino credit card data indicating whether the credit was issued in the pit or at the cashier's cage.
.04 Bingo--A record of the number of games played, cost of tickets purchased and amounts collected on winning tickets. Supplemental records include any receipts from the casino, parlor, etc.
.05 Racing: Horse, Harness, Dog, Etc.--A record of the races, entries amounts of wagers, and amounts collected on winning tickets and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.
.06 Lotteries--A record of ticket purchases, dates, winnings and losses. Supplemental records include unredeemed tickets, payment slips and winnings statement.
The recordkeeping suggestions set forth above are intended as general guidelines to assist taxpayers in establishing their reportable gambling gains and deductible gambling losses. While following these will enable most taxpayers to meet their obligations under the Internal Revenue Code these guidelines cannot be all inclusive and the tax liability of each depends on the facts and circumstances of particular situations.
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