Here is a better read on this issue.
It is from Iowa State University —
I apologize for the poor text formatting.
Professional Gamblers Hit It Big in the Tax Court…Sort Of
2321 N. Loop Drive, Ste 200 Ames, Iowa 50010
http://www.calt.iastate.edu
January 26, 2011
‐ by Roger McEowen
A brand new, full decision of the U.S. Tax
Court recognizes that losses incurred by
gamblers can lead to a net operating loss.1
In so finding, the Court rejected a portion of
its
1951 opinion concerning a gambler’s
ability to deduct associated business
expenses where the court held that such
expenses were to be treated the same as
gambling losses – deductible only to the
extent of gambling winnings. The decision
was to be anticipated – the IRS had already
revealed it’s litigating position on the issue
in late 2008.
Overview
The Internal Revenue Code does not define
what a “gain” or “loss” is, and the courts
haven’t provided a great detail of clarity on
the matter either. According to I.R.C. §165,
“losses from wagering transactions shall be
allowed only to the extent of the gains from
such transactions.” So, if what a gambler
receives from a wager is less than what was
wagered, the “wagering loss” is the
difference. Further complicating the matter
is that wagering losses are not the same as
“business expenses” under I.R.C. §162(a) or
a net operating loss (NOL) from a business
under I.R.C. §172. In addition, NOLs have
another benefit to a taxpayer – they can be
carried forward or back to offset gains in
those years.
The historic rule has been that gambling
losses only offset gains from gambling2 and
only in the same tax year. That has been the
rule at least since the Tax Court decided a
case in 1951.3 But that rule only applies to
gambling losses. It doesn’t necessarily limit
the deduction for business expenses of
professional gamblers that is available under
I.R.C. §162(a).4
Mayo v. Comr.5
Facts of the case. The taxpayers were
engaged in the trade or business of gambling
on horse races during 2001 – the tax year at
issue. Their Schedule C reported gross
receipts of $120,463 and expenses of
$142,728. The expenses consisted of
$131,760 for wagers placed and $10,968 in
business expenses. They deducted the
excess of their Schedule C expenses over
their gross receipts - $22,265. IRS
disagreed, disallowing the entire $22,265.
According to the IRS, the deduction was
limited to the taxpayers’ gambling winnings
in accordance with I.R.C. §165(d). IRS also
claimed that the statutory phrase “losses
from wagering transactions” included both
the cost of wagers the taxpayers placed and
the expenses incurred in their business of
gambling.
Tax Court’s rationale. In its 1951 decision
in Offutt,6 the court held that business
expenses were to be treated the same as
gambling losses – deductible to the extent of
the taxpayer’s gambling winnings. But,
there are really two tax aspects to gambling
losses incurred by a professional gambler –
losses from wagering transactions and
business expenses incurred in the conduct of
the taxpayer’s trade or business. The Court
held that its Offutt decision was still good
law with respect to wagering losses.
Deductible losses remain limited to
gambling gains. That’s the case for amateur
as well as professional gamblers. However,
the Tax Court rejected its 1951 opinion as
applied to professional gamblers deducting
trade or business expenses. The real
question was whether such expenses were
deductible under I.R.C. §165(d) (where they
would be limited to gambling gains) or
I.R.C. §162(a)(where they are not limited to
gambling gains).
On the trade or business expenses deduction
issue, the Tax Court examined the statutory
phrase “gains from wagering transactions.”
On that point, the Tax Court noted that
courts have generally held that “gains” from
“wagering transactions” means what it says -
actual wagers entered into by the taxpayer.
So, not included in the definition are gains
that arise in the conduct of wagering
activities that aren’t a direct result of a
wager.7 Indeed, IRS conceded this point in
late 2008 in a Chief Counsel Memo.8 so
don’t expect IRS to appeal.9 Remember,
they still won on the point that deductible
gambling losses are limited to gambling
winnings.
Conclusion
Mayo is an important case, particularly
because it’s a full decision of the Tax Court.
It also is important because it allows
professional gamblers to utilize NOLs
arising from their gambling business. The
rules governing NOLs have been made even
more favorable in recent years. This is
exactly what we’ve been pointing out to
practitioners at seminars since late 2008.
1 Mayo v. Comr., 136 T.C. No. 4 (2011).
2 See Tschetschot v. Comr., T.C. Memo. 2007-38.
This is the rule regardless of whether the taxpayer is
a professional gambler or not.
3 Offutt v. Comr., 16 T.C. 1214 (1951).
4 See, e.g., IRS Chief Counsel Memo. AM2008-013
(Dec. 10, 2008).
5 136 T.C. No. 4 (2011).
6 16 T.C. 1214 (1951).
7 For example, on this point, the court noted that it
had held in Williams V. Comr., T. C. Memo. 1980-
494, that a blackjack player’s toke bets were not
“gambling winnings.”
8 AM2008-013 (Dec. 10, 2008). The memorandum is
of no precedential value, but has at least provided
insight into the IRS’s position on the issue for the
past two years.
9 Which raises the question why IRS took this
position in the litigation.