Establishing Basis for Gambling Losses— footnotes

¹ Preben Norgaard, TC Memo 1989-390, aff’d on one issue and rev’d on another, 939 F2d 874 (9th Cir. 1991).

² See, e.g., Robert M. Kalisch, TC Memo 1986-541, aff’d in unpub. op., 838 F2d 461 (3d Cir. 1987); Carolyn J. Schooler, 68 TC 867 (1977); and Clifford F. Mack, TC Memo 1969-26, aff’d, 429 F2d 182 (6th Cir. 1970).

³ U.S. Tax Court Rule 142(a); Welch v. Helvering, 290 US 111 (1933).

⁴ Mack, note 2 supra.

⁵ Ronald J. Lutz Jr., TC Memo 2002-89.

⁶ In Lutz, id., the court pointed out that had the IRS wanted to introduce at trial the amount of unreported gambling winnings (which were not listed in the notice of deficiency), it had the burden of proving this amount. The Service may have been able to reconstruct the amount based on large asset purchases mentioned in the case.

⁷ Rev. Proc. 77-29, 1977-2 CB 538.

⁸ Robert M. Kalisch, note 2 supra.

⁹ U.S. General Accounting Office, Impact of Gambling: Economic Effects More Measurable Than Social Effects (Washington, DC, 2000), available at www.gao.gov/new.items/gg00078.pdf.

¹⁰ The $73 billion is composed of $28.7 billion (39.4%) from commercial casinos, $16.7 billion (23%) from Indian Tribal Government casinos, $19.9 billion (27.4%) from state lotteries and $7.4 billion (10.2%) from horserace wagering and charity events; see National Indian Gaming Association, An Analysis of the Economic Impact of Indian Gaming in 2004 (hereafter cited as “Indian Gaming”), available at www.indiangaming.org/NIGA_econ_impact_2004.pdf.

¹¹ Garrett, Casino Gambling in America and Its Economic Impacts (Federal Reserve Bank of St. Louis, August 2003).

¹² IRS Pub. 1304, SOI Tax Stats—Individual Income Tax Returns, Tables 1.4 and 2.1.

¹³ See Indian Gaming, note 10 supra.

¹⁴ Total national casino visits of 310 million (see Harrah’s Survey 2004, “Profile of the American Casino Gambler”), divided by the national average of 5.8 times per visitor, equals 53 million individuals.

¹⁵ Foltin, “Gaming on the Rise Across America: Smart Money Says CPAs Should Take Notice,” CPA Journal (October 2005), available at www.nysscapa.org/cpajournal/2005/1005/essentials/p56.htm.

¹⁶ Edward D. Hamilton, TC Memo 2004-161.

¹⁷ Jimmie L. Clemons, TC Summ. Op. 2005-109.

¹⁸ Taxpayers may assume that if the net result of a casino session is a loss, no winnings need to be reported. However, in the process of losing, it is unlikely that there were no winning transactions. Winnings are “realized accessions to wealth” over which a taxpayer has dominion and control and, thus, are presumed to be income; see Paul F. Roemer Jr., 716 F2d 693 (9th Cir. 1983) and Glenshaw Glass Co., 348 US 426 (1955). That a taxpayer chooses to bet the winnings rather than cash them out is not determinative of their taxability.

¹⁹ Schooler, note 2 supra.

²⁰ Regs. Sec. 1.165-10 states, “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.”

²¹ IRS General Counsel Memorandum 37312 (11/7/77).

²² IRS Letter Ruling 8123015 (2/27/81).

²³ See Sec. 451(a). Regs. Sec. 1.451-2(a) states, “Income although not actually reduced to the taxpayer’s possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time.” Winnings from a slot machine, for example, are “set aside” for the taxpayer, requiring only a push of the button labeled “cash out.” The regulation further states that “income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.” In the case of a slot machine, there is no limit or restriction on pressing the “cash out” button (except, perhaps, the gambler’s desire for greater winnings).

²⁴ See Regs. Sec. 1.451-2.

²⁵ See Lutz, note 5 supra.

²⁶ However, gamblers must request this document from a casino; it will not be sent automatically.

²⁷ If the taxpayer-gambler is a frequent casino player and the separately paid jackpots are added back to amounts cashed out, it may be possible to use the average slot machine payout rate (e.g., 95%) to argue that the cash removed from the machine was the same percentage of the amount inserted into the machine. To date, however, there is no authority for this position in court cases or IRS rulings.

²⁸ This issue can be confusing to the courts as well. In Est. of Graciano Espinoza, TC Memo 2005-239, the Tax Court grappled with the issue of the relative wealth of an individual who admittedly won $2.6 million playing slot machines (receiving 526 Forms W-2Gs averaging $5,000 each) and claimed to have lost a like amount. The court seemed to believe that if the taxpayer had wagered $7 million during the year, as claimed, he must have had been very wealthy. The court asked, “where did decedent [Espinoza] in 2000 obtain $7 million to play the slot machines?...Decedent apparently owed the Nevada casinos only $70,000, suggesting that decedent had access to millions of dollars.” But this confuses gross revenue with net income. If a gambler constantly plows winnings back into gambling, producing losses and more winnings, the cumulative winnings cannot be used as a measure of wealth. The winnings may be great, but the losses may be (and often are) equal in proportion. This is why it is important to look at issues of lifestyle and asset acquisition (which the court did). The assets acquired in the case included an automobile purchased “with $10,000 in cash.” For someone claiming he or she did not win $10,000, this might be a sticky point. But when the court is asking how the taxpayer acquired $7 million, a $10,000 expenditure appears immaterial.

²⁹ Eldron Erbs, TC Summ. Op. 2001-85.

³⁰ Erbs reported his gambling income and losses on Schedule C, claiming he was a professional gambler (which the court denied). Moving the gambling income to page one of Form 1040 and the gambling losses to miscellaneous itemized deductions (not subject to the 2% limit), and using the figures in the case, but calculating the changes using 2005 rates, he would have lost slightly over $1,200 of itemized deductions had he claimed gambling income of $325,668 ($10,538 jackpots + $315,130 from other winnings) and gambling losses of a like amount. Items based on AGI, such as the taxability of Social Security (which was otherwise nontaxable to Erbs), the medical expense deduction, IRA deductions, itemized deductions, personal exemptions and various credits, would all be correspondingly affected. In addition, the statute of limitations increases from three to six years if unreported grossed-up gambling winnings constitute 25% of the gross income originally reported on the return; see Sec. 6501(e)(1)(A). Finally, 11 of the states that impose an individual income tax do not allow a deduction for gambling losses. 

³¹ Mary O’Hara Alsop, 290 F2d 726 (2d Cir. 1961). 

³² To date, there is little evidence that taxpayers make extensive use of these year-end reports in filing returns. In Remos, TC Summ. Op. 2005-98, the taxpayer attempted to convince the court of gambling losses he needed to offset unreported gambling winnings using a Players’ Club report, but could not explain the significance of the numbers appearing on the report, or even prove that the report was issued to him.

³³ More precisely, if records are available, amounts wagered on winning bets should be removed from the $341,766.95 total wagers and subtracted from total winnings to arrive at gross winnings. The net would be the same, but AGI would decrease.

³⁴ Nick Kikalos, TC Memo 1998-92, rev’d on another issue, 190 F3d 791 (7th Cir. 1999).

³⁵ Juan Rodriguez, TC Memo 2001-36.

³⁶ Leroy V. Satran, TC Summ. Op. 2001-140.

³⁷ Philip Stein, TC Memo 1962-19, aff’d, 322 F2d 78 (5th Cir. 1963); Plisco, 306 F2d 784 (CA DC 1962), aff’g 192 FSupp 337 (DC DC 1961).

³⁸ Gene P. Green, 66 TC 538 (1976).

³⁹ See also James P. McKenna, 1 BTA 326 (1925); George Winkler, 230 F2d 766 (1st Cir. 1956).

⁴⁰ George M. Cohan, 39 F2d 540 (2d Cir. 1930).

⁴¹ John David Zielonka, TC Memo 1997-81.

⁴² Herman Drews, 25 TC 1354 (1956).

⁴³ Randy G. Doffin, TC Memo 1991-114.

⁴⁴ Other cases in which the court applied the Cohan doctrine to estimate gambling losses include Green, note 38 supra (gambling partnership); and Kalisch, note 2 supra (horserace wagering).

⁴⁵ See, e.g., Odysseus Metas, TC Memo 1982-36; Gregory Alberico, TC Memo 1995-542; Walter E. Parschutz, Sr., TC Memo 1988-327; Tiobor I. Skirscak, TC Memo 1980-129.

⁴⁶ See Mack, note 2 supra.