The Good, the Bad and the Ugly of IRS Guidance
Sometimes taxpayers take it upon themselves to read and interpret the tax code. Quite the daunting task. While spending a year at NYU studying the tax code, I kept realizing how ridiculously and unnecessarily twisted some code sections are. In an attempt to provide taxpayers guidance, the Treasury Department issues regulations, and the IRS issues various administrative rulings and memoranda. Taxpayers need be aware, however, that sometimes such guidance should not be relied on, because either (i) it is unclear or (ii) it is not binding.
Both points are on display in this Two Plus Two Poker Forum thread. There, the original poster cited this IRS memorandum from 2008. The memorandum examines the issue of whether certain expenses incurred by a “professional” gambler are deductible. To me, the irreconcilable interpretations of the memo in the thread clearly indicate the memo failing to achieve its purpose of bringing clarity. There’s point one. Regarding point two, the first page of the memo clearly states that the “advice may not be used or cited as precedent.”
“Then why bother,” the frustrated taxpayer asks. Although not binding, it is useful to learn the various ways the code section may be interpreted. Also, in case of audit, the taxpayer can mention the memo to demonstrate some reasonable cause for the position taken on the return.
Essentially, the memo takes the position that the statutory language “losses from wagering transactions” means the amount of the wager lost, and that such losses do not include business expenses. The significance of this distinction is that only wagering losses, and not business expenses, are limited in deduction to the extent of wagering gains. The memo adds that some courts indeed take the view that business expenses are considered “losses from wagering transactions.”
Ultimately, when unsure how the tax code applies to you, discuss your situation with a tax professional versed in the subject.