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Victory in U.S. Tax Court for Professional Gamblers

Sometimes, just sometimes, persuasive authority that seems to favor your side of the law becomes binding authority.

Last week I noted the confusion of this IRS memorandum from 2008.  The memorandum’s position is only wagering losses, and not business expenses, are limited in deduction to the extent of wagering gains.  For the professional gambler, this may result in a lower tax burden.  I also expressed caution with relying on this memorandum, as it was merely advisory, and not binding on taxpayers.

Earlier this week, the United States Tax Court issued a decision examining the position of this memorandum.

The basic facts of the case are straightforward.  The petitioner was a professional gambler.  He liked to bet on horse races.  A lot.  For the 2001 year, the petitioner reported $120,463 in gambling winnings, $131,760 in gambling losses, and $10,968 in “ordinary and necessary” expenses incurred with the taxpayer’s business of gambling.  The petitioner attached a Schedule C to his 2010 tax return, reported a $22,265 business loss, and applied it against other income from the year.

The court upheld the rule that gambling losses can be applied against gambling winnings to the extent of gambling winnings.  The holding reaffirms the fundamental principle we have discussed all along.

How about the more interesting position of the IRS memorandum; whether “ordinary and necessary” expenses incurred with the taxpayer’s business of gambling are deductible beyond the extent of gambling winnings.  The court said this is proper.

The United States Tax Court is a federal court of record.  The court’s decisions are binding on both the IRS and taxpayers, unless reversed on appeal.  In this case, it seems unlikely the IRS will appeal the decision, considering the previous position taken in the memorandum.

The holding’s significance:  Although professional gamblers may still only deduct gambling losses to the extent of gambling winnings, the taxpayer may further deduct the “ordinary and necessary” expenses incurred with the taxpayer’s business of gambling.  This may cause a professional gambler to have business loss, which may be applied against other income.

Back to the facts for clarification.  The taxpayer was allowed to deduct $120,463 of gambling losses (the additional $11,297 in gambling losses lands in a black hole), as well as the $10,968 of business expenses.  The result:  The taxpayer may report a business loss of $10,968.

Important takeaway:  If reporting a business loss from professional gambling, be sure to maintain proper records to substantiate these losses.  The burden is on the taxpayer to prove these losses.  If unable to, the result could be a large tax deficiency, plus interest and penalties.

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