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Same Old Story: Without Diary, Gambling Loss Disallowed

Some taxpayers seem to believe that a casino’s statement is sufficient to substantiate a taxpayer’s reported gambling winnings and losses. In a recent case decided by the California Board of Equalization, taxpayer Marsha Kakalia learned the hard way that such statements are not sufficient.

During 2003, Ms. Kakalia gambled at several casinos, mostly playing slot machines. She reported gambling losses of $89,980, offsetting her entire federal AGI (adjusted gross income) of $89,980 and determining a California AGI of zero.

It’s no surprise the California Franchise Tax Board examined her return. For the year, six casinos issued to her (and to the IRS) Form W-2Gs, reflecting $89,834 of total gambling winnings. For slot machine winnings, a Form W-2G is issued only when winnings are $1,200 or more.

The taxpayer was essentially saying that all of her winnings were $1,200 or more; she never won smaller amounts. The auditor questioned this by requesting documentation of her winnings and losses from the year.

To substantiate her winnings and losses, the taxpayer provided to the auditor two statements: One from Harrah’s dated July 7, 2007, and one from Thunder Valley Casino dated July 2, 2007. The Harrah’s statement showed she had total net gambling losses of $14,666 during 2003 as a result of gambling from four different Harrah’s locations. The Thunder Valley Casino statement reflected total net losses for 2003 of $36,151.20.

The taxpayer took the position these two statements demonstrated there was “no doubt” that she had no gambling income for 2003 from any casino.

The position is weak. First, the statements only included gambling activity when the taxpayer used her rewards cards. Second, the statements themselves emphasized that they were not intended for tax purposes, and that the IRS recommends keeping a contemporaneous diary of gambling activity. See IRS Publication 529.

The Franchise Tax Board took the following—and correct—legal position:

[A]dequate recordkeeping is essential to establish entitlement to a gambling loss deduction… “[I]f a taxpayer fails to maintain adequate records, both her gambling losses cannot be ascertained. In such a case, it cannot be determined whether her gambling losses exceeded her unreported gambling income. In those circumstances, courts have denied the taxpayer a gambling loss deduction.”

The taxpayer made a final effort to support the gambling loss deduction by providing bank records reflecting ATM cash withdrawals at various casinos. The problem with using bank statements for proving gambling losses is that there was no indication the cash withdrawn was actually used for gambling.

Ultimately, the Board of Equalization held for the Franchise Tax Board, disallowing the taxpayer’s gambling loss for the year.

As I say over and over, a taxpayer should maintain a contemporaneous diary of gambling activity. Otherwise one faces a steep uphill battle to meet the burden of proof for substantiation. In today’s case, the taxpayer came up very short.

Case: In re Kakalia, Case No. 404650, California Board of Equalization (Dec. 14, 2011).

  1. Jimmy
    April 2nd, 2012 at 13:28 | #1

    Why is a taxpayer diary substantive but a casino record is not? It seems to me that a taxpayer could easily falsify or exaggerate a diary but not so easily manipulate casino records. This position does not make sense to me.

    • April 2nd, 2012 at 22:34 | #2

      You raise a fair question. Sure, a taxpayer could fabricate a diary. But the IRS and state tax agencies like written, contemporaneous records. If the records, put together with other evidence (e.g. bank statements reflecting ATM withdrawals at the casinos on the days indicated in the diary) substantiate the reported winnings and losses, the auditor should be satisfied. If, however, the diary was the only piece of evidence presented to substantiate a $90,000 gambling loss, then your point is taken.

      The problem with the casino records in this case was that they did not include all of the taxpayer’s gambling activity. A properly kept diary, however, includes information about each gambling session, as specified in IRS Publication 529.

  2. Anonymous
    April 20th, 2012 at 20:09 | #3

    -> The taxpayer was essentially saying that all of her winnings were $1,200 or more; she never won smaller amounts

    I know nothing about the case or why California State is second guessing the IRS, but I disagree with the above statement.

    Tax people tell taxpayers they must always report as income, at least the sum total of their W-2s. For gamblers, with a lot of churn and a lot of W-2Gs, the sum of the W-2Gs is not a very meaningful number. IRS personnel verbally advises such gamblers to bump their winning sessions total up to match their W-2G total, and they generally advise that losing sessions may be bumped by an equal amount. Such advice has been given for reacreational filings and professional filings. I’d like to see this advice written in a memo.

    Even after a recent IRS memo, AM2008-013, indicating the sum of W2-Gs number may not really represent income, many tax people (including tax court judges) continue to insist it is income. Combine the memo with the fact that casinos rarely have a machine that gives a player more than a couple percentage points of advantage, and then look at a gambler who has received several W2-Gs in a session. Each W2-G, per the odds, cost the gambler about as much as he was paid, so the sum of W2-Gs represents income only to those folks who do not count the costs. If I am dealt two pair on a five play video poker machine at $25, I double the $625 that I put in, such that I receive a W-2G with the $1250. Ask the IRS how I should report this one hand of video poker that I played during the year. No matter how they tell you, it will be wrong because there is no right answer.

  3. JPLion
    March 13th, 2015 at 16:55 | #4

    So the individual did not have a problem with the IRS, but with their California tax return only?
    Also, I’ve been playing slots for over 5 years to date and I’ve seen only one individual using a diary. I won a hand-pay one night and that casino was able to give me a statement showing I had gambled and lost about $500, before winning the $2,000 hand-pay. Since it was all on the same slot machine, aren’t I allowed to only report $1,500 of winning, even though the W2G shows $2000? I do not file Schedule A, as I do not pay a mortgage.

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