Archive for the ‘Wisconsin’ Category

Pro Gambler’s Refund Request Denied

April 22nd, 2012 No comments

Sometimes an audit of a tax return concludes in the taxpayer’s favor. “No change” are the magic words in the tax controversy world.

What could be a better result than “no change”? A change resulting in the taxpayer having paid too much in tax. To receive the overpayment, a taxpayer must make a claim for refund. Claims for refund have expiration dates, however.

In a recent case before the Wisconsin Tax Appeals Commission, taxpayer Dennis Spear’s claim for refund from his 2004 tax year was not timely.

Dennis Spear was a professional gambler in Wisconsin. His 2004 through 2007 tax returns were audited by the Wisconsin Department of Revenue, who challenged his status as a pro gambler for 2005 through 2007. He filed as an amateur in 2004. The amount of tax and interest at stake during his pro years was $149,901.17.

Wisconsin is known as a “bad” state for amateur gamblers because one cannot deduct gambling losses for state tax purposes, but professional gamblers can to the extent of winnings. Clearly, the state tax consequences between filing as a pro or amateur in Wisconsin can be very significant.

Spear submitted 225 pages of documentation to establish his status as a professional gambler. The Department agreed to cancel its assessment for the 2005 through 2007 tax years. The only remaining issue was whether Spear was entitled to a refund from his 2004 year.

Spear sought to apply a different method than originally used to calculate his total gambling winnings for the 2004 year. Apparently, the method he originally used was inappropriate. Applying the appropriate method would have resulted in less total income tax. The different method was the “session method,” which involves netting gambling gains and losses on a daily or per session basis rather than bet-by-bet.

As an aside, I’ve written about gambling sessions before. The tax code does not define a gambling session. In the two U.S. Tax Court cases referenced in Spear, the taxpayers were entitled to treat all gambling activity during a day as one gambling session.

Those cases do not necessarily imply all gamblers may treat a day as one gambling session. In each of those cases, the taxpayers played exclusively on slot machines. If, however, a taxpayer throughout one day plays slots, blackjack, and roulette, he is almost certainly required to treat the gain or loss from each type of game as separate gambling sessions.

In this case, the taxpayer could not change to the “session method.” The reason was because his request to make the change was untimely.

Under the Wisconsin tax code, a taxpayer may make a request for an income tax refund if the claim is filed within four years of the original due date of the tax return. (Note: Under the Internal Revenue Code, a taxpayer may make a request for an income tax refund if the claim is filed within three years of the original due date of the return or within two years of the overpayment, whichever is later.)

Spear’s 2004 tax return was due April 15, 2005. His claim for refund was made on May 17, 2010, more than a year after the four year period expired on April 15, 2009.

Spear argued that the four year statute of limitations should have been extended in his case. The problem was that the plain language of the statute establishing a four year period is clear. A court won’t rule against plain language in a statute unless the statute is unconstitutional.

Ultimately, a small price to pay for an otherwise victorious result for the taxpayer.

Case: Spear v. Dep’t of Revenue, Docket No. 11-I-140 (Wis. Tax App. Comm’n Mar. 16, 2012).

Gambler Ruled an Amateur by Wisconsin Tax Appeals Commission

September 14th, 2011 No comments

The federal tax consequences facing recreational gamblers are not terribly difficult for me to discuss. That’s because the rules apply no matter where in the United States the recreational gambler is situated.

The same cannot be said for the state tax consequences facing recreational gamblers. On the one hand, some states don’t impose any income tax on individuals. On the other hand, some states impose income tax on gambling winnings but do not recognize a deduction for any gambling losses. Wisconsin is one of these “bad” states for recreational gamblers.

A recent Wisconsin Tax Appeals Commission case highlighted the state tax consequences facing a Wisconsin taxpayer who sought to file as a professional gambler, but was held to be a recreational gambler.

On her 2007 federal tax return, Carol Kubsch reported $473,075 of gambling winnings as “other income” and $473,075 gambling losses as an itemized deduction. On her 2007 Wisconsin income tax return, she reported $473,075 of gambling winnings, but could not deduct any of the $473,075 gambling losses.

Likely after realizing the Wisconsin tax law does not permit a deduction for gambling losses, Ms. Kubsch didn’t pay to the state the approximately $30,000 due from her gambling income. Instead, she filed amended 2007 federal and state income tax returns, changing her status from recreational gambler to professional gambler. That way, she thought, she could net the winnings and losses on a Schedule C, reflecting no income and thus no tax owed to Wisconsin for her gambling activity.

Unfortunately, a taxpayer can’t simply categorize oneself the type of gambler that produces the lesser tax bill. The professional versus amateur gambler status is a facts and circumstances determination.

Similar to the analysis recently employed by the U.S. Tax Court, the court applied a several factor test to determine whether the taxpayer gambled with regularity to the production of income for a livelihood.

Ms. Kubsch’s gambling was restricted to slot machines. She gambled when it conveniently worked into her weekly schedule, amounting to approximately eight days per month. She did not maintain an accurate and complete book of records. She did not present any evidence that she had ever studied any publications that would make her slot machine playing profitable.

Ultimately, the court held that all nine factors weighed in favor of the Department; the taxpayer’s gambling activities did not constitute a trade or business.

A taxpayer seeking to file as a professional gambler need be prepared to substantiate the position when called upon. Otherwise, be prepared to pay additional tax, interest, and possibly penalties.

Case: Blaha v. Wis. Dep’t of Revenue, Docket No. 09-I-261 (Wis. Tax App. Comm’n Aug. 23, 2011).

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