Better Odds for Pro Gamblers' Business Deductions: Tax Court Rules Sec. 162(a)expenses Can Exceed Gross Receipts from Wagers
EXECUTIVE SUMMARY * The IRS acquiesced to the Tax Court's recent holding that a professional gambler in the trade or business of gambling could deduct nonwagering expenses in excess of gambling winnings under Sec. 162(a). * Historically, such costs in excess of gambling winnings have been disallowed under Sec. 165(d) and previous Tex Court precedent. Now, however, such deductions may offset other income and even result in a net operating loss that may be carried back or forward to other tax years. * To be considered a professional gambler, taxpayers generally must demonstrate to the satisfaction of the IRS that they are engaged in gambling as a trade or business rather than casually. The IRS and courts apply nine factors in regulations under Sec. 183, as well as all relevant facts and circumstances, in making the determination. * Nonwagering business expenses may include transportation, meals and entertainment, admission, subscriptions and other fees. Wagering gains include wagering winnings and "comps" (the fair market value of complimentary goods and services) but not additional income to casino personnel in the form of "take-offs" and "tokes," which are likely to be considered compensation or other, nonwagering income. ********** [ILLUSTRATION OMITTED] Recently, professional gamblers' luck prevailed as the Tax Court changed directions on the deductibility of nonwagering business expenses. The Tax Court in Mayo (136 T.C. 81 (2011)) partially overruled its precedent, Offutt (16 T.C. 1214 (1951)). Offutt allowed the deduction of wagering losses only to the extent of winnings and included professional gamblers' nonwagering business expenses in the definition of losses. The Mayo court, contrary to Offutt and subsequent cases, allowed a professional gambler to deduct ordinary and necessary business expenses under Sec. 162(a), potentially in excess of gross receipts from gambling as a trade or business. In doing so, the court noted it was following recent IRS policy on the issue outlined in a 2009 IRS legal memorandum. Furthermore, in December 2011, the IRS acquiesced to the court's holding and analysis (Action on Decision 2011-06). PROFESSIONAL VS. CASUAL GAMBLERS Historically, gamblers have had difficulty establishing themselves as members of a profession engaged in a trade or business of gambling. Most people gamble for pleasure. Some do so for profit, but those taxpayers historically have had problems defining their occupation. The Supreme Court in Groetzinger (480 U.S. 23 (1987)) said a gambling activity could be considered a trade or business if it is pursued full rime, in good faith and with regularity, to make income for a living, and not merely as a hobby Along the same lines, Sec. 183 denies deductions beyond income derived from any activity that is not a trade or business engaged in for profit--in other words, without a profit motive. Naturally, the deductibility of a gambler's costs depends on the tax status of the gambler as either a casual or professional gambler. A casual gambler can deduct gambling losses on Form 1040, Schedule A, Itemized Deductions, but only to the extent of winnings and cannot deduct associated expenses, which are nondeductible under Sec. 262 (AM 2008-013). A professional gambler, on the other hand, who is engaged in the trade or business of gambling, is allowed to offset losses and expenses of gambling against income from it on Schedule C, Profit or Loss From Business (Sole Proprietorship). Among the requirements for being considered a professional gambler engaged in gambling as a trade or business, the profit motive requirement may easily cause a dispute with the IRS. To determine whether a profit motive exists, all facts and circumstances with respect to an activity should be taken into account. Regs. Sec. 1.183-2(b) provides nine factors: 1. The manner in which the taxpayer carries on the activity. …