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Master the Tax System for Gambling Winnings and Losses

2005; RELX Group (Netherlands); Linguagem: Inglês

1556-5068

Randy Serrett, Marvin Williams,

Gambling Behavior and Treatments

Facts in Libutti - Mr. Libutti gambled extensively at Trump Plaza in Atlantic City. Upon audit by the IRS, Mr. Libutti received total assessments for the three years involved in excess of $1.4 million. Mr. Libutti incurred losses at Trump Plaza of $4,139,100 in 1987, $3,080,050 in 1988, and $1,215,900 in 1989. Comps during this time totaled $443,278 in 1987, $974,992 in 1988, and $1,126,856 in 1989. The comps included these automobiles: five Rolls Royces, three Ferraris, one Bentley Corniche, and one Mercedes Benz. Comped vacations included five to Europe and one to California. Jewelry comps included a Rolex watch and bracelet, a 2.7carat diamond, and various other bracelets and earrings. Mr. Libutti was also comped 178 bottles of Cristal Rose champagne. Entertainment comps included tickets to the theater and sporting events such as the Super Bowl, NCAA basketball tournament, boxing events, and the United States Open in Flushing Meadows. Main Issue in Libutti - The IRS, in disallowing the losses claimed by Mr. Libutti, determined that gambling losses are only allowed to the extent they offset from wagering. In essence, the comp income reported from the Casino, according to the IRS, could not be treated as gains from wagering as defined by Section 165(d). The article covers issues related to the many activities that constitute gambling as defined under Federal taxation laws. The various activities of casino gambling (slot machines, blackjack, roulette, etc.), lottery playing, raffles, horse racing, dog racing, bingo, sweepstakes and others are covered. In addition, the proper tax treatment of gambling activities (winnings and losses) is included. Moreover, special and unique issues related to the topic of gambling are also addressed including the distinctions in the law between the recreational and professional gambler. The taxpayer who participates in gambling activities, whether a recreational gambler or a professional gambler, must be aware that tax issues are involved. It is incumbent upon the taxpayer to be able to substantiate and validate gambling losses in order to offset some or all of the gambling winnings. It is possible for gambling to be classified as a taxpayer's profession. In such a case, the gambler would then report the results of gambling activities on Schedule C. In addition to being able to deduct gambling losses, a professional gambler would also be able to deduct other ordinary and necessary business expenses related to the trade or business (e.g. travel, meals, professional fees, etc.). However, for these additional deductions to be available, the gambling winnings would need to be greater than related gambling losses (i.e. result in net gambling income for the year). Over the years, the courts have been faced with many cases where the issue involved was whether the taxpayer could be found to be in the trade or business of gambling. Although many issues have surfaced in this regard, the primary issue has been determining the definition of trade or business.