Case — Gambling Expenses

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TL Case Summ

THE QUESTION

Can a professional gambler deduct non-wagering related expenses in excess of gambling winnings?

THE DISPUTE

Taxpayer Says: The expenses of carrying on his gambling business (other than direct wagering expenses) are deductible because they are ordinary and necessary business expenses.

Internal Revenue Service Says: The expenses are not deductible because they exceed the receipts from gambling.

THE LAW

From Internal Revenue Code Section 162(a): Generally allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”

From Internal Revenue Code Section 165(d): Provides that “Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.”

THE CAUSE OF THE DISPUTE

When you make your living gambling, you can treat your gambling activities as a business. That means you can deduct expenses related to your business. However, the tax code provides a limitation on the amount of losses you can deduct, limiting them to the amount of your gains from gambling. That’s true whether you’re a professional gambler or you gamble as a hobby.

Disputes arise because of the apparent conflict between two code sections, one that allows deductions for business expenses, and one that limits losses for gambling activities, even when those activities are conducted as a business. In addition, the term “loss” is not defined in the code or the regulations, and the distinction between wagering losses and deductible business expenses is not always clear-cut.

In this case, the taxpayer, a professional gambler, deducted various expenses, such as vehicle expenses, meals, entertainment, telephone, and subscriptions, from the income he made gambling. The expenses created a loss, which he deducted from his other income on his personal tax return.

The IRS disallowed the loss, saying deductions related to the taxpayer’s gambling business are limited to gains from that business.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 46KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Right answer!
Sorry, wrong answer :(
For the taxpayer. The taxpayer is entitled to deduct under section 162(a) the business expenses claimed in connection with carrying on his gambling business. Editorial Note 1: This decision reverses many previous cases, including Crawford, which was featured in Taxing Lessons on March 27, 2010. Editorial Note 2: This case addressed another issue as well: The taxpayer had deducted wagering losses in excess of wagering gains. The court *did* limit those losses to the amount of wagering gains. For more information about the distinction between losses and deductions, see IRS Chief Counsel Attorney Memorandum, AM2008-013 (Dec. 19, 2008).
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