Doctor Green

MEMORANDUM

TO: Doctor Green

FROM: Jeri Andrews

DATE: November 20, 2009

RE: Tax Memo #1 Gambling Activities

FACTS AND ISSUES

Dr. Green is a participating physician in Chicago who, as an avid blackjack and slot machine player, travels to Las Vegas every other weekend to gamble.

Dr. Green would like to know what criteria are used to determine whether gambling activities constitute a trade or business for federal income tax purposes and whether or not his activities qualify for trade or business status.

If Dr. Green's gambling activities do not qualify as a trade or business, he would like to know if he can deduct his gambling-related travel and lodging expenses against his gambling winnings.

Dr. Green would also like to know if he and his wife, with whom he files a joint return, can combine their gambling transactions and use his losses to offset her winnings.

APPLICABLE CASE LAW, CODE, AND REGULATION

In order for gambling activities to constitute a trade or business (Professional Gambler) the criteria set down in 1987 in the case of Commissioner v. Groetzinger must be met. These criteria can be summarized as follows:

1. Gambling activity must be done full time with regularity and continuity.

2. Gambling activity must be done with the expectation of making income to support yourself.

3. You must show a profit in three out of five consecutive years.

4. You must act like a business and keep a set of books.

If the criteria are met than tax deductions should be granted for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business for tax purposes. (IRS code § 162(a))

Further, losses from "wagering transactions" may be deducted to the extent of gains from gambling activities. In order to qualify for a deduction of the expenses incurred from wagering, the taxpayer can only deduct up to the amount of gains he or she accrued from wagering. (IRS Code § 165(d))

Having established what gambling activities constitute the professional gambling designation we must now discuss what an individual who is not a professional gambler must include in winnings and what he can write off as losses.

According to IRS Publication 529, gambling wins and losses consist of specific wager, or wagering activities. (Publication 529, Miscellaneous Deductions)

A wager is defined in Treasury regulation § 44.4421–1 as:

1. Any wager placed with a person engaged in the business of accepting wagers upon the outcome of a sports event or a contest;

2. Any wager placed in a wagering pool with respect to a sports event or a contest, if such pool is conducted for profit; and

3. Any wager placed in a lottery conducted for profit. (Reg. 44.4421-1(d))

Topic 419 published by the IRS (not an authoritative source) states that gambling income includes income from but is not limited to, lotteries, raffles, horse races, and casinos.

Expenses incurred while participating in gambling activities do not involve wagering, and cannot be considered losses.

With regard to how gains and losses are handled on a joint tax return, Treasury Regulation §1.165-10, wagering losses, states that losses sustained during the taxable year on wagering transactions shall be allowed as a deduction but only to the extent of the gains during the taxable year from such transactions. In the case of a husband and wife making a joint return for the taxable year, the combined losses of the spouses from wagering transactions shall be allowed to the extent of the combined gains of the spouses from wagering transactions. (Reg. §1.165-10(a))

IRS Publication 529 states that gambling winnings must be reported on Form 1040 line 21, losses are itemized on Schedule A line 28.

Further, miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income. (Code § 67)

According to the 2009 instructions for schedule A, itemized deductions are reduced by 1% of the amount exceeding AGI of 166800 for 2009.

The reporting of gambling losses is further limited to only those losses which can be proven. Revenue Procedure 77-29 provides guidelines for recordkeeping.