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Tax Policy

In: Business and Management

Submitted By cgibbon1
Words 728
Pages 3
Memorandum-to-the-File
Date: April 5, 2016
From: Conor Gibbons
Re: Taxability of gambling gains and losses Facts
Anthony is a professional gambler whose specialization is in horse racing. He dedicates 60 hours per week to gambling activities including research, study, and placing bets. Throughout the current year, Anthony has won $235,000 on $375,000 worth of bets placed. Besides $12,000 worth of stock investment income shared with his spouse, his gambling activities are his only source of income. Additionally, his wife earns $45,000 per year as a teacher.
Issue
The tax court has ruled in the past that gambling losses directly associated with wagering are only deductible up to the amount of winnings. Any losses in excess of this have been ruled nondeductible. There have been a few court cases in the past which have tried and failed to argue against this ruling.
Applicable Law
IRC § 165(a) states that “there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.” However, IRC § 165(d) specifically singles out gambling activities stating that “losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.” Therefore, § 165(d) limits the application of § 165(a).
Mayo v. Commissioner, 136 T.C. 81 (2011), applies directly to this situation. The taxpayer argued that, because he was in the trade/business of gambling, § 165(d) should not apply to him. The court held that the limitations of § 165(d) applies to all persons engaged in the trade or business of gambling, but they ruled that any expenses incurred in nonwagering activities were deductible. Therefore, the taxpayer was not allowed to deduct the excess of his losses over his wagering gains, but he was able to deduct other expense that included transportation, travel, meals,…...

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