Tax Laws Part II

Who creates the tax laws? See if you can choose the right answer from the following:

(a) U.S. Congress 
(b) The IRS 
(c) Taxpayer 
(d) Judges and juries 
(e) All of the above.

If you selected (e) 'All of the above' give yourself a gold star. To illustrate the process of the creation of the tax law and the forces that shape the law, let's examine a subject near and dear to all of us, the law regarding the deductibility of wagering losses.

All Federal tax law originates in Congress through the enactment of Revenue Acts which have been "codified" into the Internal Revenue Code. Years ago, Congress enacted Section 165(d) of the Code which is entitled "Wagering Losses" that msimply states "Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions". That is the sum total of the legislative law regarding wagering losses. Congress has said no more, but the IRS has.

The IRS is empowered to enforce the Revenue Code. As a part of that power, the IRS issues Income Tax Regulations, makes private letter rulings, publishes pamphlets, and otherwise interprets the intent and meaning of the Code as enacted by Congress (incidentally this all started in 1913).

The IRS has issued a regulation concerning "Wagering losses" (Reg 1.165-10) which narrowed the scope of the law as stated in the Code, by requiring that losses can only be applied to gains that occurred in the same year as the losses. Since Congress placed Section 165(d) under the part of the Code entitled "Itemized Deductions for Individuals and Corporations" the IRS required that wagering losses be deducted (by individuals) on form 1040 Schedule A - Itemized Deductions.

That means that if you have large gaming wins as well as large losses, the winnings reported on Form 1040 will inflate your income and may cause you to exceed the phase points for some of the various deductions you claim on schedule A. Your gaming losses are not subject to the phase-out laws. That is a long way from the simple sentence Congress wrote as Section 165(d).

Enter the taxpayers, especially those brave and courageous souls, professional gamblers, who felt that their wagering loses should be deductible from their gains in determining Adjusted Gross Income in the same manner that most self employed taxpayers are allowed to compute their net business income.

They took the IRS to court as far back as 50 years ago, but lost a landmark Supreme Court decision in 1941, which required that to be considered self employed, one must be engaged in the selling of goods or services. Merely wagering for one's own account was not considered a trade or business. Thus the professional gambler was disallowed the ordinary and necessary business deductions that were granted to individuals engaged in other legal trades or businesses. The Court had upheld the interpretation made by the IRS, which treated gambling for one's own account as a hobby or a recreational activity. Is that what Congress said?

The persistent professional gambler did not give up and continued to challenge the IRS and the doctrine established by the Supreme Court in the years that followed the 1941 decision. One after another, trying different arguments, filed appeals in the hopes of obtaining relief from what could be termed prejudicial treatment. Finally, in the mid 1980's, the Tax Court began issuing rulings which took exception with the guidelines established by the 1941 decision.

In 1987, the Supreme Court heard a case involving a full-time gambler who made wagers solely for his own account and ruled that the taxpayer "was engaged in a trade or business". The Court established a new "test" in order to determine when a taxpayer is engaged in a trade or business, which states that the taxpayer must be involved in the activity with continuity and regularity and the primary purpose for engaging in the activity must be for income or profit.

A sporadic activity, a hobby, or an amusement diversion, would not qualify. The Court held that the resolution of the issue of whether a taxpayer is engaged in a "trade or business" requires an examination of the facts in each case. In so doing, the Court expressly rejected the position taken by the IRS which had been upheld by the Supreme Court in 1941. Thus, due to the tenacity of a gambler, a significant change in the tax law occurred.

At present, the current case law supports the contention that a professional gambler is engaged in a trade or business for tax purposes and may deduct losses to the extent of gains for the purpose of determining adjusted gross income, and may deduct business-related expenses which meet the necessary and ordinary test.

Additionally, the professional gambler won the right to participate in theself-employment tax (i.e. Social Security and Medicare Taxes).

Many of you have inquired if your particular set of circumstances qualifies you for professional gambler status. Please understand that determination requires an examination of the facts and how they compare to similar cases previously decided by the IRS and/or the courts. A professional tax practitioner must be well versed in the trends in the recent IRS rulings and court decisions in order to properly advise you as to the position you may take and your expectations of prevailing should the IRS disagree with your position.

Question of The Day: I won a new car in Las Vegas. The casino offered me $33,000 or the car - I chose the car. The casino gave me a tax form showing my winnings as $33,000. Do I have to show the entire $33,000 as income? I read an article that said I could possibly claim a lesser amount as to what I could have sold the car for immediately after winning. I talked to a local dealer here and he said he would have sold me the same car for about $29,500 and that he would buy my car from me for an amount slightly less than thatÇŸR.L. from Topica.

Answer: The IRS Regulation Section 1.74-1 states that non-money winnings shall be taxed at fair market value. Since the casino offered you either $33,000 or the car and since you chose the car, it seems to us that establishes the "fair market value". The IRS has recognized a court decision that defines fair market value as "being the price which property will bring when offered for sale be a willing buyer to a willing seller, neither being obligated to buy or sell".

This definition does not seem to fit the circumstances. It has been our experience that the IRS only accepts the "fair market value" decided by the establishment offering the prize.

Be sure to visit our web site @ If you have a question regarding the tax laws and regulations as they apply to gaming that you would like answered in an upcoming article, please mail your question to: R.B.S., PO Box 60908, Sunnyvale, CA 94088-0908, or email it to We will keep your identity confidential. If you would like to utilize our professional services or order our book, The Tax Guide for Gamblers, please call (800) TAX-7271 (We accept all major credit cards).

Tax Laws Part I