IRS agrees—professional gambler\'s business expenses not subject to loss limitation
AOD 2011-06,12/21/2011
IRS has issued an action on decision (AOD) announcing its acquiescence with the Tax Court\'s decision in Mayo, (2011) 136 TC, that the business expenses of a taxpayer engaged in the trade or business of gambling are not subject to Code Sec. 165(d). While, as the Tax Court also held in Mayo, Code Sec. 165(d) limits the deduction for gambling losses of a taxpayer engaged in the trade or business of gambling to the taxpayer\'s gains from wagering transactions, the Court made it clear, and IRS now agrees, that Code Sec. 165(d) does not limit deductions for expenses incurred to engage in the trade or business of gambling. Those business expenses are deductible under Code Sec. 162.
RIA observation: In reaching its holding on the business expense issue, the Tax Court overturned its decision in Offutt (1951), 16 TC 1214, that “losses from wagering transactions†extended to expenses incurred in connection with the conduct of a wagering activity. It followed Offutt in concluding that an individual engaged in the trade or business of gambling is subject to the Code Sec. 165(d) limitation on wagering losses.
Facts. Ronald Mayo was engaged in the trade or business of gambling on horse races during 2001. Mayo attached a Schedule C, Profit or Loss From Business, to his 2001 tax return, on which he reported the results of his gambling business, including gross receipts of $120,463 and expenses of $142,728, consisting of $131,760 for wagers placed and $10,968 in expenses incurred in connection with the conduct of the gambling business. Mayo deducted the excess of the Schedule C expenses over gross receipts, $22,265, as a business loss against his other income.
IRS issued a notice of deficiency disallowing $22,265 of Mayo\'s claimed loss from gambling—i.e., the amount by which expenses from Mayo\'s gambling activity exceeded his gross receipts from gambling. IRS contended that Mayo\'s allowable losses from his gambling business were limited to the reported gross receipts from the business under Code Sec. 165(d).
IRS further contended that “losses from wagering transactions†for purposes of Code Sec. 165(d) included both the $131,760 cost of wagers placed by Mayo and the $10,968 in expenses he incurred in connection with the conduct of the gambling business. That is, IRS contended that since “losses from wagering transactions†covers both, Mayo couldn\'t deduct either the $11,297 excess of his wagering expenses over gambling gross receipts or the $10,968 in business expenses he claimed in connection with carrying on his gambling business.
Court\'s holdings. The Tax Court held that the Code Sec. 165(d) limitation applies to persons engaged in the trade or business of gambling, and therefore Mayo couldn\'t deduct the $11,297 of excess wagering losses over wagering gains. It further held that a gambler\'s business expenses are not “losses from wagering transactions†subject to the Code Sec. 165(d) deduction limitation. Therefore, it allowed Mayo\'s deduction under Code Sec. 162(a) for the $10,968 of gambling-related business expenses. The Court further announced that it will no longer follow the contrary holding of Offutt and other cases applying the Code Sec. 165(d) deduction limitation to Code Sec. 162 business expenses.
IRS acquiesces. IRS now says it agrees with the Tax Court\'s analyses. Code Sec. 165(d) limits the deduction for the wagering losses of persons engaged in the trade or business of gambling. However, it does not limit deductions for expenses incurred to engage in the trade or business of gambling. Those business expenses are deductible under Code Sec. 162.
RIA Research References: For treatment of gambling losses, see FTC 2d/FIN ¶ M-6100 et seq.; United States Tax Reporter ¶ 1654.500 et seq.; TaxDesk ¶ 424,001 et seq.
Source: Federal Tax Updates on Checkpoint News tab 12/22/2011
