Thursday, December 27, 2007

IRS Examination - Gambling losses: Deduction: Substantiation. --
An individual could not deduct gambling losses beyond the amount conceded by the IRS due to her failure to provide any substantiation. The taxpayer argued that because she was in debt at the end of the year, her losses from playing slot machines must have exceeded her gains. Because the taxpayer presented no credible evidence to corroborate this theory, the Cohan rule was inapplicable, and the court did not estimate the taxpayer's gambling losses.

Kathleen Jackson v. Commissioner.

Dkt. No. 23959-06 , TC Memo. 2007-373, December 26, 2007.

[Code Secs. 61] and [165]


HAINES, Judge: Respondent determined a deficiency in petitioner's 2002 Federal income tax of $68,254.1 The issue for decision is whether petitioner is entitled to deduct gambling losses in excess of the $127,165 that respondent conceded for 2002.


Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. At the time she filed her petition, petitioner resided in Blaine, Minnesota.

Petitioner is a recreational gambler who played slot machines regularly in 2002. Petitioner visited the casino on a weekly basis and played the slots for hours at a time. When petitioner won a jackpot, she would often use her winnings to play at a higher stakes slot machine. Petitioner kept no diary, log, or record of any kind of her gambling winnings and losses.

In her 2002 Form 1040, U.S. Individual Income Tax Return, filed in April 2006, petitioner reported gambling winnings and losses of $21,051. Petitioner subsequently filed a Form 1040X, Amended U.S. Individual Income Tax Return, in which she reported gambling winnings and losses of $244,744. Petitioner now concedes that her total gambling winnings for 2002 were actually $265,795.

Respondent issued a notice of deficiency on October 6, 2006, disallowing $223,693 of petitioner's claimed $244,744 gambling losses due to lack of substantiation. Petitioner filed a timely petition with this Court, and a trial was held on September 25, 2007, in St. Paul, Minnesota. At trial, respondent conceded that petitioner had presented sufficient documentation to substantiate $127,165 in gambling losses.2


Gross income includes all income from whatever source derived, including gambling. See sec. 61; McClanahan v. United States, 292 F.2d 630, 631-632 (5th Cir. 1961). In the case of a taxpayer not engaged in the trade or business of gambling, gambling losses are allowable as an itemized deduction, but only to the extent of gains from such transactions. Sec. 165(d); McClanahan v. United States, supra at 632 n.1 (citing Winkler v. United States, 230 F.2d 766 (1st Cir. 1956)). In order to establish entitlement to a deduction for gambling losses in this Court, the taxpayer must prove the losses sustained during the taxable year. Mack v. Commissioner, 429 F.2d 182 (6th Cir. 1970), affg. T.C. Memo. 1969-26; Stein v. Commissioner, 322 F.2d 78 (5th Cir. 1963), affg. T.C. Memo. 1962-19.

Petitioner failed to present credible evidence of gambling losses beyond those respondent conceded. Petitioner did not maintain a diary or any other contemporaneous record reflecting either her winnings or her losses from gambling during 2002. Further, petitioner's gambling income of $265,795 for 2002 was established only by an examination of her Forms W-2G, Certain Gambling Winnings, and petitioner appeared unaware of the specific figure until confronted by respondent. At trial, petitioner submitted no evidence to validate her claimed gambling losses, relying only on the theory that her losses must have equaled her earnings because she found herself in debt at the end of the year.3 We conclude that petitioner has failed to satisfy her burden of substantiating her losses.

As a general rule, if the trial record provides sufficient evidence that the taxpayer has incurred a deductible expense, but the taxpayer is unable to substantiate adequately the precise amount of the deduction to which he or she is otherwise entitled, the Court may estimate the amount of the deductible expense, and allow the deduction to that extent. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985); Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014(Nov. 6, 1985). In these instances, the Court is permitted to make as close an approximation of the allowable expense as it can, bearing heavily against the taxpayer whose inexactitude is of his or her own making. Cohan v. Commissioner, supra at 544. However, in order for the Court to estimate the amount of an expense, the Court must have some basis upon which an estimate may be made. Vanicek v. Commissioner, supra at 742-743. Without such a basis, any allowance would amount to unguided largesse. William v. United States, 245 F.2d 559, 560-561 (5th Cir. 1957).

The record provides no satisfactory basis for estimating petitioner's gambling losses. See Stein v. Commissioner, supra. Unlike cases such as Doffin v. Commissioner, T.C. Memo. 1991-114, where evidence of the taxpayer's lifestyle and financial position allowed this Court to approximate unsubstantiated gambling losses, petitioner has failed to produce any evidence to corroborate her story.4 Consequently, the Court will not apply the Cohan rule to estimate the amount of petitioner's gambling losses.

In reaching our holdings, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. Amounts are rounded to the nearest dollar.

2 This documentation consisted of casino ATM receipts, canceled checks made payable to casinos, carbon copies of checks made payable to casinos, and credit card statements stating that cash was advanced at the casinos.

3 Petitioner testified that she determined her gambling losses were greater than her winnings because she took out a second mortgage on her house for $25,000 in 2002 and spent the money on slot machines. Petitioner claimed she was still $25,000 in debt at the end of 2002, and inferred that this was because her gambling expenditures outpaced her earnings.

4 Petitioner asserted at trial that the difference between her gambling income and the loss she substantiated was put back into slot machines. This testimony, standing by itself, does not constitute a basis which would allow us to approximate petitioner's gambling losses.

What Is Included in Gross Income: Gambling income, legal

A cash-method taxpayer who was required to receive a $26 million lottery jackpot in annual installments over a 20-year period did not constructively receive the winnings in the year the jackpot was hit. Rather, the taxpayer received annual installment payments over the payout period, resulting in taxable income for the tax year at issue. The taxpayer's inability to draw upon the jackpot at any time constituted a substantial limit or restriction on his control over the winnings and precluded application of the constructive receipt doctrine under Reg. §1.451-2(a). Even assuming the taxpayer could have sold his right to future payments, the constructive receipt doctrine was inapplicable because the lottery winner's ability to assign the prize did not accelerate the time in which the lottery is required to make the payment.

A.B. Jombo, CA-D.C., 2005-1 USTC ¶50,197.

A gambler's slot machine winnings for two years were includible in his gross income. The absence of withholding at the source did not affect the individual's obligation to report the winnings as income.

V. Lyszkowski, CA-3 (unpublished opinion), 96-1 USTC ¶50,170.

The amount of income received by the taxpayer for wagering on horses was determined for two tax years. A record book of gambling income and losses constituted adequate proof of the amount of the taxpayer's losses as well as the amount of winnings.

B.L. Dunnock, 41 TCM 146, Dec. 37,326(M), TC Memo. 1980-449.

The taxpayer's testimony established that he accurately reported his wagering income on his income tax return when he could not produce records of his gambling activities for that year because they had been lost. Similar records from a prior year that tied into gambling income reported on the prior year's return convinced the court that the taxpayer had properly reported his gambling income from the lost records.

M. Rockin, 41 TCM 145, Dec. 37,325(M), TC Memo. 1980-448.

Despite an absence of documentary evidence and of consistent testimony, the fact that the taxpayer engaged in gambling activities established that he did incur some gambling losses, but his court-determined gambling winnings still exceeded his losses and such excess constituted taxable income.

W.L. Wagoner, 54 TCM 1332, Dec. 44,387(M), TC Memo. 1987-614.

The taxpayer was required to include gambling winnings from horse races in his income, as reported on his return and which he denied at trial.

K.V. Hall, 44 TCM 256, Dec. 39,134(M), TC Memo. 1982-356.


D. Bodine, 47 TCM 1337, Dec. 41,081(M), TC Memo. 1984-143.

E. Whitman, 50 TCM 1322, Dec. 42,445(M), TC Memo. 1985-537.

G.B. Bauman, 65 TCM 2165, Dec. 48,928(M), TC Memo. 1993-112.

An individual's gambling winnings were includible in his taxable income even though he lost more than he won in the year in question. The taxpayer elected to take the standard deduction rather than claiming his gambling losses as an itemized deduction.

A.C. Ling, CA-9 (unpublished opinion), 97-2 USTC ¶50,902, aff'g an unreported Tax Court decision.

Although the IRS was able to demonstrate that a gambler had failed to report all of his racetrack winnings, the taxpayer proved that his gambling losses exceeded those allowed by the IRS and approximately equalled his unreported winnings.

K.A. Forman, 55 TCM 139, Dec. 44,589(M), TC Memo. 1988-64.

Lottery winnings are taxable income.

Ayoub, BTA Memo., Dec. 8453-B.

H.A. Lange, 90 TCM 69, Dec. 56,099(M), TC Memo. 2005-176.

Lottery winnings were includible in the winner's gross income for the year in which he received a check for payment and not in the year that the prize was won because the taxpayer could not exercise essentially unfettered control of the proceeds until the check arrived.

T.J. Paul, Jr., 64 TCM 955, Dec. 48,551(M), TC Memo. 1992-582.

Taxpayers had unreported wagering gains in excess of their losses as determined by the Tax Court and, thus, were not entitled to deduct the losses. The taxpayers failed to establish additional gambling losses greater than the unreported gambling income. In addition, because the taxpayers failed to keep adequate records, the burden of proof was not shifted to the IRS. Bank statements showing cash withdrawals and debit or credit card charges at the casinos did not substantiate actual gambling losses, nor did generalizations by casino employees citing the unfavorable long-term odds of beating a casino.

R.J. Lutz, Jr., 83 TCM 1446, Dec. 54,705(M), TC Memo.

The value of a house won in a raffle drawing for the benefit of a charitable organization was includible in the winner's gross income as gambling winnings. The winner was required to include the fair market value of the residence less the amount paid for the raffle ticket.

Rev. Rul. 83-130, 1983-2 CB 148.

See also ¶5704.2892, ¶5901.40 and ¶6204.01.

A debtor unsuccessfully challenged the IRS's proof of claim against his bankruptcy estate for taxes, penalties, and interest. His unreported gambling income for the tax year at issue was includible in full in his gross income. His contention that the winnings were nontaxable because he sustained a net gambling loss for the year was rejected. Gambling losses cannot be netted against winnings; instead, the taxpayer was required to report the receipt of the winnings and claim an itemized deduction for the losses, but he failed to do so. Also, he produced no evidence to refute the IRS's deficiency determination.

G.N. Berardi, 2002-2 USTC ¶50,736. Aff'd, CA-3 (unpublished opinion), 2003-2 USTC ¶50,648, 70 FedAppx 660.

Lottery winnings were included in gross income for purposes of the Code Sec. 469(i)(3) phase-out of the rental real estate loss deduction.

E.D. Hamilton, 88 TCM 12, Dec. 55,686(M), TC Memo. 2004-161.

Gambling winnings from slot machine jackpots are includible in gross income.

A. McQuarrie, 91 TCM 1127, Dec. 56,505(M), TC Memo. 2006-93.

The IRS has reminded poker tournament sponsors, including casinos, that they will be required to report winnings in excess of $5,000 to winners and the IRS starting on March 4, 2008. Tournament winners are reminded that, by law, they are required to report all their winnings on their federal income tax return, regardless of the amount and regardless of whether or not they receive a Form W-2G or any other information return. This is true both before and after the new reporting requirement goes into effect.

IRS News Release IR-2007-173.

No comments: