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Natalie Is Going To “A C” For Her B-Day and What She Needs To Know…

March 16, 2011

Natalie’s birthday is April 2, which is also my 17 year anniversary…but she is going to Atlantic City while I’m here at Gunwel doing tax returns… I joke with her that she needs to win big for both of us. There was a recent case in Tax Court that was revisited after 60 years that has made Professional Gamblers very happy.

Background: In 2001, Andrew Mayo gambled on horse races, winning $120,463, but he also incurred $131,760 of total wagers placed and $10,968 of other business expenses (travel, subscriptions, car and truck expenses, etc). Claiming that he was a professional gambler in the business of gambling, he reported his income and expenses on Schedule C, showing a net loss of $22,265 ($120,463 – 131,760 -10,968).

IRS Position: Although the IRS agreed that he was a professional gambler, it limited his deductions to his wagering gains and thus eliminated the $22,265 loss he claimed. The IRS based its position on Section 165(d), which provides that losses from wagering transactions are allowed only to the extent of wagering gains. In 1951, the Tax Court in Offutt (16TC 1214) ruled that Section 165(d) applied to both amounts expended on wagers as well as other expenses incurred in carrying on the trade or business of gambling. Thus, the IRS simply followed the Tax Court’s earlier ruling on how to apply Section 165(d).

Court Conclusion: Based on its analysis, the Court concluded that its 1951 holding in Offutt should no longer be followed with regard to the business expenses of a professional gambler other than the cost of wagers. Thus Mr. Mayo could deduct his $10,968 of business expenses but his wagering losses were limited to his wagering gains.

I believe it is encouraging that the Tax Court would consider a 60-year-old case and make substantial changes. At GAI ( we are here to help you navigate thru the ongoing tax law changes and help you maximize all your tax benefits. Give us a call at 212-979-6830. We are open Monday – Friday 8am – 8pm and Saturdays 8am – 5pm. See you soon!

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