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Gambling and Taxes - Robert E. McKenzie, Tax Attorney

Gambling and Taxes

Gambling and Taxes = The Price of Winning

By: Robert E. McKenzie ©2011


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Inclusion of Gambling Income in Gross Income 

Income from gambling,[1] lotteries,[2] sweepstake winnings,[3] and card playing[4] are included in gross income. Such income is included in gross income even though it may be exempt from withholding, for example, slot machine winnings.[5] All slot machine winnings must be included in income, not just the winnings reported on Form W-2G.[6] Individuals who are not in the trade or business of gambling report income from gambling winnings on Form 1040, Line 21 (other income).[7] Neither Form 1040A[8] nor Form 1040EZ[9] can be used.


Observation: Individuals who are in the trade or business of gambling report income from gambling winnings on Schedule C (Form 1040).


Amount of Wagering Gains  

The amount of income from a winning bet or wager is the full amount of the winnings less the cost of placing that winning bet or wager.[10] Thus, the winner of a sweepstakes includes as income the amount by which the prize money exceeds the ticket price,[11] and the winner of a horse race includes as income the amount of prize money less the cost of the winning race ticket.[12] In computing the amount of income from winnings, the cost of losing tickets (or other forms of wager) is not netted against the winnings.[13]  


Illustration:  C plays a slot machine that takes $5 tokens. He makes ten “pulls.” He loses nine times, but on the tenth pull, he wins $100. The amount of his winnings income is $95—the $100 win, less the cost of the $5 winning token. The $45 C spent on losing tokens is a gambling loss.


For a professional bookmaker, the amount of gross income from accepting bets on horse races must take into account the total net profits (winning bets less losing bets) on each race.[14] The income from a gambling venture doesn’t include a return of capital. The income on liquidation of a gambling syndicate was the amount by which the distribution exceeded what the taxpayer had paid for his interest.[15]


Lottery and Raffle Winnings 

Winnings from lotteries and raffles are gambling winnings and therefore are included in gross income. In addition to cash winnings, the taxpayer must include in income bonds, cars, houses, and other non‑cash prizes at fair market value. If a state lottery prize is payable in installments, the annual payments and amounts designated as interest on the unpaid balance must be included in gross income.[16]


Computing Taxable Income on Gambling Winnings 

Income derived from gambling or wagering transactions must be included in gross income.[17] Losses from wagering transactions are deductible only to the extent of the gains from those transactions.[18] However, the cost of placing a winning bet or wager is not a deductible loss allowable under Code Sec.165(d), but is rather a tax‑free return of capital.[19]  


Observation: Gambling losses are only deductible if the taxpayer itemizes his deductions.


Deductibility of Gambling Losses 

Gambling losses (technically, “losses from wagering transactions”) in a tax year are deductible, but only to the extent of that year’s gambling gains.[20]  Individuals who are not “professional” gamblers deduct gambling losses (against wins) only as miscellaneous itemized deductions, not subject to the 2%-of AGI limitation.[21]  For purposes of this rule, where a gambling gain is paid out to and properly recognized by the recipient in tax years after the year in which the gain was won, the gain retains its character as a gambling gain in the later years. Thus, where taxpayers won a state lottery in Year 1, and their winnings were payable in annual installments beginning in Year 1 and ending in Year 20, and taxpayers properly recognized the gain only as each installment was received, the payments in Years 2‑20 were gambling gains in those years, and taxpayers were entitled to deduct gambling losses in each year up to the amount of their income from their lottery winnings received in that year.[22]


During 2011, the Tax Court rejected six decades of precedent and the law now allows the deduction of the excess of gambling losses over gambling gains by a person in the business of gambling.[23] Prior to Mayo, a professional gambler’s loss deductions were limited to the extent of his winnings, and the specific provision of Code Sec. 165(d) limiting gambling losses prevailed over the more general provision of Code Sec. 162(a) providing for the deduction of ordinary and necessary business expenses.[24]  However, the Tax Court in Mayo has ruled that the Code Sec. 165(d) gambling loss limitation is limited to wagering-related expenses and that non-wagering gambling expenses are deductible as business expenses.[25]


An individual can deduct a gambling loss to the extent of gambling gains without need to prove it was incurred in a transaction entered into for profit (or in business, casualty, or theft) and whether or not gambling is legal where the gambling occurred.[26] Losses from one kind of gambling transaction are deductible against gains from another kind. Thus, horse bet losses are deductible against newspaper pool winnings,[27] gambling losses against “wagering winnings” from the operation of an illegal casino.[28] A partner’s losses from his own gambling transactions are deductible against his share of partnership gambling gains.[29]


Joint Return

If a husband and wife file a joint return, their gambling gains and losses are pooled so that the losses of one spouse are deductible against the gains of the other.[30]  The Tax Court rejected an attempt to convert gambling losses into ordinary losses on the investment in Section 1244 stock. The taxpayer organized a corporation which advanced money to an individual who wagered on horse races using a special system, but when the money was lost, the taxpayer dissolved his corporation. However, the corporation did not meet the requirements for a “small business corporation” so there was no loss on its stock.[31]


IRS Guidelines for Proving Gambling Losses 

An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, the diary should contain at least the following information:[32]


(1)               Date and type of specific wager or wagering activity;


(2)               Name of gambling establishment;


(3)               Address or location of gambling establishment;


(4)               Names of other persons (if any) present with taxpayer at gambling establishment; and


(5)               Amounts won or lost.


Verifiable documentation of losses includes wagering tickets, cancelled checks and credit records. Where possible IRS says the documentation should be backed up by other documentation of the activity or visit to a gambling establishment, e.g., hotel bills, airline tickets, etc. Affidavits from “responsible gambling officials” (not further defined) regarding gambling activities can also be used.[33] However, the Tax Court treated as unreliable and gave no weight to an unsigned letter to taxpayer from Caesar’s Palace Casino in Las Vegas that estimated that during the tax year taxpayer had put $898,050 into slot machines and had estimated winnings of $837,570 and therefore an estimated net loss of $60,480.[34]


With regard to specific wagering transactions, winnings and losses may be further supported by the following items:


Keno —Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment.


Slot Machines —A record of all winnings by date and time that the machine was played.


Table Games: Twenty One (Blackjack), Craps, Poker, Baccarat, Roulette, Wheel of Fortune, etc.—The number of the table at which the taxpayer was playing. Casino credit card data indicating whether credit was issued in the pit or at the cashier’s cage.


Bingo —A record of the number of games played, cost of tickets purchased and amounts collected on winning tickets.


Racing: Horse, Harness, Dog, Etc.—A record of the races, entries, amounts of wagers, and amounts collected on winning tickets and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.


Lotteries —A record of ticket purchases dates, winnings and losses. Supplemental records include unredeemed tickets, payment slips and winnings statement.[35]


Gambling Losses and Winnings

In 2011, the Tax Court ruled that the section 165(d) gambling loss limitation is limited to wagering-related expenses and that non-wagering gambling expenses are deductible as business expenses.[36]  The case involved strictly a question of law because there was no factual issue–such as whether the individual was in the business of gambling–since both parties stipulated that he was a (racing horse) gambler for the year at issue.

In analyzing the breadth of section 165(d) which limits deductions of wagering losses to wagering gains, the Tax Court held that section 165(d) is limited to expenses that are related to wagering.  The Tax Court also reiterated that the section 165(d) limitation, as applied to an individual in the business of gambling, was not removed by virtue of the Supreme Court of the United Statesdecision in C.I.R. v. Groetzinger.

The Court also addressed what is–and is not–included in the limitation (“losses from wagering transactions”) when they held that the term does not include business expenses that are not the result of the wager.  In so doing, they rejected (i.e. will no longer follow) what had been Tax Court precedent for over sixty years as the result of the holding Offutt v. Commissioner.[37]  The court applied an “ordinary meaning” interpretation of the term losses from wagering.  A narrow interpretation of the term was also consistent with the narrow interpretation of the other component of section 165(d) (gains from wagering) that the Tax Court and numerous Courts of Appeal have applied. The Court did not reject Offutt in its entirety, just its expansive definition of wagering losses under section 165(d). Offutt remains precedent for the application of the overall section 165(d) limitation (wagering losses are only deductible to the extent of wagering gains).

The Court then went on to hold that the gambler’s non-wagering expenses were deductible as ordinary and necessary business expenses.

Reporting Gambling Loss on Individual’s Tax Return

For an individual not engaged in the trade or business of gambling, gambling losses may be deducted only as itemized deductions[38] (on other‑miscellaneous‑deduction Line 27 of Schedule A, Form 1040).[39] Thus, if an individual does not itemize deductions, or is not entitled to itemize deductions, gambling losses aren’t deductible and may not be used to offset income from gambling winnings.[40]


Individuals who are in the trade or business of gambling report their losses from gambling on Form 1040, Schedule C.[41]


Estimated Gambling Losses Without Supporting Records—Use of Cohan Rule

Applying the Cohan rule, a court allowed estimated gambling losses of only slightly less than the taxpayer’s non-gambling income to offset gambling winnings. Although the taxpayer had some gambling losses, the taxpayer failed to establish nontaxable sources (i.e., gift, loan, cash hoard) beyond his taxable non-gambling income.[42]


However, the Tax Court allowed deduction even in the absence of complete records.[43]


Where taxpayers have established that some gambling losses were sustained by them, courts have determined the amount under the Cohan rule.[44] For the Cohan rule to apply, there must be “sufficient evidence to satisfy the trier that at least the amount allowed in the estimate was in fact spent or incurred for the stated purposes.”[45]  Thus, the court refused to apply the Cohan rule where taxpayer kept no records and his claimed deduction was admittedly a guess. He reported his winnings of $8,328 from one big race, the only winnings he reported, and sought to offset $8,000 of gambling losses. The court upheld IRS’s allowance of only $1,360 of losses and disallowance of the remainder.[46] Similarly, where taxpayers tried to offset estimated bingo losses of $6,900 against $12,600 of bingo winnings reported on Forms W‑2G, the Tax Court refused to allow any offset. Before it would allow a deduction based on estimates, the court had to be convinced that the taxpayer’s gambling losses exceeded unreported gains from gambling transactions. And while it was obvious that taxpayers had sustained gambling losses during the tax year, it was equally obvious that they had enjoyed unreported bingo winnings. Since they didn’t consider small amounts won to be consequential, and since they didn’t consider breaking even to equate to winning, the court had no basis to calculate, or estimate, their unreported winnings and therefore couldn’t determine whether their bingo losses exceeded those unreported winnings.[47]


No Records and No Evidence of Extent of Losses

Taxpayer kept no records of his gambling activities, offered no evidence concerning the extent of his losses, and although his offtrack betting parlor account showed losses, it was only a partial record of taxpayer’s gambling activities. The Court refused to apply the Cohan rule to estimate losses because there was no satisfactory basis for making an estimation. The court was unconvinced that taxpayer’s losses exceeded his unreported gains.[48] 


Delay In Producing Logs

Taxpayer’s delay in producing log books of his wagering activities, failure to keep racing programs to corroborate log book entries for more than 74 of the 171 days he attended races, failure to keep winning tickets, and inability to explain log book figures for days for which he had no corroborative evidence cast doubt on the credibility of the log books as evidence. In the absence of corroborative evidence, taxpayer failed to prove the amount of his deductible gambling losses. The court refused to apply the Cohan rule because there was no basis for estimating the taxpayer’s gambling losses.[49]


Losses Allowed

Applying the Cohan rule, the Tax Court found that taxpayer, a compulsive gambler who had gambling winnings in the amount of $192,372 for the tax year in issue, had substantial deductible gambling losses totaling $100,000 (leaving taxpayer with net gambling income in the amount of $92,372). The Tax Court rejected IRS’ argument that the court had no satisfactory basis for estimating taxpayer’s losses. The court concluded that unlike the taxpayer in Rivera (footnote 51), taxpayer here have credible testimony and did not doctor his records.[50]


Observation: Presumably, some of the “records” which the Tax Court in Famuyiwa (footnote 52) referred to included $172,470 in cash withdrawals (evidenced by cashier’s checks, personal checks and credit card cash advances), many of which occurred at or near racetracks or casinos.

However, the Tax Court allowed a taxpayer to deduct gambling losses although he did not keep contemporaneous records of his gambling winnings and losses or keep his losing tickets, where the court was convinced that losses were sustained.


Pulltabs Losses

Applying the Cohan rule, the court estimated the deductible losses which were much greater than those the IRS allowed, given the amount of time taxpayer devoted to pulltab gambling and the odds against his buying a winning ticket. The records showed that, having limited funds, taxpayer relied heavily on gambling winnings to finance the purchase of more pulltab tickets. The taxpayer’s modest lifestyle and the minimal increase in his net worth indicated that he lost most of these winnings.[51]  However, where the taxpayer did not corroborate her story, the court refused to apply the Cohan rule.[52]


The Tax Court, noting that a taxpayer had gambling winnings of $117,896 must have placed enough bets to have some losses, applied the Cohan rule to permit a deduction for gambling losses even though the taxpayer had no records of the losses. However, because of the lack of records, the court decided to “bear heavily against” the taxpayer in determining the amount of the loss, and only permitted a deduction for $2,000.[53]


Gambling Losses Claimed Based on Gambling Winnings 

A taxpayer was allowed some gambling losses to offset gambling winnings because he couldn’t have gambled as much as he did without incurring losses. The losses were allowed despite the lack of credibility to the taxpayer’s testimony that he gave all his records, including winning and losing bet tickets, to an unidentified IRS examining agent.[54]


Slot Machine Losses

Although a taxpayer kept no records, some losses were allowed because the court felt the taxpayer couldn’t have had winnings without incurring some losses.[55] But another taxpayer who kept no records was not allowed to deduct any losses even though he had slot machine winnings of $162,000 (based on information returns issued to him by a Las Vegas casino).[56]


Caution: Although some taxpayers have been allowed gambling losses on the theory that there could not be gambling winning without some gambling losses, this line of cases should be relied upon only as a last resort, particularly when the taxpayer has access to other proofs. Most cases decided in the taxpayers’ favor are based on documented proof and supporting testimony of the taxpayer. 


Reporting Only W-2G amounts Results in Denial of Losses

Gambling losses were denied taxpayer, a compulsive gambler, even though the court recognized that, given the extent of his gambling activity, he must have sustained some losses. The gambling winnings shown on the return for one year appear to represent only amounts reported as gambling winnings on Forms W‑2G issued by horse and dog tracks. For the other year at issue, taxpayer admitted that part of the gambling winnings he reported was based on an estimate. With no assurance that all of taxpayer’s gambling winnings had been reported, the court declined to estimate his losses.[57]


Gambling Losses Claimed Without Supporting Documentation 

Based upon the adequacy of his records for the prior year and the court’s observation of what it believed to be the honesty and forthrightness of the taxpayer, the court accepted taxpayer’s amounts for the year in question.[58]


Gambling losses were disallowed in their entirety where the taxpayer offered no proof other than his own testimony in the following cases:


 . . . The taxpayer had no records[59] and failed to provide any basis for estimating his losses or concluding his losses exceeded his unreported gains.[60]


. . . Taxpayer, a professional gambler, introduced no evidence other than his own testimony, which included his claim of maintaining 250 to 400 pounds of records per year, but kept them for only three years. Due to his lack of permanent residence, the court found it difficult to believe he would carry 750 to 1200 pounds of records with him.[61]


Gambling Loss Claims Based Primarily on Ticket Stubs 

The Cohan rule does not apply if the taxpayer does not lay the proper foundation by establishing gambling income and the relation of gambling losses to that income.[62]  Racetrack tickets alone, to support the taxpayer’s testimony of gambling losses, are of little weight without supporting evidence of their purchase by the taxpayer. The tickets could be the discarded stubs of bettors who lost,[63] or could be winning tickets.[64]  If IRS can identify the winnings, as in the case of various horse races, it will tax them without allowing the individual to offset his claimed gambling losses from his gambling winnings.[65] 


Gambling Losses Supported by Diaries, Check, Debts or Other Papers 

Gambling losses were allowed in full where:


. . . The taxpayer kept a pocket notebook which showed the date a bet was made, the type of bet or name of the player, and the amount won or lost.[66]


Gambling losses were allowed in part where:


. . . Taxpayer’s monthly diary accurately reflected the taxpayer’s winnings and losses from the race tracks.[67]


. . . Cancelled checks issued to pay for gambling losses were offered into evidence. The checks were supported by statements of witnesses, etc.[68]


Gambling losses were disallowed in their entirety where:


. . . The taxpayer argued that his gambling losses were greater than his winnings by an amount equal to the money he borrowed during the year. He was further in debt at the close of the tax year than at the beginning and he had no assets other than the clothes he wore. The court rejected his reasoning as proof of gambling losses. The taxpayer kept no records of his gambling activities.[69]


. . . A “compulsive” gambler who kept no records couldn’t convince the court that the steady decline in his bank account was due to his gambling losses.[70]


. . . The only substantiation of certain losses offered by a taxpayer whose sole occupation was gambling on race horses was “master sheets” where he listed his daily winnings and losses.[71]


. . . Taxpayer maintained no records of his gambling activities and only submitted a schedule of his bets prepared three years later from race results in back issues of a local paper. His argument that the interest expense reported on his return reflected a decline in his net worth caused by gambling losses was also rejected.[72]


. . . Taxpayer argued that he and his wife lived moderately and had to borrow substantial sums of money during the year. The borrowing history failed to prove that he lost money.[73]


. . . Taxpayer offered records indicating that he had been extended credit by a casino, but offered nothing to support the assertion that the use of the proceeds resulted ultimately in losses. The Tax Court noted that it was perfectly possible that the use of the credit line resulted in net winnings, or in net losses in an amount less than, but not all of, the entire line of credit.[74]


. . . Taxpayer did not maintain any financial records relating to his gambling winnings and cost. The only documentary evidence he submitted was an unsigned letter from Caesar’s Palace Casino in Las Vegasthat estimated taxpayer’s net loss from slot machines at $60,480. The letter specifically stated that it only provided estimates, “[did] not constitute an accurate accounting record,” and “should be used as a supplement to your own records or information.”[75]


Professional Gamblers

Professional Gamblers expenses are no longer limited by Code Sec. 165(d).  As indicated earlier, during early 2011, the Tax Court ruled that the section 165(d) gambling loss limitation is limited to wagering-related expenses and that non-wagering gambling expenses are deductible as business expenses.[76]  The Court then went on to hold that the gambler’s non-wagering expenses were deductible as ordinary and necessary business expenses.

Winnings of a Dealer from Bets Made by Patrons for Him 

“Side money,” that is, winnings of a casino dealer from bets made for him by patrons, is compensation income like tips rather than gambling income. Therefore, gambling losses can’t offset that income.[77]


“Take‑off” Income of a Casino Manager 

The “take‑off” income of a casino manager is ordinary income, which could not be offset by gambling losses. The casino manager participated in poker games to stimulate play in the poker room. As compensation he received a portion of the “take‑off” income which the casino charged players to participate in poker games. Taxpayer’s cut of the take‑off was the major source of his income for the years he worked as a casino manager. Taxpayer contended that his share of take‑off income was gain from wagering income. However, his contention was rejected. He had no real risk with respect to his take‑off income. Whether he won or lost his poker games, he would still get his share of the casino’s take‑off. Thus, his take‑off income was ordinary income.[78]


“Comps” Paid by Casino to Gambler 

Gambling casinos often provide their customers with complimentary goods and services (“comps”) to encourage future patronage. IRS says that extraordinary comps, such as autos and jewelry, are taxable income. But it reserved the question of whether “normal comps,” such as food, drink, lodging, and entertainment, can be excluded from income as purchase price adjustments.[79]


Full‑time Gambling as Trade or Business

The Supreme Court has held that a full‑time gambler is engaged in a trade or business for purposes of Code Sec. 162(a). A taxpayer does not have to offer goods or services to the public in order to qualify his activity as being a trade or business. Where the taxpayer devotes his full‑time activity to gambling and it is his intended source of livelihood, basic concepts of fairness demand that his activity be regarded as a trade or business just as any other readily accepted activity, such as being a retail store proprietor or a casino operator or an active trader on the exchanges.[80]


Observation: The Supreme Court in Groetzinger has held that if one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business for purposes of the trade or business expense deduction under Code Sec. 162(a)(1).  The same test applies for purposes of the self‑employment tax. Therefore, a full‑time gambler’s earnings presumably would be self‑employment income.


Hours Per Week

A taxpayer who devoted approximately 35 hours per week to horse racing, attended various tracks 175 days out of the 200‑day season, gambled at Atlantic City, and consistently bought lottery tickets was engaged in the trade or business of gambling. He could deduct the losses incurred from income items (including taxable unemployment compensation and an annual installment from a state lottery win) in computing his adjusted gross income. Taxpayer’s activities—attending the track, studying racing forms, interviewing horse owners and riders, placing bets, plus keeping a daily log—showed that he was not pursuing a mere hobby. Employment as a machine operator for two weeks in January did not preclude his status as a “full time” gambler during the remainder of the year. There is no requirement that an endeavor must begin Jan. 1 to be considered full time.[81]


Not Enough Time To Be a Professional Gambler

Another taxpayer failed to establish that his gambling activities rose to the level of a trade or business where his records contained so many errors and inconsistencies that the Tax Court concluded he did not devote nearly as much time to gambling, in addition to his full‑time job, as his testimony suggested. Taxpayer listed travel and program expenses on days the tracks were closed as well as on days following the date other records indicated he had placed his last bets for the year. There was also evidence that particular horses he recorded as having placed bets on did not race on the days recorded.[82]


Net Amount of Wins

A taxpayer, in the trade or business of gambling, recorded only the net amount of his wins and losses, but did so on a daily basis. The Tax Court held that this constituted adequate record keeping, and that he was not required to record his wins and the expenses of his bets. Where bookkeeping methods used by a professional gambler were prepared by a national accounting firm and were commonly acceptable in Nevada, where gambling is legal, the government could not employ the net worth method merely because it would prefer higher bookkeeping standards.[83]


IRS Arbitrary

IRS’s use of the specific item method of reconstructing the taxpayer’s income was arbitrary and without foundation where the specific item of $2 million in gambling income was based solely upon information contained in a newspaper article. The IRS agent performed no further investigation of the taxpayer’s gambling income.[84]


Cancellation of Gambling Debts as Income

A gambler contested a gambling debt of $3,435,000 on the grounds the casino extended credit to him illegally, but the dispute was settled, with the taxpayer agreeing to pay $500,000 to the casino in full satisfaction of the debt. The Tax Court held that the disputed debt/contested liability doctrine did not apply to relieve the taxpayer of cancellation of indebtedness income, because the amount of the taxpayer’s debt was liquidated—i.e., there was no dispute about its amount—and the dispute was only about the enforceability of the debt (because it was a gambling debt). However, the Third Circuit reversed, holding that the disputed debt/contested liability doctrine did not apply only to unliquidated debts, but applied also where there was a dispute about the enforceability of a debt—because, when a debt is unenforceable, it follows that the amount of the debt, and not just the liability on the debt, is in dispute.[85]


A gambler does not realize debt cancellation income when the casino accepts payment of his marker at less than its face amount under an arrangement that was negotiated before his visit and noted in the casino’s books before he signed the marker. The discount is an adjustment to the purchase price of the gambling services and entertainment.[86]


Income Tax Withholding From Certain Gambling Winnings, Sweepstakes and Lotteries

Every person who makes any payment of gambling winnings in excess of specified minimum amounts must withhold 28% of the payment. Winnings subject to withholding are the proceeds from a wager—the amount paid less the amount of the wager.[87]  Separate rules apply to withholding on Indian casino profits distributed to tribal members.[88]


Who Must Withhold

Every person who makes any payment of winnings subject to withholding, must deduct and withhold from the payment the amount specified.[89]  Every person includes a tax‑exempt charitable organization,[90] the government of a state or political subdivision of a state, and any instrumentalities of the U.S. or a state or its political subdivisions.[91] The payer of the winnings withholds.[92] 


Illustration: D wins $100 a month for life in state Y’s lottery. State Y, in its own name, as owner, buys an annuity of $100 a month for D’s life from E corporation in order to fund the obligation to D. E, as paying agent for state Y must withhold.[93]


A numbers banker was not liable for failing to withhold taxes on the cash gambling winnings that he transferred to runners, who actually paid the cash to the individual gamblers. It was the runners who had the ultimate responsibility for paying the gamblers their winnings. The taxpayer had no direct contact with the gamblers, and did not know their identities. The runners solicited their own customers with no assistance from the taxpayer, and the taxpayer had no control over the geographic areas in which the runners operated. The taxpayer never took any personal responsibility for paying the gamblers their winnings. The district court concluded that the runners were independent contractors who had control over the payment of the gambling winnings, and were not merely conduits for the payment of the gambling winnings by the taxpayer.[94]


Amount to Withhold 

Except with respect to noncash winnings where the payer pays all taxes required to be deducted and withheld, the amount of withholding is 28% of any payment of winnings subject to withholding.[95]


Illustration: A buys a $1 ticket in a state conducted lottery and wins $5,002. The winnings subject to withholding are $5,001 (amount paid less the amount of the wager). The payer must withhold $1,400.28 ($5,001 x .28) if the entire winnings are paid to A in a lump sum.[96]


The 28% rate applies to any payment (including an installment payment) of gambling proceeds won before January 1, 1993 and paid on or after that date, if the aggregate of those proceeds would have been subject to withholding under Code Sec. 3402(q) had they been paid before January 1, 1993 (i.e., if the aggregate of the proceeds exceeds $1,000).[97]


Winnings Subject to Withholding Defined

Winnings subject to withholding are the proceeds of more than $5,000 from:

(1)       a wagering transaction in a parimutuel pool with respect to horse races, dog races, or jai alai if the amount of the proceeds is at least 300 times as large as the amount wagered, Code Sec. 3402(q)(3)(C)(ii).


(2)       a wager placed in a lottery conducted by an agency of a state acting under authority of state law, but only if the wager is placed with the state agency conducting the lottery or with its authorized employees or agents, Code Sec. 3402(q)(3)(B). This includes wagers placed in state‑conducted lotteries in which the amount of winnings is determined by a parimutuel system, Treas. Reg. § 31.3402(q)‑1(c)(2).


(3)       a wager placed in a sweepstakes, wagering pool, or lottery (other than a state‑conducted lottery, above), Code Sec. 3402(q)(3)(C)(i).


(4)       all other wagering transactions, if the amount of the proceeds is at least 300 times as large as the amount wagered, Code Sec. 3402(q)(3)(A).


No Withholding on Payments of Certain Gambling Winnings

Winnings from bingo, keno, and slot machines are specifically excepted from the withholding rules on gambling winnings by Code Sec. 3402(q)(5).  Backup withholding rules may apply if the winner fails to furnish his or her accurate taxpayer identification number to the payer.


A Form W‑2G must be filed by every person engaged in a trade or business and making a payment in the course of that trade or business of winnings (including winnings such as keno, bingo, and slot machine winnings exempt from the withholding rules of Code Sec. 3402(q)(5)) of:


(a)       $1,200 or more in bingo or slot machine winnings, Treas. Reg. § 7.6041‑1(a), (without reduction by the amount wagered), Treas. Reg. § 7.6041‑1(b)(1);


(b)       $5,000 or more from a poker tournament;


(b)       $1,500 or more in keno winnings, Treas. Reg. § 7.6041‑1(a) (after reduction by the amount wagered), Treas. Reg. § 7.6041‑1(b)(2); or


(c)        $600 or more in gambling winnings from:


(1)       Horse racing, dog racing, jai alai, state conducted lotteries, and other wagering transactions not specifically referred to in (a) or (b) above, or (2), below, and the winnings are at least 300 times the amount of the wager; or


(2)       Lotteries (including state conducted lotteries), raffles, or drawings (such as those held by churches, civic organizations, etc.).[98]


For purposes of calculating the amounts in (a) and (b) above:


. . . winnings include the fair market value of a payment in any medium other than cash, Treas. Reg. § 7.6041‑1(b)(3).


. . . all winnings by the winner from one bingo or keno game must be aggregated, Treas. Reg. § 7.6041‑1(b)(4). Thus, where an organization ran a 30‑game bingo night every week, but the most any individual could win at any one of the game was $250 (because a local municipal code so limited the per‑game winnings), the organization was not required to file Form W‑2G.[99]


. . . winnings and losses from any other wagering transactions by the winner are not taken into account, Treas. Reg. § 7.6041‑1(b)(5).


Caution: Except in limited situations, if a taxpayer files at least 250 Form W‑2Gs during a calendar year, the form must be filed by electronic means.


Once the proceeds from a wager qualify as winnings subject to withholding, then the total proceeds from the wager are subject to withholding, not just the amounts in excess of the threshold amounts above.[100]


Winnings When Winner Paid Nothing

Winnings from a game or drawing for which the winner paid nothing nor was required to purchase anything are not subject to withholding. An example is a lottery or drawing situation in which participants merely fill out applications and there is no obligation on their part to expend anything, so there is a lack of a wager to win the amount. The Code does not cover these types of windfalls that feature no wager or other obligation by the participant.[101]


Illustration: Taxpayer buys a subscription to N magazine at the regular subscription price. All new subscribers are automatically eligible for a special drawing. The drawing is held and taxpayer wins $50,000. Since taxpayer has not placed a wager or entered a wagering transaction, the magazine is not required to deduct and withhold taxpayer’s winnings.[102]


Reliance by Payor on Statement by Winner of Identical Wager Winnings

If the recipient of gambling winnings makes the Form W‑2G and/or Form 5754 statement, which indicates whether or not the recipient (and any other persons entitled to a portion of the winnings) is entitled to winnings from identical wagers and the amount of those winnings, if any, then the payer may rely upon that statement in determining the total amount of proceeds from the wager.[103]


If the recipient refuses to make the statement(s), the payer would have no basis provided by the payee upon which to rely in determining whether the payment is subject to withholding. Under these circumstances, the payer is required to deduct and withhold tax from the payment.[104]


Information Winners must Provide to Payers

Every person who receives a payment of winnings which are subject to withholding must furnish the payer a statement, made under the penalties of perjury, containing the name, address, and taxpayer identification number of the person receiving the payment and of each person entitled to any portion of the payment.[105]


The person presenting a winning ticket for payment of gambling winnings must fill out, and give to the payer, either Form W‑2G or Form 5754 and in some cases, both. Form W‑2G is used if the person receiving the gambling winnings is the only person entitled to the winnings. Form 5754 must be used if anyone other than the person receiving the payment is entitled to all or part of the winnings.[106] The statement to the payer must include information as to the amount of winnings from identical wagers, and whether any other person is a recipient.[107]


Observation: If a winning bettor were not required to aggregate proceeds from identical wagers then that bettor could present winning tickets at different cashiers to avoid the threshold for “winnings subject to withholding”.


Information Return of Payer of Gambling Winnings

Every payer of winnings which is required to receive from a winning bettor a payee information statement must file Form W‑2G with the IRSServiceCenterserving the district in which is located the payer’s principal place of business on or before February 28 of the calendar year following the calendar year in which the payment of winnings is made. Form W‑2G filed with IRS by the payer need not be signed by the payee provided that the Form(s) W‑2G and/or Form 5754 the payee originally gave to the payer is retained for as long as the contents of the Form may become material in the administration of any internal revenue law.[108] For electronically filed Forms W‑2G, the due date is Mar. 31 (instead of Feb. 28) of the year following the calendar year in which the payment of winnings is made.[109]


Each Form W‑2G must Contain the Following:

(1) the name, address, and employer identification number of the payer;


(2) the name, address, and social security account number of the winner;


(3) the date, amount of the payment, and amount withheld;


(4) the type of wagering transaction;


(5) the amount of winnings from identical wagers.[110] 


Gambling Payments Treated as Wage Payments for Certain Code Purposes

Payments to any person of gambling winnings which are subject to withholding are treated as if they are wages paid by an employer to an employee. This is so for purposes of Code Sec. 3403 (employer’s liability for the payment of the tax required to be deducted and withheld), Code Sec. 3404 (pertaining to rules concerning returns and payments by governmental employers) and for purposes of so much of subtitle F (procedures and administration, Code Sec. 6001 et seq. except Code Sec. 7205, pertaining to fraudulent withholding exemption certificates) as relates to income tax withholding.[111]


Gambling Winnings

For domestic transactions, Treas. Reg. § 31.3406(i)-1 backup withholding does not apply to reportable gambling winnings if tax is required to be withheld from the winnings under Code Sec. 3402(q). For winnings not subject to Code Sec. 3402(q) withholding, backup withholding only applies when the payee fails to furnish his taxpayer identification number. The rules on aggregating payments to meet the $600 threshold (see ¶ J‑9116) do not apply. The payor does not have to aggregate a payee’s gambling winnings for a calendar year, or determine if an information return was required to be filed by the payee for the preceding year.[112]


For backup withholding purposes, a reportable gambling winning is one that is subject to information reporting under Code Sec. 6041. The amount of a reportable gambling winning is the amount paid with respect to the wager reduced, at the payor’s option, by the amount of the wager.[113]


Amounts Paid on Identical Wagers

Amounts paid on identical wagers are treated as paid on a single wager. Also, a gambling winning (other than from bingo, keno, or slot machines) is reportable only if the amount paid on it is at least $600 and if the proceeds are at least 300 times as large as the amount wagered. For whether winnings from bingo, keno, or slot machines are reportable (and thus subject to backup withholding).[114]


For Purposes of Backup Withholding:

. . . the reportable gambling winnings is the amount paid with respect to the amount of the wager reduced, at the option of the payor, by the amount of the wager, and


. . . amounts paid with respect to identical wagers are treated as paid with respect to the single wager for purposes of calculating the amount of the proceeds from a wager.[115]


Gambling winnings in excess of $600 are reportable only if the payout is based on betting odds of 300 to 1, or higher. The applicability of the odds requirement to information reporting and backup withholding is being studied by IRS and is subject to change in further regulation, Treas. Reg. § 35a.9999‑3, Q&A 19. Despite the odds requirement, winning from bingo, keno, and slot machines are subject to backup withholding if reportable under Treas. Reg. § 7.6041‑1, Treas. Reg. § 35a.9999‑3, Q&A 19.


Reportable Cash Transactions 

For purposes of the more‑than‑$10,000‑in‑cash‑receipt reporting requirement, the term “transaction” means the underlying event causing the payer’s transfer of cash to the recipient. It includes the sale or rental of property; the exchange of cash for other cash; the establishment, maintenance of or contribution to a custodial, trust or escrow account; the payment of a preexisting debt; the conversion of cash to a negotiable instrument; a reimbursement for expenses paid; or the making or repayment of a loan.[116]


The reporting requirement is imposed on any receipt of cash in connection with a trade or business, whether or not the receipt constitutes income in the trade or business.  If the receipt of cash is not in the ordinary course of the recipient’s trade or business, e.g., a realtor receives payment for the sale of a motorboat, a report isn’t required.[117]


Reporting is required whether or not consideration is returned for the cash and whether or not the cash is received for the recipients’ account or for the account of another. Thus, reportable receipts include the purchase or exchange of property, the opening of a deposit or credit account, or the purchase of gambling chips.[118]  A transaction may not be divided into multiple transactions to avoid the reporting requirement.[119]  Reporting is required where more than $10,000 in cash is received in two or more related transactions.[120]


Tax Deductions

Travel expenses incurred in the gambling activities of a nonprofessional gambler were held to be deductable to the extent of winnings. The Tax Court held that, in light of the fact that the taxpayer had net gambling winnings for the year, IRS failed to meet its burden of proof that the taxpayer’s gambling activities were not engaged in for profit.[121] But in another case the court ruled that the cost of a trip to Las Vegas, though taxpayer won $1,600 in gambling winnings which he included in income, was a nondeductible personal expense.[122]


While the Tax Court said that it was possible that tips and table fees paid by a professional gambling prop (public relations player) were the ordinary and necessary business expenses of a professional gambler, it refused to so hold where taxpayer had maintained no records of his expenses. Taxpayer’s argument that these expenses were distinct from his gambling losses and that the deductibility of the expenses was therefore not limited by his gambling gains was ignored where the Tax Court had no basis upon which to estimate the amount of the expenses.[123]


A taxpayer, which was in the business of repossessing cars, boats and motor homes for financial institutions, sponsored a weekend trip to Las Vegas. It chartered three buses to carry its own employees, a number of collection contacts (financial institution employees) and their spouses. During the five hour bus ride to Las Vegas, taxpayer’s employees mingled with the collection contacts to find out if taxpayer’s services were considered adequate and what could be done to improve them. In Las Vegas, there was no schedule of activities or meetings and almost everyone on the trip spent a significant amount of time gambling. Only informal and insubstantial business discussions occurred during the weekend. Although the trip significantly increased taxpayer’s business, the expenses for the trip weren’t deductible since the primary purpose of the trip was to promote goodwill.[124]


Where taxpayer, an individual who spent a substantial amount of time gambling on dog races, kept mental, but not written records of his winnings and losses, the Tax Court allowed an estimated deduction under the Cohan rule. Testimony showed that his standard of living, life style and visible assets did not suggest that he had winnings that greatly exceeded his expenditures.[125] Similarly, the Tax Court allowed another taxpayer to deduct his transportation costs, costs of programs, seats and forms as well as his gambling losses.[126]


Raffles, Bingo and Similar Games Conducted by Charities

Most persons who buy raffle tickets for the benefit of a church or other charitable, etc., organization intend primarily to make a contribution although the gambling aspects may lend an element of excitement or suspense. But if the raffle ticket entitles the buyer to a chance for valuable prizes, then the payment for the ticket is not a charitable contribution to any extent; it is merely the price paid for a chance at a valuable prize. (However, the Sixth Circuit suggested that if a charitable organization puts a reasonable value on the raffle ticket and designates the excess of the ticket price above that value as a contribution, the excess may possibly be deductible.[127]


Amounts paid for raffle tickets, bingo or similar games, and losses on games of chance are not deductible charitable contributions.[128] However, where a university distributed sweepstakes tickets, along with solicitations for contributions, by means of a direct mailing campaign, as well as through radio and television advertisements, contributions made in response to the campaign were deductible where participation in the sweepstakes was not contingent on making a contribution, and sweepstakes participants didn’t have a better chance of winning if they made a donation.[129]


Casino Employee Tip Reporting

The IRS has always had a problem with casino employees properly reporting their tip income. As a result there is a huge body of case law on the topic. In 1997 the IRS began offering the gaming industry tip rate determination agreements. Under these agreements the casino agrees with the IRS on a specific tip rate for each occupational category; wait staff, dealers, etc. The employees must then report tips in the agreed amount. Those employees who refuse to participate are reported to the IRS. The casino agrees to keep substantial records which allow the IRS to determine tip rates.


Reconstruction of Tip Income of Waiters and Waitresses at Resort Casinos and Hotels

The Tax Court upheld the following IRS formula for reconstructing the tip income of waitresses at the Casino de Paris Showroom of the Dunes Hotel, of a waiter at the Circus Maximus Room of Caesar’s Palace Hotel, and of waiters and waitresses at the Ziegfeld Room and Celebrity Room of the MGM Grand Hotel, all inLas Vegas:


(1)       a tip percentage based on the ratio of total charge sales (including taxes) at the respective night clubs to total tips on these sales was computed;


(2)       total sales were reduced by 25% (for the Dunes), 35% (for Caesar’s Palace), and 20% (for the MGM Grand) to account for patrons who left no tip, the fact that cash customers may tip less than charge customers, and the fact that waitresses vary in skill;


(3)       the adjusted sales were multiplied by the applicable tip percentage, yielding gross tips received by all waitresses or waiters;


(4)       gross tips were reduced by 16.67% to account for tip‑sharing with busboys and bartenders;


(5)       in the case of waitresses at the Dunes, the tips were further reduced by the amount of contract tips paid to the captains;


(6)       this figure was divided by the total hours worked by all waitresses and waiters, yielding an hourly tip rate;


(7)       the hourly tip rate was multiplied by the yearly hours that each individual taxpayer worked, resulting in each taxpayer’s reconstructed tip income for the year.[130]


The method described above was applied to reconstruct the tip income of a taxpayer who was employed as a waiter in the Piazza Restaurant at Ceasar’s Palace Hotel and Casino. IRS used a tip percentage of 15.6% and a reduction of gross sales by 20% for non‑tippers.[131]


7.7% of Gross Sales

Waiters and waitresses working at the Las Vegas Hilton either maintained no records or inadequate records of their tip income. IRS estimated tip income using charge sales over a representative 28‑day period and, based on the tips shown on the charge receipts, applied a 12.5% tip rate to 75% of charge and cash sales. IRS determined that no tip was received on 25% of the charge sales, and reduced gross sales, both cash and charge, by 25%. The 12.5% was further reduced by amounts paid by waiters and waitresses to bartenders and busboys, so that the tip rate that was used was only 7.7% of gross sales. The Tax Court found the method reasonable and fair. In the absence of taxpayer’s records, IRS need only produce a result which is substantially correct.[132]


Since waitresses were permitted to leave an area of the BenihanaVillagerestaurant of the Las Vegas Hilton when business was slow, IRS correctly did not take the lack of business into account in its computation of tip income, based on actual hours worked. However, a reduced rate (12% instead of 14%) had to be applied to cash sales, on the basis of credible testimony that cash sale customers tipped less than charge sale customers.[133]


Another Method

IRS used the following method to reconstruct the income of cocktail waitresses serving free drinks at the Union Plaza Casino Hotel:


(1)       IRS determined that half of all persons receiving free drinks tipped the waitresses who served them and the average tip amount;


(2)       this rate was then multiplied by the number of drinks served annually during the casino’s busiest shift;


(3)       this amount was reduced by 2% to reflect the amounts paid out by the waitresses to the bartenders preparing the drinks;


(4)       the reduced amount was divided by the total number of hours worked by waitresses during the shift to arrive at an hourly tip rate;


(5)       this amount was further reduced by one‑eighth to reflect breaks taken by the waitresses for dinner and other purposes; and


(6)               the adjusted hourly tip amount was then multiplied by the number of hours worked by any given waitress to determine her actual tip income.


The taxpayers argued that the recomputed amounts applied to them were too high because they worked in gambling pits where low minimum bets and heavy patronage by bus tours resulted in lower tip rates for them. The court believed them, and accordingly adjusted their recomputed tip income downward.[134]


IRS reconstructed the tip income of waiters employed at the Circus Maximus Room of Caesar’s Palace using the McQuatter formula. The Tax Court, however, made the following adjustments:


(1)       estimated coupon sales, which already included a 17% tip, were deducted from the gross receipts for one taxable year in question in the same proportion as coupon sales from a later year;


(2)       an overall 15% stiff rate was applied to gross sales before IRS’s deduction for credit card sales;


(3)       the overall tip rate was reduced to 8% for both credit card and cash sales; and (4) tip outs to bartenders and bus boys were deducted.[135]


Statistical Sampling

Another approach accepted by the Tax Court was the use of statistical sampling. Taxpayer was a cocktail server at the Golden Nugget Hotel and Casino, serving complimentary drinks to gaming customers. IRS had conducted undercover surveillance in seven of the Atlantic Citycasinos, which the court found to provide statistically reliable data. The data was analyzed, by IRS’s mathematical statistician, to show that there was no significant difference in the amount of tips received based on the day of the week or the identity of the casino, but it did show a difference based on the shift, which was taken into account to establish the taxpayer’s tip rate.[136]


The court upheld IRS’s reconstruction, based on statistical data, of the tip income of a cocktail server in the pit area of the Circus Circus casino in Las Vegas. The court reduced the reconstructed income to reflect the taxpayer’s testimony that she shared her tips with bartenders. Moreover, IRS conceded that a reduction was appropriate to reflect the fact that the taxpayer was pregnant during a portion of the year and had to leave the pit area repeatedly to rest. The court thus determined that the taxpayer received tip income based on an hourly rate of $16.33 for 1988 and $16.23 for 1987.[137]


Tokes Received by Gambling Casino Employees

The receipt of “tokes” by a casino dealer from patrons is includible in the dealer’s income[138] and is not an excludable gift.[139]


Observation: “Tokes” are casino chips that players either give to the dealers directly or place along with their own bets as bets for the dealers.


The Ninth Circuit reversed the district court, which had differentiated a casino dealer from a cab driver or waitress on the basis that the latter’s tips are directly related to the personal services they perform, or are paid as a result of social custom or compulsion, while a dealer is usually prohibited from performing extra services and receives tokes from only 5% to 10% of casino customers.[140]  The Claims Court has said that tokes, like tips, are received as incidents of the services rendered by the dealer and as a direct result of the dealer’s employment. As such, tokes aren’t gifts.[141] A casino dealer’s share of pooled tokes collected while he was on vacation is taxable since he was entitled to his share of the tokes pooled during his vacation. Thus, his absence from the casino while he was on vacation was immaterial.[142] 


Wagering Tokes

A casino dealer’s wagering tokes—bets placed by the casino patron on behalf of the dealer—were includible in the dealer’s gross income as compensation for services rendered rather than as gambling income, and therefore the dealer couldn’t offset his gambling losses against this income under Code Sec. 165(d).  A dealer has no control over the wagering toke, and cannot elect to receive the amount wagered in lieu of the proceeds (if any) of that wager. Therefore, the receipt of a wagering toke isn’t a wagering transaction under Code Sec. 165(d).[143]



Payments made by a gambling house to “shills” (persons hired by gambling clubs to participate at card tables to start or keep a game going) to stake them with gambling chips and to reimburse them for their losses in accordance with customary practice, resulted in wagering losses to the gambling house rather than deductible compensation payments.[144]


Reconstructing Income of Operators of Lotteries and Numbers Games

Taxpayer owned an illegal numbers operation. IRS based taxpayer’s income on his records seized by the police. The records were for one week’s operations. IRS allowed deductions, equal to 70% of gross wages, for: (1) commissions to the individual sellers (2) payments to the men who picked up the numbers from the sellers and (3) amounts paid out as winnings. This percentage was based on testimony of witnesses familiar with illegal lottery operations and the win ratios applicable to the wagers. The income figure obtained for one week’s operations was multiplied by the number of weeks taxpayer was in business.[145]


In the case of two numbers operators annual income was determined as follows: For one, projection of gross wagers for Years 1‑3 was based on average daily gross wagers received over an 80‑day period in Year 3 for which records were submitted.[146] For another, the annual income was determined by calculating average daily wages from four days’ betting slips seized from his premises.[147]



Taxpayer accepted wagers from bettors on sporting events, horse racing, and numbers. IRS was able to obtain betting records for a two‑week period only. It used the average weekly gross wagers to reconstruct annual gross wagers and applied a 10% profit percentage to get earnings. The Tax Court reduced the gross wager estimate since the weeks for which there were records were playoff weeks which would generate more wagers and would cause taxpayer to obtain additional offsetting bets from other bookmakers. The Tax Court also reduced the estimated profit percentage from 10% to 8%, based partially upon the taxpayer’s simple lifestyle and reliance on personal loans for many purchases. On appeal, the First Circuit reduced the 8% profit percentage to 6.05% because there was no evidence that the profit percentage exceeded 6.05%. The Tax Court’s sole stated ground for estimating profit percentages at 8% was the spread of profit percentages on one day which actually indicated a profit percentage of 6.05%. The First Circuit said that in order to find a higher gross profit percentage than 6.05%, the Tax Court was required to find either that the profitable bets were systematically under represented in the mix of betting for that day or that the various profit percentages were systematically too low, or both. Neither was demonstrated and the evidence suggested that the gross profits were closer to 5%.[148] The Tax Court held that IRS’s method of reconstructing a bookmaker’s income was reasonable. An IRS revenue agent reconstructed taxpayer’s wagering income based on books and records seized in a raid, which were incomplete and mostly undated. The agent carefully cross‑checked the books and records against one another to avoid duplication, and excluded certain bets, and then deducted all reported wagering income to determine reconstructed income. Taxpayer claimed that IRS erred in recomputing his taxable income but offered no proof. The Tax Court concluded that any inaccuracy resulted from taxpayer’s failure to maintain adequate books and records, not from IRS’s actions, and sustained the recomputation of income.[149]


In another case involving a bookmaker, the Tax Court upheld IRS’s use of a gross wagers method to reconstruct the income omitted by taxpayer, a sports bookmaker. Taxpayer’s records, lawfully seized by police during a gambling arrest were incomplete. An IRS agent, experienced in wagering tax enforcement and sports bookmaking records, reconstructed the omitted income for a three‑year period using an entry in taxpayer’s theme‑book for a series of bets made over a 17‑day period. The agent added 10% bookmaker’s commission to the entry and used a 4.5% gross profit to determine an average daily gross wager for this 17‑day period. After adjustment for mathematical error, IRS used this gross wagers figure to reconstruct taxpayer’s income. The court rejected taxpayer’s claims that IRS did not consider the fluctuations in seasonal betting, lay‑off bets, or use the net worth analysis, IRS could use any method that was reasonably and substantially accurate, and any inaccuracies resulted from taxpayer’s own failure to keep adequate records in the first instance or to cooperate fully with IRS.[150]


The Tax Court, which had upheld IRS’s use of the profit‑factor method to recompute the income of a sports bookmaker in Robinson rejected its use to recompute the taxpayer‑bookmaker’s income where IRS’s use of the profit factor method was too theoretical to be reliable and therefore not reasonable.[151]


Tax on Wagers and the Occupational Tax

Every person required to pay the tax on wagers must file a return on Form 730. Once the requirement is imposed, a return must be filed monthly whether or not the tax is due for a particular month. If the taxpayer ceases operations which make him liable for the tax, the last return should be marked “final return.”[152]  A taxpayer who accepts wagers only during the professional football season (Sept. through Jan.) is not treated as ceasing operations during the other months. He is still in the business of accepting wages and must therefore file Form 730 monthly even though no tax is due.[153]


Taxpayers engaged in illegal gambling activities are not relieved from the filing requirements.[154]


Persons in the occupation of accepting wagers or persons who receive wagers on behalf of a person liable for the occupational excise tax on wagering must file Form 11‑C.[155]  This return is filed annually.[156]


Constitutionality of Wagering Tax

Imposition of a tax to regulate wagering doesn’t violate the constitution. The dual rate structure is not evidence of an improper congressional objective because the higher rate imposed on wagers that aren’t authorized under state law is reasonable based on the likely higher rate of return earned on illegal wagering. Further, tax is applied uniformly throughout the states. The distinction between illegal or legal wagering is a geographically neutral basis for assessing unequal tax rates.[157]


Nor, is imposition of a higher tax rate on illegal wagering a “punishment” that violates either (1) the Excessive Fines Clause under the Eighth Amendment which prohibits Cruel and Unusual Punishments, or (2) the Double Jeopardy Clause of the Constitution which prohibits a second punishment for a single offense (here the taxpayer having already been punished under state law for his wagering offense). Rather, imposition of a gambling tax at a 2% rate is not excessive in relation to the revenue‑building purpose of the tax.[158]


Liability for Wagering Tax

Liability for the wagering tax arises in the following cases:


(1)       Each person who is engaged in the business of accepting wagers is liable for, and must pay, the tax on all wagers placed with him.


(2)       Each person who conducts any wagering pool or lottery is liable for, and must pay, the tax on all wagers placed in that pool or lottery.


(3)       Any person who is required to register under the occupational wagering tax rules, Code Sec. 4401(c), by reason of having received wagers for or on behalf of another person (i.e. an agent), Treas. Reg. § 44.4401‑2(a)(2), but who failed to register the name and place of residence of that other person (i.e., the “principal”) is liable for, and must pay, the tax on all wagers received by him[159] during the period in which he failed to so register the information with respect to the principal. Later compliance with registration requirements will not relieve the agent of liability for and the duty to pay the tax. Payment by the agent of the tax doesn’t relieve him from liability for any penalty for failure to register.[160]


Games When All Are Present

The term lottery does not include (i.e., wagering tax will not apply with respect to) any game of a type in which usually the wagers are placed, the winners are determined, and the distribution of prizes or other property is made in the presence of all persons placing wagers in the game.[161]  Thus, no tax would be payable with respect to wagers made in a bingo or keno game since those games are usually conducted in the circumstances described in Code Sec. 4421(2)(A). For the same reason, no tax would apply in the case of card games, dice games, or games involving wheels of chance, such as roulette wheels and gambling wheels of a type used at carnivals and public fairs.[162]  It makes no difference whether the games are run by a professional or are on a friendly basis.[163] The inherent feature of the games to which the above exclusion applies is that they involve “group play.” That feature was not present in a gaming device (a non‑coin‑operated “joker” machine) that involved continual operation rather than a series of games.[164]  The exclusion requirements apply to a “game.” Where a wagering activity is based on poker hands drawn from a deck of cards, the odds of winning are predicated on the play at the particular poker table, and not on some predetermined odds, or the play at some other table or at some other time. Where the wagering activity was the progressive jackpot component (PJC) of a Caribbean Stud card game, the game for purposes of the exclusion was the round (i.e., each participant at a table receiving a hand of cards). Thus, the PJC involved a series of games rather than continual operation as in Rev. Rul. 57‑241 and did not involve advance wagering as in Rev. Rul. 79‑146. Because the PJC wagers were placed and the winners were determined in the presence of all PJC participants and the lapse (30‑45 minutes) in distributing the progressive payouts after the winning hands were revealed were not so excessive that the participants in the round of play would not be on the casino premises for the payout, the PJC met the requirements for exclusion from tax[165].






























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[1]  Slavin v. C.I.R., (1941) 43 BTA 1100, acq1941‑1 CB 9, app. dismd. (1942, CA8) 29 AFTR 840, 129 F2d 325;  Ellery v. C.I.R., E., (1944) 4 TC 407, acq1945 CB 3;  Kalinski v. C.I.R., 1986 WL 21753;  Gajewski v. C.I.R., 84 T.C. 980, 982 (1985).

[2] Droge v. C.I.R., (1937) 35 BTA 829, acq. 1937‑1 CB 8.

[3] Silver v. C.I.R., (1940) 42 BTA 461, acq. 1940‑2 CB 7.

[4] Weiner v. C.I.R., (1928) 10 BTA 905.

[5] Lyszkowski v. C.I.R., (1995) T.C. Memo 1995‑235, RIA T.C. Memo. ¶95235, 69 CCH TCM 2751.

[6] Praytor v. C.I.R.,  (2000) T.C. Memo. 2000‑282, RIA T.C. Memo. ¶2000‑282;  Castignetta v. C.I.R., T.C. Summ.Op. 2006-24.

[7] Instructions to Form 1040 (2011) p. 26.

[8] Instructions to Form 1040A (2011) p. 19.

[9] Instructions to Form 1040EZ (2011) p. 11.

[10] Hochman v. C.I.R., (1986) T.C. Memo. 1986‑24, PH TCM ¶86024, 51 CCH TCM 311; Silver v. C.I.R., (1940) 42 BTA 461, acq. 1940‑2 CB 7.

[11] Silver v. C.I.R., (1940) 42 BTA 461, acq. 1940‑2 CB 7.

[12] Hochman v. C.I.R., (1986) T.C. Memo. 1986‑24, PH TCM ¶86024, 51 CCH TCM 311.

[13] Hochman v. C.I.R., (1986) T.C. Memo. 1986‑24, PH TCM ¶86024, 51 CCH TCM 311.

[14] Winkler v. U.S., (1956, CA1) 49 AFTR 345, 230 F2d 766, 56‑1 USTC ¶9342;  also, see Wallach v. U.S., 800 F.2d 1121 (C.A. Fed., 1986).

[15] Page v. Comm., (1952) PH TCM ¶52058, 11 CCH TCM 201.

[16]  IRS Pub No. 525, (2010), pg. 33-34.

[17]  Rev. Proc. 77‑29, 1977‑2 CB 538.

[18]   Gajewski v. C.I.R., 84 T.C. 980, 982 (1985);  Gagliardi v. C.I.R., T.C. Memo. 2008-10, 2008 WL 199722 (U.S.Tax Ct.), 95 T.C.M. (CCH) 1044, T.C.M. (RIA) 2008-010, 2008 RIA T.C. Memo. 2008-010.

[19]  GCM 37312, 11/7/77.

[20]  Code Sec. 165(d); Treas. Reg. § 1.165‑10.

[21] Federal Tax Handbook  (RIA) ¶ 1786.

[22]  Rusnak v. C.I.R., (1987) T.C. Memo. 1987‑249, PH TCM ¶87249, 53 CCH TCM 835; IRS Letter Ruling 9808002; GCM 37312, 11/7/77;  see also, Abeid v. C.I.R., 122 T.C. 404, 406 (2004).

[23]  Mayo v. C.I.R., 136 T.C. No. 4, 136 T.C. 81 (2011), partially overruling Offutt v. C.I.R., (1951) 16 T.C. 1214.

[24]  Boyd, William W. v. U.S., (1985, CA9) 56 AFTR 2d 85‑5266, 762 F2d 1369, 85‑2 USTC ¶9458, but see Libutti v. C.I.R., T.C. Memo1996-108, 1996 WL 98762; Valenti v. C.I.R., (1994) T.C. Memo. 1994‑483, RIA T.C. Memo. ¶94483, 68 CCH TCM 838; Kochevar v. C.I.R., (1995) T.C. Memo. 1995‑607, RIA T.C. Memo. ¶95607, 70 CCH TCM 1627.

[25]  Mayo v. C.I.R., 136 T.C. No. 4, 136 T.C. 81 (2011), partially overruling Offutt v. C.I.R., (1951) 16 T.C. 1214.

[26]  Humphrey, Anne Est v. Com., (1947, CA5) 35 AFTR 1572, 162 F2d 853, 47‑2 USTC ¶9310, cert. den. (1947, S Ct 332US 817, 92 L Ed 394.

[27]  Drews v. C.I.R., (1956) 25 T.C. 1354, acq.

[28]  Presley v. C.I.R., (1979) T.C. Memo. 1979‑339, PH TCM ¶79339, 38 CCH TCM 1301.

[29]  Jennings, Zelda v. Com., (1940, CA5) 24 AFTR 824, 110 F2d 945, 40‑1 USTC ¶9385, cert. den.  (1940, S Ct) 311US 704, 85 L Ed 457.

[30]  Treas. Reg. § 1.165‑10.

[31]  Brown v. C.I.R., (1979) T.C. Memo. 1979‑24, PH TCM ¶79024, 38 CCH TCM 91.

[32]  Rev. Proc. 77‑29, 1977‑2 CB 538.

[33]  Rev. Proc. 77‑29, 1977‑2 CB 538.

[34]  Mayer v. C.I.R., (2000) T.C. Memo. 2000‑295, RIA T.C. Memo. ¶2000‑295.

[35]  Rev. Proc. 77‑29, 1977‑2 CB 538.

[36] Mayo v. C.I.R., 136 T.C. No. 4, 136 T.C. 81 (2011), partially overruling Offutt v. C.I.R., (1951) 16 T.C. 1214.

[37] 16 T.C. 1214 (1951)

[38]  McQuarrie v. C.I.R., T.C. Memo. 2006-93;  Torpie v. C.I.R., (2000) T.C. Memo. 2000‑168, RIA T.C. Memo. ¶2000‑168 ; Umstead v. C.I.R., (1982) T.C. Memo. 1982‑573, PH TCM ¶82573, 44 CCH TCM 1294; Carter v. C.I.R., (1976) T.C. Memo. 1976‑23, PH TCM ¶76023, 35 CCH TCM 83; IRS PLR 8040008.

[39]  Instructions to Form 1040 Schedule A (2010).

[40]  Ling v. Com., (1997, CA9) 80 AFTR 2d 97‑7641, 127 F3d 1105, 97‑2 USTC ¶50902 ; Hochman v. C.I.R., (1986) T.C. Memo. 1986‑24, PH TCM ¶86024, 51 CCH TCM 311.

[41]  Torpie v. C.I.R., (2000) T.C. Memo. 2000‑168, RIA T.C. Memo. ¶2000‑168 .

[42]  Kalisch v. C.I.R., (1986) T.C. Memo. 1986‑541, PH TCM ¶86541, 52 CCH TCM 991, affd(1987, CA 3838 F2d 461.

[43]  Gagliardi v. C.I.R., T.C. Memo. 2008-10, 2008 WL 199722 (U.S.Tax Ct.), 95 T.C.M. (CCH) 1044, T.C.M. (RIA) 2008-010.

[44]  Drews v. C.I.R., (1956) 25 TC 1354, acq; Szkircsak v. C.I.R., (1980) T.C. Memo. 1980‑129, PH TCM ¶80129, 40 CCH TCM 208; DeMonaco v. C.I.R., (1981) T.C. Memo. 1981‑17, PH TCM ¶81017, 41 CCH TCM 718; Jones v. C.I.R., (1981) T.C. Memo. 1981‑458, PH TCM ¶81458, 42 CCH TCM 843.

[45]  Gagliardi v. C.I.R., T.C. Memo. 2008-10, 2008 WL 199722 (U.S.Tax Ct.), 95 T.C.M. (CCH) 1044, T.C.M. (RIA) 2008-010;  Glazer v. C.I.R., (1980) T.C. Memo. 1980‑337, PH TCM ¶80337, 40 CCH TCM 1065; Metas v. C.I.R., (1982) T.C. Memo. 1982‑36, PH TCM ¶82036, 43 CCH TCM 376; Woosley v. C.I.R., (1982) T.C. Memo. 1982‑316, PH TCM ¶82316, 44 CCH TCM 64.

[46]  Altobelli v. C.I.R., (1975) T.C. Memo. 1975‑53, PH TCM ¶75053, 34 CCH TCM 318.

[47]  Smith v. C.I.R., (1998) T.C. Memo. 1998‑212, RIA T.C. Memo. ¶98212.

[48] Cooper v. C.I.R., (1987) T.C. Memo. 1987‑431, PH TCM ¶87431, 54 CCH TCM 334.

[49] Rivera v. C.I.R., (1988) T.C. Memo. 1988‑497, PH TCM ¶88497, 56 CCH TCM 498.

[50]  Famuyiwa v. C.I.R., (1991) T.C. Memo. 1991‑570, PH TCM ¶91570, 62 CCH TCM 1265.

[51]  Doffin v. C.I.R., (1991) T.C. Memo. 1991‑114, PH TCM ¶91114, 61 CCH TCM 2157.

[52]  Jackson v. C.I.R., T.C. Memo. 2007-373;  Hardwick v. C.I.R., T.C. Memo. 2007-359.

[53]  Stafford v. C.I.R., (1992) T.C. Memo. 1992‑637, RIA T.C. Memo. ¶92637, 64 CCH TCM 1199.

[54]  Whitman v. C.I.R., (1985) T.C. Memo. 1985‑537, PH TCM ¶85537, 50 CCH TCM 1322.

[55]  Gallagher v. C.I.R., (1968) T.C. Memo. 1968‑27, PH TCM ¶68027, 27 CCH TCM 124.

[56]  Mayer v. C.I.R., (2000) T.C. Memo. 2000‑295, RIA T.C. Memo. ¶2000‑295.

[57]   Zielonka v. C.I.R., (1997) T.C. Memo. 1997‑81, RIA T.C. Memo. ¶97081.

[58]  Rockin v. C.I.R., (1980) T.C. Memo. 1980‑448, PH TCM ¶80448, 41 CCH TCM 145.

[59]  Morris v. C.I.R., (1973) T.C. Memo. 1973‑182, PH TCM ¶73182, 32 CCH TCM 852.

[60]  Legawiec v. C.I.R., (1970) T.C. Memo. 1970‑295, PH TCM ¶70295, 29 CCH TCM 1364; Scoccimarro v. C.I.R., (1979) T.C. Memo. 1979‑455, PH TCM ¶79455, 39 CCH TCM 486.

[61]  Bershesky v. C.I.R., (1983) T.C. Memo. 1983‑452, PH TCM ¶83452, 46 CCH TCM 906.

[62]  Hardwick v. C.I.R., T.C. Memo. 2007-359.

[63]  Norgaard v. C.I.R., (1989) T.C. Memo. 1989‑390, PH TCM ¶89390, 57 CCH TCM 1122, affd(1991, CA9) 68 AFTR 2d 91‑5302, 939 F.2d 874, 91‑2 USTC ¶50378.

[64]  Coloney v. C.I.R., (1999) T.C. Memo. 1999‑194, RIA T.C. Memo. ¶99194.

[65]  Scoccimarro v. C.I.R., (1979) T.C. Memo. 1979‑455, PH TCM ¶79455, 39 CCH TCM 486; Mader, Gerald, (1982) T.C. Memo. 1982‑125, PH TCM ¶82125, 43 CCH TCM 763.

[66]  Presley v. C.I.R., (1979) T.C. Memo. 1979‑339, PH TCM ¶79339, 38 CCH TCM 1301

[67]  Faulkner v. C.I.R., (1980) T.C. Memo. 1980‑90, PH TCM ¶80090, 40 CCH TCM 1.

[68]  Jacoby v. C.I.R., (1970) T.C. Memo. 1970‑244, PH TCM ¶70244, 29 CCH TCM 1068.

[69]  Klabacka v. C.I.R., (1987) T.C. Memo. 1987‑77, PH TCM ¶87077, 53 CCH TCM 92.

[70]  Donovan v. C.I.R., (1966, CA1) 17 AFTR 2d 839, 359 F.2d 64, 66‑1 USTC ¶9366, affg (1965) T.C. Memo. 1965‑247, PH TCM ¶65247, 24 CCH TCM 1325.

[71]  Greenfeld v. C.I.R., (1966) T.C. Memo. 1966‑83, PH TCM ¶66083, 25 CCH TCM 471.

[72]  Zooloomian, Henry v. Com., (1969, CA1) 24 AFTR 2d 69‑6020, 417 F2d 1337, 69‑2 USTC ¶9739.

[73]  Schooler v. C.I.R., (1977) 68 T.C. 867.

[74]  Coloney v. C.I.R., (1999) T.C. Memo. 1999‑194, RIA T.C. Memo. ¶99194, 77 CCH TCM 2156.

[75]  Mayer v. C.I.R., (2000) T.C. Memo. 2000‑295, RIA T.C. Memo. ¶2000‑295.

[76] Mayo v. C.I.R., 136 T.C. No. 4, 136 T.C. 81 (2011), partially overruling Offutt v. C.I.R., (1951) 16 T.C. 1214.

[77]  Bevers v. C.I.R., (1956) 26 T.C. 1218.

[78]  Boyd, William v. U.S., (1984, DC NV) 53 AFTR 2d 84‑1101, 588 F. Supp. 569, 84‑1 USTC ¶9312, affd (1985, CA9) 56 AFTR 2d 85‑5266, 762 F.2d 1369, 85‑2 USTC ¶9458.

[79]  Wallace v. C.I.R., T.C.Memo. 1976-219, 35 CCH TCM 954.

[80]  Com. v. Groetzinger, Robert, (1987, S Ct) 59 AFTR 2d 87‑532, 480 US 23, 94 L. Ed. 2d 25, 87‑1 USTC ¶9191, affg (1985, CA7) 56 AFTR 2d 85‑5683, 771 F2d 269, 85‑2 USTC ¶9622, affg (1984) 82 T.C. 793.

[81]  Rusnak v. C.I.R., (1987) T.C. Memo. 1987‑249, PH TCM ¶87249, 53 CCH TCM 835.

[82]  Jones v. C.I.R., (1988) T.C. Memo. 1988‑393, PH TCM ¶88393, 55 CCH TCM 1690.

[83]  U.S. v. Clark, Wilbur, (1954, DC CA) 46 AFTR 395, 123 F. Supp. 608, 54‑2 USTC ¶9546.

[84]  Chagra v. C.I.R., (1991) T.C. Memo. ¶91366, 62 CCH TCM 347, T.C. Memo. 1991‑366, affd (1993, CA) 2990 F.2d 1250, cert. den. (1993, S. Ct.) 510 U.S. 990, 126 L. Ed. 2d 447.

[85]  Zarin v. C.I.R., (1989) 92 T.C. 1084, rev’d. (1990, CA3) 66 AFTR 2d 90‑5679, 916 F.2d 110, 90‑2 USTC ¶50530.

[86]  Chief Counsel Advice200039037.

[87] Treas. Reg. § 31.3401(q)-1(c).

[88] Treas. Reg. § 31.3402(r)-1.

[89]  Code Sec. 3402(q)(1).

[90]  Rev. Rul. 85‑46, 1985‑1 CB 334.

[91]  Code Sec. 3402(q)(1).

[92]  Treas. Reg. § 31.3402(q)‑1(a)(1).

[93]  Treas. Reg. § 31.3402(q)‑1(d), Ex (7).

[94]  Sims, Sam Jr. v. U.S., (1991, DC TN) 67 AFTR 2d 91‑885, 756 F. Supp. 1048, 91‑1 USTC ¶50110.

[95]  Code Sec. 3402(q)(1).

[96] Treas. Reg. § 31.3402(q)‑1(d), Ex (2).

[97] Notice 93‑7, 1993‑1 CB 297; Internal Revenue Manual (2007).


[98]  Instructions to Form W‑2G (2011).

[99]  IRS Letter Ruling 8917011.

[100]  Treas. Reg. § 31.3402(q)‑1(b).

[101]  Tax News 1977‑6, 3/4/77.

[102]  Treas. Reg. § 31.3402(q)‑1(d), Ex (10). 

[103]  Treas. Reg. § 31.3402(q)‑1(c)(1)(ii).

[104]  Treas. Reg. § 31.3402(q)‑1(d), Ex (3).

[105]  Code Sec. 3402(q)(6).

[106]  Treas. Reg. § 3l.3402(q)‑1(e).

[107]  Treas. Reg. § 1.6011‑3(b).

[108]  Treas. Reg. § 31.3402(q)‑1(f).

            [109]  Code Sec. 6071(b);  Treas. Reg. § 31.3402(q)‑1(f)(1).


[110] Treas. Reg. § 31.3402(q)‑1(f).


[111] Code Sec. 3402(q)(7).

[112]  Treas. Reg. § 31.3406(g)‑2(d)(1).

[113]  Treas. Reg. § 31.3406(g)‑2(d)(2).

[114] See the rules under Treas. Reg. § 7.6041‑1 and Treas. Reg. § 31.3406(g)‑2(d)(3).


[115] Treas. Reg. § 35a.9999‑3, Q&A 19.


[116]  Treas. Reg. § 1.6050I‑1(c)(7)(i).

[117]  Treas. Reg. § 1.6050I‑1(d)(3).

[118]  S. Rept. No. 98‑169, Vol. I (PL 98‑369) p. 430.

[119] Treas. Reg. § 1.6050I‑1(c)(7)(i).

[120] Treas. Reg. § 1.6050I‑1(a)(1).


[121]  Rowles v. C.I.R., (1986) T.C. Memo. 1986‑30, PH TCM ¶86030, 51 CCH TCM 330.

[122]  Dicker v. C.I.R., (1963) T.C. Memo. 1963‑82, PH TCM ¶63082, 22 CCH TCM 345.

[123]  Votaw v. C.I.R., (1989) T.C. Memo. 1989‑550, PH TCM ¶89550, 58 CCH TCM 344.

[124]  Auto Zapper & Towing Inc v. C.I.R., (1992) T.C. Memo. 1992‑662, RIA T.C. Memo. ¶92662. 

[125]  Barrish v. C.I.R., (1984) T.C. Memo. 1984‑602, PH TCM ¶84602, 49 CCH TCM 115.

[126]  Meredith v. C.I.R., (1984) T.C. Memo. 1984‑651, PH TCM ¶84651, 49 CCH TCM 318.

[127]  Goldman, Douglas v. Com., (1967, CA6) 21 AFTR 2d 301, 388 F2d 476, 68‑1 USTC ¶9126, affg (1966) 46 T.C. 136.

[128]  Rev. Rul. 83‑130, 1983‑2 CB 148.

[129]  IRS PLR200012061.

[130]  Cracchiola v. C.I.R., (1979) T.C. Memo. 1979‑3, PH TCM ¶79003, 38 CCH TCM 5, affd (1981, CA9) 47 AFTR 2d 81‑1439, 643 F2d 1383, 81‑1 USTC ¶9410; Cracchiola v. C.I.R. (1979) T.C. Memo. 1979‑3, PH TCM ¶79003, 38 CCH TCM 5, later proceeding (1979) T.C. Memo. 1979‑11, PH TCM ¶79011, 38 CCH TCM 29, affdsub. Nom. Cracchiola, Anthony v. Com., (1981, CA9) 47 AFTR 2d 81‑1439, 643 F2d 1383, 81‑1 USTC ¶9410; Long v. C.I.R., (1980) T.C. Memo. 1980‑221, PH TCM ¶80221, 40 CCH TCM 531; Castorina v. C.I.R., (1981) T.C. Memo. 1981‑87, PH TCM ¶81087, 41 CCH TCM 971; Powers, Sandra, f/k/a Belcher, (1981) T.C. Memo. 1981‑69, PH TCM ¶81069, 41 CCH TCM 905.

[131]  Becker v. C.I.R., (1981) T.C. Memo. 1981‑562, PH TCM ¶81562, 42 CCH TCM 1274, affd (1983, CA9 711 F. 2d 1062.

[132]  McLeod v. C.I.R., (1984) T.C. Memo. 1984‑658, PH TCM ¶84658, 49 CCH TCM 344.

[133]  Williams v. C.I.R., (1984) T.C. Memo. 1984‑640, PH TCM ¶84640, 49 CCH TCM 272.

[134]  Williams v. C.I.R., (1985) T.C. Memo. 1985‑476, PH TCM ¶85476, 50 CCH TCM 1029.

[135]  Way v. C.I.R., (1990) T.C. Memo. 1990‑590, PH TCM ¶90590, 60 CCH TCM 1264.

[136]  Ross v. C.I.R., (1989) T.C. Memo. 1989‑682, PH TCM ¶89682, 58 CCH TCM 1069, affd without published opinion (1992, CA9) 967 F.2d 590.

[137]  Martin v. C.I.R., (1993) T.C. Memo. 1993‑180, RIA T.C. Memo. ¶93180, 65 CCH TCM 2470.

[138]  Tomburello v. C.I.R., (1986) 86 T.C. 540, affd. (1988, CA9) 838 F.2d 474, cert. den. (1988, S Ct) 486 U.S. 1057, 100 L. Ed. 2d 928; Keen, Sidney, (1981) T.C. Memo. 1981‑313, PH TCM ¶81313, 42 CCH TCM 170.

[139]  Olk, Wendell v. U.S., (1976, CA9) 38 AFTR 2d 76‑5219, 536 F.2d 876, 76‑2 USTC ¶9484, rev (1975, DC NV) 35 AFTR 2d 75‑910, 388 F. Supp. 1108, 75‑1 USTC ¶9248, cert. den. (1976, S Ct429 US 920, 50 L. Ed. 2d 287; Kalkas, John v. Com., (1982) T.C. Memo. 1982‑1, PH TCM ¶82001, 43 CCH TCM 246, affd (1983, CA9) unpublished op.

[140]  Olk, Wendell v. U.S., (1976, CA9) 38 AFTR 2d 76‑5219, 536 F.2d 876, 76‑2 USTC ¶9484, rev (1975, DC NV) 35 AFTR 2d 75‑910, 388 F. Supp. 1108, 75‑1 USTC ¶9248, cert. den.(1976, S Ct429 US 920, 50 L. Ed. 2d 287.

[141]  Armeno, Joseph v. U.S., (1984, Cl. Ct.) 54 AFTR 2d 84‑6249, 6 Cl. Ct. 521, 84‑2 USTC ¶9896.

[142]  Seffel v. C.I.R., (1990) T.C. Memo. 1990‑531, PH TCM ¶90531, 60 CCH TCM 983.

[143]  Allen v. U.S., (1992, CA5) 70 AFTR 2d 92‑6124, 976 F2d 975, 92‑2 USTC ¶50585, affg (1991, DC TX) 71A AFTR 2d 93‑3917, 91‑2 USTC ¶50493; Farkas v. C.I.R., (1986) T.C. Memo. 1986‑420, PH TCM ¶86420, 52 CCH TCM 402.

[144]  Nitzberg v. C.I.R., (1978, CA9) 42 AFTR 2d 78‑5742, 580 F.2d 357, 78‑2 USTC ¶9667, rev (1975) T.C. Memo. 1975‑228, PH TCM ¶75228, 34 CCH TCM 996.

[145]  Guercio v. C.I.R., (1982) T.C. Memo. 1982‑28, PH TCM ¶82028, 43 CCH TCM 336.

[146]  Quinn, John v. U.S., (1976, DC NV) 37 AFTR 2d 76‑1619, 76‑1 USTC ¶16211, affd. (1978, CA9) unpublished op.

[147]  U.S. v. Cox, 44 AFTR 2D 79-5176, 79-2 USTC ¶9434 (D.S.C., May, 1979).

[148]  Todisco v. C.I.R., (1983) T.C. Memo. 1983‑247, PH TCM ¶83247, 46 CCH TCM 35, affd., vacd. & remd. (1985, CA1) 55 AFTR 2d 85‑1043, 757 F2d 1, 85‑1 USTC ¶9256.

[149]  McCanless v. C.I.R., (1987) T.C. Memo. 1987‑573, PH TCM ¶87573, 54 CCH TCM 1111.

[150]  Robinson v. C.I.R.,  (1986) T.C. Memo. 1986‑382, PH TCM ¶86382, 52 CCH TCM 211;  Paterson v. C.I.R., T.C. Memo. 2007-109, 93 TCM (CCH) 1184.

[151]  Clayton, David, (1994) 102 TC 632.

[152] Treas. Reg. § 44.6011(a)‑1(a).

[153]  Rev. Rul. 81‑258, 1981‑2 CB 216.

[154]  U.S. v. Haydel, John Jr., a/k/a “Ice Cream” and “Mugsy,”, (1981, CA5) 49 AFTR 2d 82‑1543, 649 F.2d 1152, 81‑2 USTC ¶16367, reh. den. (1981, CA5) 664 F.2d 84, cert. den. (1982, S. Ct.) 455 U.S. 1022, 72 L. Ed. 2d 140.

[155] Treas. Reg. § 44.6011(a)‑1(b).

[156]  Treas. Reg. § 44.6071‑1(b).

[157]  U.S. v. Hallmark, (1990, CA10) 911 F.2d 399.

[158]  Moser, Guy Vernon v. U.S., (1998, CA6) 82 AFTR 2d 98‑7256 (unpublished), affg. (1997, DC TN) 79 AFTR 2d 97‑2982, 97‑1 USTC ¶70079.

[159]  Code Sec. 4401(c); Lima, Jack (a/k/a Jack Brandy) v. U.S., (1972, DC CA) 30 AFTR 2d 72‑5941, 72‑2 USTC ¶16050.

[160]  Treas. Reg. § 44.4401‑2(a)(2).


[161]  Code Sec. 4421(2)(A).

[162]  Treas. Reg. § 44.4421‑1(b)(2)(i).

[163]  H. Rept. No. 586 (PL 183, 82nd Cong.) p. 57.

[164]  Rev. Rul. 57‑241, 1957‑1 CB 419.

[165]  IRS TAM199906057.