Neonbill: Article on IRS vs. pro gambler

[Neonbill]

(I included the direct link to this article, but you have to 'register' to see it.)

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Tax law a gamble
Claiming professional status can be risky
By AVRUM D. LANK
[email protected]
Last Updated: Sep. 24, 2005

In 2001, Thomas L. Pias won about $38,800 in casinos.

The Racine resident dutifully reported the sum on his federal income tax form, but then added the claim that he was a professional gambler. As such, Pias said, he was entitled to deduct $68,861 in losses and $1,727 of other expenses relating to his profession.

In doing so, Pias spun the audit roulette wheel and lost. Last week, the United States Tax Court rejected his claim of being a professional. As a result, Pias owes the croupier, Uncle Sam, $9,934 more than he originally paid.

The outcome illustrates that gamblers not only have to beat the dealer, but also the tax collector, to come away with anything except entertainment. Just as the odds favor the house, the tax laws are stacked in favor of the government.

Why Pias claimed to be a professional gambler is unclear. He declined to discuss the matter, and the Internal Revenue Service can't comment on individual cases.

Had his claim been sustained, however, tax experts say Pias would have owed the IRS less, and he would have lowered his Wisconsin tax bill considerably.

Under federal law, a gambler - professional or amateur - is entitled to deduct losses equal only to his winnings. To do so, though, he must have proof of both.

Wisconsin also taxes winnings but does not allow a deduction for losses.

Proof of winnings is not difficult, as there are strict reporting requirements. For bingo, slot machines and video poker - the game Pias played - the IRS must be told if a payout is $1,200 or more. For keno, the requirement kicks in at $1,500 and for most other gambling at $600, provided the winnings are at least 300 times the bet.

The $38,800 in Pias' case came from such reports, called W2-Gs.

Proof of losses is more difficult. "You can keep a diary, but it has got to be pretty specific," said Craig Zetley, a Milwaukee CPA and tax attorney.

For amateur gamblers, the winnings are reported as part of adjusted gross income and the losses taken as an itemized deduction.

That is a problem, as most people do not itemize.

Furthermore, the higher a person's adjusted gross income, the more likely he is to lose some of his itemized deductions and personal exemptions, or to have part of Social Security income taxed.
'High threshold'

However, because of quirks in the federal tax code, a professional gambler is able to deduct the losses before figuring his adjusted gross income.

Sustaining the claim of being a professional gambler "is a very high threshold to meet," said Zetley.

"It is a facts-and-circumstances test," said Deborah Kossow, a CPA with Clifton Gunderson in Wauwatosa. In 20 years of preparing individual tax returns, she has yet to have a client who could successfully make the claim.

"You have to be pursuing it full time and with regularity to produce income for a livelihood," Zetley said. "Based on the odds of winning, not many people can do that."

If they can, then their expenses also are deductible, including such things as the cost of airplane tickets. Pias claimed automobile expenses of $421, for instance.

However, there are potential pitfalls to claiming expenses, Zetley said. Many professional gamblers are given complimentary food and lodging. If they deduct such things as travel, he said, then the value of those comps is taxable, according to federal tax law.

And then there is the issue of Wisconsin taxes. The state is unusual, but not unique, in not allowing a deduction for gambling losses even while taxing every win.

Theoretically, state taxes are payable on every quarter won in a slot machine in a Wisconsin casino, even if the player ultimately walks away a loser.

However, as the government gets no report on most of the quarters, the tax is probably paid about as regularly as the sales tax on out-of-state purchases.

George Tsouflias of Greendale does not think much of the Wisconsin law.

"It's terrible," he said, as he came out of the Potawatomi Casino in Milwaukee Thursday. Most people who have winnings in some bets have lost more in other wagers, Tsouflias said.

"To win $1,000, you have to spend $10,000 losing," he said.

Tsouflias is nothing like a professional gambler. He works as a restaurant manager and comes to the casino infrequently.

For a professional gambler, Wisconsin's law is no problem because state tax forms start with adjusted gross income, which would already take into account gambling losses and expenses for a professional.

So had his claim of being a professional gambler been upheld, Pias would have saved on his Wisconsin taxes, experts said.

As it was, the Tax Court was quick to dismiss his claim. Pias told the judge he started gambling a lot at the end of 2000 because he "was in what I thought was a lucky streak."

"This explanation rings more of a pastime or a hobby than of an activity for the production of income for a livelihood," U.S. Tax Court Judge Carleton Powell wrote in his decision.
State law unlikely to change

Were Wisconsin to allow deduction of gambling losses, then the motivation for claiming to be a latter-day Nathan Detroit or modern-day competitor for Doyle Brunson would diminish.

But the chances of that are slim, according to John Logan, a senior state tax analyst for CCH Inc., a tax information firm in Riverwoods, Ill.

Wisconsin's decision to disallow deductions for gambling losses "really parallels the treatment of other sins, so to speak, not to encourage it," he said. Allowing such deductions is "not the sort of change that a lot of legislators would want to take a strong public stand on," Logan added. "There is not a lot of capital to be gained there."

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Tax Law a Gamble

[Sun Runner]

A couple of comments about the article. Like many newspaper articles about gambling (counters) the reporters often are ill informed or uneducated.

First, and respectfully, Mr. Pias was an idiot. No one shows up at tax court wanting to claim gambling as a profession and state the following ..

> I started gambling a lot at the end of 2000 because I was in what I thought was a lucky streak.

Geez.

> "This explanation rings more of a pastime or a
> hobby than of an activity for the production of income
> for a livelihood," U.S. Tax Court Judge Carleton
> Powell wrote in his decision.

You think? The judge was probably an AP'er; Pias never had a chance. I would have denied his claim also.

But the following statement is just plain wrong ..

> However, because of quirks in the federal tax code, a
> professional gambler is able to deduct the losses
> before figuring his adjusted gross income.

It is no quirk. The federal tax code allows ANYONE who can prove they are actually engaged in a trade or business of ANY KIND with the intent of producing income to deduct losses (and expenses) before adjusted gross income.

> "You have to be pursuing it full time and with
> regularity to produce income for a livelihood,"
> Zetley said. "Based on the odds of winning, not
> many people can do that."

Zetley is right, you have to be engaged in the activity regulary, there has to be a reasonable expectation of income .. but in my opinion it does not have to be 'full time' and the 'odds of winning' have nothing to do with it. If they did, the burden of proof for an AP'er would be EASIER as we all play to a long run positive EV; no? I have a reasonable expectation of income. Thorp, Revere, Wong, Snyder, Schlesinger, Wattenberger, and computer science all back me up. As do my personal life to date records.

> However, there are potential pitfalls to claiming
> expenses, Zetley said.

No there are not; not as he describes below.

> Many professional gamblers are
> given complimentary food and lodging. If they deduct
> such things as travel, he said, then the value of
> those comps is taxable, according to federal tax law.

No problem with that. As long as the comped rooms are being used in the production of income, it's a wash. Income in, expense out. If you happen to use a comped room for the family summer vacation, that might be another matter.

The bar is high, for tax purposes, to achieve status to move your reporting activity from 'other income/schedule A' to schedule C, I don't disagree, but articles like this .. like articles calling counters cheaters .. is only bad journalism.

[Bettie]

who successfully convinced the IRS last year that he was a pro gambler. He was smart enough to have his accountant present to the IRS for him, though. The biggest issue in making this "pro" claim is whether or not deductions can be taken off the front or back end, which for the amount of money he won in W2-Gs, saved him $30,000 in additional taxes. This isn't something to screw around with ? the IRS will really hone in on anyone claiming to be a pro, especially if you don't live near a major gambling mecca.

Bettie

[Sun Runner]

> who successfully convinced the IRS last year that he was a pro gambler.

Can you in general terms describe this individual, to wit:

-was he full time ..
-did he have any other means of support ..
-did he have a day job, or, was he also self-employed doing something else..
-was he asked for his records of play ..

> The biggest issue in making this "pro" claim is whether or not deductions can be taken off the front or back end ..

If I may clarify; it is not whether or not deductions come off the front or the back, it is if deductions get to come off at all! If you are not a 'pro' you are limited to wins against losses. If you are a pro, it is wins against losses minus ALL KINDS of other directly attributable deductions (meals, lodging, travel, books, periodicals, etc, etc, etc)

> which for the amount of money he won in W2-Gs, saved him $30,000 in additional taxes.

I'm a firm believer it is more doable than some who could qualify would think. I do not believe you have to be 'full time' to meet the bar. I do believe you have to be serious about, and take seriously, the making money in this endeavour. If you are, it will usually show. If you are going to LV or Tunica once a quarter, probably not.

And BTW, you keep refering to W2-G earnings. Just for the record, and I'm not coming down either way, but the law says all wins are taxable!

Thanks for the first hand account.

P.S. to anyone -I have considered forming an LLC to operate my gambing effort out of, primarily with an eye to (legally) avoiding the self employment tax on net profits. Anyone else been down this road?

[Hollywood]

> who successfully convinced the IRS last year that he
> was a pro gambler. He was smart enough to have his
> accountant present to the IRS for him, though. The
> biggest issue in making this "pro" claim is
> whether or not deductions can be taken off the front
> or back end, which for the amount of money he won in
> W2-Gs, saved him $30,000 in additional taxes. This
> isn't something to screw around with ? the IRS will
> really hone in on anyone claiming to be a pro,
> especially if you don't live near a major gambling
> mecca.

> Bettie

Bettie, right off the top I can see you are not telling the truth.

Vic told me you had NO friends. lol

Your buddy,

Hollywood

[Bettie]