T.C. Memo. 2000-282
UNITED STATES TAX COURT
WILLIAM T. AND DEBORAH S. PRAYTOR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3568-99. Filed August 31, 2000.
J. Donald Hughes, for petitioners.
Shuford A. Tucker, Jr., for respondent.
MEMORANDUM OPINION
CARLUZZO, Special Trial Judge: Respondent determined
deficiencies of $6,621, $9,500, and $9,012 in petitioners’
Federal income taxes for years 1994, 1995, and 1996,
respectively. For each year in issue, the issue for decision
is whether deductions for losing wagers and related expenses
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attributable to gambling transactions are limited by the gains
from such transactions.
Background
This case was submitted fully stipulated, and the stipulated
facts are so found. Petitioners are husband and wife. Their
joint Federal income tax return for each year in issue was timely
filed. At the time that the petition was filed, petitioners
resided in Fairhope, Alabama. References to petitioner are to
William T. Praytor.
As evidenced by numerous Forms W-2G, Certain Gambling
Winnings, issued to petitioner by various casinos, petitioner won
the following amounts from slot machine play (the Form W-2G
winnings):
Year Amount
1994 $49,800
1995 24,950
1996 244,000
The Form W-2G winnings are the exclusive source of gross
income reported on a Schedule C, Profit or Loss From Business,
included with petitioners’ Federal income tax return for each
year. Other items reported on the Schedules C are listed below
(amounts rounded):
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Item 1994 1995 1996
Interest deduction $4,719 $8,868 $9,303
Losing wagers 70,125 54,797 267,841
Net loss 25,044 38,715 33,143
The net losses listed above offset other income reported on
petitioners’ returns.
On each Schedule C petitioner described his profession as a
“Professional Gambler”. The parties stipulated that petitioner
“was in the trade or business of legal gambling” during each year
in issue. They further stipulated that during 1996, petitioner
incurred additional expenses totaling $41,992.23 in connection
with his gambling trade or business.
In the notice of deficiency respondent disallowed the net
losses referred to above. According to the explanation in the
notice of deficiency, each net loss was disallowed in full
because “gambling losses are only allowed to the extent of gains
derived from such transactions.”
Discussion
In general, section 165(a)1 allows a taxpayer to deduct “any
loss sustained during the taxable year and not compensated for by
insurance or otherwise.” Losses from wagering transactions,
however, are “allowed only to the extent of the gains from such
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue.
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transactions.” Sec. 165(d).
According to petitioners, section 165(d) is not applicable
because petitioner was engaged in a gambling trade or business
during the years in issue. Petitioners further argue that even
if applicable, section 165(d) only limits deductions for losing
wagers and not other expenses incurred in a gambling trade or
business. According to respondent, section 165(d) applies to all
gambling losses whether incurred in connection with a trade or
business or otherwise. Furthermore, according to respondent,
section 165(d) limits deductions not only for losing wagers but
also for any otherwise deductible expense incurred in connection
with gambling transactions.
In Offutt v. Commissioner, 16 T.C. 1214 (1951), we held that
the taxpayer, who was engaged in a gambling trade or business,
was entitled to deduct gambling losses only to the extent of
gambling winnings. Further, we construed the phrase “losses from
wagering transactions” to include not only losing wagers but also
mailing, printing, and stenographic expenses. In the line of
cases following Offutt, this and other Federal Courts have
consistently held that section 165(d), or its predecessor,
applies to gambling losses incurred in a trade or business and
limits deductions not only for losing wagers but also for other
expenses incurred in connection with gambling transactions. See
Estate of Todisco v. Commissioner, 757 F.2d 1 (1st Cir. 1985),
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affg. T.C. Memo. 1983-247 (holding that deductions for State
taxes attributable to gambling income are limited under section
165(d)); Kochevar v. Commissioner, T.C. Memo. 1995-607 (holding
that slot-machine players, even if considered to be in the trade
or business of gambling, could deduct gambling losses and
expenses, including automatic teller machine charges, office
supplies, travel mileage, and meals, only to the extent of their
winnings); Valenti v. Commissioner, T.C. Memo. 1994-483 (holding
that a deduction for losses incurred in wagering transactions is
subject to section 165(d) regardless of the fact that the
taxpayer was in the trade or business of gambling); Kozma v.
Commissioner, T.C. Memo. 1986-177 (construing the phrase “losses
from wagering transactions” as used in section 165(d) to include
expenses incurred by a professional gambler for transportation,
meals, lodging, admission fees, and office supplies).
According to petitioners, the precedent established by the
Offutt line of cases should not be followed because the reasoning
expressed in those cases is based more upon a prejudicial view
towards gamblers and gambling than technical considerations. We
disagree with the premise as well as the proposition. We are
satisfied that following the precedent established by the above
line of cases leads to a result in this case that is supported by
the express language of section 165(d) and, although petitioners
suggest otherwise, entirely consistent with Congressional
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intent.2 For each year in issue, petitioners claimed Schedule C
deductions for losing wagers and related expenses that exceeded
the reported gains from wagering transactions. Pursuant to
section 165(d), petitioners are entitled to deduct losing wagers
and related expenses only up to the amount of gains from wagering
transactions. Respondent’s adjustments in this regard are
therefore sustained.
To reflect the foregoing,
Decision will be
entered for respondent.
2
We note that for each year in issue petitioners reported
only those gains from wagering transactions evidenced by a Form
W-2G, Certain Gambling Winnings. We further note that only
certain gains from slot machine play require the issuance of a
Form W-2G. See sec. 31.3402(q)-1, Employment Tax Regs. Although
no issue has been presented on the point, given the nature of
slot machine play, we think it unlikely that all of petitioner’s
gains from slot machine play were subject to the issuance of a
Form W-2G. Lastly, we note that in enacting the predecessor of
section 165(d), the Congress was concerned that “taxpayers take
deductions for gambling losses but fail to report gambling
gains.” H. Rept. 704, 73d Cong., 2d Sess. (1934), 1939-1 C.B.
(Part 2) 554. Thus, one purpose of section 165(d) is to “force
taxpayers to report their gambling gains if they desire to deduct
their gambling losses.” Id.