T.C. Summary Opinion 2006-95
UNITED STATES TAX COURT
JANICE G. SPENCER AND FRED E. EGERTON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16626-04S. Filed June 27, 2006.
Janice G. Spencer, pro se.
Michael L. Bowman, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect when the petition was filed.1
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue.
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Respondent determined a deficiency of $2,525 in petitioners’
Federal income tax for 2002.
The sole issue for decision is whether gambling winnings of
Janice G. Spencer (petitioner), who is not a professional
gambler, are required to be reported as gross income, or whether
the winnings may be offset by the losses that were incurred in
connection with the gambling activity.
Some of the facts were stipulated. Those facts, with the
exhibits annexed thereto, are so found and made part hereof.
Petitioners, husband and wife, were legal residents of
Independence, Missouri, at the time they filed their petition.
Petitioners filed a joint Federal income tax return for
2002. On their Form 1040, U.S. Individual Income Tax Return,
they reported wage and salary income of $30,314, of which
$24,717.64 was earned by petitioner Janice G. Spencer, and
$5,595.86 was earned by her spouse, Fred E. Egerton (Mr.
Egerton). Petitioners also reported Social Security income of
$7,728, of which the reported taxable portion was $1,089.
Petitioners claimed a $395 tax credit pursuant to Form 8880,
Credit for Qualified Retirement Savings Contributions.2
Petitioners did not claim any itemized deductions and
instead claimed the standard deduction under section 63.
2
The Social Security income and the retirement savings
contributions credit are believed to be attributable to
petitioner Fred E. Egerton.
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During the year 2002, petitioner won $13,400 on slot
machines at several casinos. The payers issued information
returns to evidence these winnings; however, the $13,400 won by
petitioner was not included by petitioners as income on their
2002 Federal income tax return. Although petitioner experienced
some losses at these casinos, petitioners did not deduct any
gambling losses on their return. Petitioners contend that the
reason why petitioner’s gambling winnings were not included as
income on their 2002 income tax return is because petitioner’s
gambling losses exceeded her winnings, and, therefore, the
winnings did not have to be reported as income. Respondent,
although agreeing that the losses were at least equal to the
winnings, does not share that view.
In the notice of deficiency, respondent determined that the
$13,400 in gambling winnings constituted gross income and that
petitioners were entitled to an itemized deduction in an amount
equal to their gambling losses, instead of the standard deduction
previously claimed. As a result of treating their winnings and
losses in that way, a larger amount of the Social Security
benefits was determined to be taxable (over the amount reported
by petitioners), and the $395 credit for qualified retirement
savings was eliminated.
Petitioners take issue with respondent’s adjustment as to
the character of their gambling winnings. They contend that,
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because their gambling losses exceeded their gambling winnings,
the winnings did not have to be reported as gross income, nor
could their gambling losses be claimed as deductions, since they
were not professional gamblers. Respondent does not dispute that
petitioners sustained gambling losses at least equal to or even
greater than their gambling winnings. However, respondent
disagrees with petitioners’ position as to how the gambling
winnings and losses are to be treated for income tax purposes.
The law is clear that income from gambling is includable in
gross income under section 61.3 Moreover, gambling losses are
deductible only to the extent of the taxpayer’s winnings from
similar transactions. Sec. 165(d); Offutt v. Commissioner, 16
T.C. 1214 (1951); sec. 1.165-10, Income Tax Regs. If a taxpayer
is a professional gambler and is engaged in the trade or business
of gambling, the income and losses therefrom are reported for
income tax purposes as a trade or business activity. As such,
the losses sustained in the activity are deductible as ordinary
and necessary expenses paid or incurred in carrying on a trade or
business under section 162(a), subject to section 165(d), which
limits the deduction for losses to the extent of the gains
realized from gambling. Boyd v. United States, 762 F.2d 1369,
3
Because the issue in this case is legal in nature, sec.
7491, which in some circumstances shifts the burden of proof to
respondent, is not applicable.
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1372 (9th Cir. 1985); Valenti v. Commissioner, T.C. Memo. 1994-483.
The parties agree that petitioners were not professional
gamblers and were not engaged in gambling as a trade or business
activity. Therefore, the income and losses from the activity
could not be reported on their return on Schedule C, Profit or
Loss From Business. Petitioners’ gambling winnings,
nevertheless, constituted gross income under section 61(a), and
such income was required to be reported on Form 1040 of their
income tax return. Petitioners did not report any of their
gambling winnings on their income tax return. The deductions for
losses attributable to the gambling activity were allowed by
respondent (to the extent of the winnings) as an itemized
deduction. Sec. 63(b) and (c); Stein v. Commissioner, T.C. Memo.
1984-403, affd. without published opinion 770 F.2d 1075 (3d Cir.
1985); Heidelberg v. Commissioner, T.C. Memo. 1977-133. As a
consequence, respondent sustained the aforedescribed adjustments
giving rise to the determined deficiency.
Petitioners contend that itemized-deduction treatment of
their gambling income and losses is unfair, and that they can
simply ignore the winnings and the losses by not reporting the
same on their return. They take strong issue with respondent’s
determination that causes them to recognize a greater amount of
their Social Security benefits as gross income and to lose the
tax credit and the standard deduction, both of which are
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unrelated to their gambling activity. Petitioners also argue
that, if their gambling winnings have to be reported as income on
their tax return, then the losses should be allowed as deductions
on the Form 1040, or “above the line”. The Court rejects that
argument because to treat the income and losses in that fashion
would effectively remove any distinction between a professional
gambler and a nonprofessional gambler. Petitioners are in that
latter category, and their only entitlement to the deduction for
their gambling losses is the manner in which respondent
determined it as an itemized deduction. Petitioners have cited
no authority, and indeed there is no authority to support their
argument that unrelated income and credits are immune from the
effects of the manner in which respondent treated their gambling
winnings and losses. The Court, therefore, sustains respondent.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.