T.C. Memo. 2009-306
UNITED STATES TAX COURT
GEORGE D. AND LILLIAN M. SHOLLENBERGER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5504-08. Filed December 28, 2009.
George D. and Lillian M. Shollenberger, pro se.
Richard J. Hassebrock, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Respondent determined a $555 deficiency in
petitioners’ 2005 Federal income tax. The issue for decision is
whether petitioners had unreported gambling income in 2005 and,
if so, the amount thereof.1
1
Certain computational adjustments that follow from the
(continued...)
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Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) as in effect for the taxable
year at issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
FINDINGS OF FACT
The parties have stipulated some facts, which we so find.
When they petitioned the Court, petitioners resided in West
Virginia. At all relevant times, petitioners have been retired.
During 2005 petitioners gambled recreationally at a Charles
Town, West Virginia, casino. Before going to the casino they
often would stop by their bank and withdraw some money for
gambling.
On March 29, 2005, they withdrew $500 from their joint
checking account to take to the casino. That day petitioner
husband hit a $2,000 jackpot on a dollar slot machine play at the
casino. Petitioners each took $200 out of the jackpot winnings
for additional slot machine play. They left the casino that day
with $1,600, which they deposited the next day in their joint
checking account.
On their joint 2005 Form 1040A, U.S. Individual Income Tax
Return, petitioners did not report any gambling winnings. They
claimed a $10,000 standard deduction. By notice of deficiency,
1
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resolution of this issue are not in controversy, and we do not
address them.
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respondent determined that petitioners had $2,000 of unreported
income from gambling winnings.
OPINION
Gross income includes all income from whatever source
derived, including gambling. Sec. 61(a); McClanahan v. United
States, 292 F.2d 630, 631-632 (5th Cir. 1961). In the case of a
taxpayer not engaged in the trade or business of gambling,
gambling losses from “wagering transactions” are allowable as an
itemized deduction but “only to the extent of the gains from such
transactions.” Sec. 165(d); see McClanahan v. United States,
supra; Winkler v. United States, 230 F.2d 766 (1st Cir. 1956).
Respondent asserts that for purposes of applying section
165(d) to casual gamblers like petitioners, the correct analysis
and methodology is set forth in Chief Counsel Advice 2008-011
(Dec. 5, 2008) (the Chief Counsel Advice), which states in part:
A key question in interpreting §165(d) is the
significance of the term “transactions.” The statute
refers to gains and losses in terms of wagering
transactions. Some would contend that transaction
means every single play in a game of chance or every
wager made. Under that reading, a taxpayer would have
to calculate the gain or loss on every transaction
separately and treat every play or wager as a taxable
event. The gambler would also have to trace and
recompute the basis through all transactions to
calculate the result of each play or wager. Courts
considering that reading have found it unduly
burdensome and unreasonable. See Green v.
Commissioner, 66 T.C. 538 (1976); Szkirscak [sic] v.
Commissioner, T.C. Memo. 1980-129. Moreover, the
statute uses the plural term “transactions” implying
that gain or loss may be calculated over a series of
separate plays or wagers.
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The better view is that a casual gambler, such as
the taxpayer who plays the slot machines, recognizes a
wagering gain or loss at the time she redeems her
tokens. We think that the fluctuating wins and losses
left in play are not accessions to wealth until the
taxpayer redeems her tokens and can definitively
calculate the amount above or below basis (the wager)
realized. See Commissioner v. Glenshaw Glass Co., 348
U.S. 426 (1955). For example, a casual gambler who
enters a casino with $100 and redeems his or her tokens
for $300 after playing the slot machines has a wagering
gain of $200 ($300-$100). This is true even though the
taxpayer may have had $1,000 in winning spins and $700
in losing spins during the course of play. Likewise, a
casual gambler who enters a casino with $100 and loses
the entire amount after playing the slot machines has a
wagering loss of $100, even though the casual gambler
may have had winning spins of $1,000 and losing spins
of $1,100 during the course of play. [Fn. ref.
omitted.]
Applying this methodology, respondent concedes that if we
find, as we have found, that on March 29, 2005, petitioners
entered the casino with $500 and took home $1,600 of winnings,
the amount of gambling income which petitioners should have
reported on their 2005 return was $1,100 ($2,000 jackpot winnings
less $500 brought to the casino for gambling and less $400 taken
from the jackpot for additional gambling) rather than $2,000 as
determined in the notice of deficiency.
Although petitioners have stated that they “agree with” the
Chief Counsel Advice, they nevertheless maintain, contrary to the
Chief Counsel Advice, that they should be allowed to offset their
March 29, 2005, net winnings with $2,264 of gambling losses they
claim to have incurred throughout 2005. They contend that this
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result is necessary to treat “regular and casual gamblers
equally”.2
The Code mandates, however, that casual gamblers be treated
differently from taxpayers who are in the trade or business of
gambling. In particular, gambling losses incurred in a trade or
business of gambling are allowable in computing adjusted gross
income pursuant to section 62(a)(1). Gambling losses incurred
other than in the trade or business of gambling are allowable, if
at all, as itemized deductions in calculating taxable income.
See sec. 63(a), (d); Johnston v. Commissioner, 25 T.C. 106, 108
(1955); Cromley v. Commissioner, T.C. Memo. 2008-176; Heidelberg
v. Commissioner, T.C. Memo. 1977-133.
Because petitioners were not engaged in the trade or
business of gambling, their gambling losses are allowable only as
itemized deductions. But because petitioners have elected the
standard deduction, they are not entitled to itemize their
deductions.3 Sec. 63(b), (e); see Johnston v. Commissioner,
supra; Heidelberg v. Commissioner, supra. We reject as without
merit petitioners’ contention that this statutory arrangement is
2
By “regular” gamblers, we understand petitioners to mean
gamblers who are in the trade or business of gambling.
3
A taxpayer may change an election to claim the standard
deduction at any time before the period of limitations has
expired. Sec. 63(e). Insofar as the record shows, petitioners
have not sought to change their election to claim the standard
deduction. In any event, on the record before us it would not
appear advantageous for petitioners to do so.
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unconstitutional. See Tschetschot v. Commissioner, T.C. Memo.
2007-38 (upholding constitutionality of section 165(d)); Valenti
v. Commissioner, T.C. Memo. 1994-483 (same); cf. Gajewski v.
Commissioner, 84 T.C. 980 (1985) (holding that for purposes of
computing the minimum tax the 16th Amendment does not require
that a casual gambler’s gambling losses be netted against
gambling gains).
Drawing an analogy to the recovery of a capital investment,
this Court has held that a casual gambler’s gross income from a
wagering transaction should be calculated by subtracting the bets
placed to produce the winnings, not as a deduction in calculating
adjusted gross income or taxable income but as a preliminary
computation in determining gross income. See Lutz v.
Commissioner, T.C. Memo. 2002-89 (slot machine winnings); Hochman
v. Commissioner, T.C. Memo. 1986-24 (horse race winnings). This
Court has also recognized the practical difficulties of tracking
the basis of each wager individually in a session of like play.
See Green v. Commissioner, 66 T.C. 538, 548 (1976) (stating that
a “tabulation of the amounts paid for chips less the amount paid
to redeem chips would have served to verify the net win or loss
figures”); Szkircsak v. Commissioner, T.C. Memo. 1980-129
(stating that “it is impractical to record each separate roll of
the dice or spin of the wheel”). The methodology put forward by
respondent is consistent with these principles.
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Insofar as petitioners mean to suggest that section 165(d)
permits their gross income from slot machine play to be
calculated by netting all their 2005 slot machine gains and
losses, we disagree. Section 165(d) does not define gross income
but instead limits the deductibility of losses on wagering
“transactions” to the amount of gains from wagering
“transactions”. Consistent with general principles treating each
wager as a separate taxable event under Federal tax law, see
Abeid v. Commissioner, 122 T.C. 404, 411 (2004), section 165(d)
clearly contemplates that gross income from wagering is
determined in the first instance by reference to individual
wagering “transactions.” To permit a casual gambler to net all
wagering gains or losses throughout the year would intrude upon,
if not defeat or render superfluous, the careful statutory
arrangement that allows deduction of casual gambling losses, if
at all, only as itemized deductions, subject to the limitations
of section 165(d).
Respondent has effectively conceded that petitioners’ gross
income from their March 29, 2005, slot machine play was $1,100.
Cf. LaPlante v. Commissioner, T.C. Memo. 2009-226 (holding that
taxpayers failed to substantiate claims of net gambling gains and
losses). Giving effect to this concession, we hold that
petitioners had $1,100 of unreported gross income from gambling
in 2005 and are entitled to no deduction for gambling losses.
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To reflect the foregoing,
Decision will be entered
under Rule 155.