IRS Gets Tough On Gamblers

IRS has typically not been a fan of gamblers.  They like it when winnings are reported, and therefore tax can be collected.  But sometimes there are issues regarding the deductibility of gamers’ expenses – take the recent Tax Court decision in the matter of John C. Hom.

This bloke is a poker player – having competed regularly since 1995 in this “trade or business.”  In 2002, he won an event at the World Series of Poker, and during other years he played both online and casino poker.  And needless to say, he had some expenses related to this “trade or business,” including travel and lodging, generally, which he deducted on Schedule C submitted with his annual income tax returns.  But he wasn’t the best recordkeeper on the planet.  Seems IRS disallowed a hefty amount of the taxpayer’s gambling losses, not only as a result of the fact that taxpayer’s records couldn’t substantiate those losses, but also because Hom was just downright “uncooperative.”

Not a good characteristic when dealing with the Revenooers.

Further, the taxpayer here suggested he should be allowed to invoke the “Cohan Rule,” (based on an old case in which oral testimony and “reasonableness” arguments were sufficient to enable a taxpayer to claim some deductions.)  The Court in Hom was unimpressed, however, noting that “We must have sufficient evidence upon which to make a reasonable estimate to apply the Cohan rule.”  Seems Hom had gross receipts from casino poker of over $150,000 in 2007 and 2008, though the winnings were won on only four dates – suggesting that his casino poker earnings were won in relatively few events, suggesting to the Court that unlike cases involving slot machine players with continuous play but only occasional jackpots, this taxpayer did not necessarily suffer any losses from playing casino poker in 2007 and 2008, thus providing the Court no basis upon which to estimate his gambling losses for those years!

No bueno.

Moving right along – many of our taxpayer friends have been clipped (increasingly in recent years) by the dreaded alternative minimum tax (AMT), which usually makes their hair hurt.  Especially because this provision of the law was originally enacted in the late 1960s, mainly because the Treasury discovered in 1969 that 155 individuals making more than $200,000 paid no (zero) Federal income tax.  These were the “wealthy” folk of the day, when $200,000 was real money – equivalent to something like $1.5 million now.

Today the AMT hits millions of taxpayers – many of whom report a lot less than $1.5 million of income, we might add.  And you can thank your lucky stars that Congress recently took action (as a result of the “fiscal cliff” negotiations) to impose a little control over this problem, lest 34 million of you become subjected to the dreaded AMT – roughly one fifth of all taxpayers!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He can be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.

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