Taxability of Gambling Gains and Losses and Business Expenses - Assignment Example

Lewis incurs other expenses in terms of purchases made for wigs, fake mustaches, fake beards, and special clothing meant to make him appear heavier.

Issues

Is gambling a business and what is the treatment of Kevin Lewis's gambling business gains, losses, and expenses?

Authorities

1. IRC §162(a)
2. IRC §165(d)
3. Offutt v. Commissioner, 16 TC 1214.
4. Mayo v. Commissioner, 136 TC No 4
5. Boyd v. Commissioner, 56 AFTR 2d 85-5266
6. Groetzinger v. Commissioner. 59 AFTR 2d 87-532

Conclusion

According to IRC §162 (a), deductions are permissible for all the conventional and indispensable outlays or sustained for a tax year. All ventures or trades are, for this reason, taxable. IRC §165(d) on the other hand applies to gambling losses by just stating that losses from wagering transactions are deductible to the extent of wagering gains. This provision serves to limit the usage of §162 (a) to the charges made to cover gambling losses. In Offutt v. Commissioner, 16TC1214, the tax court decided that taxpayers’ losses cannot be covered with income from other sources or the gambler’s salary. This means that under the limitation of §165 and Offutt, Kevin’s gambling losses are only deductible to the extent of his gambling gains of $ 1000,000.

In Mayo v. Commissioner, 136TC No 4, the tax court judged that a gambler’s business expenses incurred in the course of his trade are deductible under IRC §162(a) even though these losses may not offset other income. The court reasoning, in this case, was founded on the fact that the court in Mayo held that non-wagering expenses were not within the loss limitation defined by sec 165 and reversed Offutt on this matter. To further strengthen the judgment, the court in Mayo quoted Boyd v. Commissioner, 56 AFTR 2d 85-5266, which indicated that restrictions of §165(d) do not take into account more than direct expenses from wagering. The Boyd case also gave a clear difference in losses arising from wagering and expenses associated with gambling activities. It, for this reason, makes it easy and clear that the limitation of the §165(d) does not affect peripheral expenses. This provision, for this reason, implies that losses resulting from direct wagering are subject to the gambler’s winnings while the expenses, on the other hand, are strictly subject to §162(a).

Other full-time gamblers have made citation of Groetzinger v. Commissioner. 59 AFTR 2d 87-532, claiming that the limitation of §165(d) does not apply to professionals who gamble for a living, this assertion was rejected by Mayo. The tax court also implied that the Supreme Court’s main intention, in its Groetzinger ruling, was to show the difference between losses and expenses even in a case where gambling losses are realized when the gambler takes gambling as a source of living.

Analysis

Based on §165(d) of the IRC, betting losses are restricted in deductibility to gaming winnings. In addition, the decision in Mayo holds that the commercial expenditures sustained in carrying on gaming business are deductible distinctly and wholly under §162(a). Thus, Kevin Lewis may deduct in full gambling business expenses that were incurred in the ordinary and necessary course of business. However, the wagering losses that Kevin Lewis suffered are subject to limited deductibility.