Commissioner Of Internal Revenue - Research Paper Example

Commissioner Of Internal Revenue ABSTRACT The findings in the case of Gloria mainly bring about diverse arguments of the tax returns in regard to a married couple's deduction of the wife's tournament poker losses as limited by Code Sec. 165(d). The court rejected the taxpayers' arguments that tournament poker, unlike other types of poker, is not a wagering activity and is classified as entertainment and professional sports. Differences between tournament poker and other types of wagering brought out in George E. and Gloria Tschetschot v. Commissioner., U.S. Tax Court, CCH Dec. 56,840(M), and T.C. Memo. 2007-38, 93 T.C.M. 914, (Feb. 20, 2007) were not meaningful or substantive enough to warrant different tax treatment. Conducting the event in a tournament setting did not transform the poker activity into something other than wagering. Further, the act of betting is intrinsic to poker, regardless of whether it occurs in tournament poker or "live action" poker. Finally, the taxpayers' argument that tournament poker should be treated the same way as sports such as golf or tennis was rejected. Congress's decision todraw clear distinctions can mainly be viewed as a reasonable form of setting out the distinction without violating due process or equal protection. At trial, petitioners concurred that Mr. Tschetschot was not a professional gambler but argued that Mrs. Tschetschot's professional tournament poker playing is not gambling and thus not subject to the limitations of section 165(d) on losses from gambling. Professional Gambler (Sporting Activity) Vs. Tournament Poker Player Introduction The Internal Revenue Code (IRC), as cited fromen.wikipedia.org/wiki/Internal_Revenue_Code is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code (USC) .It is organized topically, into subtitles and sections, covering various types of taxes as well as procedure and administration. Its implementing agency is the Internal Revenue Service. In reference to the Black’s law dictionary, gaming is defined as the act or practice of playing games for stakes or wagers; gambling; the playing at any game of hazard (re Stewart (D. C.) 21 Fed. 398). (2) An agreement between two or more persons to play together at a game of chance for a stake or wager which is to become the property of the winner, and to which all contribute(People v.Todd, 51 Hun, 440, 4 N. Y. Supp. 25;)  In general, the words gaming and gambling, in statutes, are similar in meaning, and either one comprehends the idea that, by a bet, by chance, by some exercise of skill, or by the transpiring of some event unknown until it occurs, something of value is, as the conclusion of premises agreed, to be transferred from a loser to a winner, without which latter element there is no gaming or gambling. A poker tournament is a tournament where players compete by playing poker. It can feature as few as two players playing on a single table (called as many as tens of thousands of players playing on thousands of tables. The winner of the tournament is usually the person who wins every poker chip in the game. The others are awarded places based on the time of their elimination. To facilitate this, in most tournaments, blinds rise over the duration of the tournament. Unlike in a cash game, a player's chips in a tournament cannot be cashed out for money and serve only to determine the player's placing (Feldman, Andrew (February 1, 2012). "2012 WSOP Schedule features 61 events". ESPN.com.). In regards to the findings in the George E. and Gloria Tschetschot v.Commissioner., U.S. Tax Court, CCH Dec. 56,840(M), T.C. Memo. 2007-38,93 T.C.M. 914, (Feb. 20, 2007,) thecourt mainly substantiated the distinction between professional gambling and a tournament poker playing. This was established through the limitations as per Sec. 165 (d) of the internal revenue code which states that a married couple's deduction of the wife's tournament poker losses was limited to the amount of her tournament poker winnings. Conducting the event in a tournament setting did not transform the poker activity into something other than wagering. Further, the act of betting is intrinsic to poker, regardless of whether it occurs in tournament poker or "live action" poker. Finally, the taxpayers' argument that tournament poker should be treated the same way as tournament sports such as golf or tennis was rejected. Congress’s decision to treat businesses based on wagering andgambling differently from other businesses is a rational differentiation and does not violate due process or equal protection. Overview of the Relevant Sections The Internal Revenue Code contains an explicit provision regulating income-tax deductions for gambling losses. Under Section 165(d) of the Internal Revenue Code, losses from “wagering transactions” may be deducted to the extent of gains from gambling activities. Essentially, in order to qualify for a deduction of losses from wagering, the taxpayer can only deduct up to the amount of gains he or she accrued from wagering. In Commissioner v. Groetzinger, the Supreme Court Justice Blackmun alludes to Section 165(d) which was a legislative attempt to close the door on suspected abuse of gambling loss deductions. In Bathalter v. Commissioner, (Tax Court Memorandum Decisions - Volume 68 - Page 840), A full-time horse-race gambler had gains of $91,000 and losses of $87, 000. The taxpayer deducted the expenses under Section 162. The service argued that Section 165(d) precluded the taxpayer from engaging in gambling as a "trade or business."The Tax Court held that the taxpayer's gambling was a business activity and allowed the deductions.In essence, the court held that Section 165(d) only applies when a taxpayer is at a loss instead of a net gain and “serves to prevent the [taxpayer] from using that loss to offset other income.” However, if the taxpayer has a net gain, as the horse-race gambler did, then the taxpayer may deduct the expenses under Section 162. In regards to wagers, The Internal Revenue Service has ruled that a “wagering transaction” consists of three elements.First; the transaction must involve a prize. Second, the element of chance must be present. Finally, the taxpayer must give some consideration. In addition, in Valenti v. Commissioner, the court reiterated that Section 165(d) applies to professional gamblers as well as recreational gamblers The court stated, "... it has been held both by this Court and various courts of appeals that wagering losses cannot be deducted, except to the extent of the taxpayer's gains from wagering activities, and it has been so held even where such activities were conducted as a trade or business as opposed to a hobby. Therefore, for example, if a recreational gambler visits a casino one Saturday and accumulates $600 of losses and $200 of gains, that recreational gambler may deduct $200 of the wagering losses (because she can only deduct an amount up to the amount of wagering gains she accrued. The same findings were echoed in William E. Baxter Jr. v. United States. George E. and Gloria Tschetschot commissioner. U.S. Tax Court, CCH Dec. 56,840(M), T.C. Memo. 2007-38, 93 T.C.M. 914, (Feb. 20, 2007) In relation to section 165(d) that clearly limits losses from wagering transactions to the amount of wagering gains. This means that in Gloria’s case losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.Therefore the findings of this case were clearly in disregard to the stipulations in Sect 165(d)This can be clearly established through the failure of the Internal Revenue Code of 1986 to define what constitutes a wager activities and therefore for the purpose of acquire what it constitutes we result to reference of different case that establish its constitution Courts F. Supp. 912, 86-1 U.S. Tax CA’s. (CCH) paragraph. 9284 (D. Nev. 1986) have often had to differentiate between wagering and related activities on the one hand and those activities not falling into that category on the other. However, courts have routinely held that poker is a wagering activity. See, e.g. Boyd v. United States, supra. But here, petitioners ask us to treat tournament poker differently than other kinds of poker. After a careful review of the record, it is clear that while there are differences between tournament poker and other types of poker, none rise to the level of meaningful, substantive differences that would warrant different tax treatment under the current Internal Revenue Code. In relation to Gloria plea in her case, mainly may be explained by looking at tournament poker as a sporting event whereby it is argued that tournament poker is conducted in much the same way as other professional sporting tournaments. Participants pay an entry fee and compete to win prizes through their good fortune and superior skill. But simply because a sport or activity is played or conducted in a tournament setting does not transform the underlying activity into something different. Tournament poker play, much like live-action poker, necessitates the use of the word “bet” or “wager” even to describe how the game is played. Petitioners argue that the usage of the word “bet” in this context is insignificant. The Court sees it differently. Betting is so intrinsic to poker that it is nearly impossible to avoid using a word that implies gambling in anyway when discussing the topic. Bets are placed on each hand, and each round of betting has consequences. Whether or not the chips are used to make these bets have immediate and tangible monetary value does not change the fact that the players are still placing bets, hoping to win. This is true even in a tournament setting. Petitioners agree that the first poker games held were, in fact, “wagering events”. For example, in those early games, “Each participant put up $10,000 and received $10,000 in chips.” The fact that the chips being used to place bets in tournament poker today only bear some fractional relationship to the dollar values of the prizes and/or entry fees does not change the fundamental nature of the game as a wagering activity. In relation to Gloria’s existence of being a professional poker player raises an equal protection argument and argues that there is no valid reason to treat tournament poker differently, for tax purposes, from tournament golf or tennis. Petitioners argue that the benefits of being able to offset “exaggerated income” from very successful years by losses sustained in less successful years should be available to professional tournament poker players as much as they are to other professions. Congress held a decision to treat businesses based on wagering activities differently. In the absence of Congressional action, we are not free to correct any perceived unfairness stemming from a rationally based policy choice. In Valenti v. Commissioner the Court held that treating businesses based on wagering and gambling differently from other businesses is a rational differentiation and not one that rises to the level of being violative of due process or equal protection CONCLUSION The moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many years ago. Not only has tournament poker become a nationally televised event, but casinos or lotteries can be found in many States. Further, the ability of the Internal Revenue Service to accurately track money being lost and won has improved, and some of the substantiation concerns, particularly for professionals, no longer exist. That said the Tax Court is not free to rewrite the Internal Revenue Code and regulations. We are bound by the law as it currently exists, and we are without the ability to speculate on what it should be. Accordingly, we hold that tournament poker is a wagering activity subject to the limitations of section 165(d). Works Cited Tschetschot v. COMMISSIONER OF INTERNAL REVENUE, 2007 T.C. Memo 38 (T.C. 2007 ) re Stewart (D. C.) 21 Fed. 398 Feldman, Andrew (February 1, 2012). "2012 WSOP Schedule features 61 events". ESPN.com. § 195 of the Internal Revenue code Tax Court Memorandum Decisions - Volume 68 - Page 840), www.bradfordtaxinstitute.com/Endnotes/TC_Memo_2007-12.pdf ‎ F. Supp. 912, 86-1 U.S. Tax CA’s. (CCH) paragraph. 9284 (D. Nev. 1986) www.leagle.com/decision/199490668fwtcm838_1728 ‎ www.irs.gov/Tax.../Tax-Code,-Regulations-and-Official-Guidance Read More