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IRS Says Gambler Trade, Business Expenses Are Deductible

By Robert T. Zung
Publication Date: 12/22/2011

The Internal Revenue Service announced in Action on Decision 2011-06, released Dec. 21, that expenses incurred by a taxpayer in the trade or business of gambling are deductible under Internal Revenue Code Section 162(a).

The action on decision follows the U.S. Tax Court case of Mayo v. Commissioner, 136 T.C. 81 (2011), where the court held trade or business expenses incurred by Ronald Andrew Mayo in 2001 as the result of his business of gambling on horse races are not subject to the limitation of Section 165(d), which allows wagering losses only to the extent of wagering gains.

Trade or Business of Gambling on Horse Races

Mayo, in the trade or business of gambling on horse races, incurred $10,968 of business expenses in 2001. Mayo also had an $11,297 loss from wagering. On his Schedule C, Mayo deducted both the $11,297 wagering loss and $10,968 of business expenses, making a total of $22,265 of claimed deductions.

The Internal Revenue Service disallowed the entire $22,265 amount under Section 165(d), which limits deductions for wagering losses to the amount of wagering gains. IRS argued the business expenses, as well as the loss, were “losses from wagering transactions” within the meaning of Section 165(d) and therefore the statute prevented Mayo from deducting both amounts.

Mayo asserted that Section 165(d) did not apply to persons engaged in the trade or business of gambling and alternatively, he said that if Section 165(d) applies to persons engaged in the trade or business of gambling, the limitation in the statute does not apply to gambling-related business expenses, because business expenses are not “losses from wagering transactions.”

Tax Court's Holding

The Tax Court held that the limitation in Section 165(d) applies to persons engaged in the trade or business of gambling and therefore Mayo may not deduct the $11,297 of excess wagering losses over wagering gains. The court allowed Mayo's deduction under Section 162(a) for the $10,968 of gambling-related business expenses.

The Tax Court said that it would no longer follow the holding of Offut v. Commissioner,  16 T.C. 1214 (1951) and other cases applying the Section 165(d) deduction limitation to Section 162 business expenses.

IRS recommended acquiescence as it agreed with the analyses set out by the Tax Court.

The AOD will be published in Internal Revenue Bulletin 2012-3 on Jan. 17.

The complete text of this article can be found in the BNA Daily Tax Report, December 22 2011. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »

© 2011, The Bureau of National Affairs, Inc.