An Interesting Gambling Case

Here’s the one post that didn’t make the move from the old host. Note that “today” (in the below post) means October 1st, not October 17th.

The Tax Court looked at an interesting case today. A recreational gambler (playing slot machines) makes numerous trips to a casino. When she prepares her tax return, the attorney preparing her return reports only $4,000 of $30,170 of gambling winnings. The IRS objects, and increases her gambling winning and assesses an accuracy related penalty. The Tax Court was left to decide which figure was correct.

Back in 2004 the petitioner went to Foxwoods, the large Indian casino in Connecticut. She liked playing the slots, and she did so. While she mostly lost, she did hit big payouts now and then. She received 26 W-2Gs showing gambling winnings of $56,200. (The IRS reduced the number at audit to $30,170.)

She went to an attorney to prepare her tax return. The attorney, after talking with his client, realized that much of her winnings were illusory; that her true winnings were not the total of her W-2Gs but she walked out of the casino with—the net win or loss for the trip. The attorney felt that $4,000 was the correct number to report on the return rather than $30,170.

Not surprisingly, her return was selected for examination (audit). She lost, and appealed to the Tax Court. The IRS did not dispute that the wins and losses were not based on the individual pulls of the slot machines but on the net win and loss during her trips. Rather, the IRS disputed that the taxpayer could prove that she really won $4,000 rather than $30,170.

The problem is that the taxpayer had little evidence to support the lowering of the income. “No valid reason exists for taxpayers engaged in wagering transactions not to maintain a contemporaneous gambling diary or gambling log.” She relied on a worksheet that was neither clear, complete, or contemporaneous.

Moreover, petitioner did not provide copies of bank statements, canceled checks, or other corroborating evidence to establish the accuracy of individual line items on the worksheet or to establish the completeness of the worksheet by reconciling the worksheet to figures supplied by the bank. Without support, the worksheet is unreliable to corroborate petitioner’s claims…

Moreover, respondent has already reduced the gambling winnings that Foxwoods reported for 2004 on the Forms W2-G, from $56,200 to $30,170. Petitioner has simply not provided sufficient corroborating evidence to make an estimate beyond the reduction respondent has already determined.

So the taxpayer does owe the tax. However, she does not owe an accuracy-related penalty. “Petitioner made a good-faith effort to determine the proper tax by engaging an attorney to prepare her return, the same attorney who had prepared her prior returns which respondent never challenged.” With a credible albeit unsupported story the taxpayer does not have to pay the accuracy related penalty.

Case: Laplante v. Commissioner, T.C. Memo 2009-226


There is a bit of good news overall for slot players in the case:

Respondent nonetheless agrees with petitioner’s theory of recognizing slot machine play on the basis of net wins or losses per visit to the casino. Specifically, respondent states the following:

[T]he better view is that a casual gambler playing a slot machine, such as the petitioner, recognizes a wagering gain or loss at the time she redeems her tokens. 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).

I do need to point out that the Tax Court did not pass judgment on this issue, so it is possible they would disagree at some future date.

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