"You`ve got to know when to hold `em, know
when to fold `em. Know when to walk away, know when to run..." Everyone
is familiar with those famous lyrics of Kenny Rogers.
America has had a love affair with the professional gambler, courtesy
of television, from its earliest years. Each generation grew up with
its favorite gamblers and cardsharps -- Maverick, Bat Masterson, Yancy
Derringer. These days, the Travel Channel airs the World Poker Tour.
Bravo carries Celebrity Poker Showdown. A variety of television dramas,
like CSI, Las Vegas and others, are set in Las Vegas. And more reality
shows about poker and gambling are hitting the air.
When you take into account Indian casinos, riverboats, racetracks, card
rooms and lotteries, practically every state in the union has some form
of legalized gambling. And of course, there`s Internet gambling -- with
real money and real monetary jackpots. As Americans, we are bombarded
with the whole get-rich-instantly message today.
With so much time devoted to games of chance, is it surprising that
more people want to consider themselves professional gamblers for tax
purposes? After all, as a professional, you get to deduct more than
just your losses -- you get to deduct business expenses, too.
Wanna bet you`re not a pro?
If you`ve ever hit a big jackpot, you`re looking for a way to reduce
your taxes on it. Naturally, the first thing you want to explore is how
to establish yourself as a professional gambler. It`s not as easy as
you might think. Pansy Panages tried it in 2001.
On Jan. 3 the Tax Court issued a decision about her status as a
professional gambler. The case is Panages vs. Commissioner. Panages had
two businesses, a florist shop and a wholesale flower market, which she
ran during the day. Looking for another way to make a living when she
retired, Panages decided she could make a living as a gambler.
Before embarking on this enterprise, she called IRS and asked them how
to go about reporting her income as a professional gambler. She was
told to use Schedule C, Profit and Loss from Business or Profession,
and to keep detailed records of her gambling activities -- both
winnings and losses.
Panages went about this whole business quite methodically. After
closing her shops, Panages devoted her time to systematically gambling
on progressive slot machines at a certain grocery store. Having settled
on the kind of machine she preferred to use, Panages established a
relationship with the employees at the market and paid (tipped) them to
let her know which machines had not paid out for a while, operating on
the premise that they would hit soonest.
She devoted 20 to 25 hours per week to this business, more than 1,000
hours a year. In any other business, that would be enough time for any
objective observer to say she was taking it seriously. In fact, if this
business were a real estate activity, IRS regulations would concede
that she materially participated if she had been involved in the
activity for more than 500 hours a year. Yet, both IRS and the Tax
Court insist the gambling activity wasn`t a business.
What more does IRS want? What did Pansy Panages do wrong?
Let`s ask a former IRS agent with 30 years of audit experience, who also trained auditors.
It`s all or nothing
Floridian Larry Phillips, an enrolled agent, is now a technical advisor
in the area of IRS audits for J.K. Harris & Company, a national
tax-resolution, debt-management and financial-planning company. During
a stint as an IRS group manager in Detroit, Phillips had the
distinction of convincing a drug dealer to admit to underreporting his
taxable income by half a million dollars -- and he collected the taxes
due, without fuss.
So, what did Panages do wrong? Phillips agrees with the Tax Court`s
position that gambling was not her primary occupation. The first thing
Panages did wrong was to list `floral manager` as her occupation on
page 2 of her Form 1040, not `gambler`.
The next problem was that, according to the court, Panages didn`t
appear to have a profit motive. She showed nothing but a net loss on
her Schedule C, then deducted more gambling-related expenses from that.
She should have shown her gambling winnings first, then deducted the
losses. Then, she should have deducted her other expenses.
Third, IRS and the Tax Court both felt that since she had two other
businesses, this gambling activity was not her primary livelihood. They
didn`t take into account that she was working to build up her expertise
and winnings in order to make it possible to stop working.
Did the authorities object because she didn`t have a license as a
gambler? Is it necessary to register with anyone in order to take
gambling deductions? Neither IRS nor the court brought up that
question. Phillips says that IRS doesn`t really care if the business
you report is legal or illegal -- just as long as you report the income
and pay your taxes.
What was her biggest mistake? Not really learning how to handle the
reporting of a professional gambling business. If she had, Panages
would have known that even a professional gambler may only deduct her
losses and expenses up to her winnings. She may not show a loss on her
Schedule C. Or rather, if she does show a loss, she may not deduct it
from other income.
All that you may do, as a gambling professional, is to zero out your
winnings. It`s because of those losses that she was audited in the
first place.
People with full-time jobs who are gamblers
Researching this issue turned up a Las Vegas enrolled agent Roger C.
Roche, who wrote "The Tax Guide For Gamblers." He and his partner,
Yolanda Smulik-Roche, also an enrolled agent wrote an article for
CardPlayer Magazine discussing the case of a woman with a full-time
job, earning $100,000 per year who filed a case in Tax Court to protest
an IRS decision disallowing her gambling business. With some solid
preparation and cases to present, the Roche`s helped her win her case
when it was sent back to IRS`s Appeals division before the court was to
hear it.
So, if you do want to insist that you are in the business of being a
gambler, even if you have another source of work and income, there are
ways to make it happen.
IRS looks at each gambling case on its own merits. And it will fight.
So, if your gambling losses are higher than your winnings anyway, you
may as well just report the income and losses like anyone else --
report the income on line 21 of page 1 of your Form 1040 as "Other
Income" and report your losses, up to the amount of your income, on
Schedule A on a special line in the "Other Miscellaneous Deductions"
section line 27. This line lets you deduct your gambling losses without
first subtracting 2 percent of your adjusted gross income (the amount
on the last line of page 1 of your Form 1040).
You don`t need to match up the losses to the source of the winnings.
For instance, you may deduct horseracing losses from poker winnings.
Remember when you add up your gambling losses be sure to add the cost
of lottery tickets to your casino, sports book and other losses.
How do you prove your losses?
Since you`re gambling anyway, you may as well keep records. For
lotteries, keep the tickets in a file. If you win, make a note of the
winnings and drop those notes into the file. For casino play, just
about all casinos have membership cards. You can use them for both slot
machine play and table play. The cards track the number of coins you
spend. You can get a year-end report from the casino showing your
winnings and your coins expended.
Phillips had one audit in Florida where the couple used a card. It
proved that they had inserted about 4.9 million coins into slot
machines in that year. He`s still trying to figure out how they were
able to that and still have time to eat and sleep.
Another way to prove losses is to write checks for your play, or use an
ATM withdrawal right before you start playing. Keep a notepad handy and
write down how much cash you`re playing with that day, or that session.
When you`re done, write down how much money you had left. If you
started with $500 and ended up with $600, you know that you have $100
winnings for that day or session. The easiest thing to use is a daily
calendar or PDA with a daily calendar. You can get printed ones that
are small enough to fit into a pocket or purse.
Keep detailed entries for each day. Be sure to include the amount of
time you played, the tips you paid to attendants and staff and any
expenses related to your travel. Just in case you end up so mesmerized
that you find most of your time has become devoted to gambling, track
your travel and meals expenses, too.
Who knows, if you win really big, you might find yourself becoming a
professional gambler. After all, when the money is flowing in, it looks
as if your luck will never end. But it will ... it always does.
What do you think, are today`s reality show contestants, like "Fear
Factor" and "Survivor" gamblers? Would these adrenaline junkies be
considered professional gamblers if they devoted all their time to
chasing after spots on those shows? Or would they be considered
entertainers? That concept is yet to be tested.
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