Offbeat Argument from Elderly Gamblers Fails

[Cpt Banjo]

ALAN A. AND MARY E. SJOBERG, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Release Date: DECEMBER 23, 2008

UNITED STATES TAX COURT

Filed December 23, 2008

Alan A. and Mary E. Sjoberg, pro se.

Michael A. Pesavento, for respondent.

SWIFT, Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.

Respondent determined a $ 660 deficiency in petitioners' Federal income tax for 2004 and a
$ 132 accuracy-related penalty under section 6662(a). The primary issue for decision is whether on their 2004 Federal income tax return petitioners may treat gambling winnings and expenses as business income and expenses or whether the gambling winnings must be treated as "Other" income and the expenses as miscellaneous itemized deductions. The resolution of this issue affects only the taxable amount of petitioners' Social Security benefits.

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue.

BACKGROUND

Some of the facts have been stipulated and are so found. Petitioners resided in Minnesota.

In 2004 petitioners were recreational gamblers.

In 2004 petitioners received $ 19,995 in wage income, $ 1,439 in business income, $ 10,000 as an individual retirement account (IRA) distribution, and $ 20,154 in Social Security benefits.

Also in 2004, petitioner Mary E. Sjoberg won a $ 4,000 slot machine jackpot, which was fully offset by her gambling expenses. The casino submitted to petitioners and respondent a Form W-2G, Certain Gambling Winnings, reporting the $ 4,000 jackpot.

On their 2004 joint Federal income tax return, petitioners did not include the $ 4,000 jackpot in income and they did not claim their offsetting gambling expenses. Rather, petitioners simply attached a handwritten note to their return disclosing the $ 4,000 jackpot. Petitioners also treated only $ 4,704 of their Social Security benefits as includable in income.

On audit respondent determined that petitioners must include the $ 4,000 jackpot in gross income, offset by a $ 4,000 gambling loss deduction but triggering a mechanical $ 2,494 increase in petitioners' taxable Social Security benefits and a $ 130 decrease in allowable miscellaneous itemized deductions. Respondent also determined a $ 132 accuracy-related penalty under section 6662(a).

DISCUSSION

Petitioners do not dispute that under the provisions of the Internal Revenue Code respondent's adjustment with respect to the Federal income tax treatment of their $ 4,000 gambling winnings and offsetting expenses is correct, including the effect thereof on the taxability of petitioners' Social Security benefits. Petitioners, however, contend that this treatment of gambling winnings and losses is discriminatory against the elderly and should not be enforced. Petitioners note that today's casinos are like "Disneyland" to the elderly, offering all sorts of freebies to entice the elderly into casinos to gamble. Petitioners contend that respondent needs to update the tax rules to take into account today's casino operators, casino operations, and customers.

Petitioners complain that it is just "too easy" for the elderly to gamble and therefore that the tax rules applicable thereto are outdated and should not be enforced--particularly those rules that affect the taxability of Social Security benefits. Lastly, petitioners allege that some types of gambling winnings are not required to be reported to respondent by the casinos (generally poker and blackjack), and petitioners claim that such differences in the reporting of gambling winnings constitute discrimination.

Petitioners' arguments raise policy issues that do not relieve petitioners of their liability for the determined deficiency.

We sustain respondent's determination of the $ 660 deficiency in petitioners' Federal income tax and the $ 132 accuracy-related penalty under section 6662(a).

Decision will be entered for respondent.

Hit me, Goofy!

[Evil Squirrel Overlord]

In that case girly clubs are like Disneyland for young men and all "losses" should be deductible.

Petitioners do not dispute that under the provisions of the Internal Revenue Code respondent's adjustment with respect to the Federal income tax treatment of their $ 4,000 VIP room expenses and offsetting revenue is correct, including the effect thereof on the taxability of petitioners' Able-Bodied Welfare benefits. Petitioners, however, contend that this treatment of strip club losses is discriminatory against the stupid and should not be enforced. Petitioners note that today's strip clubs are like "Disney's Little Mermaid" to post-teen males, offering all sorts of boobies to entice post-teen males into massive strip club losses through deceptive amorous interest by the clubs "contractors". Petitioners contend that respondent needs to update the tax rules to take into account today's strip club operators, "contractors", and customers.

Petitioners complain that it is just "too easy" for the post teen males to enter these establishments and therefore that the tax rules applicable thereto are outdated and should not be enforced--particularly those rules that affect the deductability of said as legitimate business expenses. Lastly, petitioners allege that some types of "services" are not required to be reported to respondent by the club (even if the activities are posted on the internet), and petitioners claim that such differences in the reporting of such "services" constitute discrimination.

[LPC]

In that case girly clubs are like Disneyland for young men and all "losses" should be deductible.

Right.

That's not the law?

Petitioners, however, contend that this treatment of strip club losses is discriminatory against the stupid and should not be enforced.

As someone who is both (a) stupid and (b) male (to the extent that is not redundant), I agree.

So just tell me what else I should agree with, and I'll agree with it.

[RyanMcC]

On audit respondent determined that petitioners must include the $ 4,000 jackpot in gross income, offset by a $ 4,000 gambling loss deduction but triggering a mechanical $ 2,494 increase in petitioners' taxable Social Security benefits and a $ 130 decrease in allowable miscellaneous itemized deductions.

What is the rationale for requiring this as opposed to allowing them to declare it as self-employment income then deduct the loss (up to the ammount won) via a Schedule C for the ammount lost that year?

Other situations where this scenario could cost you:
- You take the standard deduction and don't have enough other itemized deductions to make it worth deducting the losses.
- Win $4,000 one year, lose it the next.

It is kind of messed up how a $0 net gain can end up increasing your tax bill like that.

They have learned a valuable lesson on gambling, the house ALWAYS wins in the long run - which is also applicable to taxes and the IRS.

Which may be why many countries don't tax gambling winnings (Canada for example), the house will eventually get it back and the government will just tax them.

[LPC]

What is the rationale for requiring this as opposed to allowing them to declare it as self-employment income then deduct the loss (up to the ammount won) via a Schedule C for the ammount lost that year?

Some years ago (don't make me look it up), Congress decided to raise some revenue by putting a floor on "miscellaneous itemized deductions." One of the deductions that ended up being classified as "miscellaneous" was the deduction for gambling losses.

This Congressional decision had two consequences relevant to the instant case:

1. The amount of taxable Social Security benefits might be increased because that calculation is based on adjusted gross income (which does not take into account itemized deductions) and not taxable income (which takes into account itemized deductions); and

2. Taxable income might be increased because of gambling losses that were disallowed because they exceeded the allowable floor.

The taxpayers in the instant case seemed to have suffered from both of those consequences.

As far as I am aware, Congress intended both of those consequences. (Or at least there is no reason to believe that Congress did not intend those consequences of the literal statutory language that was enacted.)

[LaVidaRoja]

Blame it on our wonderful, mythological Puritan heritage. Gambling is EVIL, a SIN. Therefore, the winnings should be taxed in full, but losses must be limited.

Yes, historical myths are a part of our tax law

[Demosthenes]

I just got back from a few days in Las Vegas last night. If gambling is a sin, I'll at least be warm in the afterlife.

Las Vegas was spooky, it was so empty.

[Arthur Rubin]

(All line numbers and specific dollar amounts are for 2008 returns to be filed in 2009.)

I thought gambling losses were miscellaneous deductions not subject to the 2% (of AGI) limit [floor], or to reduction of itemized deductions for excessive AGI ($159,950 for 2008). I'm not sure about AMT, but it looks as if Schedule A line 28 miscellaneous itemized deductions are allowable against AMT income, even if Schedule A line 27 deductions are not.

In other words,

2. Taxable income might be increased because of gambling losses that were disallowed because they exceeded the allowable floor.

is not correct unless the taxpayer would not be declaring itemized deductions at all.

That's a little more favorable than investment expenses, except that deductable gambling losses are limited to current gambling income, while deductable investment losses are limited to the amount a reasonable person would put in to recovering the investment value (i.e., lending a company $1M when your investment is only $10K might not lead to a bad debt loss when the company goes under.)

I don't have the history of gambling loss deduction allowances at my fingertips, but I'm sure the current status is more favorable than you've indicated.

[LPC]

I thought gambling losses were miscellaneous deductions not subject to the 2% (of AGI) limit [floor],

You're right. I misremembered.

Wagering losses are allowed by section 165(d), which is specifically excluded from the definition of miscellaneous itemized deduction in section 67(b)(3).