Category: Individuals Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com In connection with your questions regarding substantiation of gambling losses I offer the following comments. There is virtually nothing that deals with the substantiation value of markers, per se. There is one case, Shih-Hsieh, 52 TCM 881, in which substantial gambling markers were accepted without comment as evidence of gambling losses in an income reconstruction case. Clearly, the evidentiary value of the markers was not raised as an issue in the case. Practically speaking, this case means nothing in my view. I located approximately 80-to-100 cases dealing with some aspect of substantiation of gambling losses, although none of them address markers. I have not undertaken to go through them one-by-one at this point. There is Revenue Procedure 77-29, in which the IRS provides recordkeeping guidelines for substantiation of gambling expenses. Perhaps this could be used as a guide to constructing the proper substantiation after the fact to the extent such substantiation does not already exist. I have attached the Rev. Proc. to this document. There are two groups of marker-related cases and rulings outside the gambling substantiation area that are worthy of note. There is a revenue ruling and a group of cases that look at gambling markers from the perspective of the gambling house. Specifically, is an accrual basis gambling house required to accrue income on gambling markers in advance of payment? The casinos argued that because gambling debts are not legally enforceable under Nevada law, income should be delayed until receipt. The casinos lost. It is noteworthy in my opinion that the casinos did not attempt to argue that the markers might represent something other than gambling income. The only issue was timing. See Revenue Ruling 83-106, 1983-2 CB 77, Flamingo Resort, Inc. v. U.S., 485 F. Supp. 925, 80-1 USTC ¶9312 (CA9, 1980), and Hilton Hotels Corporation v. Cmr., 46 TCM 303. In Estate of Chagra, 60 TCM 104, the issue was whether a decedent's estate could take a deduction for a gambling debt represented by a series of markers. The court noted obliquely that the decedent frequently left the casino having cashed in gambling chips. In other words, the markers were not entirely used for gambling purposes. Although this was not a factor in the court's decision, it seems to me that the IRS could argue that your client did not necessarily use the marker money for gambling and should thus not be allowed to reduce gambling income by the entirety of the outstanding markers. As far as your client being a professional gambler is concerned, I offer the following. It is clearly possible to be a professional gambler for tax purposes. The Supreme Court said so in the case of Groetzinger v. U.S., 480 U.S. 23 (1987), even though the threshold for being so considered is quite high. Oftentimes, professional gambler status is sought after in order to allow the taxpayer to deduct losses in excess of winnings and to allow the expenses related to gambling such as travel and meals, etc. It is unclear from our conversations whether your client has excess losses and incidental expense or not. It seems to me that claiming a Schedule C loss from gambling would normally raise a taxpayer's audit chances considerably. On the other hand, I wonder if your client is not virtually assured of getting audited in any event given the long period of non-filing and the large gambling income amounts. Clearly, there is no one right answer in this circumstance. |
