kcace1024 wrote:
Harry,
I usually agree with your logic, but not this time. I think you
underestimate the power of precedent that attaches to a case like
this. There is some real irony in the IRS's statement that "we can't
just take your word" because what is a gambling diary, but your word
on paper. A win/loss statement has much more probitive value because
it is from another party. Why aren't you allowed to keep a diary of
your wages instead of using a W-2? Why are self-employed audited
more than wage earners because the IRS knows that most people fudge
their diaries. Some even keep a second set of books.
The IGT consultant has now established in court the obvious fact that
anyone who plays negative games on a regular basis will not make a
profit. The burden of proof has now been shifted to the IRS to
explain how someone can make a lot of money playing slots on a
regular basis.
The IRS now knows it will be hard to stick it to a gambler just
because he does not have perfect records including the worthless
gambling diary.
The tax court decision
http://www.ustaxcourt.gov/InOpHistoric/GAGLIARDI.TCM.WPD.pdf
notes at the outset that the key question is, "Whether petitioner
substantiated the amounts of his claimed gambling losses".
It's necessary to weigh what the judges relied upon in finding in
favor of the taxpayer to determine whether the decision applies
generally to all gamblers, or only those who share very specific
attributes with the gambler in this case.
Ultimately, here is what the case cites as the necessary loss
substantiation that satisfied the judges:
(Note: "respondent" refers to the IRS; included in this statement is
that the IRS had accepted the submitted documentation as establishing
a portion of the claimed losses, but not all):
"The voluminous contemporaneous and other documentary
evidence, the corroborating testimonial evidence of an eyewitness
to petitioner's gambling and daily activities during the years in
issue and of petitioner's return preparer, and the testimonial
evidence of two experts in addition to petitioner's testimony
substantiate and establish that petitioner incurred the
disallowed gambling losses."
"We conclude that petitioner substantiated the amount of
disallowed gambling deductions in issue (i.e., in excess of the
amount respondent conceded--see supra pp. 16-17). Accordingly,
we do not sustain respondent's disallowance of the gambling loss
deductions Mr. Gagliardi claimed for 1999, 2000, and 2001. See
also Jackson v. Commissioner, T.C. Memo. 2007-373 ("At trial,
respondent conceded that petitioner had presented sufficient
documentation to substantiate $127,165 in gambling losses"; "This
documentation consisted of casino ATM receipts, canceled checks
made payable to casinos, carbon copies of checks made payable to
casinos, and credit card statements stating that cash was
advanced at the casinos.")."
It's interesting to note that casino-sourced win/loss statements were
not one of the documents submitted to substantiate losses.
Instead, there was a steady record of receipts documenting the source
of gambling funds. That, at least in part, satisfied the court's
thirst for some type of contemporaneous documentation of play (even
though not a log).
This was supplemented with testimony that attested to the specific
gaming involved as having an expected payback of no greater than 90%,
and quite likely less than 80% -- with the consequence that it was
next to statistically impossible that the gambler might have come away
from any year a winner.
Further, a statement of cashflow accounting for the taxpayer was
submitted to further establish that there was evidence of a steady
outflow related to the gambling activity.
···
------
I'll agree that there may be some room that as a consequence of this
case an examiner might be willing to accept receipts of cash draws as
potential evidence of losses, in absence of the desired
contemporaneous diary.
However, my real expectation is that in absence of authoritative
documentation that your gaming had a sharply negative expectation
comparable to the taxpayer in this case (and I wouldn't expect a
presumption that all machine gaming has lousy odds) an examiner would
find that documentation insufficient.
If called into an examination, I view the prospects of a gambler who
is prepared merely with a set of win/loss statements to be meager, at
best.
Concerning a diary, there's no question that it's fraught with the
potential of fraudulent preparation. That's true of any number of
accounting documents that are relied upon to substantiate tax returns.
An analogy of a casino diary to W-2 wage reporting is specious. A
comparison of W-2G reporting and W-2 submission by employers has some
validity, however. It's to be noted that if you wish to deduct
employee expenses against reporting wages (outside of those reimbursed
by the employer), it's expected that you'll maintain a similar
contemporaneous diary to substantiate those expenses.
I speak here merely as an accountant/financial analyst who doesn't
prepare tax returns professionally. It would be interesting to see
insight from someone such as Marissa Chien, EA.
- Harry
