Scenario - What would you do?

[ILLMAS]

Here is a tax scenario we work on at this tax update seminar I attend this past Saturday:

Tom Muldoon went to a Vegas casino in 2013 on the following dates and the following resulted: This is the sum of all of his gambling activity for the year.

May 1, 2013

Took $500 out of the ATM at the casino, hit a $5,000 slot payout 2 hours later, started drinking immediately (free drinks provided) left that evening with $1,000, which he deposited the next morning to his bank account. Found a W-2G for $5,000 in his jacket pocket when he had it cleaned a week later. $800 of federal tax was withheld on this W-2G.

June 2, 2013

Took $1,000 out of the ATM at the casino, played all day and was up and down, hit a big sot for $22,000, again started drinking, left with -0-. Received a W-2G for $22,000 from the casino. $4,000 of federal tax was withheld on this W-2G.

Don't assume that he bought his wife or girlfriend a diamond necklace with the winnings

How would you reported on this his 1040, Sch A etc....? What amount would you report on line 21 of the 1040?

MAS

[Pacun]

First day he will report winning $5000 and $3,700 in losses.

Second day he will report winning $22,000 and $19000 in losses.

Line 21 should read $4,300.

This would be the same answer if he was drunk or not at the casino's expenses.

[kcjenkins]

I'd get a printout from the casino, if he had their 'loyalty card', which is highly likely, Since he started out with 500 the first trip and got home with 1,000, he had 500 cash plus 800 withheld, so 1,300 in winnings that night. Second night he started with 1,000, ended with zero, so his only winnings was the 4,000 withheld. So I'd say he'd have taxable income of 5,300.

[Pacun]

I'd get a printout from the casino, if he had their 'loyalty card', which is highly likely, Since he started out with 500 the first trip and got home with 1,000, he had 500 cash plus 800 withheld, so 1,300 in winnings that night. Second night he started with 1,000, ended with zero, so his only winnings was the 4,000 withheld. So I'd say he'd have taxable income of 5,300.

Same as mine except for $1,000

[kcjenkins]

Where is your difference coming from?

[JMovichEA]

2nd day losses = (1000+(22000-4000) = 19,000; Won 22,000 = net 3000

[Pacun]

Where is your difference coming from?

On the second day, he lost his own $1,000 plus $18,000 from his winnings.

[DANRVAN]

If the assumption is that he spent all the money on gambling, he spent $3,700 the first day. He started out with $500 and then won $ 5,000 less $800 in withholdings, 500+5,000-800=4700 funds available. Less $1,000 saved = $3,700 spent. So $1,300 gain.

Second session started out with 1,000 plus winnings of 22,000 less 4,000 w/h for total funds of 19,000.

Since all the funds were spent he had a net of gain of $3,000.

Total gain of $4,300.

[kcjenkins]

I agree, you are right, it IS 4,300.

[ILLMAS]

Now lets say Mr. Muldon, came to see you and didn't keep a accurate diary of his winnings and losses by receipts, tickets, or statements? In other words, Mr. Muldon is not a professional gambler or was not aware he had to keep a log. How would you report now?

[Pacun]

In this case, he has records since he withdrew the money and he has the beginning amount and the end amount. He has bank records.

Just out of curiosity, why drinking was mentioned? I would have done the same without any alcohol involved. As a matter of fact, the first night I would have won only $300. I can identify with what he did the second night, that's the way I would have done it without any alcohol involved. I guess I was first a gambler and then later on an accountant!!!!

[jshtax]

Simple he has 27000 of income and on the sch A you put 27000 of losses. NO ONE THAT GAMBLES WINS!!! I am sure they can come up with the losses.

[ILLMAS]

That's how the instructor wrote the example, but if I had to guess why he put that in, it would because alcohol impairs your judgement. In truth, casino want you to spend money, because the odds of winning stink.

[Pacun]

Simple he has 27000 of income and on the sch A you put 27000 of losses. NO ONE THAT GAMBLES WINS!!! I am sure they can come up with the losses.

But he didn't loose $27000.

[jklcpa]

That's correct, he didn't lose the entire $27,000 because the IRS is holding $4,800 of his money via the withholding. He never had that $4,800 to gamble away, so that portion can't be claimed as a loss. The $4,800 less the $500 net decrease in cash over the 2 days reconciles this back to the overall net of $4,300.

[kcjenkins]

Simple he has 27000 of income and on the sch A you put 27000 of losses. NO ONE THAT GAMBLES WINS!!! I am sure they can come up with the losses.

While that is usually true over time, it's not the facts given. And people who go only occasionally do sometimes win and take it home. Even some who usually lose may, in a particular year, win more than they lose. Sure, it's usually because they won it on 12/30 and did not lose it until 1/1, but you must report based on the records you have, and the time being reported.

[JohnH]

best thing that happened to him at that trip to the casino was the tax withholding.

[Pacun]

best thing that happened to him at that trip to the casino was the tax withholding.

I think two things are good about the whole thing: Witholding and the fact that he got drunk for "free" without his friends complaining about him.

[jshtax]

But he didn't loose $27000.

I am sure this isn't the first rodeo for this person. They have probably lost money at some other point in the year but if they had not gambled at other times you are correct they didn't gamble away the amount withheld.

[jshtax]

I am sure this isn't the first rodeo for this person. They have probably lost money at some other point in the year but if they had not gambled at other times you are correct they didn't gamble away the amount withheld.

What sucks most about this is I had a client a few years back that won $250K or at least had that much in W2G's. They had their win loss report from casino showing they lost an amount greater so they had no tax liability. They did have one issue.....increased medicare premiums do to an inflated AGI.

[joanmcq]

News for all of you; ATM withdrawals are NOT proof of losses or the amount gambled in a session. So if Muldoon was audited, he's got $27,000 of winnings. He might be able to argue that the casino statement is proof, but since there are usually more little wins that don't result in a W2G, the coin in & out isn't an accurate record. A diary is the only proof by regs that is accepted.

[Mr. Pencil]

free drinks provided.... hit a big sot for $22,000

According to TC Memo 1996-108, complimentary drinks are includible in taxable gains because they are only received as a result of the gambling activity. I don't know what to say about fighting with that other drunkard!

[jshtax]

According to TC Memo 1996-108, complimentary drinks are includible in taxable gains because they are only received as a result of the gambling activity. I don't know what to say about fighting with that other drunkard!

And if you report those drinks as income you might be the first in the history of US tax code and potentially in line for a holiday named after you

[Mr. Pencil]

And if you report those drinks as income you might be the first in the history of US tax code

Your didn't notice my reference. Somebody took this to Tax Court. I'm not sure what the issue was---the taxpayer, not the IRS, claimed the comps were taxable income. And he won.

[jshtax]

Your didn't notice my reference. Somebody took this to Tax Court. I'm not sure what the issue was---the taxpayer, not the IRS, claimed the comps were taxable income. And he won.

Wow very interesting. I just read the case. Guy received a 1099-MISC other income for roughly $3,000,000(fair market value of the comps) over a 3 year period. He reported it as other income but took a gambling loss equal to the gains. IRS challenged and he won in tax court. I have never seen anyone 1099'd for the FMV of their comps I just thought the guy volunteered this info to the IRS.