Mayo v. Comm'r of Internal Revenue
| Decision Date | 25 January 2011 |
| Docket Number | No. 15527–03.,15527–03. |
| Citation | 136 T.C. 81,136 T.C. No. 4 |
| Parties | Ronald Andrew MAYO and Leslie Archer Mayo, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
Ronald Andrew MAYO and Leslie Archer Mayo, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 15527–03.
United States Tax Court.
Jan. 25, 2011.
P–H was engaged in the trade or business of gambling on horse races during 2001. Ps attached a Schedule C, Profit or Loss From Business, to their 2001 Federal income tax return, on which they reported the results of P–H's gambling business, including gross receipts of $120,463 and expenses of $142,728, consisting of $131,760 for wagers placed and $10,968 in expenses incurred in connection with the conduct of the gambling business. Ps deducted the excess of the Schedule C expenses over gross receipts, $22,265, as a business loss against their other income.
R issued a notice of deficiency disallowing $22,265 of Ps' claimed loss from gambling;
[136 T.C. 82]
i.e., the amount by which expenses from P–H's gambling activity exceeded gross receipts from gambling. R contends that Ps' allowable losses from P–H's gambling business are limited to the reported gross receipts from the business pursuant to I.R.C. sec. 165(d). R further maintains that the “Losses from wagering transactions” for purposes of I.R.C. sec. 165(d) include both the $131,760 cost of wagers placed by P–H and the $10,968 in expenses he incurred in connection with the conduct of the gambling business. Finally, R determined that Ps are liable for an accuracy-related penalty under I.R.C. sec. 6662(a) and (b)(2) for a substantial understatement of income tax.
Held: I.R.C. sec. 165(d) applies to P–H notwithstanding his engagement in the trade or business of gambling and limits his allowable losses from wagering transactions to the extent of gains from such transactions. The holding of Offutt v. Commissioner, 16 T.C. 1214, 1951 WL 165 (1951), to that effect followed.
Held, further, trade or business expenses incurred by P–H in the conduct of the trade or business of gambling, other than the cost of wagers, are not subject to the limitation of I.R.C. sec. 165(d) but are instead deductible under I.R.C. sec. 162(a). The holding of Offutt v. Commissioner, supra, to the contrary will no longer be followed.
Held, further, Ps are not liable for any penalty under I.R.C. sec. 6662(a) and (b)(2).
Ronald Andrew Mayo and Leslie Archer Mayo, pro sese.
Michael S. Hensley, for respondent.
GALE, Judge.Respondent determined a deficiency of $9,732 in Federal income tax and an accuracy-related penalty under section 6662(a) and (b)(2) 1 of $1,387 with respect to petitioners' 2001 taxable year.2 Respondent subsequently conceded that petitioner Ronald Andrew Mayo (petitioner) 3 was in the trade or business of gambling during 2001 and allowed petitioner's gambling expenses (which totaled $142,728) to be deducted as trade or business expenses to the extent of his gross receipts from gambling ($120,463). The foregoing concessions resulted in a reduced deficiency and accuracy-related penalty of $6,993 and $1,387, respectively. The issues for decision are:
[136 T.C. 83]
(1) Whether petitioner's engagement in the trade or business of gambling entitles him to deduct the losses from his gambling business from gross income without regard to section 165(d), which allows wagering losses only to the extent of wagering gains;
(2) whether petitioner is entitled to deduct the expenses, other than the costs of wagers, incurred in carrying on his gambling business pursuant to section 162(a) without regard to section 165(d); and
(3) whether petitioners are liable for an accuracy-related penalty under section 6662(a) and (b)(2) for substantial understatement of income tax.
Some of the facts have been stipulated and are so found. We incorporate by this reference the stipulation of facts and the exhibits attached thereto. 4
Petitioners resided in California when the petition was filed.
The parties have stipulated that petitioner was engaged in the trade or business of gambling on horse races during 2001. During that year he wagered $131,760 on the outcome of horse races and won $120,463 as a result of the wagers he placed. Petitioners attached a Schedule C, Profit or Loss From Business, to the 2001 Federal income tax return on which they reported the results of petitioner's gambling business. On the Schedule C petitioners reported as gross receipts the $120,463 of proceeds from petitioner's winning wagers and deducted as an expense the $131,760 in wagers petitioner placed (wagering expenses). Petitioners also claimed the following as expenses on the Schedule C (collectively, business expenses):
+-------------------------------+
¦Expense ¦Amount ¦
+----------------------+--------¦
¦Car and truck ¦$3,109 ¦
+----------------------+--------¦
¦Interest ¦91 ¦
+----------------------+--------¦
¦Office ¦256 ¦
+----------------------+--------¦
¦Travel ¦776 ¦
+----------------------+--------¦
¦Meals & entertainment ¦1,651 ¦
+----------------------+--------¦
¦Telephone & Internet ¦670 ¦
+----------------------+--------¦
¦Admission/Entry fees ¦1,251 ¦
+----------------------+--------¦
¦Subscriptions ¦1,056 ¦
+----------------------+--------¦
¦Handicapping data ¦1,960 ¦
+----------------------+--------¦
¦ATM fees ¦148 ¦
+----------------------+--------¦
¦Total ¦10,968 ¦
+-------------------------------+
[136 T.C. 84]
Petitioners deducted the total of the wagering expenses and business expenses ($142,728) from the reported gross receipts from wagering ($120,463), resulting in a reported net loss on the Schedule C of $22,265. This figure was claimed as a business loss, which petitioners deducted from gross income. 5
On June 9, 2003, respondent sent petitioners a notice of deficiency for 2001 in which he determined that petitioner was not engaged in the trade or business of gambling and was therefore required to claim any gambling losses (but only to the extent of gambling gains) as itemized deductions (pursuant to section 63) and subject to the limitation of section 68, rather than as trade or business expenses under section 62(a)(1). On August 11, 2003, respondent sent petitioners a Notice CP2000 in which he conceded that petitioner was in the trade or business of gambling and that petitioners were therefore entitled to deduct petitioner's wagering expenses and business expenses on Schedule C, but only to the extent of his gross receipts from gambling. Consequently, respondent allowed Schedule C expenses of only $120,463, the amount of gross receipts reported from gambling, thereby eliminating the $22,265 net loss from gambling that petitioners had claimed as a deduction from gross income. Respondent's limitation of petitioners' allowable deductions from gambling to $120,463 effectively disallowed both the excess of the $131,760 in wagering expenses over the $120,463 in gross receipts from gambling ($11,297) and business expenses claimed in connection with the conduct of the gambling business ($10,968).
[136 T.C. 85]
Section 162(a) generally allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. Section 165(d), however, provides that “Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.” The parties have stipulated that petitioner was in the trade or business of gambling on horse races in 2001 and that he “wagered” a total of $131,760 on the outcome of horse races and won a total of $120,463 as a result of this wagering during that year. Petitioner's wagering expenses thus come within the description of both section 162(a) and section 165(d). See, e.g., Boyd v. United States, 762 F.2d 1369, 1372–1373 (9th Cir.1985); Nitzberg v. Commissioner, 580 F.2d 357, 358 (9th Cir.1978), revg. T.C. Memo.1975–154 and T.C. Memo.1975–228; Offutt v. Commissioner, 16 T.C. 1214, 1215, 1951 WL 165 (1951); Crawford v. Commissioner, T.C. Memo.2010–54; Valenti v. Commissioner, T.C. Memo.1994–483.
Petitioner contends that under Commissioner v. Groetzinger, 480 U.S. 23, 107 S.Ct. 980, 94 L.Ed.2d 25 (1987), the limitation of section 165(d) on the deduction of gambling losses does not apply to professional gamblers. Citing the Supreme Court's observation that “basic concepts of fairness * * * demand that * * * [gambling] activity be regarded as a trade or business just as any other readily accepted activity”, id. at 33, petitioner contends that section 165(d) does not apply to an individual engaged in the trade or business of gambling since it does not apply to other trades or businesses.
In 1951 this Court considered whether an individual engaged in the trade or business of gambling is subject to the section 165(d) limitation on wagering losses, holding that the limitation applied in these circumstances. Offutt v. Commissioner, supra at 1215–1216; 6 accord Skeeles v. United States, 118 Ct.Cl. 362, 372, 95 F.Supp. 242, 246–247 (1951). In recent years we have repeatedly rejected the claim that
[136 T.C. 86]
Groetzinger modified this settled law and should be read as confining the application of section 165(d) to casual or recreational gamblers and eliminating the section's limitation on the deduction of the gambling losses of professional gamblers. See Crawford v. Commissioner, supra; Lyle v. Commissioner, T.C. Memo.1999–184, affd. without published opinion 218 F.3d 744 (5th Cir.2000); Valenti v. Commissioner, supra.
In Valenti we considered this claim regarding Groetzinger at length. We observed that, even though the gambling losses of a professional gambler fall under both the section 162(a) allowance of deductions for trade or business expenses and the section 165(d) limitation on the deduction of losses from wagering, it is a well-settled principle that section 165(d), as the more specific statute, trumps the more general provisions of section 162(a). The former provision operates as a limitation on...
To continue reading
Request your trial
-
Mayo v. COMMISSIONER OF INTERNAL REVENUE, 15527-03.
...136 T.C. No. 4RONALD ANDREW MAYO AND LESLIE ARCHER MAYO, Petitioners,v.COMMISSIONER OF INTERNAL REVENUE, Respondent.No. [136 T.C. No. 2] Ronald Andrew Mayo and Leslie Archer Mayo, pro sese. Michael S. Hensley, for respondent. GALE, Judge. Respondent determined a deficiency of $9,732 in Fede......