Wagering Losses Not Deductible, Gambling Business Expenses Deductible

By Reichert, Charles J. | Journal of Accountancy, May 2011 | Go to article overview

Wagering Losses Not Deductible, Gambling Business Expenses Deductible


Reichert, Charles J., Journal of Accountancy


The Tax Court held that a taxpayer engaged in the trade or business of gambling could not deduct wagering losses in excess of his wagering gains but could deduct ordinary, nonwagering business expenses incurred while pursuing his gambling business.

Section 165 (d) limits losses from wagering transactions to the amount of wagering gains. Section 162(a) generally allows a taxpayer to deduct any ordinary and necessary expenses related to a trade or business.

In 2001, Ronald Mayo, while engaged in the business of gambling on horse races, placed bets on them totaling $131,760, winning $120,463. During that year, he incurred expenses of $10,968 related to operating his business, which included amounts paid for transportation, travel, meals, entertainment, handicapping data and subscriptions. On his joint tax return, Mayo subtracted both his total wagers and expenses from his winnings, resulting in a Schedule C net loss of $22,265. The IRS disallowed $11,297 ($131,760-$120,463) of the wagering losses and all of his ordinary business expenses due to the limitation of section 165(d). The taxpayer petitioned the Tax Court for relief.

The taxpayers argued that since the Supreme Court decision of Commissioner v. Groetzinger, 480 U.S. 23 (1987), section 165(d) no longer applies to the losses of a professional gambler, since section 165(d) does not apply to any other business. The court rejected that argument, stating Groetzinger considered only whether a gambling activity was a trade or business for the purpose of treating a gambling loss as a tax preference item for the alternative minimum tax. …

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