REVISE ACCOUNTING PAPER

TO: File of Compulsive Gambler

FROM: (your name)

RE: Are complementary items (cash, property) received by taxpayer client Compulsive Gambler from Silver Casino gambling income which may be offset by gambling losses under I.R.C. section 165(d)?

DUE: February 15, 2021.

CONCLUSION: Thus under IRC Section 165(d) and Skeeles v. United States118 Ct. Cl. 362 (1951), complimentary items received by the taxpayer client Compulsive Gambler from Silver Casino are gambling income only for the year they are received. This statement derives its authority from I.R.C. Section 165(d). However, current period gambling gains cannot be used to offset prior year gambling losses. As such, in the review of the prior year’s tax return by the Internal Revenue Service, the IRS will only consider the $400,000 as gains for the current period and will not include the same to offset the prior year losses.

REASONING:

The facts of the question at hand involve a taxpayer, a compulsive gambler whose prior-year tax return is under scrutiny by the Internal Revenue Service. The issue is whether or not complimentary items (“comps”) from Silver Casino are gambling gains under I.R.C. section 165(d) and, thus, can be offset against gambling losses. In the year at issue, Silver Casino transferred $400,000 (fair market value) of “comps” to Compulsive Gambler.

In Skeeles v. United States118 Ct. Cl. 362 (1951), the court held that in the event there is an excess of gambling gains in one year, this cannot be used to offset an excess of gambling loss in another year.

Based on this ruling, it is therefore clear that the $400,000 is not a gambling gain that can be used to offset the prior year's gambling losses. It is important to understand that for the current year under review, the amount transferred by Silver Casino will be a gambling gain for that particular year only. In this regard, the same can only be used to offset the current year's gambling losses only in the event there is any.

IRC Section 165(d) provides that any losses emanating from gambling dealings shall be allowable only to the degree of the gains from such dealings. However, the provision has an exception to the rule where for taxable years starting after 31 December 2017 and before 1 January 2026, the phrase “losses emanating from gambling dealings” includes any deduction otherwise allowed under this provision earned in carrying on any gambling dealing.

As a rule of thumb, it is expected that all taxpayer gamblers report all the winnings from gambling in gross income. For purposes of clarity, gambling income will include all earnings derived from gambling dealings. However, when it comes to the losses, there are exceptions to the rule, and based on the type of deduction or loss, the provision provides a clear guideline. These are some of the amendments that were made on IRC Section 165(d) which mostly entail the deductions to include, and to what extent. Based on this provision, the taxpayer, compulsive gambler has the authority to include the $400,000 as gambling gains for the year they are received since the same falls under the year 2021 which is in the bracket as per the provision of IRC Section 165(d).

It is important to understand that the amended IRC Section 165(d) only changes the meaning of losses from gambling dealings and transactions. However, this provision does not alter the definition of gains from wagering transactions. As such, the only clarification would be to understand the year when the gains were received to offset against any losses arising from the same. In the case at hand, the complimentary items are only recognized as gambling gains only for the year under review.

In conclusion, complementary items received by the taxpayer client Compulsive Gambler from Silver Casino are gambling income. This may be offset by gambling losses only for the year under review. This statement derives its authority from I.R.C. Section 165(d). However, current period gambling gains cannot be used to offset prior year gambling losses. As such, in the review of the prior year’s tax return by the Internal Revenue Service, the IRS will only consider the $400,000 as gains for the current period and will not include the same to offset the prior year losses.

ATTACH: Skeeles v. United States118 Ct. Cl. 362 (1951)

1-2 pages from CCH (plus the “History”) and 1-2 pages from Westlaw (plus the “History”)