Tax Research Project

1

Research Module #2

Scenario.

Tony and Stella resided in Utah at the time their petition was filed. Before 2016 they had a job

with a business in his locality. Sometime in 2015 he learned that his employer planned to move

the business to Costa Rica. In anticipation of that event Tony sought to find another source of

income and decided that he would become a professional gambler. Stella also worked, and Tony

thought that another source of income would allow her to stay home with their child.

Before Tony’s decision to become a professional gambler, they had been casual gamblers but

they did not wager large amounts. Sometime during 2015 they began to invest heavily in

gambling (mainly playing slot machines). They were born in Vietnam, and their religious and

cultural beliefs were derived from their Vietnamese background. They believed in Feng Shui.

Because of this belief and other religious and cultural beliefs, they expected that certain days

were “lucky days” or days on which their chances of successful gambling increased. They were

cognizant that slot machine odds favored the casinos but expected to overcome those odds by

attempting to gamble on their “lucky days”. In addition, they would watch other slot machine

players; and if they had excessive losses, they believed that taking over machines of losing

players provided more opportunity. That was their plan for making a profit.

Initially, their Feng Shui/cultural approach resulted in success. Accordingly, they increased the

amounts wagered in 2015 and continued doing so through 2016 and part of 2017. In early 2017

they realized that they were about $200,000 in debt and that their attempt to make a profit had

failed. they had withdrawn money from their retirement funds and borrowed against various

assets to finance their attempt to make a profit from gambling. During 2016 they were employed

in West Jordan, Utah, and traveled approximately 130 miles to Nevada to pursue gambling.

During 2016 they traveled 130 miles each way to Nevada casinos on Friday afternoons and

gambled for long hours, sleeping only a few hours per night. They did this every weekend and on

legal holidays when they were off work. Tony and Stella, because of their “lucky day” beliefs,

generally limited their slot machine playing to one of the two individuals—the one with the more

favorable “lucky day” indicators.

During 2016 they reported combined winnings of $852,230. That included $586,038 of winnings

that the casinos reported to the IRS on Forms W-2G, Certain Gambling Winnings (winnings in

excess of $1,200), and $266,192 of winnings that were not reflected on Forms W-2G (winnings

in amounts less than $1,200). Of the $586,038, Tony’s Forms W-2G reflected $500,490 and

Stella’s Forms W-2G reflected $85,548. For 2016 their losses exceeded their gains by

approximately $200,000.

Instruction: Provide your suggestions for Tony and Stella’s 2016 tax return.