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Coleman v. Commissioner (T.C. Memo. 2020-146)

On October 22, 2020, the Tax Court issued a Memorandum Opinion in the case of Coleman v. Commissioner (T.C. Memo. 2020-146). The primary issue before the court in Coleman was whether the petitioner could substantiate that he sustained a large gambling loss ($350,000).

Rolling the Dice on Retirement Planning

The petitioner retired from the insurance business and founded a consulting business in the same area.  His consulting business generated modest income in 2014. Suffice it to say, the petitioner is a compulsive gambler. He started gambling on card games in high school. During the 1980s he began playing commercial slot machines in Atlantic City, New Jersey. As more casinos opened closer to his home in Maryland, he gambled at those locations and did so more frequently. The frequency of his gambling increased further after he retired.  The petitioner has been receiving treatment for his gambling disorder since March 2019. He still gambles occasionally, but much less frequently than he did in 2014.

During 2014 petitioner received taxable nongambling income of $77,000 and a nontaxable personal injury insurance settlement of $150,000. He also received $350,000 of gambling winnings, reported to him on 160 separate Forms W-2G (Certain Gambling Winnings), by the casinos at which he gambled.  Casinos are required to issue Forms W-2G reporting slot machine jackpots of $1,200 or more. See Treas. Reg. § 7.6041-1T; Rev. Proc. 77-29.

Petitioner gambled on at least 193 days during 2014, likely more. Drawing on the $150,000 insurance settlement he received in 2014, petitioner gambled more that year than he had been able to in other years because he had more money available to him. He made no significant changes to his lifestyle during 2014, took no vacations, made no large gifts, and purchased no real estate, jewelry, or other expensive personal property. His wife had separate bank accounts, and there is no evidence that any of his gambling winnings were deposited into her accounts.

Playing Roulette with Tax Returns (Not the Best Idea)

Neither the petitioner nor his wife filed a timely return for 2014, and neither made any estimated tax payments. The IRS prepared an SFR for each of them and issued the petitioner a notice of deficiency on the basis of his SFR. See IRC § 6020(b) (substitute for return). The notice determined a deficiency of $128,886 and additions to tax totaling $46,025 for failure to timely file, failure to timely pay, and failure to pay estimated tax. See IRC §§ 6651(a)(1) and (2); IRC § 6654.

The deficiency was largely attributable to $350,000 in unreported gambling winnings, the total reported to the IRS by the casinos on Forms W-2G. On the basis of other third-party reporting the IRS determined additional unreported income of approximately $40,000, consisting chiefly of retirement income. The petitioner thereafter submitted a Form 1040, which though not accepted, the parties stipulated to the correctness of all amounts except the gambling losses (also $350,000).

Legal Framework

Gross income includes all income from whatever source derived, including gambling winnings. IRC § 61(a); Bauman v. Commissioner, T.C. Memo. 1993-112. For a taxpayer who does not engage in gambling as a trade or business, losses from wagering transactions are allowable as an itemized deduction, but “only to the extent of the gains from such transactions.” IRC § 165(d).  Taxpayers engaged in the trade or business of gambling may deduct their gambling losses against their gambling winnings as a business expense in arriving at adjusted gross income. See IRC § 62(a)(1). The petitioner did not, however, claim that he was in the trade or business of gambling.

Applying the Cohan Rule to Gambling Losses

In some circumstances, when a taxpayer establishes that he paid or incurred a deductible expense but does not establish its precise amount, the Tax Court may estimate the amount allowable. See Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). In order for the Tax Court to do this, it must have some basis upon which an estimate can be made. See Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).

The Tax Court notes that the question in Coleman is essentially one of substantiation: whether petitioner can substantiate his losses to a degree sufficient for us to estimate, using our best judgment, that his gambling losses exceeded his gambling winnings. See LaPlante v. Commissioner, T.C. Memo. 2009-226; Gagliardi v. Commissioner, T.C. Memo. 2008-10.

In past cases taxpayers have substantiated gambling losses with “casino ATM receipts, canceled checks made payable to casinos, and credit card statements stating that cash was advanced at the casinos.” See Jackson v. Commissioner, T.C. Memo. 2007-373, n.2. The Tax Court has also considered transactions appearing on a taxpayer’s bank statements, the taxpayer’s lifestyle (modest or luxurious), and his overall financial position. See Doffin v. Commissioner, T.C. Memo. 1991-114. In Gagliardi, T.C. Memo. 2008-10, the Tax Court considered expert testimony from the petitioner’s same expert witness regarding the taxpayer’s likelihood of having net gambling winnings given the frequency of his gambling.  The expert noted that there was a 1 in 140 million chance that the petitioner had made a profit during 2014.  Along with the petitioner’s financials which did not show net gambling winnings, the expert testimony was enough to carry the day for the petitioner.

(T.C. Memo. 2020-146) Coleman v. Commissioner

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