Tax Research Memo

Date:

Preparer:

Reviewer:

Subject: Tax research case in the filing of tax returns for Gambling

Summary of Facts: For the longest time Donald Mustard has been a professional gambler with

his main interest and speciality being in horse racing gambling. Mustard frequented the horse

racing track six days in a week for 48 weeks in 2018 and could spend a considerable amount of

money studying and gathering important statistics on horse racing programs and forms and other

material that would be helpful to his gambling course. With 60 to 80 hours of gambling in a

week and with no other type of employment or professional inclinations, Mustard won $120000

in his gambling endeavours in 2018 and unluckily also lost $121000 in his gambling activities.

He also incurred some expenses as follows car expense $3100, office expense $250, travel $775,

Meals, $1600, subscriptions $1000, telephone $700, and handicapping data $9425

Issue: What is the tax treatment of Mr Donald Mustard gambling business gains, losses and

expenses?

Authorities: Rev. Rul. 77-262, 1977-2 C.B. 41

Ruling number 77-262 (262nd ruling of 1977), the volume number of cumulative bulletin 1977-

2, page number 41

Rev. Proc. 77-29,1977-2 CB 538

Procedure number 77-29, the volume number of cumulative bulletin 1977-2, page number 2

Conclusion: Gambling losses and expenses from wagering transactions are deductible to the

extent of the wagering gains. Fundamentally, for Mustard to qualify for a deduction of losses

attributed to wagering transactions, the taxpayer is only liable to subtract up to the amount of

gains they have accrued from the wagering transactions. This is to say that Donald Mustard’s

gambling losses of $121000 can only be offset or are deductible to the extent of the gambling

gains of $120000. It should be clearly understood that Mustard will not be liable to pay any

revenue as he lost more than he had made through gambling which is the only professional

undertaking that he is involved with. Professional gamblers have cited several court

determinations with landmark rulings that underlined the assertion that professional gamblers’

who earn a living purely from gambling could not be taxed more than the losses they made from

the gains of gambling. One Supreme Court ruled that there should be a clear differentiation on

how gambling losses should not be incorporated with other business losses that are not connected

with the gambling trade. People who make a living from gambling and have no other sources of

income should only be taxed commensurately with the gains they make from the gambling.

Analysis: the interpretation of the situation illustrated above is moderated tax regulation

authorities and other relevant and supportive agencies in the filing of tax returns. The internal

revenue code section 165(d) has been given reference to in relation to the tax returns for

professional gambling gains. Schedule C is another tax obligation that has been given reference

to in the breaking down of the situation in regards to filing returns for professional gamblers, in

this case, Donald Mustard. People who have taken gambling as their main economic activity and

way of earning a living should only report and file returns on the profits or losses that they have
made. The taxable returns from Schedule C start from a minimum income of $400 and should

indicate the expenses that have been incurred in the course of earning the income.