Prove Gambling Losses


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Substantiation

Prove Gambling Losses - But How?

By: A.J. Cook

With casinos nearby, more people are gambling. Many, without realizing it, violate tax laws. Pay taxes on winnings, after reducing by losses -- if you have proof of the losses.

Proof? How? You don't get receipts when playing the slots or black jack.

Here are cases.

Fred Schooler of Scottsdale, Ariz., part owner of a carpet-laying business, was a part-time dog and horse race enthusiast. He didn't keep wagering records nor did he report gains and losses on his tax return.

Unfortunately for Schooler, the Internal Revenue Service requires gambling facilities to report big winners. The agency had him down for $14,773 with no deductions.

The business executive said he didn't owe anything because his losses exceeded winnings. As proof he pointed out he and his wife lived modestly -- in fact they owed money.

The judge agreed with the IRS: A frugal lifestyle doesn't prove losses.

The Moral: Your winnings go to the dogs without written records of bets.

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James F. Klein fared a little better. The Texan traveled from Houston to Las Vegas. On his tax return he listed one trip with net winnings of $13,000, other trips with net losses totaling $10,000.

The IRS refused to deal him a winning hand. Because he had no records, it disallowed his deduction.

The judge, however, showed some compassion. Probably because Klein listed winnings exceeding the casino amount reported to the IRS, the judge allowed losses of $4,000 -- still far short of actual losses. He gently admonished Klein saying he should have written down income and losses with trip dates, money taken on the trips, out-of-pocket expenses and source of funds.

The Moral: The courts say no dice to deductions not backed with paper.

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Leon Faulkner of Washington, D.C., often bet on horses. He thought he was only required to pay taxes on winnings the tracks reported to the IRS. To offset the underreporting, the agency arbitrarily disallowed his gambling deduction. The court allowed the losses after Faulkner supported them with his diary.

The Moral: Back your bets with pen and paper.

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THE PLANNING TIP: If you gamble, keep a diary or log. After each day write down the date, location, amount wagered, type of wager, net winnings or losses and names of people accompanying you. If you can, support this with canceled checks showing the money you took, expenses and a bank deposit slip showing money remaining.

Even with all of this, you can't be sure the IRS won't challenge you. Regrettably, there's no ironclad formula as to adequacy of records.

Good luck!

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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