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Hellmouth
01-24-2005, 11:48 AM
I just found this article on CBS marketwatch you can get the reprint there at http://www.marketwatch.com/news/story.asp?page=2&guid={9CCF933D-B45A-4D15-8D8D-777EA0BDD3A9}&siteid=mktw

Don't bet against the IRS
Hurdles are high for status as professional gambler

By Eva Rosenberg, MarketWatch
Last Update: 10:01 PM ET Jan. 23, 2005


LOS ANGELES (MarketWatch) -- "You've got to know when to hold 'em, know when to fold 'em. Know when to walk away, know when to run..." Everyone is familiar with those famous lyrics of Kenny Rogers.


America has had a love affair with the professional gambler, courtesy of television, from its earliest years. Each generation grew up with its favorite gamblers and cardsharps -- Maverick, Bat Masterson, Yancy Derringer. These days, the Travel Channel airs the World Poker Tour. Bravo carries Celebrity Poker Showdown. A variety of television dramas, like CSI, Las Vegas and others, are set in Las Vegas. And more reality shows about poker and gambling are hitting the air.

When you take into account Indian casinos, riverboats, racetracks, card rooms and lotteries, practically every state in the union has some form of legalized gambling. And of course, there's Internet gambling -- with real money and real monetary jackpots. As Americans, we are bombarded with the whole get-rich-instantly message today.

With so much time devoted to games of chance, is it surprising that more and people want to consider themselves professional gamblers for tax purposes? After all, as a professional, you get to deduct more than just your losses -- you get to deduct business expenses, too.

Wanna bet you're not a pro?

If you've ever hit a big jackpot, you're looking for a way to reduce your taxes on it. Naturally, the first thing you want to explore is how to establish yourself as a professional gambler. It's not as easy as you might think. Pansy Panages tried it in 2001.

On Jan. 3 the Tax Court issued a decision about her status as a professional gambler. The case is Panages vs. Commissioner. Panages had two businesses, a florist shop and a wholesale flower market, which she ran during the day. Looking for another way to make a living when she retired, Panages decided she could make a living as a gambler.

Before embarking on this enterprise, she called IRS and asked them how to go about reporting her income as a professional gambler. She was told to use Schedule C, Profit and Loss from Business or Profession, and to keep detailed records of her gambling activities -- both winnings and losses.

Panages went about this whole business quite methodically. After closing her shops, Panages devoted her time to systematically gambling on progressive slot machines at a certain grocery store. Having settled on the kind of machine she preferred to use, Panages established a relationship with the employees at the market and paid (tipped) them to let her know which machines had not paid out for a while, operating on the premise that they would hit soonest.

She devoted 20 to 25 hours per week to this business, more than 1,000 hours a year. In any other business, that would be enough time for any objective observer to say she was taking it seriously. In fact, if this business were a real estate activity, IRS regulations would concede that she materially participated if she had been involved in the activity for more than 500 hours a year. Yet, both IRS and the Tax Court insist the gambling activity wasn't a business.

What more does IRS want? What did Pansy Panages do wrong?

Let's ask a former IRS agent with 30 years of audit experience, who also trained auditors.

It's all or nothing

Floridian Larry Phillips, an enrolled agent, is now a technical advisor in the area of IRS audits for J.K. Harris & Company, a national tax-resolution, debt-management and financial-planning company. During a stint as an IRS group manager in Detroit, Phillips had the distinction of convincing a drug dealer to admit to underreporting his taxable income by half a million dollars -- and he collected the taxes due, without fuss.

So, what did Panages do wrong? Phillips agrees with the Tax Court's position that gambling was not her primary occupation. The first thing Panages did wrong was to list 'floral manager' as her occupation on page 2 of her Form 1040, not 'gambler'.

The next problem was that, according to the court, Panages didn't appear to have a profit motive. She showed nothing but a net loss on her Schedule C, then deducted more gambling-related expenses from that. She should have shown her gambling winnings first, then deducted the losses. Then, she should have deducted her other expenses.

Third, IRS and the Tax Court both felt that since she had two other businesses, this gambling activity was not her primary livelihood. They didn't take into account that she was working to build up her expertise and winnings in order to make it possible to stop working.

Did the authorities object because she didn't have a license as a gambler? Is it necessary to register with anyone in order to take gambling deductions? Neither IRS nor the court brought up that question. Phillips says that IRS doesn't really care if the business you report is legal or illegal -- just as long as you report the income and pay your taxes.

What was her biggest mistake? Not really learning how to handle the reporting of a professional gambling business. If she had, Panages would have known that even a professional gambler may only deduct her losses and expenses up to her winnings. She may not show a loss on her Schedule C. Or rather, if she does show a loss, she may not deduct it from other income.

All that you may do, as a gambling professional, is to zero out your winnings. It's because of those losses that she was audited in the first place.

People with full-time jobs who are gamblers

Researching this issue turned up a Las Vegas enrolled agent Roger C. Roche, who wrote "The Tax Guide For Gamblers." He and his partner, Yolanda Smulik-Roche, also an enrolled agent wrote an article for CardPlayer Magazine discussing the case of a woman with a full-time job, earning $100,000 per year who filed a case in Tax Court to protest an IRS decision disallowing her gambling business. With some solid preparation and cases to present, the Roche's helped her win her case when it was sent back to IRS's Appeals division before the court was to hear it.

So, if you do want to insist that you are in the business of being a gambler, even if you have another source of work and income, there are ways to make it happen.

IRS looks at each gambling case on its own merits. And it will fight. So, if your gambling losses are higher than your winnings anyway, you may as well just report the income and losses like anyone else -- report the income on line 21 of page 1 of your Form 1040 as "Other Income" and report your losses, up to the amount of your income, on Schedule A on a special line in the "Other Miscellaneous Deductions" section line 27. This line lets you deduct your gambling losses without first subtracting 2 percent of your adjusted gross income (the amount on the last line of page 1 of your Form 1040).

You don't need to match up the losses to the source of the winnings. For instance, you may deduct horseracing losses from poker winnings. Remember when you add up your gambling losses be sure to add the cost of lottery tickets to your casino, sports book and other losses.

How do you prove your losses?

Since you're gambling anyway, you may as well keep records. For lotteries, keep the tickets in a file. If you win, make a note of the winnings and drop those notes into the file. For casino play, just about all casinos have membership cards. You can use them for both slot machine play and table play. The cards track the number of coins you spend. You can get a year-end report from the casino showing your winnings and your coins expended.

Phillips had one audit in Florida where the couple used a card. It proved that they had inserted about 4.9 million coins into slot machines in that year. He's still trying to figure out how they were able to that and still have time to eat and sleep.

Another way to prove losses is to write checks for your play, or use an ATM withdrawal right before you start playing. Keep a notepad handy and write down how much cash you're playing with that day, or that session. When you're done, write down how much money you had left. If you started with $500 and ended up with $600, you know that you have $100 winnings for that day or session. The easiest thing to use is a daily calendar or PDA with a daily calendar. You can get printed ones that are small enough to fit into a pocket or purse.

Keep detailed entries for each day. Be sure to include the amount of time you played, the tips you paid to attendants and staff and any expenses related to your travel. Just in case you end up so mesmerized that you find most of your time has become devoted to gambling, track your travel and meals expenses, too.

Who knows, if you win really big, you might find yourself becoming a professional gambler. After all, when the money is flowing in, it looks as if your luck will never end. But it will ... it always does.

What do you think, are today's reality show contestants, like "Fear Factor" and "Survivor" gamblers? Would these adrenaline junkies be considered professional gamblers if they devoted all their time to chasing after spots on those shows? Or would they be considered entertainers? That concept is yet to be tested.

Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the new book, "Small Business Taxes Made Easy."

eastbay
01-24-2005, 01:07 PM
[ QUOTE ]

Who knows, if you win really big, you might find yourself becoming a professional gambler. After all, when the money is flowing in, it looks as if your luck will never end. But it will ... it always does.


[/ QUOTE ]

Yawn.

eastbay

Hellmouth
01-24-2005, 03:16 PM
[ QUOTE ]
[ QUOTE ]

Who knows, if you win really big, you might find yourself becoming a professional gambler. After all, when the money is flowing in, it looks as if your luck will never end. But it will ... it always does.


[/ QUOTE ]


eastbay

[/ QUOTE ]

Well obviouslly we can disagree with the author on this point.

However taxtime is around the corner and I just thought that people might be interested in how to fill that puppy out correctly. I for one do not want to be audited.

Greg

DesertCat
01-24-2005, 05:34 PM
[ QUOTE ]
Panages went about this whole business quite methodically. After closing her shops, Panages devoted her time to systematically gambling on progressive slot machines at a certain grocery store. Having settled on the kind of machine she preferred to use, Panages established a relationship with the employees at the market and paid (tipped) them to let her know which machines had not paid out for a while, operating on the premise that they would hit soonest.

[/ QUOTE ]

I don't know anything about progressive slot machines, but is there any merit to her approach?

Stu Pidasso
01-24-2005, 05:43 PM
[ QUOTE ]
I don't know anything about progressive slot machines, but is there any merit to her approach?

[/ QUOTE ]

No.

However, when the payout exceeds the odds of winning it, progressive slots can be positive EV.

Stu

sammysusar
01-24-2005, 06:24 PM
Yeah supposedly there were/are teams that would play every machine of the game if the jackpot exceeded a certain figure. I think it is in the book Brining Down the House. Dont know how you go about calculating the figure but these did/ used to exist.

CORed
01-24-2005, 06:25 PM
Slot machines use random number generators. The length of time since a particular machine last hit has no effect on the probability of it hitting a jackpot. A progressive jackpot might make a machine +EV if it gets big enough. The trouble is that slot machines are a real "pig in a poke" proposition. You know what the payout is for three triple bars or whatever, but you don't know the probability of that combination coming up, so how big is big enough for a progressive jackpot is pure guesswork. Also, the really big progressive jackpots are often extremely low probability, so, even if you have a +EV in theory, you might play an entire lifetime without actually hitting one. OTOH, progressive jackpots can sometimes create a known +EV for video poker machines, where the probabilities can be calculated. I'm not surprised that the subject of the article had only losses to report. Also, I think grocery store slot machines are usually very tight anyway.

DesertCat
01-24-2005, 08:02 PM
I've heard that most lotteries are only paying out something like 20-40 cents for every dollar wagered. If these particular slot machines (since they appear to be run by the state, not a casino) paid out something similar, it would seem you would need at least a 2.5x normal jackpot size in order to get positive EV. From the article, it doesn't sound like she thought things through well enough.

The_Individual
01-25-2005, 06:03 AM

James282
01-25-2005, 03:28 PM
[ QUOTE ]
if you are pro you pay more in taxes.

unless you travel alot or have some scam for living expenses, its much better not to be a pro tax wise.

[/ QUOTE ]

No doubt about this.
-James

Niediam
01-25-2005, 03:45 PM
I believe however that a professional is allowed to offset his losses from his wins without having to itemize his deductions.

MicroBob
01-26-2005, 07:06 AM
Stanford Wong has done some 'slot-whoring' or something to that effect.
It's only on specific machines though.

I guess there was a slot where some special kind of result moved a little race-car up a track or something. These hits didn't come by very often so it wouldn't be unusual for people to leave the machine after a few hours with the race-car only 1/4 of the way there or something.
Stanford somehow calculated that if you found a machine where the car was half-way or 3/4 (or whatever precise figure it was)then it would be +EV to sit down and play until you got the race-car JP whatever-it-was.
Something like that anyway...I'm sure I screwed up some of the monir details.

Evidently there have been a couple of other slot-machine formats that have been 'whoreable' or +EV at certani points...as well as the obvious situations where the jackpot is significantly higher than the EV you can estimate from how frequently it has paid in the past.

I suspect that these opportunities are fewer and fewer though.



The lady in the article was officially an idiot (trying to deduct her gambling losses against her 'regular' income by saying "well...I play a lot...so I'm a pro).

Lottery Larry
01-26-2005, 03:46 PM
I wouldn't bet on that one. I'd bet the IRS is looking for itemization from gamblers more than MOST groups.

Lottery Larry
01-26-2005, 03:48 PM
I thought I'd read somewhere that, in order to deduct some expenses- similar to a business- that weren't win/loss related, you had to be labeled officially as a professional gambler.

In that, a majority of your income came from gambling AND you had to be doing this for 3 out of 5 years, before you could start treating it somewhat like a business.

Anyone know?

CORed
01-26-2005, 04:57 PM
I don't think the grocery store slot machines in Nevada are owned by the state. I believe that they are privately owned. However, I wouldn't be surprised if they have lousy payouts.

Lottery Larry
01-26-2005, 10:55 PM
"I've heard that most lotteries are only paying out something like 20-40 cents for every dollar wagered. "

Lotteries? Most state laws I've seen (such as in PA) mandate around 45-53% of payouts for the big lottery pools. I don't know about scratch tickets.

Or are you talking about some type of slot machine?