Today the Tax Court decided two cases where the Court basically said, you’re right, the law is unfair, but tough—you have to obey it.
The first case involves a gambler who wanted to net her wins and losses. If you’re a regular reader of this blog, you know that only professional gamblers can do this. In this case, both the IRS and the taxpayer agree that the wife lost more than she won. However, the amount she won—some $13,400—will have to be included as income (Other Income, line 21). As the taxpayer is retired, this caused some social security income to be taxable and that a credit for qualified retirement savings was eliminated. The taxpayer was allowed to deduct her gambling losses as an itemized deduction. The Court noted,
“Petitioners are [non-professional gamblers], and their only entitlement to the deduction for their gambling losses is the manner in which respondent determined it as an itemized deduction. Petitioners have cited no authority, and indeed there is no authority to support their argument that unrelated income and credits are immune from the effects of the manner in which respondent treated their gambling winnings and losses.”
The second case deals with a divorce decree, and which parent gets the tax exemption. The decree, granted in state court, gives the father the exemption as long as he has made child support payments. The father took the exemption, but so did the mother for the year in question. The IRS took away the father’s exemption, and he went to Tax Court.
The Tax Code states that if you’re the non-custodial parent (which the father was), in order to claim the exemption, you must have the other spouse sign and complete Form 8332. That apparently didn’t happen here, so the Tax Court ruled for the IRS and noted, “State courts, by their decisions, cannot determine issues of Federal tax law…His recourse, if any, lies in the State court for enforcement of the divorce decree.”
Cases:
Spencer and Egerton v. Commissioner, Colozza v. Commissioner