Taxable Talk

Even if you lose as a gambler, you’re supposed to report the income. Today, the Tax Court took up the case of a gambler who lost in more ways than one.

Our unlucky gambler spent quite a bit of time at Foxwoods, the big Indian casino in Connecticut. Our gambler didn’t report any gambling income, but somehow he had managed to have Currency Transaction Reports issued to him for over $800,000 in purchases of casino chips during 2004 and 2005.

Now, what do you with casino chips? You might sell one or two, but you gamble with them, of course. His return was selected for examination when he showed gross income of $16,450 and $18,230 in the two years selected for audit. The IRS was naturally curious how someone could buy $800,000 in casino chips while make $35,000.

The petitioner did not cooperate during the audit with the IRS. The IRS sent “several information document requests” to the petitioner because he claimed that other had used his rewards card and obtained casino chips. “Petitioner never provided any of the requested documentation.”

The IRS reconstructed the petitioner’s income, figuring that for every dollar expended in net casino chip purchases there was a dollar of income. He also assumed every dollar of income earned was used for purchasing casino chips. All told, that led to the IRS assuming that there was $372,759 of unreported income in 2004 and $264,375 in 2005.

When the petitioner got that news, his passport suddenly became available; the petitioner was out of the country during some of the purchases so the final number for unreported income was $159,599 for 2004 and $250,975 for 2005.

In his pretrial memorandum petitioner claimed that his casino chip purchases were financed by a loan he obtained from the “Fukkianese community” and that he would testify to this effect. However, petitioner failed to show up for trial.

Fukkianese are Chinese from the Fukien province. And nothing was presented at the trial showing there was any loans from the Fukkianese community or anyone else.

In an audit, it’s important to cooperate fully with the IRS. First, you may be able to get the burden of proof shifted to the IRS (if your audit finds its way to Tax Court). Second, if you cooperate with the IRS your audit will go far smoother; the auditor will be far more willing to compromise on some issues.

Of course, when a case gets to Tax Court its helpful to have proof of what you claim.

Petitioner did not introduce any evidence at trial to demonstrate that the cash purchases at Foxwoods were made with cash from nontaxable sources. Rather, he argues that because respondent has conceded that 11 CTRs were erroneously attributed to him, the remaining CTRs are unreliable and cannot be used as the basis for reconstructing his income. We disagree.

If you are a gambler and have CTRs issued to you, make sure you (1) report your gambling income and losses, (2) have income to justify the purchase of the CTRs, and (3) keep good records proving this. In today’s case, the gambler did none of this. Indeed, the IRS received a log from Foxwoods noting that the petitioner gambled even more extensively; the IRS could have sought an increased deficiency based on this information. (And it’s clear from the decision that the Court would have upheld this.)

As for the petitioner, he was hit with back taxes, penalties (including the accuracy related penalty), and interest. The taxes alone are near $200,000, and that’s just tough to do on an income of $35,000.

Case: Pan v. Commissioner, T.C. Memo 2011-40

This entry was posted on Tuesday, February 15th, 2011 at 5:59 am and is filed under Gambling, Tax Court. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.