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Tax Memo Page 1 Tax Memorandum TO: FROM: DATE: RE: Week 4 Gambling Activities Issue One and

Applicable Case Law, Code & Regulations Mr. Green

It has come to our attention that you requested to know which criteria is used to determine if your gambling activities constitute a trade or business status for the federal income tax purposes and if we think your gambling activities qualify for trade or business status. The case of Commissioner v. Groetzinger, 480 U.S. 23 1987 is approriate for deciding if the gambling activity has trade or business status. The Supreme Court stated that some factors had to be considered by the commissioner in determining if a taxpayers gambling activities constitute trade or business status. Treasury Regulation 1.183-2 (a) listed these factors as taxpayers gambling regularity: done in good faith for profit making reasons, done in full-time basis or fullest extent if he has employment elsewhere, maintaining records of daily wagers, winnings and losses, the gambling activity is solely for his own account yet he does not function as a bookmaker, the extent the he improves development of gambling enterprise and taxpayer claims deductions associated with the conduct of a trade or business for gambling expenses. Section 62(a) (1) of the Internal Revenue Code shows the deductions permitted and they include the deductions that are as a result of the trade or business activity. Mr. Green, you have an interest in gambling every weekend, thus you are a frequent gambler but you do not do it for profit making purpose. Furthermore, you have a physician job in

Tax Memo Page 2 Chicago, so gambling is not your profession. Therefore, part of your gambling activities qualifies for trade or business status but others do not. Issue Two and Applicable Case Law, Code & Regulations

The issue under concern is if you can deduct your gambling-related travel and lodging expenses against your gambling winnings even though your gambling activities did not qualify as having trade or business status. Section 162 (a) of the Internal Return Code allows only that deductions be made if the activity incurred an expense was due to trade or business status of that activity. Therefore, your gambling activities are not trade thus their winnings can not be offset against your travelling and lodging expenses you incurred while gambling. Therefore, Mr. Green as a taxpayer, you are not allowed to deduct your gambling expenses against your gambling winnings. The case of Trent v. Commissioner, 291 F.2d 669 (2d Cir.1961) shows that it is only losses from business activities that can be deducted from the business profits and all the activities that involved the success of that main business will be offset against the business revenue. In conclusion, Mr. Greens gambling are not of trade or business status thus he can not use his gambling gains to pay off the traveling and lodging expenses he incurred while coming to gamble. Issue Three and Applicable Case Law, Code & Regulations It is of your concern to know whether your wife, Mrs. Green and you can combine the gambling transactions and your losses be used to offset her winnings since she gambles to the same extent as you, she is your wife and you have a joint tax return file.

Tax Memo Page 3 Section 165 (d) of the Internal Revenue Code allows combined losses from wagering transactions to be deducted only to the extent of the combined gains of the spouses from the wagering transactions. Therefore, your losses can be used to offset your wifes gains only to the extent of the gains. Furthermore according to the case of McClanahan v. United States, 292 F2d 630, 631-32, 1961, gambling is treated like any other income thus can be used to offset the losses an individual has in their joint tax return. Section 3402 (q) (4) (A) determines gambling winnings as proceeds from a wager that is gotten by reducing the amount received by the amount of the wager. In addition, Treasury Regs. Sec 1.162-10 has stated "In the case of a husband and wife making a joint return for the taxable year, the combined losses of the spouses from wagering transactions shall be allowed to the extent of the combined gains of the spouses from wagering transactions. " The U.S allows spouses to file a joint tax return form for their incomes and expenses and they are treated as one. Mr. Green is entitled to offset your gambling losses against Mrs. Greens gambling profits by filing a joint tax return for this taxable year.

Tax Memo Page 4 References Commissioner v. Groetzinger, 480 U.S. 23 (1987). Retrieved September 25, 2010 from http://supreme.justia.com/us/480/23/ Internal Revenue Code Section 165(d). Retrieved September 25, 2010 from http://www.taxalmanac.org/index.php/Sec._165 McClanahan v. United States, 292 F2d 630, 631-32 (5th Cir 1961). Retrieved September 25, 2010 from http://www.publications.ojd.state.or.us/TCMD060008D.htm Section 62(a)(1). Retrieved September 25, 2010 from http://www.law.cornell.edu/uscode/26/usc_sec_26_00000062----000-.html Section 162(a). Retrieved September 25, 2010 from http://www.law.cornell.edu/uscode/uscode26/usc_sec_26_00000162----000-.html Section 3402 (q) (4) (A). Retrieved September 25, 2010 from http://www.irs.gov/irb/200736_IRB/ar21.html Treasury Regulation 1.183-2 (a). Retrieved September 25, 2010 from http://www.taxalmanac.org/index.php/Reg._1.183-2 Trent v. Commissioner, 291 F.2d 669 (2d Cir.1961). Retrieved September 25, 2010 from http://openjurist.org/291/f2d/669/trent-v-commissioner-of-internal-revenue "Treasury Regulation 1.165-10. Retrieved September 26, 2010 http://www.taxalmanac.org/index.php/Treasury_Regulations,_Subchapter_A,_Sec._1.16510>