TCJA Change to Gambling Loss Limit Applies Only to Individuals

(Parker Tax Publishing April 2021)

The Chief Counsel's Office advised that the temporary modification under the Tax Cuts and Jobs Act (TCJA) to the deduction for gambling losses under Code Sec. 165(d) for tax years 2018-2025, which limits the losses allowed on gambling transactions not only to the actual betting costs but to other expenses incurred in connection with gambling activity, does not apply to the ordinary and necessary expenses of a business in the trade or business of gambling. The Chief Counsel's Office explained that although the statutory language of the TCJA amendment does not indicate if the amendment applies to all taxpayers or only to individuals, the legislative history clarifies that the TCJA amendment was intended only to cover expenses incurred in the conduct of an individual's gambling activity. CCA 202111012.

Background

Code Sec. 165(a) allows a deduction for any loss sustained during the tax year and not compensated for by insurance or otherwise. Code Sec. 165(c) limits the deduction under Code Sec. 165(a) to: (1) losses incurred in a trade or business; (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and (3) losses arising from fire, storm, shipwreck, or other casualty, or theft. Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), Code Sec. 165(d) provided that losses from wagering transactions were allowed as deductions only to the extent of the gains from such transactions. Under TCJA Section 1305, Code Sec. 165(d) was amended to provide that, in the case of tax years beginning after December 31, 2017, and before January 1, 2026, the term "losses from wagering transactions" includes any deduction for otherwise allowable expenses incurred in carrying on any wagering transaction.

In CCA 202111012, the Chief Counsel's Office was asked whether the amendment to the deduction for wagering losses under Code Sec. 165(d) made by the TCJA applies only to individuals or whether it applies to any taxpayer involved in the trade or business of gambling, including casinos, as the plain language of the statute does not clearly distinguish between individual gamblers who are in the trade or business of gambling (professional gamblers) and businesses in the trade or business of gambling.

Analysis

The Office of Chief Counsel stated that, prior to the TCJA amendment, case law inconsistently applied the loss limitation of Code Sec. 165(d) to the expenses incurred by a professional gambler, such as traveling expenses to and from the casino. These cases differed in the treatment of expenses incurred with individual gambling and with operating a business with gaming activities. In Mayo v. Comm'r, 136 T.C. 81 (2011), the Tax Court dealt with individual taxpayers who were professional gamblers. The court acknowledged that the treatment of business expenses as wagering losses was overbroad and did not reflect the ordinary meaning of the words used in the statute. While the phrase "losses from wagering transactions" had not been extensively considered under the case law, the court construed the phrase "gains from such transactions" narrowly to mean proceeds from a wager by the taxpayer where the taxpayer stands to gain or lose on the base of chance. The court held that the gains and losses from wagering transactions must be the actual product of wagers entered into by the taxpayer, not merely arising in connection with conduct of wagering activities. The court concluded that the prior case law interpretation of the phrase including expenses that were not the result of a wager went beyond the ordinary meaning of the statute. Following this reasoning, the court held that losses from wagering transactions do not include trade or business expenses of a professional individual gambler other than the costs of the wager. Therefore, trade or business expenses incurred by individual professional gamblers in the conduct of the trade or business of gambling, other than the cost of wagers, were not subject to the limitation of Code Sec. 165(d) but were instead deductible under Code Sec. 162(a).

According to the Office of Chief Counsel, the TCJA amendment to Code Sec. 165(d) effectively negated the Mayo decision. Under the amendment, for tax years 2018 through 2025, individual professional gamblers are prohibited from claiming business expenses arising from wagering transactions in excess of gambling gains. The Office of Chief Counsel noted that the Committee Report on TCJA (Report 115-409) by the House Ways and Means Committee explains that "the Committee believes that the scope of the limitation on wagering losses should be broadened to cover expenses incurred in the conduct of the individual's gambling activity." A footnote to the report states, "the provision thus reverses the result reached by the Tax Court" in Mayo.

The Chief Counsel's Office found that nothing in the committee report states an intention to apply the amendment to losses incurred by businesses in the trade or business of gambling. The Chief Counsel's Office further found that this intent is repeated in the Reconciliation Recommendations by the Senate's Committee on the Budget, the House Conference Report on TCJA (Report 115-466), and Joint Committee on Taxation's General Explanation of TCJA (JCS-1-18).

The Chief Counsel's Office concluded that the TCJA amendment to Code Sec. 165(d) applies only to individuals, as detailed in the legislative history of the amendment and the Mayo case. As a result, individuals are limited in the amount of a deduction for wagering losses, including those expenses incurred in carrying on a wagering activity, to the amount of gains from wagering transactions.

For a discussion of deducting gambling losses up to the amount of gambling winnings, see Parker Tax ¶85,120.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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