George D. & Lillian M. Shollenberger, Petitioner

OPINION

Gross income includes all income from whatever sourc e derived, including-'gambling . Sec . 61(a)' ;' McClanahan v . Unite d States , 292 F .2d-'630 ; 631-632 (5th .Cir 1961 ) . In the case of a taxpayer not engaged in the trade orsbusiness of gambling,` gambling losses from "wagering transactions" are allowable as an itemized deduction butte"only to the extent of'the gains from suc h transactions ."'Sec . 165(d)- ; see McClanahan v . United States , supra ; Winkler v . United States , 230 F .2d 766 (1st Cir . 1956) .

Respondent asserts that for purposes of applying sectio n 165(d) to casual gamblers like petitioners, the correct analysis and methodology is set forth in Chief Counsel Advice 2008-011 (Dec . 5, 2008) (the Chief Counsel Advice), which states in part :

A key question in . interpreting §165(d) is the significance of the term "transactions ." The statute refers to gains and losses in terms of wagering transactions .-Some would'contend that transaction means every single play in a game of chance or every wager made . Under that reading, a taxpayer would have to calculate the gain or loss on every transaction separately, and treat every play or-wager as a taxable event . The gambler would also have to trace and recompute the basis through°all transactions to calculate the result of each play or wager . Courts considering that reading have found it unduly burdensome and unreasonable . Commissioner , .66 .T .C .,538WW(1976) ; Sz-kirscak v . Commissioner , T .C .-Memo . 1980-129 . . . Moreover, the statute uses the plural term "transactions" implying that gain or loss may be calculated over a series of separate plays or wagers .

See Green v .

. The better view is that a casual gambler , such-as`. the taxpayer who plays the slot machines, recognizes a wagering gain or loss at the time she redeems, he r tokens . We think-that the fluctuating wins and losse s left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the-amount above or below basis,(the wager), realized . See Commissioner v . Glenshaw Glass Co . , 34 8 .U .S . 426 (1955) ., For example, a casual gambler wh o enters a casino with $100 and redeems his or`'her token s for $300 after playing the slot machines has .-a wagerin g gain of $200 ($300-$100) . This is true even though the taxpayer may have had,$1,000 in winning , spins . and $700 in losing spins .during the course of play . Likewise, a casual gambler who enters a casino with $100 and loses , ,the entire amount after playing the slot machines has a wagering loss of $100,,-even though the .casual gambler, may have had winning spins of $1,000 and losing spin s of'.$1,100 during the-course of play . [Fn .=ref omitted .

] Applying this methodology, respondent concedes that if we find, as we have .found, that on March 29, 2005, petitioners .

entered the casino with $500 and took home $1,600'of winnings , the amount of gambling income which petitioners should have reported on their 2005 return was $1,100 ($2,000 jackpot winning s less $500 ,brought,to the casino for gambling and less .$400 . take n from the jackpot for additional,gambling) rather than .$2,000 as determined in the notice of deficiency .

Although petitioners have stated.-that they "agree with °th e Chief Counsel Advice, they nevertheless maintain, . .contrary .to the Chief Counsel Advice, that they should be allowed to offset their March 29, 2,005, net winnings with $2,264 of gambling losses they claim to have incurred throughout 2005 . They contend that this' result is necessary-to treat "regular and casual gamblers` equally„ z .

The . Code mandates, however,, that-casual gamblers be treated differently from taxpayers,' who -are in : them trade 'or business of gambling . In particular,°cgambli-ng .losses- incurred in a trade or business of gambling=are allowable,`in computing adjusted gross income pursuant to section 62(a)(1) . Gambling losses incurred other .-than'in the trade or business of gambling are'allowable, if at all,-,as itemized deductions'in calculating taxable income .

See sec . '63 (a) , (d) ; Johnston-v . 'Commissioner , ,25- T .C . .106, 108 (1955) . ; Cromley v . Commissioner , T .C .' Memo . 2008-176 ;- Heidelberci v . Commissioner , T .C . Memo . 1977-133 .

Because petitioners were--not engaged in the . trade or' business of ..gambling, their gambling losses'are allowable only as itemized deductions . But'because petitioners have elected the standard'deduction,athey are-not entitled to-itemize-their deductions 3 Sec . 63 (b)°, (e) ; see Johnston v . Commissioner , supra ; Heidelberg v Commissioner ,' sura . `- We . reject as'without .

merit petitioners' contention that this -statutory arrangement i s 2By "regular" gamblers, we'understand .petitioners to mean gamblers who are in the trade or business of gambling .

3A taxpayer may change an election to claim the standard deduction at any time before the period of limitations has expired . Sec .. 63(e) .-- Insofar as the record shows, petitioners have not sought to change their election-to claim the standard deduction . In any-event, on the record before us-it would not appear advantageous for petitioners to do so .

unconstitutional . See Tschetschot v . Commissioner , T .C . Memo .

. .

2007-,38 (upholding constitutionality of section 165(d)) ;" Valenti v . Commissioner , T .C . Memo . 1994- 483 (same ) ; cf . Galewski v .'

Commissioner , 84 T .C . 980 (1985) . .(holding that for purposes of computing the minimum tax the 16th Amendment . does not require" :.

that a casual . gambler's gambling losses be netted agains t gambling gains) .

Drawing an analogy to(cid:127)the recovery of a capital investment,,, this Court has held that a casual gambler's, gross ,incomer,from a wagering transaction should be calculated by subtracting the bets% placed'to produce the winnings, not as a, .deduction .in calculating, adjusted gross income or taxable income but as a preliminary, computation in determining gross income . . See Lutz-v .

Commissioner , T .C . Memo . 2002-89 (slot machine winnings) ; Hochman v . Commissioner ,,.T .C . Memo . .1986-24 (horse race winnings) .

. .

: . This Court has also recognized the practical difficulties-'of tracking the basis of each wager individually in ,a session of like play . ., See .:- Green v . Commissioner , 66 T .C . 538, 548=(1976) (stating that a "tabulation of the amounts paid for chips less the .amount paid , to redeem chips would have served to verify the net win or los s figures",) ; Szkiresak v . Commissioner , . T .C . Memo .'1980-129 (stating that "it is impractical to record each separate roll of the dice or spin of the wheel") ., The methodology put forward b y respondent-is-consistent with these principles .

Insofar as petitioners mean'to . suggest that,section . 165(d) permits . their gross income from slot machine play to be calculated by netting all their 2005-slot machine gains an d losses, we disagree . Section 165(d) does not define gross income but instead limits the deductibility of losses on wagering "transactions" to the amount of gains from wagering "transactions" . Consistent with general principles treating each wager as a separate taxable event under Federal tax law, see Abeid v . Commissioner , 122 T .C . 404, 411 (2004), section 165(d) clearly contemplates that gross income from wagering i s determined in the first instance by reference to individua l wagering "transactions ." To permit a casual gambler to net all wagering gains or losses throughout the year would intrude upon , if not defeat or render superfluous,, the careful statutory arrangement that allows deduction of casual gambling losses, if at all, only as itemized deductions, subject to the limitations of section 165 (d) .

Respondent has effectively conceded that petitioners' gross income from their March 29, 2005, .slot machine play was $1,100 .

Cf . LaPlante v . Commissioner , T .C .Memo . .2009-226 (holding that taxpayers failed to substantiate claims of net gambling gains and losses) . Giving effect to this concession, we hold tha t petitioners had $1,100 of unreported gross income from. gamblin g in 2005 and are entitled to no deduction for . gambling losses . .