Monday, October 19, 2009


* A recent taxpayer-friendly Chief Counsel Advice memo (CCA 200940030) tells us that the IRS Chief Counsel has determined that in the case of a taxpayer’s mortgage loan of more than $1,000,000, which was used to buy a personal residence, interest on $1,100,000 was deductible; the deduction was not limited to interest on the $1 Million “acquisition debt” maximum. The additional $100,000 of borrowings qualified as equity indebtedness. This is contrary to the decisions of court cases from 1997 and 2000.

* Great news for my clients who frequent Atlantic City. I mentioned this item briefly in a previous BUZZ posting, but it bears repeating and expanding. The Tax Court, in TC Memo 2009-226 (Ann L Laplante v Commissioner of Internal Revenue) has agreed that a gambler’s aggregate winnings for the day per casino are includible in income rather than individual winnings on a slot machine.

This is very important because “gross” gambling winnings are reported in full on Page 1 of the 1040, but losses are deductible, to the extent of winnings, only if you itemize. Gross winnings increase your AGI, and can reduce a multitude of tax benefits, increase taxable Social Security or Railroad Retirement, and make you victim of the dreaded AMT.

Russ Fox of TAXABLE TALK discusses this case in detail in “An Interesting Gambling Case”.

As Russ points out, Ms Laplante’s savvy tax professional, who happened to be an attorney, “realized that much of her winnings were illusory; that her true winnings were not the total of her W-2Gs but she walked out of the casino with—the net win or loss for the trip. The attorney felt that $4,000 was the correct number to report on the return” instead of the $56,200 she received in W-2Gs. So she entered $4,000 on Line 21 of her Form 1040 instead of $56,200.

The Court actually agreed with the tax pro’s reasoning. Russ quotes from the Court’s decision –

Respondent nonetheless agrees with petitioner’s theory of recognizing slot machine play on the basis of net wins or losses per visit to the casino. Specifically, respondent states the following:

[T]he better view is that a casual gambler playing a slot machine, such as the petitioner, recognizes a wagering gain or loss at the time she redeems her tokens. The fluctuating wins and losses 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., 348 U.S. 426 (1955)

However Russ does state the following caveat – “I do need to point out that the Tax Court did not pass judgment on this issue, so it is possible they would disagree at some future date”.

What is important for gamblers who wish to use this method to report gambling winnings to remember is the following quote from the decision –

No valid reason exists for taxpayers engaged in wagering transactions not to maintain a contemporaneous gambling diary or gambling log”.

Just as a person who uses his/her car for business must keep a contemporaneous record of business mileage, a gambler must keep a contemporaneous record of daily activity. A simple pocket notebook will do. You would indicate the date, the name of the casino, and the net activity from that casino for the day. For example:

November 19, 2009 – Bally’s Wild West - $115.00
– Ceasar’s Palace – ($25.00)

November 20, 2009 – Bally’s Wild West – ($50.00)

You may have won $1,000 in one slot pull while at Bally’s on November 19th, but you put $885.00 back into the machines before leaving the casino. So instead of reporting $1,000 you would report only $115.00. The additional $75.00 in losses could be deducted as a Miscellaneous itemized deduction not subject to the 2% of AGI exclusion.

It is also a good idea to join the various “clubs” of the casino’s you frequent so that you can get a membership card to use to track daily gains and losses as additional documentation. But using the card should be in addition to and not instead of keeping a daily gambling diary.

* Did you know that beginning with 2009 tax returns filed in 2010, you will be able to check a box on your return to use all or part of any refund to purchase Series I U.S. savings bond, available in denominations of $50, $100, $200, $500, and $1,000, which will be mailed directly to you? You do now!

* This is not a tax item – but it is certainly worth discussing –

By pure luck I happened upon a great item on this past Sunday’s CBS Sunday Morning program. It discussed the issues brought up in the book “Life Without Lawyers: Liberating Americans from Too Much Law” by lawyer Philip K. Howard.

Here is a quote from the book, taken from a review from the New York Times –

“‘Sometimes I wonder how it came to this,’ a teacher in Wyoming told me, ‘where teachers no longer have authority to run the classroom and parents are afraid to go on field trips for fear of being sued’.. Thomas Jefferson might have the same question. How did the land of freedom become a legal minefield? Americans tiptoe through law all day long, avoiding any acts that might offend someone or erupt into a legal claim. Legal fears constantly divert us from doing what we think is right.”

The press release for the book further identifies the absurdities of current life brought about by lawyers –

Americans are losing the freedom to make sense of daily choices – teachers can’t maintain order in the classroom, managers are trained to avoid candor, schools ban the game of tag, and companies plaster inane warnings on everything: ‘Remove Baby Before Folding Stroller’

With apologies to Kelly Erb, Jim Maule, Paul Caron, Tom Cooke and Jim Grisi, I have always felt that the average ambulance-chasing lawyer (not tax or labor lawyers) was the scum of the earth, and that 500 lawyers on the bottom of the ocean was a good start.

I obviously agree that there are certainly times when you do need a lawyer, and that there have been lawyers who have done much good, it is my firm belief that in the grand scheme of things, similar to my opinion on organized religion, lawyers have historically done more bad than good.

The book’s press release is absolutely correct when it says –

Today we are flooded with rules and legal threats that prevent us from taking responsibility and using our common sense.”

Of course lawyers are not totally to blame. They started the mess by filing ridiculous lawsuits and are exploiting the situation – but it is the juries that have perpetuated the folly. Remember the jury that awarded the cafone who spilt hot coffee from a fast food chain on her (?) lap millions of dollars. What complete idiots!

I have been on a jury panel twice over the years. One occasion involved a civil suit. An elderly women, as I recall at least in her 70s, was suing a non-profit hospital because she fell in the hall when visiting a patient. It seems something had spilled the floor and was not immediately cleaned up, although all normal procedures for hospital maintenance were properly in place. The bottom line of the plaintiff’s case, if memory serves me, was that as a result of the accident the woman’s legs hurt when she was on her knees scrubbing the floor at home.

Luckily, for the plaintiff that is, I was chosen as the “alternate juror” and was not involved in the final deliberations and decision. My fellow jurors ended up awarding the woman $75,000 in damages for her “pain and suffering”.

Gott In Himmel! I would expect that the legs of any 70-80 year old would hurt after scrubbing the floor on their knees.

I plan on ordering Howard’s book. I suggest you do so as well.

* Just a reminder - if you traded in a junk vehicle under the Cash for Clunkers program you do not have to pay tax on the credit you received. As a tax preparer I do not even need to know about it, unless you used your old or new car for business. And even in such a situation you won’t pay tax on the credit.

* Before I close I want to pass along an email I got from a new website –

The basic idea behind the site is that you ask questions and then receive answers from other tax professionals who might know. It's entirely peer driven. There is no single "authority" who has all of the answers. Everyone pools their knowledge into answering questions. We feel that the design we've put together and the way we've organized the information (in many cases) can much more straightforward than browsing forums or wading through database sites to get an answer.”

I have not had a chance to check it out – but I will once I “come up for air”.


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