TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

Saturday, July 12, 2008

Why Hasn't McCain Reported His Gambling Gains and Losses on His Tax Returns?

I previously blogged the release of John McCain's 2006 and 2007 tax returns.  The Daily Kos asks why McCain has not reported any gambling gains on Line 21, or gambling losses on Line 28, Schedule A, of his Form 1040, given widespread press reports that he is a frequent gambler at casinos who wagers thousands of dollars per trip.  If the press reports are accurate, it is hard to imagine that McCain would not have won at least $600 on some occasions and received a Form W-G:

What makes this lack of reporting more than a bit odd is we are talking about a guy who typically spent thousands of dollars on accountants to file his returns. He can't claim "I messed up" because he had professionals filling out the paperwork. Moreover, the returns that are part of the public record go into such fine detail they even note such trivial things as a mere 14 bucks in interest from a JP Morgan account (cf. 2006 tax returns) - yet in these same forms line 21 is totally blank. When you look at his Schedule A, you see a similar degree of scrupulous detail... yet there is still no mention of any gambling losses. So as far as the returns go, he never gambled. That is hard to reconcile with the fact it is well-known that he is a high-stakes craps player. ...

If he is winning and not declaring -- that's a crime. If he is losing and not taking the deductions, that is peculiar for a lot of obvious reasons. It means he never wins. If he is losing his own money and not taking the deduction, it looks like he is trying to hide a problem. If he is losing other people's money that certainly raises questions about influence peddling if they have business in front of his committee. Whether he is winning or losing, it doesn't take a whole lot of imagination to see how a lobbyist bankrolling the senator's marathon craps session might be using this as a way of funnelling money into the senator's coffers without drawing attention to the transactions.

Finally, all this talk about unreported transactions raises raises more questions no one in the media will likely bother to ask: Has anyone seen Cindy McCain's tax returns? Does anyone know if she ever filed a 5754? Is he hiding his winnings on her tax forms? Is he burying his losses on her forms? With all the interest paid to Obama's mortgage payments, you would think something this glaring would get more media attention. Of course, then the press would have to get off the Lapdog Express and that wouldn't be any fun, would it?

See also Huffington Post: John McCain's Gambling Problem -- and Ours?

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I previously blogged the release of John McCain's 2006 and 2007 tax returns. The Daily Kos asks why McCain has not reported any gambling gains on Line 21, or gambling losses on Line 28, Schedule A, of his Form 1040, given widespread press reports that... [Read More]

Tracked on Jul 12, 2008 7:22:38 PM

Comments

That's nothing the media and military is hiding.This McCain ought to be in jail
"McCain’s most horrendous loss occurred in 1967 on the USS Forrestal. Well, not horrendous for him. The starter motor switch on the A4E Skyhawk allowed fuel to pool in the engine. When the aircraft was “wet-started,” an impressive flame would shoot from the tail. It was one of the ways young hot-shots got their jollies. Investigators and survivors took the position that McCain deliberately wet-started to harass the F4 pilot directly behind him. The cook off launched an M34 Zuni rocket that tore through the Skyhawk’s fuel tank, released a thousand pound bomb, and ignited a fire that killed the pilot plus 167 men. Before the tally of dead and dying was complete, the son and grandson of admirals had been transferred to the USS Oriskany.

Posted by: george :^) | Jul 12, 2008 12:24:14 PM

You bring up a very interesting IRS tax law question. I'm a new reader here, keep up the good work.

Posted by: JH | Jul 12, 2008 1:31:09 PM

Another example of the "mainstream press" (if you can call Daily Kos that--what I meant is "non-tax" press) not understanding the intricacies of the Tax Code. This one (section 165(d): "Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions."), however, hardly falls into the category of obscure or arcane tax law.

I guess the question is whether a taxpayer has an obligation to report (list as a deduction on Sched. A) gambling losses in excess of gambling income?

What is next? Are they going to question Schedule A medical expenses being listed as "zero" or blank (I haven't looked, so it is possible he claimed med. exp. deds. on his Scheds. A) as "hiding his medical condition" when you can only deduct medical expenses to the extent they exceed 7.5% of AGI?

-ATP

Posted by: Adjunct Law Prof. | Jul 12, 2008 2:13:59 PM

Kos is far from an unbiased source. Besides, if he has McCain has a high amount of winnings, the IRS would find him to ask the same question--why hasn't he reported? I know, I've seen those IRS letters. McCain would have gotten one for 2006 by now if it was significant. Considering he tax bracket, it may be worth it for them to go after him for a few grand in gambling winnings.

Posted by: Carrie | Jul 12, 2008 2:43:19 PM

No country allows gambling losses as a deduction unless you have gambling wins to deduct it against.
Net losers don't have to file.

Posted by: John Turmel (TajProfessor) | Jul 12, 2008 3:14:23 PM

This is just what America needs right now....A gambler for a president!

Posted by: BlueyBlogger | Jul 12, 2008 3:18:59 PM

How many millions of dollars have the oil companies gave John McCain since he has been in office? I have seen an amount that is staggering but I don't know if it is accurate. How can he form any kind of energy plan when he is indebted so much to the oil companies. He's a big joke!!!

Posted by: Michael Mimnaugh | Jul 12, 2008 5:32:50 PM

I am no taxprof, but I am a horse gambler...

It is highly unlikely McCain generated any 1099's by playing craps. The trigger for this paperwork is a 300-1 payoff -- not possible on the tables. Recently, I heard about a change to gross poker winnings in excess of $5000, but that ain't craps.

So, either McCain is winning and lying about not making any money (very, very doubtful) or he is losing.

Gambling losses are only allowable up to gambling winnings. Since no winnings were reportable, no losses were reported to offset the winnings. It makes perfect sense.

Craps is a losing proposition.

Being addicted to craps is strike against McCain in my book.

Posted by: olrailbird | Jul 12, 2008 10:32:26 PM

Tax paying is main in financial but many gambling are made in it. For example the oil prices by which many things happen so.

Posted by: eCurrency Arbitrage | Jul 13, 2008 4:01:47 AM

You can only deduct gambling losses to the extent of your winnings. You can't deduct a net gambling loss.

Posted by: JLK | Jul 13, 2008 7:31:16 AM

This is very exciting topic,& u write it very well keep it up.

Posted by: Lorra | Jul 14, 2008 4:00:22 AM

I have found this confusing for some time. Perhaps someone can clarify this for me..

How can one report gambling losses and winnings at the same time? It seems to me that by reporting winnings one implies a lack of losses, and vice versa.

Or are we to account for every hand of blackjack as a win or a loss? …perhaps each trip to a casino or trip to Vegas? This seems ridiculous, but such accounting could result in winnings and deductible losses in the same reporting period. Is this what the IRS is suggesting?


Posted by: WA | Jul 14, 2008 6:25:20 AM

The gambling loss deduction has confused me for some time. Perhaps someone here can clarify it for me.

How can one claim both gambling winnings and losses on the same return? It seems to me that a declaration of winnings for a reporting period implies a lack of losses.

Or are we to account for each trip we make to Vegas as either a net win or loss? Perhaps every trip downstairs to the casino? Or even every hand of blackjack? Accounting for this would obviously be a nightmare (and take much of the fun out of gambling), but is this what the IRS requires?

Posted by: WA | Jul 14, 2008 7:12:54 AM

I think this entire conversation is extremely presumptive. First, we are assuming that the very liberal media is actually accurate on the amount and frequency of McCains gambling trips. Given there history of focusing on the negative on any one with an R next to their name, this is more likely the case then the fact that McCain cheated on his taxes.

Secondly, I do not know a gambler in the Country who is going to complete the gambling winnings/losses section when the net result is zero. He obviously did not win any large amounts or he would have been sent Form W-G. Since he did not report anything, we can only assume that there was no Form W-G - thus no large winnings. It makes no sense to criticize someone for not reporting $20,000 in winnings and $50,000 in losses for a net of zero if they do not have to. This is the case with each and every gambler in the country. I do not know of any law requiring you to report gambling losses on your tax return if you do not want to.

It is like JH posted above. Does anyone list your tax preparation fee on Schedule A unless you can actually deduct it?

I would think 99% of the people upset that McCain's gambling is not listed on his return are trying to hold him to a much higher standard than they would ever hold themselves or anyone else, include Obama.

Posted by: Chad Bordeaux | Jul 15, 2008 5:50:54 AM

"It makes no sense to criticize someone for not reporting $20,000 in winnings and $50,000 in losses for a net of zero if they do not have to."

That's a mighty big if. I suppose the main consequence of not reporting gambling winnings, even in the presence of exceeding losses, is an underreported AGI. As noted in the opinion below, the gambling loss deduction is not "above the line," therefore it's not exactly a "net zero" because gambling winnings affect AGI, likely triggering other tax consequences.

Janice G. Spencer, et vir. v. Commissioner, TC Summary Opinion 2006-95

Petitioners contend that itemized-deduction treatment of their gambling income and losses is unfair, and that they can simply ignore the winnings and the losses by not reporting the same on their return. They take strong issue with respondent's determination that causes them to recognize a greater amount of their Social Security benefits as gross income and to lose the tax credit and the standard deduction, both of which are unrelated to their gambling activity. Petitioners also argue that, if their gambling winnings have to be reported as income on their tax return, then the losses should be allowed as deductions on the Form 1040, or “above the line”. The Court rejects that argument because to treat the income and losses in that fashion would effectively remove any distinction between a professional gambler and a nonprofessional gambler. Petitioners are in that latter category, and their only entitlement to the deduction for their gambling losses is the manner in which respondent determined it as an itemized deduction. Petitioners have cited no authority, and indeed there is no authority to support their argument that unrelated income and credits are immune from the effects of the manner in which respondent treated their gambling winnings and losses. The Court, therefore, sustains respondent.

Posted by: WA | Jul 15, 2008 7:55:05 AM

First, it's W2-G, not W-G.

It is only reportable for a MACHINE jackpot over $1200, table win of a wager of 300:1 or more, or free win of $600 or more (no money wagered).

The IRS requires, by letter of law, to record all winnings transactions as gambling income and all losing transactions as gambling losses. In the IRS view, any bet is a transaction. Therefore, the average Las Vegas gambler should report tens of thousands of dollars in gambling income, and offset it by tens of thousands of dollars of losses. Trouble is, this affects your AGI. The country would be over-run with people reporting adjusted gross income well over the $250k threshold and everyone would start voting republican to save themselves.

The tax laws relating to gambling are ineffective, unenforcable, and antiquated. They haven't been adjusted for inflation nor adjusted to compensate for casino gambling now being an accepted entertainment option. If McCain is playing craps and not reporting every pass line winner and reporting every horn bet loser, then he is breaking IRS code. However, 99.999% of casino patrons do the same.

Posted by: CJ | Jul 16, 2008 9:05:53 AM

McCain would complete what Bush has started in the US. He'd ruin you guys. Good that he won't win.

Posted by: Blackjack | Jul 17, 2008 7:43:52 AM

Let me address a few comments:

Above some defenders are doing so by saying that net losers have no obligation to report. They do. If you don't believe me follow the link to the case of another Arazonian. This man was convicted of filing a false tax return even though he was a net loser:

Excerpt from case:

...Scholl testified to his belief that he could "net out" his
gambling wins and losses in any particular year and, if losses
exceeded wins, nothing needed to be reported on the return.
He did not, however, "net out" gambling winnings that were
reflected on Forms W-2G.

On December 5, 1995, a grand jury in Tucson, Arizona,
returned an indictment charging Scholl with filing false tax
returns for the years 1989 through 1994...

End excerpt.

Here is the whole case here:

http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=9th&navby=case&no=9710143o

Other taxpayers have had similar problems. Consider the plight of this taxpayer. She writes to columnist Mark Pilarski:

Excerpt:

A few years ago we were audited for gambling losses for '93 and '94. We went three times to the examination (supervisors, everybody) level and lost each time. We had excellent records proving that we truly had lost more than we had won (over and above W2Gs and smaller jackpots). We gamble pretty exclusively at Caesars Tahoe and had their computer printout of total coin in (loss) and coin out (wins). Anyway, $4,000 later in attorney and accountant fees, we won in appeals.
Now we are being audited for '96 and '97. We went into the examination with again perfect records and again the computer printout from Caesars. This time they said that even though we lost more then we won, we would have to claim the total "wins" ($650,000) as income. That's every 25 cents and $1 that we supposedly won. We could claim the total loss ($670,000) as losses but our gross income went from approximately 80K to $730,000. Quite a jump in tax bracket! We lost all our exemptions and various credits from schedule A. Bottom line, they say we owe $9,000 for 1996 alone even though we really did prove we lost more then we won. Needless to say, we have again hired our lawyer for another $4,000 and will go to appeals.
Have you heard if this is a new strategy by the IRS? In 93 and 94 the computer printout helped us prove our case. So far in '96 and '97 it has hurt us tremendously.

End excerpt. (To find the full article, google and use the cache feature)

The sad truth is that the gambling laws are terribly unjust. Every grandma that wins a small jackpot is expected not only to pay on the full W-2 even though she is a net loser. She is expected to carry around a diary and record every table and time she plays during her Las Vegas vacation.

Why should McCain skate when we do this to Grandma?

We should be pushing this on every gambling forum we can find.

mrick

Posted by: mrick | Jul 18, 2008 10:34:00 AM

I need to know whether 1099 "winnings" can be deducted from losses or whether they are considered as "income"?

Posted by: Sheryll Wright | Aug 29, 2008 8:40:54 AM

Well, after reading this, thank goodness McCain didn't get voted as president.

Posted by: Online Gambling | Jan 2, 2009 5:27:13 PM