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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, December 24, 2008

Tax Court Rejects TP's Argument That "Casinos Are Like 'Disneyland' to the Elderly"

Sjoberg v. Commissioner, T.C. Summ. Op. 2008-162 (Dec. 23, 2008):

In 2004 petitioners were recreational gamblers. In 2004 petitioners received $19,995 in wage income, $1,439 in business income, $10,000 as an IRS distribution, and $20,154 in Social Security benefits. Also in 2004, petitioner Mary E. Sjoberg won a $4,000 slot machine jackpot, which was fully offset by her gambling expenses. The casino submitted to petitioners and respondent a Form W-2G, Certain Gambling Winnings, reporting the $4,000 jackpot.

On their 2004 joint Federal income tax return, petitioners did not include the $4,000 jackpot in income and they did not claim their offsetting gambling expenses. Rather, petitioners simply attached a handwritten note to their return disclosing the $4,000 jackpot. Petitioners also treated only $4,704 of their Social Security benefits as includable in income.

On audit respondent determined that petitioners must include the $4,000 jackpot in gross income, offset by a $4,000 gambling loss deduction but triggering a mechanical $2,494 increase in petitioners' taxable Social Security benefits and a $130 decrease in allowable miscellaneous itemized deductions. Respondent also determined a $132 accuracy-related penalty under § 6662(a).

Petitioners do not dispute that under the provisions of the Internal Revenue Code respondent's adjustment with respect to the Federal income tax treatment of their $4,000 gambling winnings and offsetting expenses is correct, including the effect thereof on the taxability of petitioners' Social Security benefits. Petitioners, however, contend that this treatment of gambling winnings and losses is discriminatory against the elderly and should not be enforced. Petitioners note that today's casinos are like "Disneyland" to the elderly, offering all sorts of freebies to entice the elderly into casinos to gamble. Petitioners contend that respondent needs to update the tax rules to take into account today's casino operators, casino operations, and customers.

Petitioners complain that it is just "too easy" for the elderly to gamble and therefore that the tax rules applicable thereto are outdated and should not be enforced -- particularly those rules that affect the taxability of Social Security benefits. Lastly, petitioners allege that some types of gambling winnings are not required to be reported to respondent by the casinos (generally poker and blackjack), and petitioners claim that such differences in the reporting of gambling winnings constitute discrimination.

Petitioners' arguments raise policy issues that do not relieve petitioners of their liability for the determined deficiency.

We sustain respondent's determination of the $660 deficiency in petitioners' Federal income tax and the $132 accuracy-related penalty under § 6662(a).

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With a high probablility that hundreds of billions of dollars of taxable income are being hidden via offshore havens, transfer pricing scams and etc., the Service has time to shake down old people for $600?


Posted by: Rusty | Dec 26, 2008 12:15:16 PM

Merry Christmas.

Posted by: Bruce | Dec 26, 2008 12:15:16 PM

what's incredible is that you don't understand how the enforcement process works, Rusty.

The old people got caught by automated reporting. You know, CP2000? It doesn't take extra effort by the Service. The computers do it for them.

However, the eldery couple had other ideas. Instead of paying off the deficiency they dug in their heals and decided to appeal it all the way to the Tax Court.

The extra burdon wasn't created by the IRS, it was by the old couple poorly exercising their rights.

Posted by: TTC | Dec 29, 2008 6:51:36 AM

Unlike the petitioners' experience, my experience is that IRS will accept tax returns that exclude state income tax refunds from the determination of taxable Social Security benefits. This probably has something to do with the conflict between IRS instructions and section 111(a) of the Internal Revenue Code. IRS would be hard pressed to defend the inclusion of itemized deduction recoveries in the calculation of taxable Social Secrurity benefits because the inclusion results in the gross income atributable to a recovery exceeding the amount of the recovery.

Tax year 2008 marks the 25th anniversary of IRS instructions that include itemized deduction recoveries in the calculation of taxable Social Security.

Posted by: WD Kebschull | Dec 31, 2008 8:06:28 AM