                        T.C. Memo. 2009-306



                     UNITED STATES TAX COURT



     GEORGE D. AND LILLIAN M. SHOLLENBERGER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5504-08.                Filed December 28, 2009.



     George D. and Lillian M. Shollenberger, pro se.

     Richard J. Hassebrock, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:   Respondent determined a $555 deficiency in

petitioners’ 2005 Federal income tax.   The issue for decision is

whether petitioners had unreported gambling income in 2005 and,

if so, the amount thereof.1


     1
      Certain computational adjustments that follow from the
                                                   (continued...)
                               - 2 -

     Unless otherwise indicated, all section references are to

the Internal Revenue Code (Code) as in effect for the taxable

year at issue, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

                         FINDINGS OF FACT

     The parties have stipulated some facts, which we so find.

When they petitioned the Court, petitioners resided in West

Virginia.   At all relevant times, petitioners have been retired.

     During 2005 petitioners gambled recreationally at a Charles

Town, West Virginia, casino.   Before going to the casino they

often would stop by their bank and withdraw some money for

gambling.

     On March 29, 2005, they withdrew $500 from their joint

checking account to take to the casino.     That day petitioner

husband hit a $2,000 jackpot on a dollar slot machine play at the

casino.   Petitioners each took $200 out of the jackpot winnings

for additional slot machine play.   They left the casino that day

with $1,600, which they deposited the next day in their joint

checking account.

     On their joint 2005 Form 1040A, U.S. Individual Income Tax

Return, petitioners did not report any gambling winnings.     They

claimed a $10,000 standard deduction.   By notice of deficiency,


     1
      (...continued)
resolution of this issue are not in controversy, and we do not
address them.
                                 - 3 -

respondent determined that petitioners had $2,000 of unreported

income from gambling winnings.

                               OPINION

     Gross income includes all income from whatever source

derived, including gambling.   Sec. 61(a); McClanahan v. United

States, 292 F.2d 630, 631-632 (5th Cir. 1961).   In the case of a

taxpayer not engaged in the trade or business of gambling,

gambling losses from “wagering transactions” are allowable as an

itemized deduction but “only to the extent of the gains from such

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 section

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. See Green v.
     Commissioner, 66 T.C. 538 (1976); Szkirscak [sic] 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.
                              - 4 -

          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 her
     tokens. We think that 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). For example, a casual gambler who
     enters a casino with $100 and redeems his or her tokens
     for $300 after playing the slot machines has a wagering
     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 spins
     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 winnings

less $500 brought to the casino for gambling and less $400 taken

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” the

Chief Counsel Advice, they nevertheless maintain, contrary to the

Chief Counsel Advice, that they should be allowed to offset their

March 29, 2005, net winnings with $2,264 of gambling losses they

claim to have incurred throughout 2005.   They contend that this
                                - 5 -

result is necessary to treat “regular and casual gamblers

equally”.2

     The Code mandates, however, that casual gamblers be treated

differently from taxpayers who are in the trade or business of

gambling.    In particular, gambling 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; Heidelberg

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, they are not entitled to itemize their

deductions.3   Sec. 63(b), (e); see Johnston v. Commissioner,

supra; Heidelberg v. Commissioner, supra.    We reject as without

merit petitioners’ contention that this statutory arrangement is


     2
      By “regular” gamblers, we understand petitioners to mean
gamblers who are in the trade or business of gambling.
     3
      A 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.
                               - 6 -

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. Gajewski 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 against

gambling gains).

     Drawing an analogy to the recovery of a capital investment,

this Court has held that a casual gambler’s gross income 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 loss

figures”); Szkircsak 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 by

respondent is consistent with these principles.
                               - 7 -

     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 and

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 is

determined in the first instance by reference to individual

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 that

petitioners had $1,100 of unreported gross income from gambling

in 2005 and are entitled to no deduction for gambling losses.
                            - 8 -

To reflect the foregoing,


                                         Decision will be entered

                                    under Rule 155.
