                                               RONALD ANDREW MAYO AND LESLIE ARCHER MAYO,
                                                  PETITIONERS v. COMMISSIONER OF INTERNAL
                                                           REVENUE, RESPONDENT
                                                        Docket No. 15527–03.                  Filed January 25, 2011.

                                                 P–H was engaged in the trade or business of gambling on
                                               horse races during 2001. Ps attached a Schedule C, Profit or
                                               Loss From Business, to their 2001 Federal income tax return,
                                               on which they reported the results of P–H’s gambling busi-
                                               ness, including gross receipts of $120,463 and expenses of
                                               $142,728, consisting of $131,760 for wagers placed and
                                               $10,968 in expenses incurred in connection with the conduct
                                               of the gambling business. Ps deducted the excess of the
                                               Schedule C expenses over gross receipts, $22,265, as a busi-
                                               ness loss against their other income. R issued a notice of defi-

                                                                                                                                    81




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                                      82                 136 UNITED STATES TAX COURT REPORTS                                       (81)


                                               ciency disallowing $22,265 of Ps’ claimed loss from gambling;
                                               i.e., the amount by which expenses from P–H’s gambling
                                               activity exceeded gross receipts from gambling. R contends
                                               that Ps’ allowable losses from P–H’s gambling business are
                                               limited to the reported gross receipts from the business pursu-
                                               ant to I.R.C. sec. 165(d). R further maintains that the ‘‘Losses
                                               from wagering transactions’’ for purposes of I.R.C. sec. 165(d)
                                               include both the $131,760 cost of wagers placed by P–H and
                                               the $10,968 in expenses he incurred in connection with the
                                               conduct of the gambling business. Finally, R determined that
                                               Ps are liable for an accuracy-related penalty under I.R.C. sec.
                                               6662(a) and (b)(2) for a substantial understatement of income
                                               tax. Held: I.R.C. sec. 165(d) applies to P–H notwithstanding
                                               his engagement in the trade or business of gambling and
                                               limits his allowable losses from wagering transactions to the
                                               extent of gains from such transactions. The holding of Offutt
                                               v. Commissioner, 16 T.C. 1214 (1951), to that effect followed.
                                               Held, further, trade or business expenses incurred by P–H in
                                               the conduct of the trade or business of gambling, other than
                                               the cost of wagers, are not subject to the limitation of I.R.C.
                                               sec. 165(d) but are instead deductible under I.R.C. sec. 162(a).
                                               The holding of Offutt v. Commissioner, supra, to the contrary
                                               will no longer be followed. Held, further, Ps are not liable for
                                               any penalty under I.R.C. sec. 6662(a) and (b)(2).

                                           Ronald Andrew Mayo and Leslie Archer Mayo, pro sese.
                                           Michael S. Hensley, for respondent.
                                         GALE, Judge: Respondent determined a deficiency of $9,732
                                      in Federal income tax and an accuracy-related penalty under
                                      section 6662(a) and (b)(2) 1 of $1,387 with respect to peti-
                                      tioners’ 2001 taxable year. 2 Respondent subsequently con-
                                      ceded that petitioner Ronald Andrew Mayo (petitioner) 3 was
                                      in the trade or business of gambling during 2001 and allowed
                                      petitioner’s gambling expenses (which totaled $142,728) to be
                                      deducted as trade or business expenses to the extent of his
                                      gross receipts from gambling ($120,463). The foregoing
                                      concessions resulted in a reduced deficiency and accuracy-
                                         1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986

                                      as in effect during the taxable year at issue, and all Rule references are to the Tax Court Rules
                                      of Practice and Procedure.
                                         2 The foregoing reflected, among other adjustments, respondent’s determination that petitioner

                                      Ronald Andrew Mayo was not engaged in the trade or business of gambling and was therefore
                                      required to claim any gambling losses (but only to the extent of gambling gains) as itemized
                                      deductions.
                                         3 Petitioner Leslie Archer Mayo signed a joint return for the taxable year at issue but had

                                      no active involvement in the gambling activity.




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                                      (81)                            MAYO v. COMMISSIONER                                          83


                                      related penalty of $6,993 and $1,387, respectively. The issues
                                      for decision are:
                                         (1) Whether petitioner’s engagement in the trade or busi-
                                      ness of gambling entitles him to deduct the losses from his
                                      gambling business from gross income without regard to sec-
                                      tion 165(d), which allows wagering losses only to the extent
                                      of wagering gains;
                                         (2) whether petitioner is entitled to deduct the expenses,
                                      other than the costs of wagers, incurred in carrying on his
                                      gambling business pursuant to section 162(a) without regard
                                      to section 165(d); and
                                         (3) whether petitioners are liable for an accuracy-related
                                      penalty under section 6662(a) and (b)(2) for substantial
                                      understatement of income tax.

                                                                          FINDINGS OF FACT

                                         Some of the facts have been stipulated and are so found.
                                      We incorporate by this reference the stipulation of facts and
                                      the exhibits attached thereto. 4
                                         Petitioners resided in California when the petition was
                                      filed.
                                         The parties have stipulated that petitioner was engaged in
                                      the trade or business of gambling on horse races during
                                      2001. During that year he wagered $131,760 on the outcome
                                      of horse races and won $120,463 as a result of the wagers he
                                      placed. Petitioners attached a Schedule C, Profit or Loss
                                      From Business, to the 2001 Federal income tax return on
                                      which they reported the results of petitioner’s gambling busi-
                                      ness. On the Schedule C petitioners reported as gross
                                      receipts the $120,463 of proceeds from petitioner’s winning
                                      wagers and deducted as an expense the $131,760 in wagers
                                      petitioner placed (wagering expenses). Petitioners also
                                      claimed the following as expenses on the Schedule C (collec-
                                      tively, business expenses):
                                         4 Petitioner reserved relevancy objections to almost all of the stipulations and stipulated ex-

                                      hibits, including portions of the 2001 Federal income tax return, the notice of deficiency issued
                                      with respect to 2001, and the Notice CP2000 in which respondent conceded petitioner’s status
                                      as a professional gambler. We hereby overrule petitioner’s relevancy objections. Certain stipula-
                                      tions concerning petitioner’s professional education and employment appear germane only to the
                                      accuracy-related penalty for substantial understatement of income tax. Since we conclude that
                                      there is no substantial understatement of income tax on the 2001 return, these stipulations are
                                      not material in any event.




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                                      84                   136 UNITED STATES TAX COURT REPORTS                                               (81)


                                                           Expense                                                                Amount
                                                Car and truck ..........................................................          $3,109
                                                Interest .....................................................................        91
                                                Office ........................................................................      256
                                                Travel .......................................................................       776
                                                Meals and entertainment .......................................                    1,651
                                                Telephone and Internet ...........................................                   670
                                                Admission/entry fees ...............................................               1,251
                                                Subscriptions ............................................................         1,056
                                                Handicapping data ..................................................               1,960
                                                ATM fees ..................................................................          148

                                                   Total ......................................................................   10,968

                                      Petitioners deducted the total of the wagering expenses and
                                      business expenses ($142,728) from the reported gross receipts
                                      from wagering ($120,463), resulting in a reported net loss on
                                      the Schedule C of $22,265. This figure was claimed as a busi-
                                      ness loss, which petitioners deducted from gross income. 5
                                         On June 9, 2003, respondent sent petitioners a notice of
                                      deficiency for 2001 in which he determined that petitioner
                                      was not engaged in the trade or business of gambling and
                                      was therefore required to claim any gambling losses (but only
                                      to the extent of gambling gains) as itemized deductions
                                      (pursuant to section 63) and subject to the limitation of sec-
                                      tion 68, rather than as trade or business expenses under sec-
                                      tion 62(a)(1). On August 11, 2003, respondent sent peti-
                                      tioners a Notice CP2000 in which he conceded that petitioner
                                      was in the trade or business of gambling and that peti-
                                      tioners were therefore entitled to deduct petitioner’s
                                      wagering expenses and business expenses on Schedule C, but
                                      only to the extent of his gross receipts from gambling. Con-
                                      sequently, respondent allowed Schedule C expenses of only
                                      $120,463, the amount of gross receipts reported from gam-
                                      bling, thereby eliminating the $22,265 net loss from gam-
                                      bling that petitioners had claimed as a deduction from gross
                                      income. Respondent’s limitation of petitioners’ allowable
                                      deductions from gambling to $120,463 effectively disallowed
                                      both the excess of the $131,760 in wagering expenses over
                                      the $120,463 in gross receipts from gambling ($11,297) and
                                      business expenses claimed in connection with the conduct of
                                      the gambling business ($10,968).
                                        5 Petitioner’s gross income consisted of wages, interest, refunds of State and local income

                                      taxes, capital gain, pensions and annuities, royalties, Social Security benefits, and trust fees.




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                                      (81)                            MAYO v. COMMISSIONER                                         85


                                                                                  OPINION

                                      I. Application of Section 165(d) to the Trade or Business
                                         of Gambling
                                         Section 162(a) generally allows a deduction for ‘‘all the
                                      ordinary and necessary expenses paid or incurred during the
                                      taxable year in carrying on any trade or business’’. Section
                                      165(d), however, provides that ‘‘Losses from wagering trans-
                                      actions shall be allowed only to the extent of the gains from
                                      such transactions.’’ The parties have stipulated that peti-
                                      tioner was in the trade or business of gambling on horse
                                      races in 2001 and that he ‘‘wagered’’ a total of $131,760 on
                                      the outcome of horse races and won a total of $120,463 as a
                                      result of this wagering during that year. Petitioner’s
                                      wagering expenses thus come within the description of both
                                      section 162(a) and section 165(d). See, e.g., Boyd v. United
                                      States, 762 F.2d 1369, 1372–1373 (9th Cir. 1985); Nitzberg v.
                                      Commissioner, 580 F.2d 357, 358 (9th Cir. 1978), revg. T.C.
                                      Memo. 1975–154 and T.C. Memo. 1975–228; Offutt v.
                                      Commissioner, 16 T.C. 1214, 1215 (1951); Crawford v.
                                      Commissioner, T.C. Memo. 2010–54; Valenti v. Commis-
                                      sioner, T.C. Memo. 1994–483.
                                         Petitioner contends that under Commissioner v.
                                      Groetzinger, 480 U.S. 23 (1987), the limitation of section
                                      165(d) on the deduction of gambling losses does not apply to
                                      professional gamblers. Citing the Supreme Court’s observa-
                                      tion that ‘‘basic concepts of fairness * * * demand that * * *
                                      [gambling] activity be regarded as a trade or business just as
                                      any other readily accepted activity’’, id. at 33, petitioner con-
                                      tends that section 165(d) does not apply to an individual
                                      engaged in the trade or business of gambling since it does
                                      not apply to other trades or businesses.
                                         In 1951 this Court considered whether an individual
                                      engaged in the trade or business of gambling is subject to the
                                      section 165(d) limitation on wagering losses, holding that the
                                      limitation applied in these circumstances. Offutt v. Commis-
                                      sioner, supra at 1215–1216; 6 accord Skeeles v. United States,
                                      118 Ct. Cl. 362, 372, 95 F. Supp. 242, 246–247 (1951). In
                                      recent years we have repeatedly rejected the claim that
                                        6 Offutt v. Commissioner, 16 T.C. 1214 (1951), construed sec. 23(h) of the 1939 Code, a prede-

                                      cessor of current sec. 165(d) with identical language. The language first appeared in the Rev-
                                      enue Act of 1934, ch. 277, sec. 23(g), 48 Stat. 689, and has remained unchanged since.




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                                      86                 136 UNITED STATES TAX COURT REPORTS                                       (81)


                                      Groetzinger modified this settled law and should be read as
                                      confining the application of section 165(d) to casual or rec-
                                      reational gamblers and eliminating the section’s limitation
                                      on the deduction of the gambling losses of professional gam-
                                      blers. See Crawford v. Commissioner, supra; Lyle v. Commis-
                                      sioner, T.C. Memo. 1999–184, affd. without published opinion
                                      218 F.3d 744 (5th Cir. 2000); Valenti v. Commissioner, supra.
                                         In Valenti we considered this claim regarding Groetzinger
                                      at length. We observed that, even though the gambling losses
                                      of a professional gambler fall under both the section 162(a)
                                      allowance of deductions for trade or business expenses and
                                      the section 165(d) limitation on the deduction of losses from
                                      wagering, it is a well-settled principle that section 165(d), as
                                      the more specific statute, trumps the more general provisions
                                      of section 162(a). The former provision operates as a limita-
                                      tion on deductions otherwise allowable under the latter. See
                                      Nitzberg v. Commissioner, supra at 358; see also Boyd v.
                                      United States, supra at 1372–1373; Skeeles v. United States,
                                      supra at 247.
                                         Moreover, we reasoned, the Supreme Court in Groetzinger
                                      did not consider the interplay between sections 162(a) and
                                      165(d) because the restriction in section 165(d) was not at
                                      issue in that case. Instead, the issue decided in Groetzinger
                                      was whether the taxpayer’s gambling activities constituted
                                      engagement in a trade or business under section 162 ‘‘for
                                      purposes of treating his gambling losses as a tax preference
                                      item under the minimum tax scheme governed by sections 55
                                      and 56.’’ Valenti v. Commissioner, supra. In Groetzinger the
                                      Supreme Court held that an individual engaged in gambling
                                      for his own account—that is, not providing goods or services
                                      to others as would a casino operator or bookmaker—is
                                      engaged in a trade or business within the meaning of sec-
                                      tions 62(a)(1) and 162(a), with the result that his gambling
                                      losses were not items of tax preference for purposes of the
                                      then-applicable alternative minimum tax. As for the sugges-
                                      tion that Groetzinger’s holding regarding the trade or busi-
                                      ness status of certain individual gamblers eliminated the sec-
                                      tion 165(d) limitation in the case of professional gamblers, we
                                      noted in Valenti the consistent line of cases holding the sec-
                                      tion 165(d) limitation applicable even where wagering activi-
                                      ties were conducted as a trade or business, citing Boyd v.
                                      United States, supra, Estate of Todisco v. Commissioner, 757




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                                      (81)                            MAYO v. COMMISSIONER                                           87


                                      F.2d 1, 6–7 (1st Cir. 1985), affg. in part and vacating in part
                                      T.C. Memo. 1983–247, Nitzberg v. Commissioner, supra, 7
                                      Skeeles v. United States, supra, Offutt v. Commissioner,
                                      supra, Ward v. Commissioner, T.C. Memo. 1986–237, and
                                      Kozma v. Commissioner, T.C. Memo. 1986–177. 8 See also
                                      Lyle v. Commissioner, supra. The section 165(d) limitation
                                      has been applied whether the professional gambler was an
                                      individual wagering for his own account, see Boyd v. United
                                      States, 762 F.2d 1369 (9th Cir. 1985); Crawford v. Commis-
                                      sioner, supra; Tschetschot v. Commissioner, T.C. Memo.
                                      2007–38; Praytor v. Commissioner, T.C. Memo. 2000–282;
                                      Lyle v. Commissioner, supra; Kochevar v. Commissioner, T.C.
                                      Memo. 1995–607; Kozma v. United States, supra, an indi-
                                      vidual or partnership engaged in providing gambling services
                                      to others, see Estate of Todisco v. Commissioner, supra;
                                      Nitzberg v. Commissioner, supra; Ward v. Commissioner,
                                      supra, or an individual engaged in both, see Skeeles v. United
                                      States, supra; Offutt v. Commissioner, supra.
                                        In Commissioner v. Groetzinger, supra at 32, the Supreme
                                      Court made the following observations regarding section
                                      165(d):
                                        Federal * * * legislation * * * [has] been reluctant to treat gambling on
                                      a parity with more ‘‘legitimate’’ means of making a living. * * * And the
                                      confinement of gambling-loss deductions to the amount of gambling gains,
                                      a provision brought into the income tax law as § 23(g) of the Revenue Act
                                      of 1934 * * * and carried forward into § 165(d) of the 1954 Code, closed
                                      the door on suspected abuses * * * but served partially to differentiate
                                      genuine gambling losses from many other types of adverse financial con-
                                      sequences sustained during the tax year. * * *

                                         7 Although Nitzberg v. Commissioner, 580 F.2d 357 (9th Cir. 1978), revg. T.C. Memo. 1978–

                                      154 and T.C. Memo. 1978–228, reversed two Memorandum Opinions of this Court, the reversal
                                      turned upon different views concerning whether the wagering transactions at issue were those
                                      of the taxpayers or third parties and not upon a different view of the applicability of sec. 165(d)
                                      to wagering activities conducted as a trade or business.
                                         8 We acknowledge that the Court of Appeals for the Ninth Circuit, to which an appeal would

                                      lie, has voiced some doubts regarding this line of authority. In Kent v. United States, 185 F.3d
                                      867 (9th Cir. 1999), an unpublished opinion, the Court of Appeals stated that its decisions in
                                      Nitzberg v. Commissioner, supra, and Boyd v. United States, 762 F.2d 1369 (9th Cir. 1985),
                                      ‘‘clearly hold that § 165(d) limits the deduction of gambling losses even of those who gamble
                                      professionally.’’ However, the Court of Appeals went on to note:
                                         It is true that the U.S. Supreme Court’s 1987 decision in Commissioner v. Groetzinger * * *
                                      casts some doubt on the continued vitality of the reasoning of Nitzberg and Boyd, but it did not
                                      overrule those decisions. Like the district court, a three-judge panel of this court is bound by
                                      our precedents. If Nitzberg and Boyd are not to be followed any longer, the court sitting en banc
                                      must overrule them. * * * [Kent v. United States, supra.]




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                                      88                 136 UNITED STATES TAX COURT REPORTS                                       (81)


                                      Thus, contrary to petitioner’s contention, the Supreme Court
                                      acknowledged the congressional decision to treat gambling
                                      losses differently from other losses for purposes of the Fed-
                                      eral income tax, even when incurred as a ‘‘means of making
                                      a living’’. This passage cannot be readily reconciled with peti-
                                      tioner’s contention that Commissioner v. Groetzinger, 480
                                      U.S. 23 (1987), removed the section 165(d) limitation on
                                      losses from wagering transactions when incurred in the con-
                                      duct of a trade or business.
                                         The legislative history of the enactment of the Revenue Act
                                      of 1934 (1934 Act), ch. 277, sec. 23(g), 48 Stat. 689, the
                                      predecessor of section 165(d), also supports the conclusion
                                      that the limitation on losses from wagering transactions was
                                      intended to apply to all such losses, even if incurred in the
                                      conduct of a trade or business. Before enactment of 1934 Act
                                      sec. 23(g), there was no statutory provision specifically
                                      directed at wagering losses. The courts had determined the
                                      deductibility of losses from gambling on the basis of the
                                      predecessors of section 165(c)(2) that allowed deductions for
                                      losses incurred in any transaction entered into for profit,
                                      though not connected with a trade or business. 9 Caselaw and
                                      administrative rulings before enactment of 1934 Act sec.
                                      23(g) held that the deductibility of gambling losses depended
                                      upon whether the gambling was illegal or legal and whether
                                      it was undertaken for profit rather than merely for recre-
                                      ation. Losses from illegal gambling were deductible only to
                                      the extent of gains therefrom. Frey v. Commissioner, 1 B.T.A.
                                      338 (1925). 10 Losses from legal gambling were fully deduct-
                                      ible against other types of income if the gambling had been
                                      entered into for profit, see G.C.M. 10873, 1932–2 C.B. 85; see
                                      also Cronan v. Commissioner, 33 B.T.A. 668 (1935) (con-
                                      struing law before enactment of 1934 Act sec. 23(g) as
                                      allowing deduction of losses from legal gambling against non-
                                      gambling income), and not deductible at all if the gambling
                                      had not been entered into for profit, Beaumont v. Commis-
                                        9 See Revenue Act of 1932, ch. 209, sec. 23(e)(2), 47 Stat. 180; Revenue Act of 1928, ch. 852,

                                      sec. 23(e)(2), 45 Stat. 800; Revenue Act of 1926, ch. 27, sec. 214(a)(5), 44 Stat. 26; Revenue Act
                                      of 1918, ch. 18, sec. 214(a)(5), 40 Stat. 1067 (1919) (allowing deductions for losses incurred in
                                      any transaction entered into for profit, though not connected with the trade or business).
                                        10 The Board of Tax Appeals reasoned in Frey v. Commissioner, 1 B.T.A. 338, 340–341 (1925),

                                      that a loss from illegal gambling had not been ‘‘incurred’’ in any transaction entered into for
                                      profit (within the meaning of sec. 214(a)(5) of the Revenue Act of 1918) because the liability
                                      underlying the loss was not legally enforceable.




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                                      (81)                            MAYO v. COMMISSIONER                                           89


                                      sioner, 25 B.T.A. 474 (1932), affd. 73 F.2d 110 (D.C. Cir.
                                      1934).
                                         Against this backdrop, Congress decided in the 1934 Act
                                      that the unlimited deduction for legal, profit-motivated gam-
                                      bling was inappropriate. Instead, Congress determined that
                                      the judicially developed rule for illegal gambling, which lim-
                                      ited losses to gains, should be extended to legal gambling.
                                      The report of the Committee on Ways and Means explained:
                                      Section 23(g). Wagering losses: Existing law does not limit the deduction
                                      of losses from gambling transactions where such transactions are legal.
                                      Under the interpretation of the courts, illegal gambling losses can only be
                                      taken to the extent of the gains on such transactions. A similar limitation
                                      on losses from legalized gambling is provided for in the bill. * * * [H.
                                      Rept. 704, 73d Cong., 2d Sess. 22 (1934), 1939–1 C.B. (Part 2) 554, 570.]

                                      See also S. Rept. 558, 73d Cong., 2d Sess. 25 (1934), 1939–
                                      1 C.B. (Part 2) 586, 605 (to same effect). Since existing law
                                      at the time of enactment of the 1934 Act allowed losses to
                                      be deducted in excess of gains only in the case of gambling
                                      entered into for profit, see Beaumont v. Commissioner, supra,
                                      the limitation on losses in the 1934 Act was directed at
                                      profit-motivated gambling only. 11 As noted, 1934 Act sec.
                                      23(g) survives unchanged as section 165(d). Section 165(d)
                                      was therefore from its inception intended to apply to profit-
                                      motivated gambling. While caselaw at the time of enactment
                                      of the 1934 Act had not addressed gambling rising to the
                                      level of a trade or business as opposed to gambling consti-
                                      tuting a transaction entered into for profit, Congress’ clear
                                      intention to limit losses for profit-motivated gambling makes
                                      doubtful any claim that Congress did not intend the section
                                      165(d) limitation to apply to gambling conducted as a trade
                                      or business. See also Skeeles v. United States, 118 Ct. Cl. at
                                      370–371, 95 F. Supp. at 245–246 (to same effect); Offutt v.
                                      Commissioner, 16 T.C. at 1215 (finding no basis for distin-
                                      guishing gambling conducted as a trade or business from
                                      gambling constituting a transaction entered into for profit for
                                      purposes of the section 165(d) limitation on wagering losses).
                                        11 Only later was the language of sec. 165(d)—to the effect that losses from wagering trans-

                                      actions ‘‘shall be allowed’’—interpreted as a liberalizing measure in the case of recreational gam-
                                      blers, entitling them to deduct gambling losses to the extent of gambling gains without regard
                                      to profit motive. See Humphrey v. Commissioner, 162 F.2d 853, 855 (5th Cir. 1947), affg. in part
                                      and revg. in part a Memorandum Opinion of this Court; see also Winkler v. United States, 230
                                      F.2d 766, 774 (1st Cir. 1956).




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                                      90                 136 UNITED STATES TAX COURT REPORTS                                       (81)


                                        On the basis of the reasoning of Valenti v. Commissioner,
                                      T.C. Memo. 1994–483, and the additional reasons discussed
                                      above, we reject petitioner’s contention that Commissioner v.
                                      Groetzinger, supra, requires a holding that the section 165(d)
                                      limitation on losses from wagering transactions does not
                                      apply to persons engaged in the trade or business of gam-
                                      bling. Instead, following Offutt v. Commissioner, 16 T.C. 1214
                                      (1951), we hold that petitioner’s wagering expenses of
                                      $131,760 constitute losses from wagering transactions that
                                      are limited by section 165(d) to the gains he reported from
                                      wagering ($120,463), notwithstanding petitioner’s engage-
                                      ment in the trade or business of gambling. Accordingly,
                                      respondent disallowance of $11,297 of petitioner’s claimed
                                      loss is sustained.
                                      II. Definition of ‘‘Losses from wagering transactions’’
                                         We must now decide whether the section 165(d) limitation
                                      on ‘‘Losses from wagering transactions’’ is confined to peti-
                                      tioner’s wagering expenses or extends to his business
                                      expenses, as the parties dispute the point. An implicit
                                      holding in Offutt is that a professional gambler’s ‘‘Losses
                                      from wagering transactions’’ for purposes of section 165(d)
                                      include amounts expended on wagers as well as other
                                      expenses incurred in carrying on the trade or business of
                                      gambling. Respondent, relying on Offutt v. Commissioner,
                                      supra, and Estate of Todisco v. Commissioner, 757 F.2d 1 (1st
                                      Cir. 1985), contends that ‘‘Losses from wagering trans-
                                      actions’’ covers both, so that petitioner may not deduct either
                                      the $11,297 excess of his wagering expenses over gambling
                                      gross receipts or the $10,968 in business expenses he claimed
                                      in connection with carrying on his gambling business. 12
                                      Offutt and Estate of Todisco held that section 165(d) limits
                                      amounts expended on wagers as well as other expenses
                                      incurred in carrying on the trade or business of gambling,
                                      such as a bookmaker’s mailing, printing, and stenographic
                                      expenses (Offutt), or his State taxes on wagering (Estate of
                                      Todisco). Petitioner, while acknowledging Offutt, again
                                      argues that the subsequent opinion in Groetzinger requires a
                                      different result; i.e., that the expenses of carrying on his
                                        12 Respondent has not contended that the business expenses claimed are not ‘‘ordinary and

                                      necessary’’ expenses of petitioner’s trade or business within the meaning of sec. 162(a) or that
                                      they have not been substantiated.




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                                      (81)                            MAYO v. COMMISSIONER                                         91


                                      gambling business (other than direct wagering expenses) are
                                      deductible under section 162(a) without regard to section
                                      165(d).
                                         Neither the statute nor the regulations provide any defini-
                                      tion of ‘‘Losses from wagering transactions’’ as used in sec-
                                      tion 165(d). The legislative history also provides no insight,
                                      as it does not address this specific point. Offutt offered no
                                      reasoning to support the conclusion that ‘‘Losses from
                                      wagering transactions’’ should be interpreted to cover both
                                      the cost of losing wagers as well as the more general
                                      expenses incurred in the conduct of a gambling business.
                                      Although Offutt’s interpretation of ‘‘Losses from wagering
                                      transactions’’ has generally been followed by this Court in
                                      the 60 years since the case was decided, see Praytor v.
                                      Commissioner, T.C. Memo. 2000–282; Kochevar v. Commis-
                                      sioner, T.C. Memo. 1995–607; Kozma v. Commissioner, T.C.
                                      Memo. 1986–177; 13 but see Meredith v. Commissioner,
                                      T.C. Memo. 1984–651 (allowing deduction of professional
                                      gambler’s transportation expense where wagering losses
                                      exceeded gains), no Court of Appeals other than that for the
                                      First Circuit in Estate of Todisco has had occasion to directly
                                      address it. For the reasons discussed below, we conclude that
                                      reconsideration of Offutt’s interpretation of ‘‘Losses from
                                      wagering transactions’’ is warranted and that it should no
                                      longer be followed.
                                         While no Court of Appeals other than that for the First
                                      Circuit has directly addressed whether ‘‘Losses from
                                      wagering transactions’’ as used in section 165(d) encompass
                                      the business expenses of a professional gambler, various
                                      Courts of Appeals and this Court have considered the other
                                      side of the section 165(d) equation—‘‘gains from such trans-
                                      actions’’—and construed that phrase quite narrowly. The
                                      Courts of Appeals for the Fifth and Ninth Circuits and this
                                      Court have rejected arguments for an expansive reading of
                                      gains from wagering transactions and confined the phrase to
                                      the proceeds from a wager by the taxpayer where the tax-
                                      payer stands to gain or lose on the basis of chance. See Boyd
                                        13 We have expressed some subsequent doubts, however, whether the Offutt holding con-

                                      cerning the nonwagering business expenses of gambling is correct. See Kozma v. Commissioner,
                                      T.C. Memo. 1986–177 n.4 (quoting, with reference to the Offutt precedent, Justice Brandeis in
                                      Di Santo v. Pennsylvania, 273 U.S. 34, 42 (1927) (‘‘It is usually more important that a rule of
                                      law be settled, than that it be settled right.’’)).




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                                      92                 136 UNITED STATES TAX COURT REPORTS                                       (81)


                                      v. United States, 762 F.2d 1369 (9th Cir. 1985); Allen v. U.S.
                                      Govt. Dept. of Treasury, 976 F.2d 975 (5th Cir. 1992); Bevers
                                      v. Commissioner, 26 T.C. 1218 (1956); see also Williams v.
                                      Commissioner, T.C. Memo. 1980–494. But see Libutti v.
                                      Commissioner, T.C. Memo. 1996–108.
                                         In Boyd v. United States, supra, the Court of Appeals for
                                      the Ninth Circuit, in addition to finding that professional
                                      gambler Boyd’s losses from poker played as a casino
                                      employee to attract customers were losses from wagering
                                      transactions limited by section 165(d), was also faced with
                                      Boyd’s claim that his share of the casino’s ‘‘take-off ’’ from
                                      poker games conducted on the premises constituted gains
                                      from wagering transactions for purposes of section 165(d).
                                      Take-off was the fee the house charged card players for
                                      playing poker in the casino, computed either hourly or as a
                                      share of each pot, and Boyd was paid pursuant to his
                                      employment contract a portion of the take-off from the poker
                                      games in which he participated.
                                         Finding no statutory or regulatory definition of ‘‘gains from
                                      wagering transactions’’, the Court of Appeals reasoned that
                                      the words should be given their ‘‘ordinary meaning.’’ Boyd v.
                                      United States, supra at 1373. The court summarized the par-
                                      ties’ arguments and its conclusion as follows:
                                      The IRS argues that the phrase means gain from a wagering transaction
                                      entered into by the taxpayer. Boyd argues that it means gain flowing to
                                      the taxpayer from a wagering transaction, whether as a participant or as
                                      the house taking a table rental. While there is no controlling authority, the
                                      IRS position is more persuasive. [Id.]

                                      The Court of Appeals found persuasive this Court’s opinion
                                      in Williams v. Commissioner, supra, wherein we held that
                                      ‘‘tokes’’ given to blackjack dealers by players were not the
                                      dealers’ gains from wagering transactions eligible to be offset
                                      by wagering losses. Tokes are chips placed as a separate bet
                                      by a blackjack player for the dealer. If the player’s hand
                                      wins, the winnings from the separate toke bet are given to
                                      the dealer. The dealer-taxpayers in Williams argued that
                                      their toke income constituted gambling winnings that could
                                      be offset by gambling losses. We rejected that claim, because
                                      the toke bet, under casino policy and State law, remained
                                      under the control of the player until the winnings, if any,




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                                      (81)                            MAYO v. COMMISSIONER                                           93


                                      were given to the dealer. 14 Thus, we concluded, it was the
                                      player, not the dealer, who had entered into a wagering
                                      transaction, and any gain received by the dealer in connec-
                                      tion with the transaction was not gain from a wagering
                                      transaction. The Court of Appeals in Boyd adopted our rea-
                                      soning in Williams in holding that Boyd’s share of take-off
                                      income was not gain from a wagering transaction. While
                                      Boyd had contended that the take-off income was gain from
                                      a wagering transaction because it had ‘‘[flowed] to * * *
                                      [him] from a wagering transaction’’, the Court of Appeals
                                      concluded that the take-off income was not gain from a
                                      wagering transaction because it was not the result of a wager
                                      Boyd had entered. Boyd v. United States, supra at 1373.
                                         In Allen v. U.S. Govt. Dept. of Treasury, supra, the Court
                                      of Appeals for the Fifth Circuit reached the same result, on
                                      similar reasoning, as we reached in Williams regarding a
                                      blackjack dealer’s toke income. The Court of Appeals rea-
                                      soned that since the dealer ‘‘has no part in deciding to make
                                      the wager, and stands to lose nothing by it’’, he does not have
                                      gain from a wagering transaction as contemplated in section
                                      165(d) when he receives the winning proceeds from a toke
                                      bet made on his behalf. Id. at 976–977; see also Collins v.
                                      Commissioner, 3 F.3d 625, 631 (2d Cir. 1993) (taxpayer who
                                      stole racing tickets that generated net gambling losses had
                                      theft income, not gain from wagering transactions under sec-
                                      tion 165(d)), affg. T.C. Memo. 1992–478.
                                         In sum, to the extent this Court and the Courts of Appeals
                                      have considered the question, they have generally held that
                                      ‘‘gains’’ from ‘‘wagering transactions’’ within the meaning of
                                      section 165(d) must be the actual product of wagers entered
                                      by the taxpayer. Generally, it is not sufficient that the gain
                                      arise merely in connection with the conduct of wagering
                                      activities; the gain must be the direct result of a wager
                                      entered by the taxpayer. 15 By contrast, the holding in Offutt
                                      v. Commissioner, 16 T.C. 1214 (1951), is that ‘‘Losses from
                                      wagering transactions’’ extends to expenses incurred in
                                        14 We noted that, for example, the dealer was not free to take the ‘‘toke’’ chip before the cards

                                      were played, and a player was free to take back a winning bet he had placed for a dealer.
                                        15 An exception is this Court’s Memorandum Opinion in Libutti v. Commissioner, T.C. Memo.

                                      1996–108, which held that complimentary goods and services provided to the taxpayer by a ca-
                                      sino to induce gambling are gains from wagering for purposes of sec. 165(d). We nonetheless
                                      emphasized that the nexus of the ‘‘comps’’ to the placement of wagers was ‘‘close, direct, evident,
                                      and strong.’’




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                                      94                 136 UNITED STATES TAX COURT REPORTS                                       (81)


                                      connection with the conduct of a wagering activity, such as
                                      a bookmaker’s mailing, printing, and stenographic expenses,
                                      even though such expenses are not the direct result of a
                                      wager by the taxpayer. Take-off and toke gains from card
                                      games have an equally close, if not closer, nexus to wagering
                                      transactions as do the mailing, printing, and stenographic
                                      expenses of a bookmaker. Yet the latter are treated as ‘‘from’’
                                      wagering transactions in Offutt and its progeny when the
                                      issue is what constitutes a loss, while the former are not
                                      treated as ‘‘from’’ wagering transactions by this and other
                                      courts when determining what constitutes a gain. Section
                                      165(d) by its terms applies to losses and to gains ‘‘from’’
                                      wagering transactions. The use of different principles for
                                      determining what constitutes a gain versus a loss ‘‘from’’ a
                                      wagering transaction finds no support in the statute.
                                         The narrower interpretation that has been applied to gains
                                      from wagering transactions, requiring that they be the result
                                      of a wager entered by the taxpayer, more closely reflects the
                                      ordinary meaning of the words used in the statute, which is
                                      the applicable standard. See Crane v. Commissioner, 331
                                      U.S. 1, 6 (1947); Old Colony R.R. Co. v. Commissioner,
                                      284 U.S. 552, 560 (1932). Offutt’s more expansive interpreta-
                                      tion of ‘‘Losses from wagering transactions’’ as covering
                                      expenses that are not the result of the taxpayer’s wager goes
                                      beyond the ordinary meaning of the statutory phrase.
                                         In addition, the Supreme Court’s opinion in Commissioner
                                      v. Sullivan, 356 U.S. 27 (1958), decided 7 years after Offutt,
                                      casts some doubt on the treatment of a professional gam-
                                      bler’s nonwagering business expenses as creating a loss from
                                      a wagering transaction limited by section 165(d). Sullivan
                                      concerned the deductibility of the wage and rental expenses
                                      of the partners in an illegal bookmaking operation. The Tax
                                      Court had held that deductions for these expenditures were
                                      not allowable because the expenditures were illegal. The
                                      Court of Appeals reversed our decision, and the Supreme
                                      Court affirmed the decision of the Court of Appeals, holding
                                      that the bookmaking operation’s expenditures for wages and
                                      rent were ordinary and necessary business expenses deduct-
                                      ible under section 162(a).
                                      The amounts paid as wages to employees and to the landlord as rent are
                                      ‘ordinary and necessary expenses’ in the accepted meaning of the words.




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                                      (81)                            MAYO v. COMMISSIONER                                         95


                                      That is enough to permit the deduction, unless it is clear that the allow-
                                      ance is a device to avoid the consequence of violations of a law * * * or
                                      otherwise contravenes the federal policy expressed in a statute or regula-
                                      tion * * * . [Id. at 29; emphasis added.]

                                      Absent from the Supreme Court’s analysis was any reference
                                      to the section 165(d) limitation on wagering losses which,
                                      under the reasoning of Offutt, would be applicable to wages
                                      and rent incurred in conducting a bookmaking business. 16
                                      While, as indicated in the lower court opinions, the taxpayers
                                      in Sullivan had sufficient wagering gains so that section
                                      165(d) would not have operated to limit the deduction of
                                      wage and rent expenses, the absence of any analysis to
                                      establish this point suggests that the Supreme Court did not
                                      consider section 165(d) to apply to a gambling business’
                                      expenses of this nature.
                                         Moreover, the Court of Appeals for the Ninth Circuit, while
                                      not expressly holding that the section 165(d) limitation is
                                      confined to direct wagering expenses, has nonetheless
                                      employed reasoning which strongly implies as much. In Boyd
                                      v. United States, 762 F.2d 1369 (9th Cir. 1985), Boyd had
                                      also sought to deduct as business expenses under section
                                      162(a) his tipping expenses and the take-off fees he paid in
                                      order to play poker at the casino. Boyd was a refund pro-
                                      ceeding, and the Court of Appeals held that Boyd was not
                                      entitled to raise his claim for deductions for the tipping and
                                      take-off fees because he had not sufficiently identified these
                                      grounds in his refund claim filed with the Secretary, as
                                      required by the regulations under section 7422(a). The Court
                                      of Appeals distinguished between wagering losses and
                                      ‘‘expenses incidental to gambling’’, observing that the latter
                                      ‘‘would not be subject to the section 165(d) deduction limit.’’
                                      Id. at 1372. The Court of Appeals reasoned as follows:
                                        In his claim, Boyd stated that he ‘‘incurred losses from participating in
                                      the [casino] poker games’’ and that ‘‘[t]his expense’’ was deductible under
                                      section 162(a). ‘‘This expense’’ plainly refers to the poker losses, and
                                      nowhere does the claim mention tipping or take-off fees. Taken at its face
                                      value, Boyd’s claim directed the IRS’ attention to losses incurred betting
                                      on poker hands, and nothing else. Moreover, the wording of Boyd’s alter-
                                      native theory strengthens this impression. It refers to section 165(d),
                                      which provides that wagering losses may be deducted only up to the

                                       16 The taxpayer in Offutt v. Commissioner, 16 T.C. 1214 (1951), was engaged in both book-

                                      making and gambling for his own account.




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                                      96                 136 UNITED STATES TAX COURT REPORTS                                       (81)


                                      amount of wagering gains, reinforcing by implication the claim’s express
                                      statement that the losses for which deduction was sought were actual
                                      wagering losses, not other unspecified expenses incidental to gambling
                                      which would not be subject to the section 165(d) deduction limit. [Id.; fn.
                                      ref. omitted; emphasis added.]

                                      If the Court of Appeals had thought that Boyd’s tipping and
                                      take-off fees were simply a component of losses from
                                      wagering transactions to which the section 165(d) limitation
                                      applied, then distinguishing them from Boyd’s ‘‘poker losses’’
                                      would not have been necessary. Since Boyd’s poker
                                      losses exceeded his wagering gains, the tipping and take-off
                                      fees clearly would have been nondeductible because they
                                      were likewise in excess of wagering gains. Instead, the Court
                                      of Appeals distinguished the tipping and take-off fees as
                                      raising different legal issues than the poker losses. 17 As a
                                      consequence, Boyd’s failure to adequately identify these other
                                      issues in his administrative refund claim precluded the tip-
                                      ping and take-off fees from being raised in the refund suit.
                                      A necessary premise of the Court of Appeals’ holding is that
                                      the tipping and take-off fees did not necessarily constitute
                                      ‘‘Losses from wagering transactions’’ within the meaning of
                                      section 165(d).
                                         Finally, the Commissioner has applied the holding in
                                      Offutt v. Commissioner, 16 T.C. 1214 (1951), regarding the
                                      treatment of nonwagering expenses inconsistently. Since
                                      Offutt, the Commissioner has successfully maintained in
                                      many cases that the nonwagering business expenses of a
                                      professional gambler are limited by section 165(d), see Estate
                                      of Todisco v. Commissioner, 757 F.2d at 6–7; Praytor v.
                                      Commissioner, T.C. Memo. 2000–282; Kochevar v. Commis-
                                      sioner, T.C. Memo. 1995–607; Kozma v. Commissioner, T.C.
                                      Memo. 1986–177, while in other cases he has conceded their
                                      deductibility notwithstanding section 165(d), see Crawford v.
                                      Commissioner, T.C. Memo. 2010–54; Tschetschot v. Commis-
                                      sioner, T.C. Memo. 2007–38, 18 or failed to assert the section
                                      165(d) limitation on expenses of this type, see Meredith v.
                                        17 The Court of Appeals noted, for example, that lavish tipping might raise the issue of wheth-

                                      er it was an ‘‘ordinary and necessary’’ business expense within the meaning of sec. 162(a), and
                                      that take-off fees raised the issue of whether they should be construed as a component of a wa-
                                      ger’s cost rather than a business expense.
                                        18 See also Orr v. Commissioner, T.C. Summary Opinion 2010–55. We do not cite Orr as prece-

                                      dent, see sec. 7463(b), but merely to document the Commissioner’s concession in that case that
                                      gambling-related travel expenses of a professional gambler were deductible notwithstanding sec.
                                      165(d).




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                                      (81)                            MAYO v. COMMISSIONER                                          97


                                      Commissioner, T.C. Memo. 1984–651. After respondent had
                                      taken the position in this case that petitioner’s business
                                      expenses were limited by section 165(d), the Internal Rev-
                                      enue Service announced that it would no longer follow Offutt
                                      or Estate of Todisco. See IRS Chief Counsel Attorney Memo-
                                      randum, AM2008–013 (Dec. 19, 2008). However, our failure
                                      to address Offutt may invite further administrative inconsist-
                                      ency concerning a professional gambler’s entitlement to
                                      deductions under section 162(a) for the nonwagering trade or
                                      business expenses of engaging in gambling. 19
                                        For the foregoing reasons, we conclude that the holding in
                                      Offutt v. Commissioner, supra, that ‘‘Losses from wagering
                                      transactions’’ include the trade or business expenses of a
                                      professional gambler other than the costs of wagers, should
                                      no longer be followed. We accordingly hold that petitioner is
                                      entitled to deduct under section 162(a) the $10,968 in busi-
                                      ness expenses claimed in connection with carrying on his
                                      gambling business. 20
                                      III. Accuracy-Related Penalty
                                         Respondent determined that petitioners are liable for an
                                      accuracy-related penalty under section 6662(a) and (b)(2) for
                                      a substantial understatement of income tax on their 2001
                                      Federal income tax return. Respondent’s determination was
                                      premised upon the disallowance of both the $11,297 excess of
                                      wagering expenses over gross receipts from wagering and the
                                      $10,968 in business expenses not part of the costs of wagers.
                                      Since we have sustained respondent only with respect to the
                                      former, the resulting understatement would not be a
                                      substantial understatement of income tax as defined in sec-
                                      tion 6662(d). Accordingly, respondent’s determination as to
                                      the section 6662(a) and (b)(2) accuracy-related penalty is not
                                      sustained.
                                         To reflect the foregoing,
                                                                         Decision will be entered under Rule 155.
                                           Reviewed by the Court.
                                        19 Moreover, respondent’s reliance on Offutt in this case to deny petitioner’s business expenses

                                      incurred in gambling would result in an addition to tax for substantial understatement of in-
                                      come tax if respondent’s position were upheld.
                                        20 Respondent has not argued that any of petitioner’s claimed business expenses were so inte-

                                      gral to his wagers that they should be treated as part of the wagers’ cost. We leave any such
                                      issue for another day.




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                                      98                 136 UNITED STATES TAX COURT REPORTS                                       (81)


                                        COLVIN, COHEN, THORNTON, MARVEL, GOEKE, WHERRY,
                                      KROUPA, HOLMES, GUSTAFSON, PARIS, and MORRISON, JJ.,
                                      agree with this opinion.



                                         HALPERN, J., concurring: I agree with the result reached by
                                      the majority and write separately only to question the
                                      vitality of our Memorandum Opinion in Libutti v. Commis-
                                      sioner, T.C. Memo. 1996–108, in which we held that $2.5 mil-
                                      lion in comps (including free cars and European vacations)
                                      that the taxpayer received from an Atlantic City casino are
                                      ‘‘gains from * * * [wagering] transactions’’ for purposes of
                                      section 165(d). The majority describes Libutti as an ‘‘excep-
                                      tion’’ to the general rule that ‘‘ ‘gains’ from ‘wagering trans-
                                      actions’ within the meaning of section 165(d) must be the
                                      actual product of wagers entered by the taxpayer.’’ Majority
                                      op. p. 93 and note 15. The majority reports that in Libutti
                                      we emphasized that the nexus of the ‘‘comps’’ to the tax-
                                      payer’s wagering was ‘‘ ‘close, direct, evident, and strong.’ ’’
                                      Majority op. note 15. Before that statement in Libutti, how-
                                      ever, we stated: ‘‘Although petitioner’s receipt of the comps
                                      did not directly hinge on the success or failure of his wagers,
                                      he received the comps incident to his direct participation in
                                      wagering transactions.’’ (Emphasis added.) Compare that
                                      statement to what we say today: ‘‘Generally, it is not suffi-
                                      cient that the gain arise merely in connection with the con-
                                      duct of wagering activities; the gain must be the direct result
                                      of a wager entered by the taxpayer.’’ Majority op. p. 93.
                                      Whether there is any material difference between ‘‘incident
                                      to’’ and ‘‘in connection with’’ remains to be seen. And whether
                                      the Libutti result can survive as an exception to the general
                                      rule in the light of our analysis herein also remains to be
                                      seen.
                                         GOEKE and HOLMES, JJ., agree with this concurring
                                      opinion.

                                                                               f




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