Question

Godfry has been a professional gambler for years. He loves this line of work and believes the income is tax-free.

a) Use an available tax research service to determine whether Godfry's thinking is correct. Is the answer to this question found in the Internal Revenue Code? If not, what type of authority answers the question?

b) Write a short client letter communicating the results of your research. It should be no more than 2 pages, single spaced, in length (generally about 1 page should be sufficient).

Answer 1

(a): Godfry’s thinking is incorrect. This is because the income that is earned by him in his capacity as a professional gambler is not tax free. This income will in fact be taxed. Gambling income will be included in Godfry’s gross income.

The answer to this question is not found in the Internal Revenue Code. In fact the answer to this question is found in a court cases that has specifically addressed this issue. The court cases are Slavin, Arthur (1941) 43 BTA 1100, McKenna, James (1925) 1 BTA 326. Ellery, E., (1944) 4 TC 407.

(b) Letter to Mr. Godfry:

Dear Mr. Godfry,

This is with regards to the income being earned by you in your capacity as a professional gambler. Being your tax advisor it is my duty to advise you that the income being earned by you in your capacity as a professional gambler will not be tax free. In fact it will be included in your gross income and will be taxed.

You should be aware of the fact that income of a professional gambler is regarded as income from a trade or business for the gambler. A professional gambler seeks to earn profits on a continuous basis and profit motive is necessary for an activity to be classified as a trade or as a business. A professional gambler, in almost all circumstances, will be deemed to be conducting his gambling activities in a business-like manner. Moreover a professional gambler prepares for the gambling activities by doing extensive research and to enhance his gambling skills and expertise. A professional gambler will also expend considerable amount of time and effort to conduct his gambling activities and this will be deemed as an intention to earn profit by the gambler.

Considering the above factors your gambling income will be included in your gross income and hence will be taxed.

Please feel free to contact me and I will advise you on how to reduce your tax liability by making optimal use of standardized deductions and itemized deductions.

Best Regards,

Mr. Richard Dhoni

(Tax advisor and consultant)