Taxpayer is an individual and resident of Ohio. During the 2012 year, Taxpayer occasionally visited various casinos, located in Indiana and outside of Indiana, and played slot machines recreationally. For each casino visit, Taxpayer had some wagering gains and also had some wagering losses. Also, for each casino visit, Taxpayer recorded his wagering gains and/or losses on a "per session" (usually per day/per visit) method, which includes the amount of money he designated to play and the amount of money remaining before he leaves for each casino visit. Pursuant to Indiana tax withholding requirements, the Indiana casinos withheld income tax on Taxpayer's wagering gains, if any, and issued W-2G forms.
In 2013, Taxpayer timely filed his 2012 Indiana Part-Year or Full-Year Nonresident Individual Income Tax Return ("IT-40PNR"), claiming that he was entitled to a refund of $2,708 on the income tax withheld by the Indiana casinos on his wagering gains.
Upon reviewing Taxpayer's 2012 return, the Indiana Department of Revenue ("Department") denied Taxpayer's refund claim. The Department also adjusted Taxpayer's Indiana income, resulting in the assessment of additional income tax, penalty, and interest.
The Department denied Taxpayer's refund for the 2012 tax year on the ground that Taxpayer could not claim gambling losses in calculating his Indiana income tax. The Department reasoned that Taxpayer, as a casual gambler, can only claim an itemized deduction concerning the gambling losses to the extent of his gambling winnings in Schedule A of his federal income tax return. Since Indiana does not allow a casual gambler to claim an itemized deduction of gambling losses on his state income tax return, the Department disallowed Taxpayer's requested adjustment of $79,068 to the taxable income reported on the W-2G forms. The Department's disallowance of Taxpayer's $79,068 adjustment on his 2012 return resulted in a deficiency of tax.
Taxpayer protested the denial of refund and the additional assessment of the individual income tax. Taxpayer added that, as a casual gambler, he did not attempt to deduct his gambling losses in his Indiana 2012 Indiana return, IT-40PNR. Taxpayer maintained that he did not deduct a loss–i.e., when he lost all of his wagers for the day. Rather, Taxpayer stated that, following the "per session" method outlined by the Internal Revenue Service ("IRS") in its Chief Counsel Attorney Memorandum AM2008-011 (Dec. 12, 2008), 2008 WL 5203844 ("IRS AM 2008-011"), he recorded his gambling winnings/losses (per day or per visit) for federal income tax purpose, which resulted in reducing gains by $79,068 (i.e., the total gains after netting minus the total amount stated in the W-2G forms) for 2012 tax year. Taxpayer thus asserted that since Indiana generally follows federal law and regulations in reporting income tax, he should be permitted to use the "per session" method to determine his Indiana adjusted gross income for Indiana income tax purposes. Thus, the issue is whether Taxpayer, a casual gambler, is permitted to use the "per session" method to report his gambling gains–as opposed to each individual winning transaction (per play)–in determining his Indiana adjusted gross income.
Under the facts presented, the taxpayer purchased and subsequently lost $100 worth of tokens on five separate occasions. As a result, the taxpayer sustained $500 of wagering losses ($100 x 5). The taxpayer also sustained losses on two other occasions, when the taxpayer redeemed tokens in an amount less than the $100 (basis) of tokens originally purchased. The loss is the basis of the bet ($100 in tokens) minus the amount of the tokens eventually redeemed. Therefore, on the day the taxpayer redeemed $20 worth of tokens, the taxpayer incurred an $80 wagering loss ($100-$20). On the day the taxpayer redeemed $70 worth of tokens, the taxpayer incurred a $30 wagering loss ($100-$70).
On three occasions, the taxpayer redeemed tokens in an amount greater than the $100 of tokens originally purchased. The amount redeemed less the $100 basis of the wager constitutes a wagering gain. On the day the taxpayer redeemed $150 worth of tokens, the taxpayer had a $50 wagering gain ($150-$100). On the day the taxpayer redeemed $200 worth of tokens, the taxpayer had a $100 wagering gain ($200-$100). And on the day the taxpayer redeemed $300 worth of tokens, the taxpayer had a $200 wagering gain ($300-$100).
For the year, the taxpayer had total wagering gains of $350 ($50 + $100 + $200) and total wagering losses of $610, ($500 from losing the entire basis of $100 on five occasions + $80 and $30 from two other occasions). The taxpayer's wagering losses exceeded her wagering gains for the taxable year by $260 ($610 - $350). The taxpayer must report the $350 of wagering gains as gross income under § 61. However, under § 165(d), the taxpayer may deduct only $350 of the $610 wagering losses. The taxpayer may not carry over the excess wagering losses to offset wagering gains in another taxable year or offset non-wagering income.
A casual gambler who elects to itemize deductions may deduct wagering losses, up to wagering gains, on Form 1040, Schedule A. In this case, the taxpayer may deduct only $350 of her $610 of wagering losses as an itemized deduction. A casual gambler who takes the standard deduction rather than electing to itemize may not deduct any wagering losses.
IRS AM 2008-011. (Internal citations omitted).
In this instance, referencing IRS AM 2008-011, Taxpayer noted in his 2012 return an adjustment of $79,068 in filing his Indiana IT-40NPR return. At the hearing, Taxpayer stated that he is a casual gambler and played the slot machines at various casinos in Indiana and outside of Indiana during 2012. Taxpayer stated that, for each visit, he recorded the amount of his wager at the beginning of his play and the remaining amount at the end of each of his visits pursuant to the method outlined in IRS AM 2008-011. Taxpayer further explained that, similar to the casual gambler in IRS AM 2008-011, the casinos only issued W-2G forms, withholding income tax on his winnings, and did not record his losses, if any. Thus, Taxpayer maintained that, for state income tax purposes, he should be allowed to use the "per session" method pursuant to IRS AM 2008-011 in filing his Indiana income tax return because Indiana generally follows federal tax law and regulations. Taxpayer further explained that his 2012 Indiana IT-40NPR return, as filed, resulted in a reduction of his federal adjusted gross income in the amount of $79,068 and, thus, a refund of state income tax is due in the amount of $2,708. To support his protest, Taxpayer submitted additional documentation, including a copy of his activity log–"2012 Slot Machine Activity by Session." The log consists of several columns, including, but not limited to, (1) the amount of money he designated to play at the beginning for each visit; (2) the amount of money remaining at the end of that day when he leaves the casino; (3) amount stated in W-2G form(s), if any; and (4) witness. Taxpayer thus claimed that he was entitled to a refund of the tax withheld on his wagering gains pursuant to the "per session" method outlined in IRS AM 2008-011 and that the Department erred in denying his refund and assessing additional income tax by only considering the income stated in the W2Gs issued by the casinos.
As a preliminary matter, the document Taxpayer cited is a Chief Counsel Memorandum which may not be cited as precedent pursuant to I.R.C. § 6110(k)(3). Nonetheless, as mentioned earlier, for income tax purposes, Indiana generally piggybacks federal law and regulations. Thus, IRS AM 2008-011 can be a useful guide to determine the proper amount of a casual gambler's income (from wagering gains) attributable to Indiana. Specifically, the reasoning offered in IRS AM 2008-011 to support its conclusion that aggregating winnings and losses occurred in a particular period, and then including the net winnings (winnings minus losses, whenever winnings exceed losses) as income is persuasive and well accepted by the federal courts. Additionally, as a matter of recordkeeping, the approach of netting upon redemption of token would have been less cumbersome.
In short, Taxpayer is permitted to report his wagering gains on a "per session" (per day or per visit) basis in determining his Indiana adjusted gross income pursuant to IRS AM 2008-011. For each session, Taxpayer's wagering gain is subject to Indiana income tax; however, Taxpayer is not allowed to claim any losses, if any, to reduce his gain in his 2012 Indiana IT-40NPR return or to carry over the losses to a different taxable year for state income tax purposes. Taxpayer's protest is sustained pending the Department's further review of Taxpayer's supporting documentation, including the activity log for the year at issue and W-2Gs, in determining the amount of refund.