Tax Type
Individual Income Tax
Description
Gambling income
Topic
Taxable Income
Date Issued
03-02-1988
March 2, 1988
Re: §58.1-1821 Application for Correction
§58.1-313 Jeopardy Assessment; Individual Income Tax
Dear******************
This is in response to conferences with you on July 23, 1987, and September 11, 1987, at which you initially presented an offer in compromise of ********* to settle the above assessments, then withdrew it and protested the assessment.
You contend that you have no undeclared income from gambling and have submitted several affidavits from players to the effect that the games were social and not for profit. The affidavits you submitted are consistent with the information received from State Police undercover agents to the extent that gambling occurred on a regular basis; that *********gambled; and that the pot was cut on a regular basis. Your affidavits state that gambling occurred "often" or "once or twice a week, if enough players." The police indicate that gambling hours were posted, totaling********** hours a week and their surveillance supports the assumption that gambling activity was carried on throughout the posted hours.
Based on this information, and a review of the Virginia returns filed for 1982 through 1986, the department concludes that there exists a significant amount of undeclared income from gambling. Your affidavits state that ********** played often and "lost as much as he won." Under the Internal Revenue Code and regulations, gambling winnings are gross income and must be reported. Gambling losses are deductible as a miscellaneous itemized deduction, but are limited to the amount of gambling winnings unless the taxpayer is in the business of gambling. See U. S. Treasury Regulation §1.165-10. Your returns do not show any itemized deductions for gambling losses nor do they include a schedule C to report gambling income or loss from a business.
Based on the information obtained from the police, it appears that ********* provided space, equipment and refreshments for gambling on a regularly scheduled basis over an extended period of time, and that the gambling occurred as scheduled even in *********absence. The fact that gambling hours were posted and that police observed activity at various times of the week for several years indicates that the gambling activity was more in the nature of a business than a social activity for**********. Thus, the amounts cut from the pot should also have been reported as gross income and the cost of the refreshments and other items should have been reported as expenses.
Therefore, the department properly concluded that there exists undeclared income from operation of a gambling business. Because the income was not reported the department was forced to estimate the amount of income pursuant to §§58.1-111 and 58.1-313. The amounts of the assessments appear to be reasonable based on the information available to the department at the time of the assessments. However, after reviewing the information provided in your affidavits and in the conferences, it appears that expenses may have been underestimated.
The original assessments were based on a gross income of $80 per posted hour of operation less 5% for the cost of refreshments. Based on the affidavits submitted, the percentage for expenses will be increased to 40% to cover the cost of refreshments and the Sunday "bonus pots." Attached are calculations showing the amount of the revised assessments which include the income reported and taxes Paid with the 1985 and 1986 returns.
After reviewing the information available at this time, the department will abate the fraud penalty and the assessments for the period before the police investigation began.
Accordingly, the assessments will be adjusted as shown in the attached schedule. The assessments, as adjusted, are a reasonable estimate of the undeclared income and are affirmed. Revised bills will be mailed to you shortly and payment should be made promptly.
It should be noted that these assessments are based upon estimates of federal adjusted gross income. Should the Internal Revenue Service audit your returns and adjust your federal adjusted income for any of these taxable years amended returns should be filed within 90 days from the change in federal adjusted gross income as required by §58.1-311 (60 days if a refund is claimed pursuant to §58.1-1823).
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner