Tax Research Memorandum Assignment 1

 

Tax Research Memorandum

Date

: September 28, 2011

To

: Tax Files

From

: Johnny Appleseed

Subject 

: Taxability of Gambling Gains/Losses and Business Expenses

Summary of Facts

Stephen Colbert is a part-time talk show host earning wages of $100,000 annually.Mr. Colbert is also a professional slot machine gambler, whose gambling activitiesrise to the level of a trade or business. In over 50 days of gambling in 2010, Mr.Colbert generated $102,000 in slot machine winnings and concurrently lost $116,000 at the slots. Mr. Colbert kept meticulous records of his gains, losses andexpenses. Besides the $102,000 in gambling winnings and $116,000 in wageringlosses, Mr. Colbert also incurred $3,000 in gambling business expenses that includedsupplies, travel and telephone costs. These expenses were ordinary and necessaryexpenses that directly related to his gambling business.

Issue

What is the tax treatment of Mr. Colbert’s gambling business gains, losses and

expenses?

Law and Analysis

IRC §162(a) generally allows a deduction for

all the ordinary and necessary expenses paid or incurred during the taxyear in carrying on any trade or business.However, IRC §165(d) applies to gambling losses more narrowly by specificallyproviding that losses from wagering transactions are only deductible to the extent of wagering gains. This serves to limit the applicability of §162(a) to thedeductibility of gambling losses. In

Offutt v. Commissioner,

16 TC 1214, the Tax

Court held that a taxpayer’s gambling losses canno

t offset active wages or incomefrom other non-gambling sources. Thus, under the limitations of §165 and Offutt,

Stephen’s gambling losses of $116,000 are deductibility only to the extent of his

gambling gains of $102,000.In

Mayo v. Commissioner 

, 136 TC No 4, the Tax Court concluded that although the

gambler’s losses may not offset other income, his business expenses

incurred in thecourse of his trade were deductible under IRC §162(a). The court reasoned that while §165(d) limited gambling losses it d

id not define “losses from wagering

Issues in research memos should be written in the context of the client’s facts. For example, the taxpayer’s name is used in the issue. In contrast, the issue in a judicial brief should be written in more general terms.

A one-sentence conclusion should immediately follow each issue. Research memos are easier to understand and follow when the reviewer knows the conclusion before reading the analysis.

Often, a good strategy is to begin an issue’s analysis with the relevant Code section.

When the case is attached, the only relevant information is the court and year. The traditional cite, consisting of the volume, reporter series, and page number, is unnecessary information that clutters the research memo.

This statement is the rule of law. At times, providing only a judicial decision’s rule of law is sufficient, especially for well-known landmark cases with broadly-applicable holdings. In contrast, other judicial decisions cited in this research memo are briefly discussed to establish their relevance to the client’s facts. Generally, you should discuss each judicial decision or ruling briefly to show its relevance; the example here is an exception to this usual procedure.

This sentence applies the Welch v. Helvering’s rule of law to the client’s facts. An explicit application of law to facts is very important in a research memo.

Subsequent references to a judicial decision within the same issue need only include a summary reference consisting of the taxpayer’s name.

The §162 possibility is addressed first since, if allowed, the deduction would be for adjusted gross income (AGI). Deduction for AGI is a more favorable outcome for many taxpayers than an itemized deduction, which the next paragraph addresses.

Often, a good strategy is to begin an issue’s analysis with the relevant Code section.

When the case is attached, the only relevant information is the court and year. The traditional cite, consisting of the volume, reporter series, and page number, is unnecessary information that clutters the research memo.

Sufficient facts are provided about Duberstein to establish the decision’s relevance to the client’s facts. Establishing that the fact pattern in the judicial decision is analogous to the client’s facts is very important in a research memo. The same is true of IRS rulings.

The rule of law follows the brief discussion of the judicial decision’s facts.

The explicit application of the law to the client’s facts is very important.

When the ruling is attached, the only relevant information is the ruling’s year and number. The traditional cite, which includes the volume, reference to the Cumulative Bulletin, and page number, provides unnecessary information that clutters the research memo.

Sufficient facts are provided about Rev. Rul. 55-192 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.

The explicit application of the law to the client’s facts is very important.

Issues in research memos should be written in the context of the client’s facts. For example, the dollar amount of the fines is used in the issue. Note that issues 1 and 2 could be combined as follows: "How much can Fly deduct for the $5,000 fines he paid to the Slammin-Jammin Club?" Combining the two issues might be appropriate when the analysis of each is very short or involves substantial overlap.

A one-sentence conclusion should immediately follow each issue. Research memos are easier to understand and follow when the reviewer knows the conclusion before reading the analysis.

Sometimes an issue requires that several subpoints be addressed (e.g., that total contributions must be allocated). In this situation, a short conclusion at the beginning of each subpoint is an organization strategy that can increase readability.

When the case is attached, the only relevant information is the court and year. The traditional cite, consisting of the volume, reporter series, and page number, is unnecessary information that clutters the research memo.

Sufficient facts are provided about Wilson to establish the decision’s relevance to the client’s facts. Establishing that the fact pattern in the judicial decision is analogous to the client’s facts is very important in a research memo. The same is true of IRS rulings.

Subsequent references to a judicial decision within the same issue need only include a summary reference consisting of the taxpayer’s name.

The explicit application of the law to the client’s facts is very important. As a Tax Court memorandum decision, other sources (besides and perhaps better than Wilson) could have been cited to establish the general principle that only the payor of an expense or donation is entitled to a deduction. The mere fact that Wilson involved a charitable contribution, like our client’s, does not necessarily mean that it is the best source to cite for such a general principle.

These two sentences simply clarify a difference between Wilson and our client’s facts that is irrelevant.

The explicit application of the law to the client’s facts is very important.

Sometimes an issue requires that several subpoints be addressed (e.g., no deduction for benefits received). In this situation, a short conclusion at the beginning of each subpoint is an organization strategy that can increase readability.

When the ruling is attached, the only relevant information is the ruling’s year and number. The traditional cite, which includes the volume, reference to the Cumulative Bulletin, and page number, provides unnecessary information that clutters the research memo.

Sufficient facts are provided about Rev. Rul. 76-232 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.

Sometimes an issue requires that several subpoints be addressed (e.g., nonattendance is irrelevant). In this situation, a short conclusion at the beginning of each subpoint is an organization strategy that can increase readability.

When the ruling is attached, the only relevant information is the ruling’s year and number. The traditional cite, which includes the volume, reference to the Cumulative Bulletin, and page number, provides unnecessary information that clutters the research memo.

Sufficient facts are provided about Rev. Rul. 55-192 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.

The explicit application of the law to the client’s facts is very important. The tax law often does not provide explicit allocation rules for every conceivable situation. Taxpayers often allocate items on the basis of common sense or sound logic. In other words, citing primary authority is not always necessary for allocation issues.

Issues in research memos should be written in the context of the client’s facts. For example, the dollar amount of the contribution (as established in issue 2), the client’s name, and the donee’s name are used in this issue.

A one-sentence conclusion should immediately follow each issue. Research memos are easier to understand and follow when the reviewer knows the conclusion before reading the analysis.

Often, a good strategy is to begin an issue’s analysis with the relevant Code section. If a regulation adds further insight, discuss its contribution next. In this issue, the regulation provides some clarification but is insufficient to resolve the issue and reach a conclusion.

Often, a good strategy is to begin an issue’s analysis with the relevant Code section. If a regulation adds further insight, discuss its contribution next. In this issue, the regulation provides some clarification but is insufficient to resolve the issue and reach a conclusion.

Sufficient facts are provided about Rev. Rul. 55-192 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.

Sometimes a statement summarizing the relevant factors, such as this one, is helpful before applying the law to the client’s facts. The more complex the law, the more likely a summary statement will be helpful.

The explicit application of the law to the client’s facts is very important.

Example of a Tax Research Memo

TO: File
FROM:
Albert Smith
RE:
Fly Jones (tax year 2003)

 
  
   
  
   
  
   
  
   
  
   
   
  
   

Is Fly entitled to a deduction for fines he paid to the Slammin-
Jammin Club?1

  
   
  
   
   
  
   
 

 
A-1

ABS
10/23/03


Fly Jones , 2003

  
 
   
 
   
   
  
   
  
   
  
   
   
  
   
 
  

 
A-2

ABS
10/23/03


Fly Jones , 2003 
  
  
   
  
   
  
   
   
  
   
 
   

 
A-3

ABS
10/23/03


Fly Jones, 2003
38

 

The Slammin-Jammin Club is not an authorized agent of the
American Red Cross since the latter did not know of the
contribution until it was actually received. Thus, payments
made to the club are deductible in the year the club transfers
the payment to the American Red Cross. Though Fly paid
some of his fines in 2002 and some in 2003, his $4,500
deduction falls entirely in 2003.39

 

  

 
A-4

ABS
10/23/03


  1. Issues in research memos should be written in the context of the client’s facts. For example, the taxpayer’s name is used in the issue. In contrast, the issue in a judicial brief should be written in more general terms.
  2. A one-sentence conclusion should immediately follow each issue. Research memos are easier to understand and follow when the reviewer knows the conclusion before reading the analysis.
  3. Often, a good strategy is to begin an issue’s analysis with the relevant Code section.
  4. When the case is attached, the only relevant information is the court and year. The traditional cite, consisting of the volume, reporter series, and page number, is unnecessary information that clutters the research memo.
  5. This statement is the rule of law. At times, providing only a judicial decision’s rule of law is sufficient, especially for well-known landmark cases with broadly-applicable holdings. In contrast, other judicial decisions cited in this research memo are briefly discussed to establish their relevance to the client’s facts. Generally, you should discuss each judicial decision or ruling briefly to show its relevance; the example here is an exception to this usual procedure.
  6. This sentence applies the Welch v. Helvering’s rule of law to the client’s facts. An explicit application of law to facts is very important in a research memo.
  7. Subsequent references to a judicial decision within the same issue need only include a summary reference consisting of the taxpayer’s name.
  8. The §162 possibility is addressed first since, if allowed, the deduction would be for adjusted gross income (AGI). Deduction for AGI is a more favorable outcome for many taxpayers than an itemized deduction, which the next paragraph addresses.
  9. Often, a good strategy is to begin an issue’s analysis with the relevant Code section.
  10. When the case is attached, the only relevant information is the court and year. The traditional cite, consisting of the volume, reporter series, and page number, is unnecessary information that clutters the research memo.
  11. Sufficient facts are provided about Duberstein to establish the decision’s relevance to the client’s facts. Establishing that the fact pattern in the judicial decision is analogous to the client’s facts is very important in a research memo. The same is true of IRS rulings.
  12. The rule of law follows the brief discussion of the judicial decision’s facts.
  13. The explicit application of the law to the client’s facts is very important.
  14. When the ruling is attached, the only relevant information is the ruling’s year and number. The traditional cite, which includes the volume, reference to the Cumulative Bulletin, and page number, provides unnecessary information that clutters the research memo.
  15. Sufficient facts are provided about Rev. Rul. 55-192 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.
  16. The explicit application of the law to the client’s facts is very important.
  17. Issues in research memos should be written in the context of the client’s facts. For example, the dollar amount of the fines is used in the issue. Note that issues 1 and 2 could be combined as follows: “How much can Fly deduct for the $5,000 fines he paid to the Slammin-Jammin Club?” Combining the two issues might be appropriate when the analysis of each is very short or involves substantial overlap.
  18. A one-sentence conclusion should immediately follow each issue. Research memos are easier to understand and follow when the reviewer knows the conclusion before reading the analysis.
  19. Sometimes an issue requires that several subpoints be addressed (e.g., that total contributions must be allocated). In this situation, a short conclusion at the beginning of each subpoint is an organization strategy that can increase readability.
  20. When the case is attached, the only relevant information is the court and year. The traditional cite, consisting of the volume, reporter series, and page number, is unnecessary information that clutters the research memo.
  21. Sufficient facts are provided about Wilson to establish the decision’s relevance to the client’s facts. Establishing that the fact pattern in the judicial decision is analogous to the client’s facts is very important in a research memo. The same is true of IRS rulings.
  22. Subsequent references to a judicial decision within the same issue need only include a summary reference consisting of the taxpayer’s name.
  23. The explicit application of the law to the client’s facts is very important. As a Tax Court memorandum decision, other sources (besides and perhaps better than Wilson) could have been cited to establish the general principle that only the payor of an expense or donation is entitled to a deduction. The mere fact that Wilson involved a charitable contribution, like our client’s, does not necessarily mean that it is the best source to cite for such a general principle.
  24. These two sentences simply clarify a difference between Wilson and our client’s facts that is irrelevant.
  25. The explicit application of the law to the client’s facts is very important.
  26. Sometimes an issue requires that several subpoints be addressed (e.g., no deduction for benefits received). In this situation, a short conclusion at the beginning of each subpoint is an organization strategy that can increase readability.
  27. When the ruling is attached, the only relevant information is the ruling’s year and number. The traditional cite, which includes the volume, reference to the Cumulative Bulletin, and page number, provides unnecessary information that clutters the research memo.
  28. Sufficient facts are provided about Rev. Rul. 76-232 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.
  29. Sometimes an issue requires that several subpoints be addressed (e.g., nonattendance is irrelevant). In this situation, a short conclusion at the beginning of each subpoint is an organization strategy that can increase readability.
  30. When the ruling is attached, the only relevant information is the ruling’s year and number. The traditional cite, which includes the volume, reference to the Cumulative Bulletin, and page number, provides unnecessary information that clutters the research memo.
  31. Sufficient facts are provided about Rev. Rul. 55-192 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.
  32. The explicit application of the law to the client’s facts is very important. The tax law often does not provide explicit allocation rules for every conceivable situation. Taxpayers often allocate items on the basis of common sense or sound logic. In other words, citing primary authority is not always necessary for allocation issues.
  33. Issues in research memos should be written in the context of the client’s facts. For example, the dollar amount of the contribution (as established in issue 2), the client’s name, and the donee’s name are used in this issue.
  34. A one-sentence conclusion should immediately follow each issue. Research memos are easier to understand and follow when the reviewer knows the conclusion before reading the analysis.
  35. Often, a good strategy is to begin an issue’s analysis with the relevant Code section. If a regulation adds further insight, discuss its contribution next. In this issue, the regulation provides some clarification but is insufficient to resolve the issue and reach a conclusion.
  36. When the ruling is attached, the only relevant information is the ruling’s year and number. The traditional cite, which includes the volume, reference to the Cumulative Bulletin, and page number, provides unnecessary information that clutters the research memo.
  37. Sufficient facts are provided about Rev. Rul. 55-192 to establish the ruling’s relevance to the client’s facts. Establishing that the fact pattern in the ruling is analogous to the client’s facts is very important in a research memo. The same is true of judicial decisions.
  38. Sometimes a statement summarizing the relevant factors, such as this one, is helpful before applying the law to the client’s facts. The more complex the law, the more likely a summary statement will be helpful.
  39. The explicit application of the law to the client’s facts is very important.

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