## Facts

- Ronald Andrew Mayo gambled on horse races as his profession in 2001; Leslie Archer Mayo did not participate in the gambling activity.
- The Mayos filed a joint 2001 return reporting gambling activity on Schedule C.
- Mayo wagered $131,760 and won $120,463, producing a net wagering loss of $11,297.
- The return deducted (1) $131,760 as wagering expenses and (2) $10,968 as nonwagering business expenses (e.g., travel, meals, phone/Internet, admissions, subscriptions, handicapping data).
- The Schedule C reflected a net loss of $22,265, used to offset other income.
- The IRS issued a deficiency notice asserting an income-tax deficiency and an accuracy-related penalty under § 6662(a).
- Before trial, the IRS conceded Mayo was engaged in the trade or business of gambling but argued § 165(d) limited both wagering losses and nonwagering business expenses to the amount of wagering gains.

## Issues

1. Does I.R.C. § 165(d) apply to a taxpayer engaged in the trade or business of gambling, limiting net wagering losses to wagering gains?
2. If § 165(d) applies, does it also limit deductions for ordinary and necessary nonwagering business expenses otherwise deductible under I.R.C. § 162(a)?
3. Are the taxpayers liable for the I.R.C. § 6662(a) accuracy-related penalty?

## Decision

- The court held § 165(d) applies to professional gamblers and bars deduction of net wagering losses exceeding wagering gains.
- The court held § 165(d) does not apply to ordinary and necessary nonwagering business expenses; such expenses are deductible under § 162(a) without a § 165(d) cap.
- The court declined to impose the § 6662(a) accuracy-related penalty because the final determination eliminated the asserted substantial understatement.
- The court stated it would no longer follow earlier precedent that treated nonwagering gambling business expenses as § 165(d) wagering losses.

## Legal Principles

- I.R.C. § 165(d) limits “losses from wagering transactions” to the amount of “gains from such transactions,” including when wagering is conducted as a trade or business.
- “Losses from wagering transactions” under § 165(d) are confined to losses directly arising from the wagers themselves, not general costs of operating a gambling business.
- I.R.C. § 162(a) allows deductions for ordinary and necessary expenses paid or incurred in carrying on a trade or business, including a gambling business, and those expenses are not recharacterized as § 165(d) wagering losses merely because they relate to gambling activity.
- A penalty under § 6662(a) requires an applicable basis (such as a substantial understatement) that may be defeated when the recomputed tax liability removes the understatement.

## Conclusion

The Tax Court concluded that a professional gambler remains subject to § 165(d)’s cap on net wagering losses, but may deduct ordinary and necessary nonwagering business expenses under § 162(a) without regard to § 165(d), and it found no accuracy-related penalty due.


Mayo v. Commissioner, 136 T.C. 81 (T.C. 2011)