Are comps taxable

[jasonfish11]

I never said he want respected TT. Actually I have read many of Russ Fox's tax responses and agree he knows his stuff. But if the guy just opend his yellowpages and went to CPA or Accountant some may not know much about taxes. My teacher for advanced financial accounting was a CPA with a Dr. in accounting yet he never took a tax class.

[Jimbo]

[ QUOTE ]
I'm pretty sure you cannot combine comps into your gross winnings, which are then offset by gross losses.

[/ QUOTE ]

It would appear here that Russ agrees with the position that casino comps are promotional expenses to the casino. Now I'm not 100% sure that extrapolates to comps not being considered gambling income to the pro gambler or not. I am very sure that any income determined to be gambling income can be offset by gambling losses though. Ergo if the IRS did determine your comps to be gambling income there is no provision for them to then disallow offsetting them with gambling losses. Now your State of residence is an entirely different matter.

The IRS link that applies to the above e-mail on Russ's website.

[fishyak]

Here is a little background and may either clear things up or cloud the issues. Remember when car companies started "rebates?" Rebates, which used to be bad, illegal things, became good things. Well, the IRS has always taken the position that rebates are taxable income, but price discounts are not.

So the nature of your comp. may impact whether it is classified as a rebate or a discount. Example, when I check in at the MGM and am told: "The casino has comped your room, sir." Because I am not getting a check back, that is considered to be a discount.

Look at the specific nature of your comp. If what you are getting can't be classified as a discount, you are in the zone where you may want pro advice and the comp may be taxable as either a rebate or taxable promotion, just like jackpot winnings.

This make not help you make sense of everything, but is should give you a sense of the history of dispute.

[*TT*]

I asked Russ Fox to join this thread, hopefully he will respond soon.

[Mr Rick]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Comps could be treated as income by the IRS (like gambling wins), but if so, they can probably be offset by gambling losses.

[/ QUOTE ]
This is true, IMO.

Comps would be part of the gross winnings. If gross losses are greater, then there is no taxable gambling income.

For gambling professionals, business expenses would also offset gross winnings. And the comps could have no tax impact depending on what they were used for (e.g., if they were used for a room during a trip, it is a net wash, if they were used for meals then 50% would be considered winnings).

[/ QUOTE ]

guys "IMO" - which stands for In My Opinion" statements when it comes to tax issues are false and invalid. The only thing that matters is fact, the IRS doesn't care about our opinions.

I'm pretty sure you cannot combine comps into your gross winnings, which are then offset by gross losses. I think read a sample case in Walter Lewis's Gamblers Guide to Taxes. I searched for the book in my home but I cannot find it to verify (but i did find How to Turn Your Poker Playing into a Business by Ann-Margaret Johnston - another great tax book but unfortunately it doesn't cover comps).

I suggest anyone interested in this subject get both books, and contact a qualified CPS such as 2+2's own Russ Fox (send him a PM), Ann-Margaret Johnston or Walter Lewis.

[/ QUOTE ]

Walter Lewis "Gamblers Guide to Taxes" p.15-18 discusses comps and notes that though the IRS tried to consider comps as income apart from gambling, the courts ruled against the IRS, that comps were in fact deductable when combined with all other gambling winnings, offset by total gambling losses.

I put IMO in my post as TT explains above to make sure that everyone does their own verification (especially with their accountants). My accountant agreed with what I said above as far as comps are concerned - but - because an accountant is liable for penalties when he/she is a signed preparer, it is important to make sure they are in agreement...

Edit: If you are a net winner, comps may have a zero impact depending on what you spend them on and how you are filing. If you file as a business (Schedule C) and use a comp on a casino trip for a room, then it is a wash because you are allowed to deduct the cost of a room. Similarly, you would be able to deduct 50% of comps used for meals. Again this is all "my opinion" based on what I have read, deduced, discussed with my accountant.

[Russ Fox]

The article that a poster in this thread linked to ( this blog post ) has nothing to do with casino comps. It has to do with casino employees and the tips (gratuities) they receive.

As to the subject of this thread, let's examine the IRS' directive on casino comps. Here are the relevant paragraphs:

[ QUOTE ]
Comps are items casinos give to their customers. Generally, they are awarded based on a casino’s expected win calculated from a gambler’s prior activity. Casinos use tracking systems to determine the amount and result of a patron’s gambling, and determine the appropriate level of comps to provide to a patron. Most regular patrons participate in casinos’ favored customer programs, often called slot clubs...

The systems casinos use to market their comps programs and award the comps have generally allowed the casinos to treat comps as promotional expenses, excepted from the limitations of IRC Sec. 274 by IRC Sec. 274(e)(7).

Therefore, unless the manner in which a casino awards comps to its patrons differs markedly from the method described above, agents are directed not to challenge whether the comps qualify for treatment as promotional expenses under IRC Sec. 274(e)(7)....

[/ QUOTE ]

Thus, for the casino, comps are generally a legitimate business expense. This is settled tax law.

For the patron, there are differences. Most comps are ignored by the casual gambler. A patron gambles, and the pit boss gives the gambler a comp for the coffee shop. Technically, it's income for the gambler but I've never seen the IRS go after such low-value comps.

On the other hand, I know of a couple of cases where a casino comped luxury items to a gambler, and the gambler declared them as income.

Adding to the complexity, the treatment might be different depending on whether the gambler was an amateur or a professional. Saying all that, the IRS still holds that comps are taxable to the gambler.

Ok, that's the IRS' position. However, as Mr Rick pointed out, the IRS has lost most (but not all) of those battles in the courts regarding taxing of comps. Discounts are not generally taxable, and the casino offers a comp (discount) to get someone to gamble.

So, what should you do? If this situation impacts you, you need to discuss your situation with your tax professional. What Mr Rick did (discuss his situation with his accountant) is absolutely the right thing to do. For me to offer a blanket statement ("gamblers can [or can't] ignore comps") would be wrong.

Hope this helps,

-- Russ Fox

[*TT*]

Russ - what about airline frequent flier miles, when they are redeemed aren't they considered income, when in fact they are a rebate against existing flights previously taken?

PS: Didnt realize Mr Rick was a CPA.

[bav]

[ QUOTE ]
Comps would be part of the gross winnings. If gross losses are greater, then there is no taxable gambling income.

[/ QUOTE ]
Only a professional gambler can offset losses against winnings and only declare the net. The rest of us are legally required to declare 100% of the winnings, and can then take losses as a Schedule A deduction.

No clue where comps fall. But honest and straightarrow as I am about taxes, I completely ignore comps. I've seen many things saying they ARE taxable. It's good to hear the IRS is losing challenges to that. Now I feel better about ignoring 'em.

[Russ Fox]

[ QUOTE ]
what about airline frequent flier miles, when they are redeemed aren't they considered income, when in fact they are a rebate against existing flights previously taken?


[/ QUOTE ]
Sure, they're income, but the IRS won't be requiring anyone to declare them--in general. We need to look at some history here.

Back in 1985, the Deficit Reduction Act of 1984 was passed. It directed the IRS to go after taxing employee fringe benefits. The IRS looked at a wide variety of these benefits, including frequent flyer miles. Most airlines did nothing, but American Airlines, which originated frequent flyer miles, protested vigorously. They claimed that such miles were a "rebate."

In 1988 the IRS dropped the issue.

This website speculates that the IRS dropped it because it would "cost too much."

Fast forward to 1995. The IRS issued a Technical Advice Memorandum stating that frequent flyer miles were taxable. I remember that well, as I was a frequent flyer during that time. America's middle class--businessmen & women--yelled at their Congressional representatives. The IRS heard that taxing frequent flyer miles was like hitting a third rail of taxation. The IRS subsequently announced that there were no plans to tax the miles.

Having said that, it's clear that under Section 61 of the I.R.C., frequent flyer miles are taxable. Indeed, when the issue has gone to court, that's been the ruling. See, for example, Charley v. Commissioner 91 F.3d 72 (9th Cir. 1996), where an executive must pay tax on his miles.

So, what does this mean if you have frequent flyer miles? Should you voluntarily declare them (the value you use for them) on your tax return? You certainly can, but given the IRS' position, you're in almost no danger if you don't. If the IRS starts up again on this issue, the yells from the airline industry and middle America would be deafening.

-- Russ Fox

NOTE: This opinion is limited to the one or more Federal tax issues addressed in the opinion. Additional issues may exist that could affect the Federal tax treatment of the transaction or matter that is the subject of this opinion and the opinion does not consider or provide a conclusion with respect to any additional issues. With respect to any significant Federal tax issues outside the limited scope of this opinion, the article was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

[Mr Rick]

[ QUOTE ]
PS: Didnt realize Mr Rick was a CPA.

[/ QUOTE ]

Well, I've been called many things before but never a CPA. I am just naturally outspoken on every subject and sometimes I get lucky...

My wife, however, is an accountant in the film industry, though equally not a CPA. This does not give me any additional insight into poker accounting issues because the film/TV industry is kind of unique. In fact, CPAs typically don't do very well there...