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IRS Issues Proposed Rules on Winnings from Electronic Slot Machines.

(Parker Tax Publishing March 23, 2015)

The IRS has issued updated guidance, in a proposed revenue procedure and proposed regulations, on how taxpayers calculate their wagering gains or losses from electronic slot machines and the thresholds for when gambling establishments must report winnings from electronic slot machines. Notice 2015-21; REG-132253-11.

Determining Gains and Losses from Electronic Slots

In recent years, controversy between taxpayers and the IRS over determining wagering gains or losses from slot machine play has been complicated by changes in gambling technology. The increased use of electronic gambling, with the development of player's cards and tickets, has curtailed the redemption of tokens by slot machine players, normally the preferred method of tracking gains or losses. To reduce the burden on taxpayers, the proposed revenue procedure in Notice 2015-21 provides an optional safe harbor method for determining what constitutes a "session of play" for purposes of calculating wagering gains or losses from electronically tracked slot machine play.

In general, gains from wagering transactions are included in gross income (Rev. Rul. 54-339), and gains from a slot machine wagering transaction are determined on a session-by-session basis (Shollenberger v. Comm'r, T.C. Memo. 2009-306). Under Code Sec. 165(d), losses from wagering transactions are allowed only to the extent of the gains from such transactions.

Under the proposed safe harbor, a "session of play" begins when a patron places the first wager and ends when the same patron completes his or her last wager before the end of the same day. A taxpayer recognizes a wagering gain if, at the end of a single session of play, the total dollar amount of payouts from electronically tracked slot machine play during that session exceeds the total dollar amount of wagers placed by the taxpayer on electronically tracked slot machine play during that session. Conversely, a taxpayer recognizes a wagering loss if wagers exceed payouts at the end of a session of play.

A taxpayer must use the same session of play if the taxpayer stops and then resumes electronically tracked slot machine play within a single gaming establishment during the same calendar day. However, a separate session of play will begin if the taxpayer moves to a different establishment, or if the taxpayer uses a non-electronic slot machine. Additionally, if a continuous session extends from one day to the next (i.e. begins before midnight and ends after midnight), a separate session of play will begin at midnight.

Example: Taxpayer engages in electronically tracked slot machine play at Lucky Casino from 3:00 pm to 6:00 pm, and then moves to a different establishment, Happy Casino, to play slots from 7:00 pm to 9:00 pm before returning to Lucky Casino for more electronic slot play from 10:00 pm to 2:00 am the next day. Taxpayer will have three distinct sessions of play: one session encompassing his time at Lucky Casino from 3:00 pm to 6:00 pm and 10:00 pm to 11:59 pm, a second session at Lucky Casino for 12:00 am to 2:00 am, and a session encompassing his time at Happy Casino from 7:00 pm to 9:00 pm.

A taxpayer must calculate his or her wagering gains or losses separately for each session of play, and may not net the sessions together.

Taxpayers may not rely on the safe harbor in the proposed revenue procedure until it is finalized.

Reporting Winnings from Electronic Slots

On the other end of the spectrum, and in conjunction with Notice 2015-21, the IRS issued proposed regulations in REG-132253-11updating and simplifying badly outdated reporting requirements to account for how gambling establishments report payouts from electronically tracked slot machines. The updated requirements are proposed to be set forth in new Reg. Sec. 1.6041-10, which would replace the current regulations in Sec. 7.6041-1 of the Temporary Income Tax Regulations under the Tax Reform Act of 1976. See Parker's SAMPLE CLIENT LETTER for tax practioners: Reporting Gambling Winnings and Losses.

The current regulations governing information reporting of winnings from bingo, keno, and slot machine play were published in 1977. There have been significant advances in gaming industry technology since then, such as electronic slot machines and other mechanisms that permit electronic tracking of wagers and/or winnings. The proposed regulations will be effective when finalized.

The proposed regulations contain the same reporting threshold requirements for winnings from bingo, keno and non-electronically tracked slot machine play. However, the proposed regulations include new rules for determining the reporting threshold for electronically tracked slot machine play. The changes are intended in part to facilitate reporting that more closely reflects the gross income that will be reported by payees on their individual income tax returns, pursuant to Notice 2015-21.

Under these new rules, gambling winnings for electronically tracked slot machine play must be reported when two criteria are met: (1) the total amount of winnings earned from electronically tracked slot machine play during a single session netted against the total amount of wagers placed on electronically tracked slot machines during the same session is $1,200 or more; and (2) at least one single win during the session (without regard to the amount wagered) equals or exceeds $1,200. The first criterion helps to implement the safe harbor for computing gross income attributable to electronically tracked slot machine play described in Notice 2015-21. The second criterion is intended to be consistent with the casino industry's current practice of gathering payee information when a player wins a single jackpot that satisfies the reporting threshold.

Under this rule, reporting with respect to electronically tracked slot machine play is not required if no single win (without reduction for the amount of the wager) meets the $1,200 reporting threshold or if the net amount of winnings reduced by the amount of all wagers is less than $1,200. However, if the $1,200 reporting threshold for a single win is satisfied and all winnings from electronically tracked slot machine play during a session netted against all wagers during that session are $1,200 or more, gambling winnings for the session must be reported on a Form W-2G.

For a discussion of income from gambling, see Parker Tax ¶85,120.25. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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