federal tax research

The report must be prepared in tax memo format, 3 pages, Times New Roman, font 12, double-spaced. • The tax memo should include the following five sections: (1) facts, (2) issue, (3) authorities, (4) conclusion, and (5) analysis
Research Module #2
Scenario.
Tony and Stella resided in Utah at the time their petition was filed. Before 2006 they had a job with a business in his locality. Sometime in 2005 he learned that his employer planned to move the business to Costa Rica. In anticipation of that event Tony sought to find another source of income and decided that he would become a professional gambler. Stella also worked, and Tony thought that another source of income would allow her to stay home with their child. Before Tony’s decision to become a professional gambler, they had been casual gamblers but they did not wager large amounts. Sometime during 2005 they began to invest heavily in gambling (mainly playing slot machines). They were born in Vietnam, and their religious and cultural beliefs were derived from their Vietnamese background. They believed in Feng Shui. Because of this belief and other religious and cultural beliefs, they expected that certain days were “lucky days” or days on which their chances of successful gambling increased. They were cognizant that slot machine odds favored the casinos but expected to overcome those odds by attempting to gamble on their “lucky days”. In addition, they would watch other slot machine players; and if they had excessive losses, they believed that taking over machines of losing players provided more opportunity. That was their plan for making a profit. Initially, their Feng Shui/cultural approach resulted in success. Accordingly, they increased the amounts wagered in 2005 and continued doing so through 2006 and part of 2007. In early 2007 they realized that they were about $200,000 in debt and that their attempt to make a profit had failed. they had withdrawn money from their retirement funds and borrowed against various assets to finance their attempt to make a profit from gambling. During 2006 they were employed in West Jordan, Utah, and traveled approximately 130 miles to Nevada to pursue gambling. During 2006 they traveled 130 miles each way to Nevada casinos on Friday afternoons and gambled for long hours, sleeping only a few hours per night. They did this every weekend and on legal holidays when they were off work. Tony and Stella, because of their “lucky day” beliefs, generally limited their slot machine playing to one of the two individuals—the one with the more favorable “lucky day” indicators. During 2006 they reported combined winnings of $852,230. That included $586,038 of winnings that the casinos reported to the IRS on Forms W-2G, Certain Gambling Winnings (winnings in excess of $1,200), and $266,192 of winnings that were not reflected on Forms W-2G (winnings in amounts less than $1,200). Of the $586,038, Tony’s Forms W-2G reflected $500,490 and Stella’s Forms W-2G reflected $85,548. For 2006 their losses exceeded their gains by approximately $200,000. 2 On the 2006 return Tony claimed that he was a professional gambler (gambled for profit). He reported his 2006 gambling winnings and losses on a Schedule C, Profit or Loss From Business, but did not claim a loss in excess of winnings for the year.