Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.
• Position: Tax rulings

Gross Income

Forfeited Gambling Winnings Not Included in Income

The IRS's Office of Chief Counsel (OCC) advised that gambling winnings that a taxpayer surrenders to a state as part of a program intended to help treat gambling addiction do not have to be reported by a casino to the taxpayer on Form W-2G, Certain Gambling Winnings, and are not includible in gross income by the =payer.

Background

A state, through a state agency, has established what is called a Voluntary Exclusion Program (VEP) as a means of treating gambling addiction. The state is not named in the chief counsel advice (CCA), but several states run similar programs, including California, Illinois, Indiana, Iowa, Kansas, Maryland, Missouri, New Jersey, Ohio, Oklahoma, and Pennsylvania.

Under the program discussed in the CCA, a participant enters into a written contract with the state under which the person voluntarily agrees to not enter a state casino. Under the terms of the contract and state administrative code, a VEP participant, who in violation of the contract enters a state casino, agrees to surrender any jackpot or thing of value won as a result of a wager made at the casino. The casino pays the winnings not paid to the VEP participant to the state for use in fighting gambling addiction.

An individual can enter into the state's VEP for a period of one year, five years, or for life. If the individual elects to participate for one or five years, he or she must affirmatively request to be removed from the program after the end of the term. However, an individual may not request removal from the VEP if he or she enrolls in the program for life. If a VEP participant enters a state casino, makes a winning wager, and then tries to claim the winnings, the casino will inform the participant that his or her name is on the VEP participant list, and the casino will not pay him or her any winnings. The participant is then supposed to be escorted from the casino. This treatment applies to slot machine jackpots and winnings from table games.

Questions for the OCC

The OCC was asked to answer two questions regarding gambling winnings that are not paid to a person because he or she is a participant in a VEP:

1. Is a casino required to issue a Form W-2G to an individual who wins a slot machine jackpot or has winnings from a table game but is not paid the winnings because he or she is a participant in a VEP?

2. Are winnings not paid to an individual because he or she is a VEP participant includible in gross income?

W-2G Reporting

Under Sec. 6041, a casino is, in general, required to report payments of winnings to gamblers of $600 or more in a tax year. Under Regs. Sec. 7.60411(a), if a casino makes a payment of a jackpot of $1,200 or more from a slot machine, it must report the payment on an information return. Under Regs. Sec. 31.3406(g)-2(d)(3), a...