Gross 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 taxpayer.
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:
- 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?
- 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. 7.6041-1(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 casino is required to report gambling winnings (other than winnings from bingo, keno, or slot machines) if the amount paid with respect to the wager is $600 or more and the proceeds are at least 300 times as large as the amount wagered.
The OCC advised that the obligation to file an information return for winnings from a slot machine or table game requires a payment of winnings to a person. Thus, a casino is not required to issue a W-2G to an individual who had gambling winnings but is not paid the gambling winnings because he or she is a VEP participant. However, if a taxpayer does receive some of his or her winnings despite being a VEP participant, the information-reporting requirements will apply to those winnings.
Income Inclusion
The OCC explained that under Sec. 61, gross income includes all income from whatever sources derived. Under the assignment-of-income doctrine, which was first set forth in the Supreme Court's decision in Lucas v. Earl, 281 U.S. 111 (1930), a taxpayer cannot assign income he or she earns to another taxpayer to avoid taxation on that income. However, the doctrine does not apply where the taxpayer disclaims, waives, renounces, or otherwise abandons any and all interests in the right to receive the income before it is earned, and the taxpayer does not direct, or retain the ability to direct, the disposition of the income after it is earned and payable.
The OCC concluded that a situation where an individual was denied gambling winnings due to participation in a VEP fell under this exception to the assignment-of-income doctrine. The OCC reasoned that by participating in the state VEP, the gambler is repudiating his or her right to any of the winnings before he or she earns or is paid any of the winnings. The fact that the taxpayer surrenders the winnings to the state does not give rise to an assignment of income because the taxpayer is not directing the payment of the winnings to another person. Rather, pursuant to state law and as reflected in the terms of the state VEP agreement the taxpayer entered into before he or she realized the winnings, the winnings the taxpayer renounces must be paid to the state. However, the OCC cautioned that if an individual received gambling winnings despite being a VEP participant, the amount he or she received would be included in gross income.
Reflections
VEPs are designed to help gambling addicts get control of their problem by keeping them out of casinos and removing any financial incentive to gamble. Based on the case law of the assignment-of-income doctrine, the OCC's reasoning in the CCA is sound, and given that a taxpayer does not become a VEP participant out of tax motives and receives no benefit from any winnings a casino turns over to the state, it would be a perverse policy to tax him or her on the winnings. Because the winnings are not paid to the taxpayer or includible in his or her gross income, it would also make no sense to require casinos to report the income on Form W-2G.
CCA 201433015 (8/18/14)
