Gambling Losses in Wisconsin

Published On: 29th August 2011

For non-professional gamblers, the Wisconsin Department of Revenue asserts that deductions for gambling losses must be added back into federal taxable income to reach Wisconsin taxable income.  (Gambling losses at the federal level are deductible itemized expenses to the extent they offset gambling gains.)  The position is based on Wis.Stat. §71.07(5)(a)7, which requires an addback for “miscellaneous itemized deductions under the Internal Revenue Code, without regard to whether such deductions are subject to the 2% floor as described in section 67 of the Internal Revenue Code.”

Ok, fine enough, but miscellaneous itemized deductions under the Internal Revenue Code are all subject to the 2% floor.  I.R.C. §67(a).  Miscellaneous itemized deductions are defined as all itemized deductions other than those specifically excluded under the statute from the definition of miscellaneous itemized deductions.  I.R.C. §67(b).  Gambling losses are an itemized deduction specifically excluded, per I.R.C. §67(b)(3) (referring to I.R.C. §165(d)).  Therefore, under the Internal Revenue Code, gambling losses are not a miscellaneous itemized deduction.

It seems the writers of the Wisconsin statute had the idea that there are miscellaneous itemized deductions, some of which are subject to the 2% floor.  Perhaps they were looking at the federal Schedule A, which tends to give that impression.

The upshot is that the Wisconsin position on gambling losses seems to be wrong, based on a straight reading of the Wisconsin statute combined with  the Internal Revenue Code.

Compare, Purdey v. United States, 39 Fed.Cl. 413 (1997), where the court noted that the “miscellaneous itemized deductions” disallowed under the federal AMT by definition do not include the excluded itemized deductions of I.R.C. §67(b).

A check on the case law indicates that no challenge to the Wisconsin position has been made along these lines.  Only one regular Wisconsin case generally addresses the issue of gambling losses under Wisconsin tax law, Dettwiler v. Department of Revenue, 731 N.W.2d 663 (Wis.App. 2007), but in that case the court simply noted that the parties accepted that gambling losses by a non-professional are a miscellaneous itemized deduction under the Internal Revenue Code.  Dettwiler, 731 N.W.2d at 666 n.2.  The court did nothing to link the Wisconsin code provisions to the definition of miscellaneous itemized deductions under the Internal Revenue Code.

Of course, it should be noted that the best way out for Wisconsites with gambling losses is to be considered a professional gambler, in which case the gambling losses are trade-or-business deductions and not any kind of itemized deduction in the first place.