Courtesy of Julian Block

Mark D. Collins was a compulsive gambler who thought it would be a career-enhancing move to take a job as a ticket seller at an off-track betting parlor in Auburn, N.Y., close by Syracuse. Once Mark settled into his job, he decided to work a scam on OTB.

The ticket seller devised a low-tech embezzlement scheme. Without shelling out money for the privilege, he entered bets for himself simply by punching them into his computer terminal. His sure-to-fail system: bet always on the favorite and increase the amount wagered until he finally hit a winning wager, thereby enabling him to recoup prior losses and to reap a slight profit.

The first few times, Mark usually netted a modest amount on his stolen bets, or lost just a small sum, which he would place in his cash drawer after the last race. Inevitably, one July day, it all hit the fan. By the end of the tenth and last race, Mark had lost so frequently that he wound up short for the day by about $38,000—total unpaid bets of $80,000 minus winning tickets of $42,000 from the final two races. Mark was unable to replace the $38,000 that should have been in his drawer, so he confessed to his supervisor and surrendered the $42,000 in winning tickets to OTB. Subsequently, he was prosecuted for grand larceny.

His punishment does not end the story, this being a tax column. He next had to contend with the IRS, which billed him for back taxes and interest charges on unreported income of $80,000 from gambling.

Mark challenged the assessment in the Tax Court, where he contended nothing extra was due the IRS because the tickets were worthless. The Tax Court easily rejected that argument and concluded that he had additional income of $80,000.

Betting tickets, reasoned the court, have an economic value; they represent "opportunities to gamble" that horseplayers are willing to purchase at face value. As a betting clerk, Mark assumed sufficient control over the tickets to realize that value. Previously, he had sidestepped detection; had he won on that July day, Mark would have put the winnings in his cash drawer to cover the amount bet and kept the excess. In short, he had stolen opportunities to gamble. However, Mark gained a partial victory. The court permitted him to offset the $80,000 with the $42,000 in winning tickets that he had given back to OTB, reducing his unreported income to $38,000.

But what about those losing tickets of $38,000? After all, the long-standing rule is that gamblers can deduct losses to the extent that they have winnings. The Tax Court refused to authorize that subtraction. Instead, it characterized the $80,000 as income attributable to theft, not gambling.

Why did the court do that? Because the law says gain from a wagering transaction is the excess of the amount won over the amount bet. Hence, no gain can result without a prior wager.

Here, there was no prior wager. The court said that what Mark did was wagering "only in the sense that he gambled that he would not be caught."