Stephen "The Truth" Colbert works as a television talk show host. In 2010, Stephen generated substantial income from his role as talk show host from his employer, Viacom Inc. Wages from Viacom were about $100,000 in 2010. However, his show is only taped four days a week and taping only lasts a few hours each day. His crew of writers and his ability to effortlessly read the teleprompter provide Stephen with an extremely well paid job for just about 20 hours work per week. This leaves Stephen with time away from work that most typical U.S. employees would find enviable.
In 2010, Stephen found a way to use that extra time by becoming, in his words, a "professional slot machine gambler." On about 50 days in 2010, Stephen played slots in casinos in and around southern California. He managed to generate slot machine winnings of $102,000 in 2010 - that is, his total winning payouts from slots were $102,000. However, during those same 50 days, Stephen lost $116,000. Because of the level of play and money spent at the casinos, Stephen was probably one of the top 1% or 2% of gamblers in all of southern California. In fact, he was frequently invited to slot machine tournaments based on his gambling celebrity status. Stephen also kept meticulous records of his gambling endeavors. He had detailed books and records which tracked the amounts played each day, the amounts won and lost and various other expenses incurred. It seemed clear that Stephen took his slots very seriously. In previous years Stephen had played the slots less frequently but had managed to generate net gambling winnings (his wins exceeded his losses) and truly believed he could make money playing slots "professionally."
On his 2010 tax return (Schedule C of Form 1040 - Profit or Loss from Business), Stephen reported the following:
Gross Income $102,000
Car and truck expenses (2,323)
Supplies (212)
Travel (400)
Other expenses:
Gambling Losses (116,000)
Telephone expenses (65)
Net loss $(17,000)
Provides your opinion on the proper treatment of Stephen's gambling activities as it relates to calculating his taxable income (i.e., what is the taxable income or loss from Stephen's gambling). For the purposes of this memo, you may assume that his gambling activities rise to level of a trade or business. You may also assume that all of his expenses are ordinary and necessary business expenses that are fully supported and directly related to his gambling business.