The IRS has proposed, via Notice 2015-21, an optional “safe harbor” method of determining slot machine sessions for purposes of tracking gambling wins and losses.  The notice contains a proposed revenue procedure that would be effective for tax years ending on or after its date of publication.  So it’s important to note the IRS is neither endorsing this method for returns currently being prepared, nor giving any assurance that this method will be respected for 2015.

The proposed procedure would allow taxpayers who are using electronically tracked slot machine play at a casino (such as via a “player’s card”) to treat each day’s electronically tracked play on a particular type of game at a single casino as a single session, with the casino presumably providing a day by day breakdown for the customer to support this treatment.

The day by day treatment is literal—if a player is playing a machine at midnight, local time for the casino, a new session will start at that time.  Similarly, if a player plays in the morning, leaves the casino and then returns that evening and plays the same type of game in the casino, that would still constitute a single session through midnight.

However, if the player goes to a different casino, the play at that casino would constitute a separate session.  As well, if the player were to engage in wagers on the same type of machine in the first casino but do so in a way that is not electronically tracked, those plays could not be combined with the electronically tracked play at the casino that day.

If a taxpayer elects to use this method for any day at a particular casino during the year, the taxpayer must use this method for all electronically tracked slot machine play at the same establishment during the year in question.

The proposed procedure gives seven examples of applying these proposed rules:

Example 1. A taxpayer engages in electronically tracked slot machine play at X, a casino, by using a player’s card. On January 1, the taxpayer plays slot machines at X, for the first time that day, from 3:00 p.m. to 5:00 p.m. At 6:00 p.m., the taxpayer leaves X for dinner. Later that day, the taxpayer returns to X and plays slot machines from 10:00 p.m. to 11:59 p.m. The play at X from 3:00 p.m. to 5:00 p.m. and from 10:00 p.m. to 11:59 p.m. is a single session of play on January 1.

Example 2. Assume the same facts as in Example 1, except that the taxpayer plays from 10 p.m. to 2 a.m. The play from 3 p.m. to 5 p.m. and the play from 10 p.m. through 11:59 p.m. constitute a single session of play. The play from 12:00 midnight to 2 a.m. is another session of play on January 2nd.

Example 3. Assume the same facts as in Example 1, except that the taxpayer goes to another casino, Y, to engage in electronically tracked slot machine play from 7:00 p.m. to 8:00 p.m. The taxpayer has 2 separate sessions of play on January 1: (1) one session of play from 3:00 p.m. to 5:00 p.m. and 10:00 p.m. to 11:59 p.m. at X, and (2) another session of play from 7:00 p.m. to 8:00 p.m. at Y.

Example 4. On January 1, at 3:00 p.m., the taxpayer starts electronically tracked slot machine play at X for the first time that day. At 5:00 p.m., the taxpayer finishes slot machine play for that day and has payouts in excess of wagers of $300. For the single session of play on January 1, the taxpayer has gambling winnings of $300.

Example 5. Assume the same facts as in Example 4, except that at 5:00 p.m., the taxpayer leaves the premises of X to eat dinner at a nearby restaurant. At 8:00 p.m., the taxpayer returns to the premises of X for more slot machine play. The taxpayer places wagers until 11:00 p.m. During the period from 8:00 p.m. until 11:00 p.m., the taxpayer’s wagers placed on electronically tracked slot machine play exceeded the total dollar amount of payouts from electronically tracked slot machine play earned by the taxpayer by $75. The taxpayer’s wagering gain for the single session of play at X is $225, the extent to which his payouts from electronically tracked slot machine play during that session exceeds the dollar amount of wagers from electronically tracked slot machine play.

Example 6. Assume the same facts as in Example 4, except the taxpayer goes to another area of X and from 5:15 p.m. to 7:00 p.m., engages in additional slot machine play that is not electronically tracked. This revenue procedure applies only to electronically tracked slot machine play (the session from 3:00 p.m. to 5:00 p.m.). Therefore, the taxpayer cannot include the slot machine play from 5:15 p.m. to 7:00 p.m. in the session of play for January 1.

Example 7. Assume the same facts as in Example 4, except that, three months later on April 1, the taxpayer returns to X for slot machine play, and begins electronically tracked slot machine play at 6:00 p.m. For the slot machine play on April 1, section 6.03 of this revenue procedure requires the taxpayer to use a session of play that runs from 6:00 p.m. up through 11:59 p.m. (or earlier in that calendar day, if his play ends earlier).

Taxpayers using this procedure would need to write “Revenue Procedure 2015-X” on line 21 of Form 1040 to indicate they are using this method, though that notation is proposed to only be first effective on 2016 returns (potentially due to issues of getting efile coding in place to recognize that election).

The IRS is looking for specific comments in the following areas with regard to this proposal:

• Alternative definitions for the term “slot machine;”
• Whether an interruption in play, such as leaving the gaming area for over 15 minutes, should affect the determination of what constitutes a single session of play;
• Whether a session of play should be based on a period other than a calendar day (making adjustments when necessary to accommodate the end of a taxpayer’s year on December 31st);
• Whether the definition of a single session of play should be determined by other factors, such as the duration of a trip or by each slot machine played (comments should include an explanation of the benefits and drawbacks of the proposed method);
• Whether the safe harbor should include payouts in the form of merchandise and bonus rewards;
• Whether the topic is appropriate for the Industry Issue Resolution (IIR) program described in Rev. Proc. 2003-36, 2003-1 C.B. 859;
• Whether a safe harbor method to determine a wagering gain or loss should be developed for other forms of gambling, including, but not limited to, keno, table games, and pari-mutuel wagers (comments should include the form of gambling, a description of the proposed safe harbor method, and an explanation of the benefits and drawbacks of the proposed method); and
• Whether any aspects of the optional safe harbor pose problems of administrability for stakeholders (including whether the issues and possible modifications on which comments are requested would pose problems for sound tax administration).

Note that taxpayers would not have to use this method to determine slot machine sessions, but rather it provides a safe harbor treatment that it appears the IRS hopes will be compatible with the casino’s electronic reporting systems for players.  Advisers who have clients that like to play the slots should keep an eye on developments regarding this procedure, as it seems likely the IRS plans to finalize the revenue procedure before the end of 2015.