Harry earns his entire living by betting on harness races and, like most gamblers, he has always been wary of dealings with the Internal Revenue Service. But he decided that the best way to handle his taxes was to be straightforward and relatively honest.
He kept meticulous records of all his gambling transactions that even eagle-eyed IRS nitpickers would find unassailable. On his tax returns he listed his occupation as "parimutuel bettor" and declared his earnings from gambling.
A navie soul might think that Harry would merit a citation as the taxpayer of the year. Instead, his straightforwardness led him into a bureaucratic thicket, into one of the Catch-22 situations that only the IRS could create.
In 1978 Harry had what he said was a sub-par year for him. He pushed $180,000 through the mutuel windows of harness tracks from New York to Florida and collected $200,000, for a profit of $20,000. Included in these winnings were about $24,000 worth of large payoffs on which the IRS had imposed its 20 percent withholding tax at the track. Harry was entitled to get some of this money back.
So he filed his tax return in the manner that IRS rules suggest. On Form 1040 he listed, $200,000 as income and subtracted a $180,000 deduction for gambling losses. The trouble with this method of reporting -- as opposed to listing only a $20,000 net profit from gambling -- is that it is sure to start red lights flashing on the IRS computer.
The lights did flash when the computer saw Harry's return, and he got a notice of an audit. But he could not have imagined what the IRS had in mind. The government was billing him for more than $9,000 as a "minimum tax" payment.
The minimum tax was instituted so that citizens with large, well-sheltered incomes would have to pay some taxes, no matter how many deductions they had fashioned. To apply this rule to someone who earned $20,000 was absurd, but the IRS was hypnotized by the $200,000 figure listed as income.
"In theory," Harry said, "I could start the year with $1,000, have $100,000 worth of activity at the windows and wind up with $1,000 at the end of the year. But the IRS would act as if I'd actually earned $100,000. It was crazy. So I went to the regional office and went through two or three levels of dummies before I found a bright young man who told me what to do."
On the suggestion of this IRS official, Harry filed an amended return and declared his gambling earnings on Schedule C, "Profit and Loss from Business or Profession." He listed his $180,000 in wagers as "cost of operations" and his $200,000 return as "gross receipts or sales." As business expenses he deducted mileage to racetracks, depreciation of his car, tips to the dinning-room maitre d's and other costs. He did this again on his 1979 return. And was audited again.
The IRS office in his home area challenged those deductions, but Harry asked that the audit be transferred to the Washington area, since he was operating at Rosecroft at the time. The auditor here had no objections to these deductions. She scrutinized Harry's gambling records and found them in order, he had saved every parimutuel ticket and kept a ledger recording every bet he made. But she told him flatly. "Gambling is not a business. You can't file on Schedule C."
At this moment Harry remains in a government-created limbo. He wants to declare his income, but one agent won't let him use Schedule C, while another acknowledges that he would be crazy to use Form 1040 and be socked for a minimum tax.
"They want you to be honest," Harry moaned. "but they won't do it. They can't do it. Instead they drive you crazy."