Your client, Mr. Smith, is a full-time professional poker player who lives in El Paso, Texas. Mr. Smith has been competing in poker tournaments for many years. For the last several years, he has been very successful, and his poker tournament winnings have far exceed his losses and expenses. Unfortunately, last year was not a good one for Mr. Smith. Last year, he won money at some poker tournaments, amounting to $164,000 in winnings, but also he lost $227,000 in other poker tournaments. In addition, Mr. Smith incurred the following expenses last year: (a) Travel to poker tournaments (others than in EL Paso): $2,400 and (b) Tournament admission/entry fees: $10,400. Smith also earned $81,000 of investment income last year. He recently told you that he assumes that, due to the losses and expenses, he will not owe any federal income tax for last year, and has asked you to confirm that for him.

• Are gambling winnings taxable?
• Are gambling losses deductible?
• Are gambling expenses deductible?
• Would Mr. Smith owe any federal income tax?

1. Develop a client letter that answers the above questions. Make sure to include appropriate references to the code and treasury regulation that support your conclusion.