It’s If you practice one type of “vice” law in Nevada—gaming law—you will often discover that not only do you require knowledge about gaming laws and regulations, but you will also need to know about the licensing and regulation of alcohol. That’s because nearly all businesses with a gaming license also require a liquor license. These include, for example, grocery stores, liquor stores, convenience stores, restaurants, and casinos.

After the Prohibition ended, the federal government left alcohol regulation primarily to the states, which then implemented a three-tier alcohol distribution system. The first tier are the makers of alcohol, also known as manufacturers or producers. These are the breweries, distilleries, wineries, etc. The second tier is made up of the distributors of alcohol, which is the group that imports alcohol and sells alcohol at wholesale to the third tier, the retailers. The retailers sell alcohol to the consumers and are the grocery stores, liquor stores, convenience stores, casinos, restaurants, etc.
Under this three-tier system, businesses will find that the purchase and sale of liquor is regulated at the federal, state, and local levels.

The feds
At the federal level, alcohol regulation is performed primarily through the Department of Treasury. See generally 27 U.S.C. § 201 et seq. Federal laws apply primarily to the makers and distributors of alcohol, rather than the retailers. Because of concerns that can be traced back to the pre-Prohibition era, when the alcohol businesses were extremely monopolistic, federal law prohibits makers and distributors to require retailers to purchase products to the exclusion of others. This means that an importer/wholesaler of liquor can’t make an arrangement with a restaurant that the importer/wholesaler will sell the restaurant a brand of whiskey so long as it does not purchase any other whiskey products from a competitor.
 Federal law also prohibits certain arrangements where a maker or distributor tries to induce retailers to purchase products to the exclusion of others through means such as giving the retailers equipment or supplies or requiring the retailer to acquire a certain quota of products. See 27 C.F.R. pt. 8. For example, an importer/wholesaler cannot require a grocery store to purchase a new line of cranberry-flavored vodka in order to obtain its normal shipment of vodka.
Basically, federal laws protect against any activity that would result in competitors being excluded from selling their products, such as offering money to the retailers’ employees to only sell a certain product or providing valuable equipment in exchange for an order. There are some federal laws that affect retailers, so your business clients should be cautioned.
The Federal Trade Commission can also take action against alcohol suppliers if their actions are considered anti-competitive, reduce consumer choices, increase prices, or cause an adverse affect on commerce. See, e.g., 15 U.S.C. § 45.

The state
The purchase and sale of alcohol is also regulated at the state level. See generally NRS Ch. 369. However, there is no state alcohol board or liquor commission (like the Gaming Control Board or Nevada Gaming Commission). State regulation is administered by the Department of Taxation and, just like federal law, primarily affects makers and distributors of alcohol. However, there are a few state law requirements for retailers.
Pursuant to the three-tier distribution in Nevada, state law requires makers of beer, wine, and alcohol to supply their products to a licensed importer. The alcohol then must be distributed by a licensed wholesaler, which means retailers can only buy alcohol from these licensed wholesalers. Usually, importers of alcohol are also the wholesalers of the products. Some states adopt a control version of the three-tier system in which the state operates at one of the tiers. For example, the state of Utah is the importer/wholesaler and retailer for liquors and wines because you can only purchase these items at a state-run liquor store.

Some states, including Nevada, allow exceptions to the three-tier system by allowing direct shipments of wines to consumers, skipping the wholesaler and retailer steps. Also, brew pubs are a form of direct distribution without having to go through the wholesale process.

The locals
Finally, your business clients that sell or serve liquor must obtain the actual liquor license through the local jurisdiction. Your first requirement is to determine the proper jurisdiction where the business is located. Your primary jurisdictions in southern Nevada are Clark County, City of Las Vegas, City of North Las Vegas, and City of Henderson. To obtain a liquor license, a detailed license application and background review by the local police department of certain individuals is required. As the process is unique and often time-consuming, it is always recommended to have a liquor attorney help with the licensing.
 

Jennifer Roberts is a shareholder with Lionel Sawyer & Collins’ Gaming and Regulatory Law Department. She practices mainly in the areas of gaming; federal, state, and local liquor laws; planning and zoning; as well as regulatory and administrative Law. Ms. Roberts is an adjunct professor of Introduction to Gaming Law and Resort Hotel Casino Law at William S. Boyd School of Law, University of Nevada, Las Vegas.

The In January 2011, taxpayer and professional gambler Ronald Mayo rolled the dice against the Internal Revenue Service (IRS) in the U.S. Tax Court and won. In Mayo v. Commissioner, 136 T.C. 4 (2011), where Mayo represented himself, the tax court decided to change sixty year-old tax law by holding that professional gamblers are now entitled to deduct business expenses incurred in their trade or businesses of gambling. Prior to the court’s ruling in Mayo, professional gamblers did not qualify for the full tax benefits of Internal Revenue Code (Code) Section 162(a), which allows a taxpayer to deduct his “ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.”

Overview
In its 1951 decision in Offutt v. Commissioner, 16 T.C. 1214, the tax court held that business expenses incurred by gamblers were to be treated the same as wagering losses (i.e., deductible only to extent of their gambling winnings). See Code § 165. Pursuant to Code section 165, a gambler may deduct his gambling losses (including any business expenses, such as travel, meals, etc.) only to the extent of his gambling winnings. Previously, the courts held that even a professional gambler could not deduct business loss against other income.

Mayo v. Commissioner
Taxpayer Ronald Mayo was a professional race horse gambler and reported on his 2001 tax return approximately $120,000 in gambling winnings, $130,000 in gambling losses, and $10,000 in ordinary and necessary business expenses. As a result, Mayo reported a $20,000 business loss on his 2001 Schedule C which he then used to offset other income he and his wife earned during that year, effectively reducing their gross income for 2001 by $20,000.

After auditing Mayo’s tax return though, the IRS did not agree with his loss deduction and issued a statutory notice of deficiency disallowing the entire $20,000 business loss (which consisted of wagering losses in the amount of $10,000 and business expenses of $10,000). Mayo’s case presented two inter-related legal questions: (1) whether a professional gambler may deduct wagering losses against gross income from other (non -gaming) sources, thus, effectively deducting wagering losses in excess of gambling winnings; and (2) whether a professional gambler is entitled to deduct his non-wagering “ordinary and necessary” business expenses against other income such as his wife’s wages.

With respect to the first issue, Mayo argued that under the U.S. Supreme Court’s decision in Commissioner v. Groetzinger, 480 U.S. 23 (1987), the limitation of Code section 165 on the deduction of gambling losses in excess of gambling winnings did not apply to professional gamblers. Relying on the U.S. Supreme Court’s observation that basic concepts of fairness demand that gambling activities be regarded as a trade or business just as any other readily accepted activities, Mayo contended that Code section 165’s limitation did not apply to professional gamblers engaged in the trade or business of gambling because it did not apply to other trades or businesses.

The tax court held that Code section 165’s limit applied, notwithstanding Mayo qualifying as a professional gambler. Consequently, his gambling losses ($130,000) were limited to the extent of his gambling winnings ($120,000). The court relied on its 1951 decision in Offutt to reach this conclusion.

On the other hand, Mayo got very lucky and prevailed on the second issue. The U.S. Tax Court held that his $10,000 in business expenses (i.e., travel, meals, etc.) during the conduct of his gaming trade or business were not subject to the Code section 165 limitation (gaming losses only deductible to the extent of gaming wins) but instead were fully deductible under Code section 162 as ordinary and necessary business expenses.

Conclusion
Mayo holds that while professional gamblers are still limited to deducting their gambling losses to the extent of their gambling winnings, professional gamblers are now entitled to deduct their “ordinary and necessary” business expenses without limit. Accordingly, for the first time, professional gamblers can deduct business losses without limitation against other income (i.e., a spouse’s wage income). Mayo is also important because it allows professional gamblers to make use of net operating losses, the rules of which have been made even more favorable in recent years.

Robert D. Grossman, Jr., is a tax attorney at Tax Law Center, LLC, in Las Vegas, Nevada. Mr. Grossman has a B.A. in economics from the University of Virginia and a J.D. from the University of Florida. Mr. Grossman also has an LL.M. in taxation from New York University and was formerly a trial attorney for the IRS, Office of Chief Counsel, Tax Court Litigation Division, Trial Branch, in Washington D.C. Mr. Grossman left that office as a Senior Trial Attorney and has been in his own law practice for the last 37 years where he represents taxpayers before the IRS and in tax planning.

Derek N. Hatch is an associate attorney at Tax Law Center, LLC. Mr. Hatch represents clients before all federal and state tax agencies, including the IRS and Nevada Department of Taxation. Mr. Hatch previously served as a law clerk for the City of Henderson Attorney’s Office and the United States Attorney’s Office for the District of Nevada. Mr. Hatch is a graduate of Brigham Young University and received his law degree from Chapman University School of Law. Mr. Hatch also holds an LL.M in taxation from Chapman University School of Law.