I don't know how much the court decisions have changed since when I looked into this about a decade ago, but the diary approach is basically whatever the IRS says it is.
We had a high net worth client who liked to gamble. She would go to Vegas or the Indian Casinos regularly. In the year of an audit, the IRS questioned her gambling losses netting against her winnings. Without our assistance, she obtained the coin in/out sheets from the casinos (She was a high roller and liked the comps and always used the card.) and turned them over to the IRS. They showed an over-all loss of about $60K. In its infinite mercy, the service accepted the coins out and in as the record. That record cost the client over $100,000 dollars.
How can this be? Statistics. Over the year, there were a ton of coins in and a ton of coins out of the slots she played. Now, overall, she lost a lot. But, on the front page of the return, there was hundreds of thousands of dollars in income that was not reported. In preparing the returns, only the W-2G's were listed as income. Because of the way losses are calculated and reduced from the income (On Schedule A) this huge increase income had all kinds of ramifications and limitations to other deductions and ratable things like passive losses and the amount one can put in retirement, the taxpayer was hit hard and we went to appeals and I was tasked with preparing a tax court case in the event appeals did not go well.
That's where we get to the diary.
The "guidelines" (The tax court enforced.) wanted EVERY WAGER documented. That would mean a diary of every pull of the handle and every placing of the bet and the result. You would think you could do it in sessions.
Something like:
Entry #1 April 1 left room with $100 at 9am and came back at noon with $10. Stupidhead was with me and I spent no money on anything else but the slots. (And so on and so forth.)
No, that is not good enough in most fact situations. EVERY pull, EVERY wager. A reasonable person would say entry #1 would result in no income and $90 gambling loss. The IRS (Statistically speaking, not an actual example, they would go by coins in.), if there was a 97% return might say you MADE about $2,900. [100 times .97 repeated until about 10 is left and then add up the amounts.] Sure, you can deduct it on schedule A. It's just that other deductions may be limited by the $2,900 on the front page.
