Tax Court Ruling - Slot player in the business

[Holland Hacker]

Seems like this ruling would permit more people to be in the business of gambling.

Good outline of what you need to do to be considered in a trade or business for Tax purposes.

Slots player held to be in the business of gambling:

Linda M. Myers, TC Summary Opinion 2007-194

The Tax Court has held that a woman who ran a trucking business and also devoted significant time and energy to playing slot machines was in the business of gambling. As a result, she could deduct over $1.4 million in gambling losses above-the-line rather than as an itemized deduction. This prevented her from being liable for an over $5,000 deficiency.

Facts.
Linda spent nearly all of her time during 2003 pursuing two activities, a trucking business that she owned and operated, and her gambling activity. She spent 25 to 35 hours per week working at the trucking business and about 40 hours per week on the gambling activity. She developed certain strategies she felt would maximize her odds of winning. Her primary strategy was essentially to locate and play those slot machines that she believed were due to make a payout.

The casinos gave Linda Forms W-2G, Certain Gambling Winnings, when she won $1,200 or more on the slot machines. They also provided her with a player card that she could insert into the slot machines to track her activities. The player card, when inserted into the machine, would record the amounts she gambled and the amounts she won. Each year, the casinos would process the player card information to generate an annual profit and loss statement for Linda. While she used her player card most of the time, she did not use it every single time. The profit and loss statements were thus not a complete reflection of her gambling activities because they lacked any gambling she did without the player card.

Linda did not report an overall profit from her gambling activities in the 3 years before and the year after 2003, the year at issue. She won large jackpots several times, however, including $50,000 twice. She won jackpots of $1,200 or more over 300 times during 2003. She took home as much as $45,000 profit from 1 day's gambling.

Linda treated herself as a professional gambler on her income tax returns since at least 2000. She used the same accountant that helped with the trucking business to assist her with matters related to the gambling activity and to prepare her individual returns.

Linda filed her return for 2003 reporting that she was in the trade or business of gambling. She deducted her gambling losses as an expense to the extent of her gambling winnings, totaling $1,408,740 in 2003. IRS examined her return for 2003 and issued a deficiency notice.

Profit motive at issue. An activity must be conducted with continuity, regularity, and the primary purpose of earning a profit to be considered a trade or business under Code Sec. 162 . IRS conceded that Linda's gambling activity was conducted with the required continuity and regularity during 2003. However, it said that her gambling was not conducted with the primary purpose of earning a profit. The Tax Court therefore examined the nine nonexclusive factors in hobby loss Reg. § 1.183-2(b) to conclude that she had the requisite profit motive. Those factors and the Court's findings with respect to them are as follow:

(1) The manner in which the taxpayer carried on the activity. This factor looks at whether Linda conducted her gambling in a businesslike manner. While she didn't keep books and records, she used her player card most of the time which enabled the casinos to track her profits and losses. Although she also had no written budget or business plan, she had a strategy she felt would enable her to win. Her strategy was to identify and play slot machines that were due for a payout. She implemented the strategy by carefully gathering information about the playing history of the slot machines in the casino and studying their patterns to determine which slot machines were likely to pay out. The Court found this factor to favor her.
(2) The expertise of the taxpayer or his or her advisers. The Court noted that Linda considered herself a gambling expert and had gambled for over 10 years. The continuity and regularity of her gambling activity strongly suggested to the Court that she was an expert at slot machines. She also consulted regularly with casino employees to further her gambling strategy and watched other gamblers to understand what she believed to be slot machine payout patterns. The Court found that this factor favored her.
(3) The time and effort expended by the taxpayer in carrying on the activity. Linda spent at least 40 hours per week gambling. She would often gamble for 12 to 15 hours at a time. While gambling activities are often viewed as recreational, Linda testified credibly that she did not view gambling as a mere recreational pursuit and that she found no pleasure in gambling. The Court found that this factor favored her.
(4) The expectation that the assets used in the activity may appreciate in value. The parties agreed that this factor did not apply.
(5) The success of the taxpayer in carrying on other similar or dissimilar activities. Linda showed that she was capable of running a successful business through her ownership and operation of the trucking business. Her success with the trucking business indicated that she had the skills to operate a business successfully. She relied on the same accountant for her gambling activities and relied on her player card to track her winnings. The Court found this factor favored Linda.
(6) The taxpayer's history of income or loss with respect to the activity. Linda did not show a profit from her gambling activity for the 3 years before and the year after the year at issue. She persisted in the activity despite the ongoing pattern of losses, although she did change her strategy to some extent. The Court found that this factor favored IRS.
(7) The amount of occasional profits, if any, which are earned. Linda occasionally won jackpots as large as $50,000 from her gambling activity. She won sums of $1,200 or more over 300 times in 2003. Her frequent wins and occasional big wins indicate the possibility that Linda could have earned enough to cover her expenses in a year. The Court found that this factor favored her.
(8) The financial status of the taxpayer. None of the $64,000 she earned from the trucking business in 2003 could be offset by gambling losses due to the Code Sec. 165(d) limitation on deducting gambling losses only to the extent of winnings. Thus, she had no tax incentive to engage in the gambling activity to shield income from other endeavors. As a result, the Court found this factor was neutral.
(9) Whether elements of personal pleasure or recreation are involved. The Court acknowledged that gambling at a casino is an activity commonly understood to be a pleasant amusement. Linda testified credibly, however, that she found no pleasure in gambling. It was work. She testified that she found gambling to be stressful, tiring, and time consuming. She further testified that she always went to the casino alone and that no friends or family members accompanied her to add any entertainment element to her activities. The Court found her testimony thoughtful and credible and, on balance, that this factor favored her.

Just thought some of you mind find this interesting as the end of the year approaches and you get redy to speak with your accountant about preparing your tax returns or do year end tax planning.