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.

[pmacdaddy]

Reading it through. It says she was allowed to deduct gambling losses to offset gains. Isn't that the case for anyone with reportable gambling income?

It says she wasn't allowed to deduct the net gambling losses against her regular (trucking) income. So what did she really accomplish?

Is it an issue of being able to deduct expenses associated with her slot play and carryover of losses?

[SniperSB23]

Proving gambling is not recreational and you derive no pleasure from it would seem to be a huge stumbling block in being able to make a similar claim. I doubt many people would be able to get away with the same thing.

[SniperSB23]

Originally Posted by pmacdaddy

Reading it through. It says she was allowed to deduct gambling losses to offset gains. Isn't that the case for anyone with reportable gambling income?

It says she wasn't allowed to deduct the net gambling losses against her regular (trucking) income. So what did she really accomplish?

Is it an issue of being able to deduct expenses associated with her slot play and carryover of losses?

I'm no expert on taxes but I believe the difference is that she could still take the standard deduction instead of having to do an itemized deduction. Let's say she made $50,000 from her business and $7,000 from gambling.

With the itemized deduction she would have $57,000 for income and then take off the itemized deduction of $7,000 to wind up at $50,000.

Being able to offset the $7,000 above the line means she only has income of $50,000. She wouldn't need an itemized deduction so could then take the standard deduction of $5,350 to wind up with $44,650. I assume this wouldn't work for anyone who is a homeowner and already does an itemized deduction.

[pmacdaddy]

Maybe. But if you run a trucking business and piss away $1.4M a year on slots and can't itemize on your tax return, you have some serious problems.

[SniperSB23]

Originally Posted by pmacdaddy

Maybe. But if you run a trucking business and piss away $1.4M a year and can't itemize on your tax return, you have some serious problems.

I'm thinking playing slots for over 40 hours a week already puts you in the serious problems category.

[Cannon Shell]

The fact that the court found her to be a gambling 'expert' is a troubling sign that our justice system has gone insane.

[SniperSB23]

Originally Posted by Cannon Shell

The fact that the court found her to be a gambling 'expert' is a troubling sign that our justice system has gone insane.

Well, she did consult with casino employees....

[Holland Hacker]

Originally Posted by pmacdaddy

Reading it through. It says she was allowed to deduct gambling losses to offset gains. Isn't that the case for anyone with reportable gambling income?

It says she wasn't allowed to deduct the net gambling losses against her regular (trucking) income. So what did she really accomplish?

Is it an issue of being able to deduct expenses associated with her slot play and carryover of losses?

The difference is where you take the deduction on your return.

If it is trade or business it goes on page one, showing 0 in income.

If it is not a trade or business the income goes on page 1 and the deductions go on schedule A "below the line".

This primarily impacts your AGI which could exclude you from certain income limited benefits like the child tax credit, and other credits not to mention would probably put your AGI into the phase out of personal exemptions and itemized deductions.

I think there might also be another classification of a professional gambler, where you would be able to deduct track admission, handicapping materials, etc against your winnings.

[pmacdaddy]

Originally Posted by SniperSB23

I'm thinking playing slots for over 40 hours a week already puts you in the serious problems category.

Very true

[Dunbar]

Originally Posted by Cannon Shell

The fact that the court found her to be a gambling 'expert' is a troubling sign that our justice system has gone insane.

And don't forget she consulted the slot attendants, which shows how shrewd she was.

Here's a link to the opinion: http://www.ustaxcourt.gov/InOpHistor...pd.SUM.WPD.pdf

The whole opinion reads like a parody. Honestly, it's like the Tax Court was trying to be absurd. The paranoid side of me, however, wonders if the Tax Court is trying to either provoke Congress into writing some new tax code which would prohibit anyone from filing a Sch C as a professional gambler, or else provoke the Supreme Court into overturning Groetzinger.

Note that a "summary opinion" cannot be used as a precedent for other cases.

Originally Posted by pmacdaddy

Reading it through. It says she was allowed to deduct gambling losses to offset gains. Isn't that the case for anyone with reportable gambling income?

It says she wasn't allowed to deduct the net gambling losses against her regular (trucking) income. So what did she really accomplish?

Is it an issue of being able to deduct expenses associated with her slot play and carryover of losses?

Yes, you can deduct expenses if you file Sch. C, but I'm pretty sure you cannot carry over losses. I know for sure there's a specific prohibition against writing off gambling business losses against other income--that's even alluded to in this Tax Court opinion. And I'm reasonably sure that you cannot carry over losses.

Her biggest incentive to file as a business is to avoid the problems with the Alternative Minimum Tax. If you declare your losses as a deduction on Sch A, you can still get hit with a big tax bill because of the AMT.

It's not clear to me what was different about 2003 from the other years. It says she made a profit in 2003, but then it seems to say she deducted her losses up to the amount of her winnings.

--Dunbar

[pmacdaddy]

Thanks Tax Guys.

That AMT stuff is wild in it's own right...

[philcski]

Originally Posted by SniperSB23

Proving gambling is not recreational and you derive no pleasure from it would seem to be a huge stumbling block in being able to make a similar claim. I doubt many people would be able to get away with the same thing.

I don't find playing poker as recreational or for pleasure, it's a lot of time and stress, and if I turned to it full time as my primary source of income rather than secondary I would consider it work rather than entertainment. I do right now and I play maybe twice a month...

[Cannon Shell]

Originally Posted by philcski

I don't find playing poker as recreational or for pleasure, it's a lot of time and stress, and if I turned to it full time as my primary source of income rather than secondary I would consider it work rather than entertainment. I do right now and I play maybe twice a month...

But are you a poker expert yet?