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Professional v. Recreational Gambler Status in Tax Court

From a tax perspective, one of the benefits to filing as a “professional” gambler instead of as a “recreational” gambler is that only the former may deduct gambling-related business expenses that exceed the taxpayer’s “net” gambling winnings. This proposition is supported by a recent U.S. Tax Court decision from January. Earlier today, the U.S. Tax Court disallowed a taxpayer’s business loss from gambling in 2006 because the court held that the taxpayer was not a professional gambler in 2006.

In 2006, Randy Moore of North Carolina worked approximately 40 hours per week as a traveling x-ray technician, earning $63,619. During his downtime, he liked to gamble, primarily playing slot machines. He was issued twelve Form W-2Gs from two casinos for the year, totaling $25,534.

To his 2006 tax return, Moore attached a Schedule C and filed as a “pro gambler,” claiming zero “net” gambling winnings (Moore reported $25,534 of wagering losses), and $15,455 of assorted business expenses, reflecting an overall business loss of $15,455. The IRS challenged Moore’s professional gambler status, taking the position that he could not claim the business loss, and that he must itemize his wagering losses of $25,534 on Schedule A.

What’s noteworthy here is how the case likely began. The IRS first raised the professional gambler status issue in its answer to the taxpayer’s petition. The notice of deficiency claimed that the taxpayer failed to report $25,534 in gambling winnings. The IRS later conceded that he did report such, but likely only after an explanation that the winnings were offset by gambling losses. It’s this explanation that probably resulted in the IRS taking notice of the taxpayer’s business loss from gambling.

Because the IRS first raised the professional gambler status issue in its answer, the burden of proof was on the IRS to prove that Moore was not a professional gambler. Accordingly, the IRS was required to demonstrate that Moore did not gamble with the intent to profit. Here are the factors the court considered to make its analysis:

  • Manner in which the taxpayer carries on the activity;
  • The expertise of the taxpayer or his advisors;
  • The time and effort expended by the taxpayer in carrying on the activity;
  • Expectation that assets used in activity may appreciate in value;
  • The success of the taxpayer in carrying on other similar or dissimilar activities;
  • The taxpayer’s history of income or losses with respect to the activity;
  • The amount of occasional profits, if any, which are earned;
  • The financial status of the taxpayer; and
  • Elements of personal pleasure or recreation.

From the evidence presented, the decision was easy for the court to make. He didn’t keep records of his gambling activity. Big mistake. Also, he had never profited from gambling, and did not seek possible ways to improve upon his performance.

As an aside, I find it rather interesting that the IRS conceded the deductibility of the taxpayer’s $25,534 in wagering losses, despite the taxpayer failing to maintain any records of his gambling activity. We can’t glean the entire history of the audit from this tax opinion alone. It’s possible the concession from the IRS was a product of audit negotiations. I wouldn’t expect the IRS to concede gambling losses without substantiation in most audits, however, particularly with reported gambling losses of six figures or greater.

This case is informative for a taxpayer who asks the question: Can I file as a professional gambler? Remember, a taxpayer doesn’t have a choice. It’s a matter of whether he/she can show that the above factors as applied to particular facts and circumstances demonstrate one engaged in gambling for profit. If not, winnings and losses are reported in separate places on the tax return.

Case: Moore v. Commissioner, T.C. Memo 2011-173.

  1. Anonymous
    July 21st, 2011 at 20:12 | #1

    interesting post… in 2000-2003 I had claim winning casinos posted from jackpots and tourn… I had records (not substantiating loses) but claimed loses of 25% to offset part of the tax burden… they didn’t bug me give them alittle and they will leave you alone

  2. July 26th, 2011 at 04:58 | #2

    Brad, you commented on Poker Grump’s blog “You are correct to state that a taxpayer almost never has a choice between filing as a professional or recreational gambler”

    So..what’s the rule? My tax preparer “assures” me that it’s “OK” that we fiel me as a recreational player.

    That’s all I do and have been making a living at it for 4 years.
    Please help. Can I be in big trouble?

    • July 26th, 2011 at 09:32 | #3

      The leading authority addressing the issue of professional versus recreational gambler status is the 1987 U.S. Supreme Court case Commissioner v. Groetzinger. In that case, the taxpayer filed as a professional gambler. The IRS selected the taxpayer’s return for audit, taking the position that the taxpayer should have itemized his gambling losses. The Supreme Court held for the taxpayer, recognizing that the taxpayer was engaged in the trade or business of gambling, and correctly filed as a professional. The court stated:

      [T]o be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer’s primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify.

      The court also made sure to point out that “resolution of this issue requires an examination of the facts in each case.” Put another way, each taxpayer’s individual facts and circumstances must be evaluated to determine whether the taxpayer is engaged in gambling with continuity and regularity, and whether the taxpayer’s primary purpose for engaging in gambling must be for income of profit.

      • July 26th, 2011 at 21:01 | #4

        Good info taxdood, thanks.
        …how do you feel about my situation? Been playing everyday for 4 years – no other income.

  3. July 27th, 2011 at 09:23 | #5

    Jim, you are asking me to provide tax advice specific to your situation, and I must refrain from doing so over the internet. Feel free to shoot me an e-mail at brad@taxdood.com to continue the conversation privately.

  4. Anonymous
    January 12th, 2012 at 17:46 | #6

    I am preparing a petition for Tax Court and qualify for a small tax case (< $50k). IRS says I can't use Sch C for 2009 (as they said for 2005, but backed off w/o explanantion). IRS says to add up W2-Gs to get winning session totals, but I have a 2009 losing session where I received 28 W2-Gs and many other sessions involving multiple meaningless W2-Gs. I spend as much time with gambling activity as with my full time job, and I have used Sch C since 2005.

    The petition kit has about 60 cities to choose from for Tax Court. A few are available only for small tax cases. I am thinking of choosing Las Vegas and choosing a regular case (w/o representation). My rational is that a court in Las Vegas should be less clueless about gambling. By choosing a regular tax case, I still have opportunity to appeal. Obviously, so does the IRS but I doubt they will appeal. Anyone have any thoughts about these decisions?

    • January 16th, 2012 at 11:09 | #7

      You are asking for advice specific to your situation, which I cannot and do not provide over the internet.

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