Gambler Ruled an Amateur by Wisconsin Tax Appeals Commission
The federal tax consequences facing recreational gamblers are not terribly difficult for me to discuss. That’s because the rules apply no matter where in the United States the recreational gambler is situated.
The same cannot be said for the state tax consequences facing recreational gamblers. On the one hand, some states don’t impose any income tax on individuals. On the other hand, some states impose income tax on gambling winnings but do not recognize a deduction for any gambling losses. Wisconsin is one of these “bad” states for recreational gamblers.
A recent Wisconsin Tax Appeals Commission case highlighted the state tax consequences facing a Wisconsin taxpayer who sought to file as a professional gambler, but was held to be a recreational gambler.
On her 2007 federal tax return, Carol Kubsch reported $473,075 of gambling winnings as “other income” and $473,075 gambling losses as an itemized deduction. On her 2007 Wisconsin income tax return, she reported $473,075 of gambling winnings, but could not deduct any of the $473,075 gambling losses.
Likely after realizing the Wisconsin tax law does not permit a deduction for gambling losses, Ms. Kubsch didn’t pay to the state the approximately $30,000 due from her gambling income. Instead, she filed amended 2007 federal and state income tax returns, changing her status from recreational gambler to professional gambler. That way, she thought, she could net the winnings and losses on a Schedule C, reflecting no income and thus no tax owed to Wisconsin for her gambling activity.
Unfortunately, a taxpayer can’t simply categorize oneself the type of gambler that produces the lesser tax bill. The professional versus amateur gambler status is a facts and circumstances determination.
Similar to the analysis recently employed by the U.S. Tax Court, the court applied a several factor test to determine whether the taxpayer gambled with regularity to the production of income for a livelihood.
Ms. Kubsch’s gambling was restricted to slot machines. She gambled when it conveniently worked into her weekly schedule, amounting to approximately eight days per month. She did not maintain an accurate and complete book of records. She did not present any evidence that she had ever studied any publications that would make her slot machine playing profitable.
Ultimately, the court held that all nine factors weighed in favor of the Department; the taxpayer’s gambling activities did not constitute a trade or business.
A taxpayer seeking to file as a professional gambler need be prepared to substantiate the position when called upon. Otherwise, be prepared to pay additional tax, interest, and possibly penalties.