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Sometimes You Should Not Dispose Dirty Napkins

Last night I appeared on a taping for a poker talk radio show. At the end, the host asked me if I had any final words for the listeners. I said: “Keep very very very good records of your gambling activity.” Insufficient records is a losing bet for a taxpayer who claims gambling losses. Roy Rampadarat found out the hard way in a recent Minnesota Tax Court decision.

Mr. Rampadarat enjoyed playing slots at the Mystic Lake Casino from 2001 to 2005. On his Minnesota income tax returns for each year, he filed as a professional gambler. Under Minnesota Tax Law, a professional gambler includes gambling losses in the Alternative Minimum Tax formula, but a recreational gambler cannot. This rule differs from federal law, which allows an amateur to take the deduction for AMT purposes.

The Minnesota Department of Revenue audited Mr. Rampadarat, and took the position that he was not a professional gambler. The Department sought $53,723.15 in tax, interest, and penalties. Mr. Rampadarat appealed and took the Department to court.

Of course, the professional versus recreational gambler status is a facts and circumstances determination. The court recognized nine nonexclusive factors to make this determination, and found four of them relevant in this case:

  • The activity is carried on in a businesslike manner and taxpayer maintains complete and accurate books and records in which the taxpayer carries on the activity (e.g., keeping records in a businesslike way);
  • The time and effort that the gambler expended;
  • The amount of occasional profits, if any, which are earned; and
  • The financial status of the taxpayer.

Mr. Rampadarat’s system of recordkeeping included notes on napkins of his winnings and losses. At a month’s end, he compared these notes to his credit card statements, and if the numbers matched, he destroyed the napkins. He also kept some monthly totals to form the basis of his reported winnings and losses, but he destroyed these as well.

The problem with credit card statements alone is that cash withdrawals at a casino could serve a number of activities: food, entertainment, gambling, or simply putting it into one’s pocket. Without a diary of gambling activity, Mr. Rampadarat was unable to show how these withdrawals were actually used.

Mr. Rampadarat also offered a statement from the casino. The problem here was that the casino only kept records when he gambled with the casino’s club card, and that was on a limited basis.

When questioned about his time spent gambling, Mr. Rampadarat offered inconsistent testimony, and pointed to his ATM receipts from the casino as proof. Not surprisingly, the receipts failed to show that he spent 20-40 hours a week gambling, as he testified.

Additional evidence further indicated 20-40 hours a week didn’t add up. A win/loss statement prepared by the casino showed that he gambled for 106 days over the five years, or 21 days per year. His credit card statements showed some more activity, totaling 231 days over the five years, or 46 days per year. That amount of gambling activity is more akin to a hobby, and not continuous and regular, said the court.

Ultimately, because the taxpayer maintained insufficient records, the court was unable to conclude that Mr. Rampadarat gambled in a businesslike manner and with sufficient regularity and continuity to be considered a professional. Although we cannot say whether his napkins would have produced a different result, we can say he didn’t help his cause by destroying them.

Case: Rampadarat v. Comm’r of Revenue, Docket No. 8024 R (Minn. Tax Ct. Nov. 17, 2011)

  1. Anonymous
    January 8th, 2012 at 00:28 | #1

    Wait, so if a job is not “continuous and regular”, it’s not a job?

    I’ve been working freelance for 11 years now and it’s hardly continuous or regular… I guess I’ve been paying tax for no reason.

    • January 8th, 2012 at 18:32 | #2

      First, the “tax” to which you refer is the self-employment tax. A freelance writer who is not considered in the trade or business of writing still must pay federal income tax on income generated by the activity.

      Second, the “continuity and regularity” language is from Commissioner v. Groetzinger, 480 U.S. 23 (1987):

      [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.

      To assist with this determination, the IRS enacted Treas. Reg. 1.183-2(b), which contains nine factors to consider:

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

      Courts typically apply these nine factors to make the determination, instead of merely examining the extent of the taxpayer’s continuity and regularity of the activity.

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