Home > Gambling, Gambling Tax Basics, New York > Surely a Pro: One Million Wagers Over 364 Days

Surely a Pro: One Million Wagers Over 364 Days

As I’ve written before, New York is known as a “bad” state for amateur gamblers. That’s because a New York resident with an adjusted gross income of at least six figures in a tax year and both gambling winnings and losses is likely to pay less state income tax if he files as a professional gambler than as an amateur.

Recently, a taxpayer asked the New York State Department of Taxation and Finance whether his gambling activities would render him a professional for tax purposes. In an Advisory Opinion, the State said yes. The pertinent facts:

Petitioner places bets on thoroughbred horse races 364 days per year for a total of over one million individual bets during the year. Petitioner kept a detailed log of his bets, his winnings and his losses. During 2010, Petitioner placed bets of $42,814,683, which generated winnings of $45,393,124 and net income of $1,008,345 after deduction for the cost of bets and other expenses incurred in the operation of the gambling business. …

Petitioner uses his skills as a mathematician to determine the horses on which his bets are placed. Together with a colleague, Petitioner created a statistical model that predicts the likelihood of certain horses winning a race. The colleague is paid an agreed upon amount by Petitioner for the right to use within the statistical model an algorithm created by the other individual. Using the odds generated by the statistical model, Petitioner compares his predicted odds to the odds posted by the racing tacks to find mispricings in the markets and places bets accordingly. This methodology requires intense analysis of each horse in each race and voluminous betting on a daily basis. Petitioner devotes approximately 20 hours per week to his gambling activities and need not appear at any racetrack to conduct his activities.

A taxpayer who places over a million bets throughout all but one day of a tax year is clearly a professional gambler. If not, then I don’t know what set of facts it would take.

A straightforward case like this means the Advisory Opinion is not very helpful when we need to address the middle of the road cases.

In addition to the facts above, the taxpayer presented a hypothetical scenario:

Petitioner may in the future decide to obtain a full-time job while continuing to operate his gambling business. The gambling business would continue at the same level. Petitioner expects that the income earned from any such job would be far outweighed by the net income earned from his gambling business, and that his gambling business would continue to be the primary source of his livelihood. Petitioner has not historically engaged in any other trade or business.

This is a far more common situation, and is far more unclear. As the Advisory Opinion notes, “it is possible that the gambling activities would by necessity be relegated to less than 20 hours per week, which may then impact the characterization of these issues.”

Makes you wonder how closely NYS may look at a taxpayer who in a given year not only files as a professional gambler but also shows significant wage income.

On the bright side, we know there is at least one person (Deborah R. Liebman, Deputy Counsel) who works for the NYS Department of Taxation of Finance and understands how the tax code applies to gambling.

Categories: Gambling, Gambling Tax Basics, New York Tags:
  1. Matthew Rappaport
    March 16th, 2012 at 12:18 | #1

    So let’s say the unaddressed hypothetical becomes reality and goes to litigation. Naturally, as they mention in the Opinion, there’s issues with §162(a) and Reg. §1.183-2(a). In my opinion, this enterprise would still qualify as a trade or business under the latter regardless of how many actual hours the taxpayer spends running it.

    If my instincts are correct, though, you would then be faced with an issue under §469, and you’d have to look to Reg. §1.469-5T(a) to make sure that it’s not a passive activity. If it is, I imagine the gambler is in serious hot water. So if you’re the gambler’s lawyer and he comes to you asking how he should plan things out if he gets a full-time gig, you’d probably have to advise him that he needs to keep a really careful log of every last minute he spends on the gambling enterprise during the taxable year, just like real estate people do. That way, in the event of an audit or litigation, you can conclusively establish your position with the IRS.

    So in that way, this case is actually even more interesting that it may seem at first glance.

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