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Mailbag: Traveling Away From the “Tax Home”

April 5th, 2012 3 comments

Taxpayer asks:

I have been following your articles on poker tax on Pokerfuse.com. I was wondering if you can clarify for me on the article about traveling expenses. What is the difference between the tax home being a residence and the tax home being the most frequented local casino in terms of deductible traveling expenses? Like if the tax home is the primary residence, then does that mean you can deduct traveling expenses and half of food/entertainment to all the local casinos since that’s traveling away from your tax home? I’m a little unsure of the definition of “traveling away from” the tax home.

For some context, check out the article the taxpayer is referring to here.

Under section 162(a) of the Internal Revenue Code, a taxpayer may deduct ordinary and necessary business expenses incurred in connection with the taxpayer’s trade or business. Travel expenses are deductible under 162(a) if they are the ordinary and necessary expenses of traveling away from the “tax home” for one’s business, profession, or job.

There are two definitions we need to explore: (1) “traveling away from” and (2) “tax home.”

Traveling Away From Home

A taxpayer is traveling away from the tax home if:

  • The duties require the taxpayer to be away from the general area of the tax home substantially longer than an ordinary day’s work; AND
  • The taxpayer needs sleep or rest to meet the demands of the work while away from home.

Keep in mind the rest requirement is not satisfied by merely napping in the car. The taxpayer need not be away from the tax home for a whole day to qualify, however, so long as relief from duty is long enough to get necessary rest.

So a professional gambler who travels away from the tax home to a casino to play in a multiple day poker tournament appears to meet the test. If, however, the pro drives an hour to a casino, plays poker for three hours, and then drives home, the travel expenses incurred for that trip may not be deductible.

Tax Home

In general, the tax home is the taxpayer’s regular place of business. If, however, the taxpayer does not have a regular place of business because of the nature of the work, then the tax home may be where the taxpayer regularly lives.

Ultimately, ascertaining the “tax home,” if any, depends on the particular facts and circumstances. If one does not have a regular or main place of business, IRS Publication 463 says to apply the following three factors to evaluate whether the tax home is where the taxpayer regularly lives:

  1. You perform part of your business in the area of your main home and use that home for lodging while doing business in the area.
  2. You have living expenses at your main home that you duplicate because your business requires you to be away from that home.
  3. You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or you often use that home for lodging.

The publication states if all three factors are met, the tax home is the home where one regularly lives. If only two factors are met, it depends on all the facts and circumstances. If only one factor is met, the taxpayer is considered an itinerant and cannot deduct travel expenses.

A professional gambler may or may not meet all three factors.

On the one hand, a pro may do business at home by studying the game and reading instructional material, duplicate living expenses by frequently paying for overnight lodging when traveling throughout the country to play poker, and return to the residence often during the year. Under those facts, it seems likely the pro meets all three factors.

On the other hand, a pro may not have a primary residence at all. Instead, he may stay in one city for three months, another city for four, and a third city for five; he sometimes stays on friend’s couches, other times stays at hotels or at casinos. This pro almost certainly would be considered an itinerant.

Then we have all of the in-between cases. Each taxpayer’s situation is different. A prudent move is to consult a tax professional to see how your particular facts and circumstances apply.

Same Old Story: Without Diary, Gambling Loss Disallowed

April 1st, 2012 4 comments

Some taxpayers seem to believe that a casino’s statement is sufficient to substantiate a taxpayer’s reported gambling winnings and losses. In a recent case decided by the California Board of Equalization, taxpayer Marsha Kakalia learned the hard way that such statements are not sufficient.

During 2003, Ms. Kakalia gambled at several casinos, mostly playing slot machines. She reported gambling losses of $89,980, offsetting her entire federal AGI (adjusted gross income) of $89,980 and determining a California AGI of zero.

It’s no surprise the California Franchise Tax Board examined her return. For the year, six casinos issued to her (and to the IRS) Form W-2Gs, reflecting $89,834 of total gambling winnings. For slot machine winnings, a Form W-2G is issued only when winnings are $1,200 or more.

The taxpayer was essentially saying that all of her winnings were $1,200 or more; she never won smaller amounts. The auditor questioned this by requesting documentation of her winnings and losses from the year.

To substantiate her winnings and losses, the taxpayer provided to the auditor two statements: One from Harrah’s dated July 7, 2007, and one from Thunder Valley Casino dated July 2, 2007. The Harrah’s statement showed she had total net gambling losses of $14,666 during 2003 as a result of gambling from four different Harrah’s locations. The Thunder Valley Casino statement reflected total net losses for 2003 of $36,151.20.

The taxpayer took the position these two statements demonstrated there was “no doubt” that she had no gambling income for 2003 from any casino.

The position is weak. First, the statements only included gambling activity when the taxpayer used her rewards cards. Second, the statements themselves emphasized that they were not intended for tax purposes, and that the IRS recommends keeping a contemporaneous diary of gambling activity. See IRS Publication 529.

The Franchise Tax Board took the following—and correct—legal position:

[A]dequate recordkeeping is essential to establish entitlement to a gambling loss deduction… “[I]f a taxpayer fails to maintain adequate records, both her gambling losses cannot be ascertained. In such a case, it cannot be determined whether her gambling losses exceeded her unreported gambling income. In those circumstances, courts have denied the taxpayer a gambling loss deduction.”

The taxpayer made a final effort to support the gambling loss deduction by providing bank records reflecting ATM cash withdrawals at various casinos. The problem with using bank statements for proving gambling losses is that there was no indication the cash withdrawn was actually used for gambling.

Ultimately, the Board of Equalization held for the Franchise Tax Board, disallowing the taxpayer’s gambling loss for the year.

As I say over and over, a taxpayer should maintain a contemporaneous diary of gambling activity. Otherwise one faces a steep uphill battle to meet the burden of proof for substantiation. In today’s case, the taxpayer came up very short.

Case: In re Kakalia, Case No. 404650, California Board of Equalization (Dec. 14, 2011).

Surely a Pro: One Million Wagers Over 364 Days

March 11th, 2012 1 comment

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:

U.S Tax Implications of Black Friday

March 9th, 2012 No comments

This week at pokerfuse I discuss some U.S. tax implications of Black Friday.

In short, it’s a mess.

House of Cards Radio

February 11th, 2012 No comments

House of Cards is a weekly radio show hosted by poker player and author Ashley Adams. This week I joined the program to chat with Ashley about some tax issues pertaining to gambling.

You can listen to the show here.  My segment begins around the 3:55 mark.

Poker and Taxes: 2011 Year in Review

January 8th, 2012 No comments

2011 was anything but a boring year in the poker world. With tax season approaching, it’s time to review some noteworthy events during the year that may impact items on a poker player’s 2011 U.S. income tax return.

Mayo Decision

In general, the tax code is very harsh towards gamblers. In January, however, the U.S. Tax Court issued a pro-gambler decision. In Mayo v. Commissioner, the court held that a professional gambler may deduct “ordinary and necessary” business expenses beyond the extent of a taxpayer’s “net” gambling winnings.

Here’s a simple example to illustrate. Suppose during 2011 I had $50,000 of gambling winnings, $70,000 of gambling losses, and $20,000 of ordinary and necessary business expenses incurred in connection with my gambling activity. Section 165(d) of the Internal Revenue Code limits the deductibility of my gambling losses to $50,000, producing “net” gambling winnings of $0. Because of Mayo, I may further deduct the $20,000 of business expenses, producing a $20,000 business loss, which may be applied against other income.

If there was any concern over the IRS appealing the decision, it’s now gone. In a recent Action on Decision, the IRS explicitly acquiesced to the tax court’s Mayo opinion. Victory for professional gamblers.

For more comprehensive commentary on the case, click here.

Black Friday

On April 15, the Department of Justice seized the internet domains of Absolute Poker, Full Tilt Poker, and PokerStars. At the time, players’ funds on each of these sites were also frozen and inaccessible. To date, only PokerStars has repaid its customers. Absolute Poker is in bankruptcy, and may or may not repay customers. Full Tilt has agreed to forfeit its assets to the U.S. Department of Justice, and French investment firm Groupe Bernard Tapie is currently in the process of purchasing the assets from the DOJ. It has been reported that the DOJ will repay Full Tilt’s U.S. customers, but nothing has been finalized.

With 2011 behind us and a lot of uncertainty remaining, it’s no surprise the number one tax question on poker players’ minds is how to treat the frozen funds on their tax returns. Of course, PokerStars customers have been fully repaid, so the tax treatment of its customers’ gambling winnings is no different this year. With respect to Absolute Poker and Full Tilt accounts, however, the current state of affairs warrants careful consideration of a couple of tax principles.

  1. Constructive Receipt

As I discussed back in April, the doctrine of constructive receipt sometimes requires cash method taxpayers to include an item in income even if no cash, services, or property are actually received in hand during that year. When are some of those times? A taxpayer has constructive receipt of income in the taxable year during which it is:

  • credited to the taxpayer’s account;
  • set apart for the taxpayer; or
  • otherwise made available such that the taxpayer may draw upon it during the taxable year if notice of intention to withdraw had been given.

Now, if an online casino maintains segregated accounts for each customer, as in the case of PokerStars, then it’s pretty clear that constructive receipt is triggered when a customer earns winnings on the site, and not when the funds are actually withdrawn. But what if an online casino pays its customers through a general operating account? Further, what if that casino’s operating account balance is far less than the total amount owed to players? According to the amended civil complaint filed against Full Tilt Poker, that was precisely the case: At the end of March 2011, Full Tilt owed $390 million to its players but had less than $60 million in its bank accounts. Does constructive receipt still apply?

I would argue that it doesn’t. Constructive receipt does not apply if the taxpayer’s control of its receipt is subject to substantial restrictions or limitations. Gambling winnings in Full Tilt accounts on April 15, 2011 were, in my view, subject to substantial limitations because Full Tilt didn’t have the money to pay the balances. With the Department of Justice alleging in a press release that Full Tilt was operating a “massive Ponzi scheme” against its own players, it would be rather inconsistent for the IRS to then assert that winnings in Full Tilt player accounts not actually received in 2011 are still taxable.

Although we have less evidence to make the same case for winnings in Absolute Poker player accounts, a pending bankruptcy without the return of player funds seems like a strong argument for no constructive receipt.

  1. Claiming a Loss for Unpaid Funds

May a poker player write off unpaid Full Tilt and Absolute Poker funds? For 2011, the answer is no. I covered this issue in detail back in May. What has changed? Now there’s a pending sale of Full Tilt assets by the DOJ to Groupe Bernard Tapie. It seems more likely players will be repaid.

Ultimately, because it’s still possible Absolute Poker and Full Tilt will pay its players back, no loss may be realized. I suspect sometime in 2012 we’ll learn the final fate of unpaid accounts.

  1. Possible IRS Examination of Online Poker Players

Back in April, I explored the possibility of the IRS examining U.S. customers of Absolute Poker, Full Tilt Poker, or PokerStars. To my knowledge, the IRS has not pursued these individuals.

With reports that the DOJ may handle the repayment process of Full Tilt funds to U.S. players, it’s not far-fetched to speculate that some tax examination process will take place. Players may have to apply to the DOJ to obtain unpaid funds. The DOJ or IRS may very well take a look at applications of taxpayers claiming significant balances, perhaps $10,000 or greater.

Another possible alternative is the DOJ offering an amnesty program to poker players who have unpaid balances and are not in compliance with U.S. tax laws. We’ve seen similar programs far greater in scope. In 2011, for example, U.S. taxpayers with certain unreported foreign financial accounts may have came forward under the 2011 Offshore Voluntary Disclosure Initiative.

World Series of Poker

In November, Pius Heinz took home $8,715,638 after capturing the 2011 World Series of Poker Main Event bracelet. And I say “took home” in the literal sense. Because Mr. Heinz was a resident of Germany, he was able to take advantage of the U.S.-Germany Tax Treaty, which exempts from U.S. income tax gambling winnings earned in the U.S. by German residents.

For a complete breakdown of how much tax each of the Main Event’s final nine players had to pay, be sure to check out Russ Fox’s article.

Legislative Developments

In December, the Department of Justice released a memorandum opinion taking the position that the Wire Act applies only to sports wagering. Not exactly a tax event, but an event worth mentioning nonetheless. Although the opinion itself addresses only online state lotteries, states now have been shown a green light for intrastate online gaming. Although player liquidity issues remain for online poker under an intrastate regime, state compacts combining player pools is a realistic possibility. Because of the opinion, legislative developments for U.S. online gaming in 2012 became far more interesting.


Postscript:

I must remind all readers that it is impossible to offer comprehensive tax advice on the internet. Information I write on this blog is not legal advice, and is not intended to address anyone’s particular tax situation. Should you seek such advice, consult with a tax professional to discuss your facts and circumstances.

IRS Circular 230 Notice:

To ensure compliance with requirements imposed by the IRS, I inform you that any U.S. federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this blog.

Sometimes You Should Not Dispose Dirty Napkins

January 6th, 2012 2 comments

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)

Pro Gambler’s Records Held Sufficient in Massachusetts

October 14th, 2011 No comments

If I was told I could provide to gamblers only one piece of advice when it comes to taxes, I would say this: Keep very good records. If the IRS or a state or city tax agency decides to examine a taxpayer’s reported gambling losses, they will very likely be disallowed if the taxpayer presents insufficient records.

Last week, Clarance W. Jones of Massachusetts learned, courtesy of the Massachusetts Appellate Tax Board, that maintaining detailed records of his gambling activity paid off big time.

Massachusetts is one of the “bad” states for amateur gamblers: The state does not permit a deduction for gambling losses. I’ve already written about cases in New York and Wisconsin; these highlight unfavorable state tax laws with respect to gambling losses. Today we turn to a case addressing the unfavorable tax law in Massachusetts.

Mr. Jones filed as a professional gambler in Massachusetts for his 2001 through 2007 tax years. His returns were selected for audit, and the state took the position that he was not a professional gambler. (Note: Professional gamblers may deduct gambling losses from winnings in Massachusetts.) Accordingly, the state claimed he could not deduct any of his gambling losses from his gambling winnings, and assessed Mr. Jones additional tax due of $33,665, $53,872, $58,446, $77,545, $102,214, and $140,002, for his 2001 through 2006 tax years, respectively. The 2007 tax year deficiency of $13,715,912 was resolved in large part because it was discovered the state misplaced a decimal point. Yes, it happens.

To determine whether Mr. Jones was a professional gambler, the Appellate Tax Board had to consider whether he was engaged in the trade or business of gambling. The board listed the following factors from Directive 03-3 for guidance:

  • Gambling activities are entered into and carried on in good faith for the purpose of making a profit;
  • Gambling activities are carried on with regularity;
  • Gambling activities are pursued on a full-time basis, or to the fullest extent possible if taxpayer is engaged in another trade or business or has employment elsewhere;
  • Gambling activities are solely for the taxpayer’s own account and the taxpayer does not function as a bookmaker;
  • Taxpayer maintains adequate records, including accounting of daily wagers, winnings, and losses;
  • The extent and nature of the taxpayer’s activities which further the development of a gambling enterprise; and
  • Taxpayer claims deductions associated with the conduct of a trade or business for gambling-related expenses.

Mr. Jones clearly met most of these factors. During the years in question, he attended various horse- and dog-racing tracks, and engaged in live and simulcast betting, casino betting, and lottery ticket betting, from about 11:00AM until midnight, for four to five days a week. He was considered a “regular” at the racetrack, and was able to place bets with window tellers by “surreptitiously giving the teller a hand signal.” This approach enabled Jones to place multiple bets quickly, without having to wait in long lines.

In this case, the only factor challenged by the Massachusetts Department of Revenue was whether Mr. Jones maintained adequate records. As I’ve written before, IRS guidance suggests to maintain a diary containing the following information:

  • Date and type of gambling activity;
  • Name and address or location of the gambling establishment;
  • Names of other persons present with the taxpayer at the establishment; and
  • Amounts won or lost.

Mr. Jones maintained voluminous records of his gambling activity, including:

[P]ersonal calendars detailing his gambling activities; race track programs, with his losing ticket stubs from the day attached to the program together with a notation of the date, number of tickets and total amount of wagers; “tax organizers” that list his income and expenses and the information from the Forms W-2G; and [his] “tax books” for each year.

Jones had been audited by the state previously, and followed the advice of his accountant after each audit for purposes of maintaining adequate records. For example, his “tax books” included listings of his losses, and the entries in the books corresponded to the receipts that he maintained in storage.

Apparently, the state wouldn’t consider his records. The board exposed the state’s inadequate audit methodology:

[The] auditors performed a limited correspondence audit, during which the auditors sent written requests to [Jones] seeking records which were to be maintained in a certain format or else the auditors would refuse to review them. Yet, nothing in [Directive] 03-3…or any relevant statute, departmental promulgation or case law required [Jones] to keep the records in the precise form demanded by the auditor.

The Commissioner presented no objectively adequate reason why [Jones’] records should have been disbelieved, and in fact, the auditors lacked a firm understanding of what the records contained and how to interpret their notations, and they lacked a willingness to inquire further. The auditors never conducted a field audit to gain a better understanding of how thorough his records of losses were, nor even a desk audit in order to gain first-hand knowledge from [Jones] as to how to interpret his records.

The court found that Jones’ evidence, and not the auditor’s conclusions, was the best available with respect to his deductions for gambling losses. Had Jones failed to maintain these records, he would have been facing a tax bill of over $460,000 for his 2001 through 2006 tax years, plus interest and penalties. Clearly, the efforts he took to do so were more than worth his time.

As a final note, yesterday the Massachusetts Senate approved a casino bill, which authorizes up to three full-scale brick and mortar casinos in the state. The governor could sign the bill into law by the end of the year. Indeed, I suspect most Massachusetts residents are aware of this legislation. What most are probably not aware of, however, is that Massachusetts casino patrons will pay state income tax on “phantom” gambling winnings, since there is no deduction for gambling losses in the state, unless one is a professional gambler. It certainly makes me wonder whether knowledge of this result would keep a significant number of would-be patrons from placing bets in the new casinos.

Case: Jones v. Comm’r of Revenue, ATB 2011-855 (Mass. App. Tax Bd. Oct. 5, 2011).

Podcast: Taxation of Gambling in U.S. and Canada

September 15th, 2011 No comments

 

Earlier today, I joined gaming attorney Stu Hoegner (@GamingCounsel on Twitter) on Casino Enterprise Management’s Gaming Law News podcast. We discussed the taxation of gambling winnings both in the U.S. and in Canada. Click here to listen in.

Gambler Ruled an Amateur by Wisconsin Tax Appeals Commission

September 14th, 2011 No comments

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.

Case: Blaha v. Wis. Dep’t of Revenue, Docket No. 09-I-261 (Wis. Tax App. Comm’n Aug. 23, 2011).

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