Gambling As A Trade Or Business

 

The question came up recently:

How does one convince the IRS that they are a professional gambler?

The answer: it is tough. But not impossible. Here is a quote from a landmark case on the topic:

If one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business.” (Groetzinger)

First, one must establish that the gambling activity is an actual trade or business.  

Believe or not, the term “trade or business” is not precisely defined in the tax Code. This point drew attention when the Tax Cuts and Jobs Act of 2017 (TCJA) introduced the qualified business deduction for – you guessed it – a trade or business. Congress was stacking yet another Code section on top of one that remained undefined.

Court cases have defined a trade or business an activity conducted with the motive of making a profit and conducted with continuity and regularity.

That doesn’t really move the needle for me.

For example, I play fantasy football with the intention of winning the league. Does that mean that I have the requisite “profit motive?” I suppose one could reply that - even if there is a profit motive - there is no continuity or regularity as the league is not conducted year-round.

To which I would respond that it cannot be conducted year-round as the NFL is not played year-round. Compare it to a ski slope – which can only do business during the winter. There is no need for a ski slope during the summer. The slope does business during its natural business season, which is the best it can do. My fantasy football league does the same.

Perhaps you would switch arguments and say that playing in one league is not sufficient. Perhaps if I played in XX leagues, I could then argue that I was a fantasy football professional.

OK, IRS, what then is the number XX?

The tax nerds will recognize the IRS using that argument against stock traders to deny trade or business status. Unless your name rhymes with “Boldman Tacks,” the IRS is virtually predestined to deny you trade or business status. You trade 500 times a year? Not enough, says the IRS; maybe if you traded 1,000 times. The next guy trades 1,000 times. Not enough, says the IRS. Did we say 1,000?  We misspoke; we meant 2,000.

So the courts have gone to the Code section and cases for hobby losses. You may remember those: hobby losses are activities for which people try to deduct losses, arguing that they are in fact true-blue, pinky-swear, profit-seeking trades or businesses.

You want an example? I’ll give you one from Galactic Command: a wealthy person’s daughter is interested in horses and dressage. Mom and dad cannot refuse. At the end of the year, I am pulled into the daughter’s dressage activity because … well, you know why.

Here are additional factors to consider under the (Section 183) hobby loss rules:

1.  The activity is conducted in a business-like manner.
2.  The taxpayer’s expertise
3.  The taxpayer’s time and effort
4.  The expectation that any assets used in the activity will appreciate in value.
5.  The taxpayer’s history of success in other activities
6.  The taxpayer’s history of profitability
7.  The taxpayer’s financial status
8.  The presence of personal pleasure or recreation

I suspect factors (7) and (8) would pretty much shut down that dressage activity.

Let’s look at the Mercier case.

The Merciers lived in Nevada. During 2019 Mrs Mercier was an accountant at a charter school and Mr Mercier operated an appliance repair business. They played video poker almost exclusively, of which they had extensive knowledge. They gambled solely on days when they could earn extra players card points or receive some other advantage. They considered themselves professional gamblers.

Do you think they are?

I see (3), (7) and (8) as immediate concerns.

The Court never got past (1):

We find that although Petitioners are serious about gambling, they were not professional gamblers. Petitioners are both sophisticated in that they are an accountant and a previous business owner. Petitioner wife acknowledged that as an accountant, she would advise a taxpayer operating a business to keep records. Petitioner husband acknowledged that for his appliance repair business, he did keep records.”

COMMENT: In case you were wondering about the sentence structure, this was a bench opinion. The judge made a verbal rather than written decision.

Petitioners did not personally keep track of their gambling activity in 2019 choosing, instead, to rely on third-party information from casinos, even though they further acknowledged that the casino record may be incomplete, as only jackpot winnings, not smaller winnings, are reported. Petitioners also did not keep a separate bank account to manage gambling winnings and expenses, but used their personal account, which is further evidence of the casual nature of their gambling.”

My thoughts? The Merciers were not going to win. It was just a matter of where the Court was going to press on the hobby-loss checklist of factors. We have learned something, though. If you are arguing trade or business, you should – at a bare minimum – open a business account and have some kind of accounting system in place.  

Our case this time was Mercier v Commissioner, Tax Court docket number 7499-22S, June 6, 2023.