A very interesting case today from the Tax Court. A husband and wife play poker. The wife is a professional, playing in poker tournaments; the husband is not a professional. The wife wins some money playing in poker tournaments; however, her expenses exceed her income. Can she deduct the additional expenses and have her net income from playing poker professionally be a net loss?
In 2000, the wife earned $11,708, but she claimed a net loss of $29,933 on her Schedule C. Section 165(d) of the Internal Revenue Code limits deductions for gamblers to the amount of their wins. However, the petitioner claimed that tournament poker is not a form of gambling; instead, it should be looked at like a professional sporting event such as tennis or golf. Alternatively, they claim an equal protection argument.
The Court first examined tournament poker (and provided one of the best descriptions for the layman that I’ve ever read), and come to these conclusions about whether tournament poker is a form of gambling:
“Betting is so intrinsic to poker that it is nearly impossible to avoid using a word that implies gambling in any way when discussing the topic. Bets are placed on each hand, and each round of betting has consequences. Whether or not the chips being used to make these bets have immediate and tangible monetary value does not change the fact that the players are still placing bets, hoping to win. This is true even in a tournament setting.
Petitioners agree that the first poker tournaments held were, in fact, “wagering events”. For example, in those early games, “Each participant put up $10,000 and received $10,000 in chips.” The fact that the chips being used to place bets in tournament poker today only bear some fractional relationship to the dollar values of the prizes and/or entry fees does not change the basic nature of the game as a wagering activity.”
It’s hard for me to argue with this conclusion; while poker tournaments have become sporting events, poker is definitely a form of gambling.
The equal protection argument also fails.
“Petitioners argue that the benefits of being able to offset “exaggerated income” from very successful years by losses sustained in less successful years should be available to professional tournament poker players as much as they are to other professions.
Congress made a policy decision to treat businesses based on wagering activities differently. In the absence of Congressional action, we are not free to correct any perceived unfairness stemming from a rationally based policy choice. In Valenti v. Commissioner, T.C. Memo. 1994-483, the Court noted that treating businesses based on wagering and gambling differently from other businesses is a rational differentiation and not one that rises to the level of being violative of due process or equal protection.”
As I’ve written in the past, I believe the equal protection argument could succeed in the right venue. However, that venue is likely a District Court, a Court of Appeals, or the Supreme Court. That’s an expensive road to take to fight the IRS and the precedents that exist on this issue.
The Tax Court’s conclusion hints that they think the law should be changed:
“The moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many year ago. Not only has tournament poker become a nationally televised event, but casinos or lotteries can be found in many States. Further, the ability for the Internal Revenue Service to accurately track money being lost and won has improved, and some of the substantiation concerns, particularly for professionals, no longer exist. That said, the Tax Court is not free to rewrite the Internal Revenue Code and regulations. We are bound by the law as it currently exists, and we are without the ability to speculate on what it should be. Accordingly, we hold that tournament poker is a wagering activity subject to the limitations of section 165(d).”
The petitioner in this case loses out on being able to deduct additional expenses; poker tournaments are just another form of gambling. For all gamblers it’s just another reminder that the Tax Code isn’t fair, but you have to live with it or get Congress to change it.
Case: Tschestschot v. Commissioner (T.C. Memo 2007-38)
Tags: Tschetschot