The Tax Court looked at two gambling related tax cases today. In the first case the petitioners thought there was discrimination; in the second case the question was whether or not the petitioners were professionals or amateurs.
In the first case (Sjoberg v. Commissioner, T.C. Summary Opinion 2008-162), the petitioners knew they were recreational gamblers (they stipulated to that). They had won a $4,000 jackpot; they had gambling losses that would allow them to write off that amount so they didn’t include the income (noted on a W-2G) on their tax return. If they had included the income they would have had an additional $660 in tax (from additional tax on social security benefits). The IRS audited them, assessed the tax and a $132 accuracy-related penalty.
The petitioners didn’t dispute the IRS’ calculations. Instead they,
“…contend that this treatment of gambling winnings and losses is discriminatory against the elderly and should not be enforced. Petitioners note that today’s casinos are like “Disneyland” to the elderly, offering all sorts of freebies to entice the elderly into casinos to gamble. Petitioners contend that respondent needs to update the tax rules to take into account today’s casino operators, casino operations, and customers…Lastly, petitioners allege that some types of gambling winnings are not required to be reported to respondent by the casinos (generally poker and blackjack), and petitioners claim that such differences in the reporting of gambling winnings constitute discrimination.”
But the court doesn’t make policy decisions (Congress does) and they owe the additional tax and the penalty.
In the second case (Freese v. Commissioner, T.C. Summary Opinion 2008-161), petitioners recorded their gambling as a business. Given that they resided in Minnesota that’s a good idea. Under Minnesota’s state income tax AMT the petitioners would likely have faced high taxation. There was a problem, though: Were the petitioners conducting their gambling as a business?
Petitioners were employed and gambled one or two nights a week. They did not keep a log of their gambling, they didn’t keep a separate bank account, and didn’t keep track of their gambling income and expenses. If you’re going to be a professional, you need to treat your business as such. “Petitioners did not maintain any meaningful records relating to their gambling activity.”
Unfortunately for petitioners, their CPA didn’t ask some rather basic questions. Though the CPA asked for any W-2Gs they received, he didn’t ask for the income from their slot play that didn’t cause a W-2G to be issued. (W-2Gs are only issued for slot machine jackpots of $1,200 or more.)
The court concluded,
Petitioners’ gambling activity in 2005 clearly did not qualify as a trade or business. Petitioners did not gamble with continuity and regularity. Petitioners regarded their gambling activity as recreation they shared, and petitioners did not expect to earn a profit from gambling. Petitioners did not maintain books and records relating to their gambling activity. They did not conduct their gambling activity in a businesslike manner. See Commissioner v. Groetzinger, 480 U.S. 23 (1987); sec. 1.183-2(b), Income Tax Regs. Petitioners’ gambling activity did not rise to the level of a trade or business, and petitioners are not allowed to deduct gambling expenses in excess of gambling income.
So if you’re going to be considered a professional gambler, treat your gambling as a business. Keep good records. Know your income and expenses. Consider a separate bank account for your gambling. And keep good records. Yes, I said that twice but the importance of a gambling log cannot be overstated for the professional gambler.