Tax Court Doesn’t Like the Idea of a Video Poker Professional

Today, the Tax Court looked at another unsuccesful gambler who thought he was a professional. This individual, though, gambled at video poker, not live poker (or poker tournaments).

Video poker differs substantially from live poker. Instead of playing against other players (and having the house (casino) take a small fee, or “rake,” from each pot), video poker is played on a machine against the casino. Almost all video poker machines play five card draw, with your goal to make the highest scoring hand (based on the pay table on the front of the machine). Computers have been used to evaluate each game, and have computed the long-term payback rate with perfect play.

Our unlucky taxpayer played video poker in the Chicago area. He considered it a side job, as he earned $51,840 as an engineer. As the Court noted,

“Petitioner testified that he tried to only play on machines with an expected payout value of a 100-percent return, meaning he thought he would never lose money; he also testified that the only way to get a return of more than 100 percent is to play on a “progressive” machine. He further testified that despite his hours of practice on a computer and diligent study of the perfect way to play the game, “it didn’t work”. [citations omitted]”

Luck was not with the petitioner, but he filed as a professional gambler in 2003, claiming $1.3 million in income and $1.3 million in losses (or a $0 overall Schedule C). The IRS believed he should have filed as an amateur, and would take his winnings on line 21 (other income) and his losses as an itemized deduction. If that were the case, the petitioner would owe another $3,068 in tax.

The Court felt that the petitioner wasn’t a professional gambler, and ruled for the IRS. In order for an activity to be a business, it must be conducted with continuity and regularity, and the purpose must be to make a profit.

“Occasionally, devoting all of one’s free time to a particular activity may be a sign of addiction.* Further, the amount of time spent engaged in the activity is not the most significant aspect of the trade or business analysis. More important is the taxpayer’s actual or honest objective of making a profit. (*At trial, petitioner testified that he had himself barred from his usual casinos for 5 years to prevent him from continuing to gamble there.)”

But the petitioner didn’t treat video poker as a business. He failed to maintain books, which a professional should do. He never sought help when, after five losing years, he continued to lose in 2003. Then the Tax Court notes,

“We are additionally unconvinced that petitioner’s gambling activity meets the standard for being a trade or business because we are not persuaded that an individual who gambles against a machine that is programmed by a casino can have, as his or her primary purpose, income or profit. After all, such a machine is on the floor to make money for the casino and is not there to provide income or profit for the casino’s patrons. For most individuals, gambling against a machine that is programmed to make money for the casino constitutes what the Supreme Court in Commissioner v. Groetzinger, 480 U.S. 23 (1987), characterized as a sporadic activity, hobby, or amusement diversion. For other individuals, gambling against such a machine may become a habit or an addiction. In neither scenario is it a trade or business with the participant’s primary purpose being income or profit. [citation omitted]”

I strongly disagree with the Court about video poker. I know that it is quite possible to be a video poker professional. It takes practice, skill, and effort (and if you’re a professional, you will maintain books, because it’s the only way you will know how you’re doing). This is a memorandum decision, and doesn’t establish a precedent. However, it does tell you what the Tax Court is thinking, and it’s clear that you would have to show substantial statistical records in order to be considered a professional video poker player.

That said, it is clear that the petitioner in this case didn’t meet the standards of being a professional gambler. You do need to keep records and treat it like a business. And the petitioner didn’t. And admitting that you’re addicted to gambling in your own testimony probably didn’t help matters at all.

Case: Ferguson v. Commissioner, T.C. Memo 2007-30

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