Taxable Talk

Can a woman who owns and operates a trucking business also be considered a professional gambler? That’s what the Tax Court had to decide.

Linda Myers operated a trucking business in the Twin Cities. The trucking business was substantial; there were 11 drivers using eight trucks. Ms. Myers earned a reasonable income (including both salary and nonemployee compensation) from the trucking business.

But that wasn’t Ms. Myers’ only activity. After she finished her daily activities with the trucking company, she headed to the casino to play the slot machines. And this wasn’t a passing fancy; she spent about 40 hours per week at a casino.

The Court stated, “She considered herself a professional gambler by 2000. Petitioner viewed herself as a gambling expert but found no pleasure in gambling. Instead, she considered gambling stressful, tiring, and time consuming. She did not go to the casino with friends or companions and was focused on doing everything she could to win while she was there.”

In 2003 she reported her gambling winnings as a professional gambler, deducting her gambling losses up to the amount of her winnings as an expense (on a Schedule C). The IRS examined her return, and issued her a deficiency notice which led to the Tax Court filing. The sole question the Court had to answer was whether Ms. Myers’ gambling rose to the level of being a professional: Was she in the trade or business of gambling in 2003?

The key is the Groetzinger decision: “An activity must be conducted with continuity, regularity, and the primary purpose of earning a profit to be considered a trade or business under section 162. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).” Both Ms. Myers and the IRS agreed that she gambled with continuity and regularity. However, was she trying to earn a profit?

The Court used a nine-factor test:

“Sec. 1.183-2(b), Income Tax Regs. The nine factors are: (1) The manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his or her advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer’s history of income or loss with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved.”

While the Court noted that she hadn’t had profits, that was the only factor that favored the IRS. Ms. Myers used Slot Club records, was knowledgeable about gambling, spent considerable time and effort, was successful in other business operations (the trucking company), and testified credibly that she derived no pleasure from the gambling. So Ms. Myers was a professional gambler for 2003.

Do note that this decision is a memorandum decision of the Tax Court, and cannot be used as a precedent. It does, though, show the factors and issues that you will need to prevail in a case where you maintain multiple businesses and want to be considered as a professional gambler.

Case: Myers v. Commissioner, T.C. Memo 2007-194