The always vexing question of whether or not a gambler is a professional or an amateur was looked at this week by the Minnesota Supreme Court. In Busch v. Commissioner of Revenue (A05-656), Estelle Busch fought the Minnesota Department of Revenue’s ruling that she was an amateur and had to pay Minnesota’s Alternative Minimum Tax (AMT) on her gambling winnings.
The facts of the case were not in dispute. Estelle Busch, a retiree, began playing slot machines at an Indian casino in Minnesota. She enjoyed herself, but lost. She played more and more, from 40 to 60 hours per week. Initially, she filed as an amateur, putting her winnings as Other Income (line 21 of her federal return) and her losses as an itemized deduction on Schedule A of her federal return.
In 2001, she decided that she met the standard of being a professional, and filed a Schedule C. She was not able to take her losses as a deduction against other income on her return; however, she was able to net out her income so she essentially reported $0 as the “net income” from her business.
The IRS apparently never audited her. (The record is not completely clear on this.) However, the Minnesota Department of Revenue did, and the Commissioner of Revenue fought her in Minnesota Tax Court. Minnesota has a very strict AMT. Minnesota AMT denies most deductions and forces a gambler to pay tax on the gross winnings rather than the net winnings. This is quite different from the federal AMT. Although in certain situations gambling winnings could conceivably cause a taxpayer to fall into the federal AMT, gambling losses are deductible on the federal AMT. The Commissioner won in Minnesota Tax Court, and Ms. Busch appealed to the Minnesota Supreme Court.
The Minnesota Supreme Court looked at four issues: (1) Was Minnesota prohibited from challenging the business vs. hobby status by the actions (or inactions) of the IRS; (2) Did the Groetzinger decision apply to Ms. Busch; and (3) Did Ms. Busch have a reasonable expectation of profit?
The first issue is a collateral estoppel argument. Is Minnesota precluded from acting because the IRS hasn’t acted? The court ruled that Minnesota can have a different ruling than the federal government, if the laws and circumstances justify it.
On the second issue, the Groetzinger decision states:
“[I]f 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 within the meaning of the statutes with which we are here concerned. Respondent Groetzinger satisfied that test in 1978. Constant and large-scale effort on his part was made. Skill was required and was applied. He did what he did for a livelihood, though with a less-than-successful result. This was not a hobby or a passing fancy or an occasional bet for amusement.”
Ms. Busch was certainly gambling on a full-time basis. But did she have an expectation of profit?
Here, the fact that she kept scrupulous records aided her case immensely. That, and the fact that she did win a jackpot now and then helped out.
Still, the Commissioner argued that it was impossible for anyone to be a professional slots player because “it’s impossible to win.” (As a side note, there are slot machines in some casinos that are either beatable (100% payback with perfect play), or are so close to beatable that perfect play combined with slot club rewards can lead to a positive expectation. That was likely not the case where Ms. Busch gambled.) The court noted,
“[W]e disagree with the tax court’s conclusion that a reasonable expectation of profit is required for a given activity to qualify as a trade or business. We conclude that it is often too difficult and uncertain for courts to decide, from the safe position of hindsight, which business activities had a reasonable expectation of profit and which did not. Furthermore, if trade or business tax incentives hinged upon a court’s determination of whether an activity had a “realistic” expectation of profit, valuable innovation in our entrepreneurial society could be chilled. We conclude that the taxpayer’s expectation of profit from a given activity need not always be reasonable for the activity to qualify as a trade or business.”
So Ms. Busch wins the big gamble, fighting the Minnesota Department of Revenue, avoids AMT, and will be able to pursue her slot play as a business.
