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The IRS conceded that Mrs. Tschetschot is a professional, which allowed her to deduct expenses associated with tournament poker.
However, the IRS maintained that tournament poker is a wagering activity and that Section 165(d) still applies, meaning that Mrs. Tschetschot had to use Schedule A to deduct losses and expenses only up to the amount she had "cashed".
See First Paragraph of Page 6:
"Respondent maintains that section 165(d) limits Mrs.
Tschetschot’s losses and that petitioners remain liable for an accuracy-related penalty. Petitioners contend that Mrs.
Tschetschot’s professional tournament poker playing activity is more properly classified as “entertainment and professional sports” than professional gambling and should bear the resulting tax treatment; i.e., that her net loss should not be limited by section 165(d) restricting losses from wagering activities. Petitioners also contend that they do not meet the threshold
amount for the imposition of an accuracy-related penalty based on a substantial understatement of income tax."
The judge agreed with the IRS. He ruled (on Page 14): "Accordingly, we hold that tournament poker is a wagering activity subject to the limitation of Section 165(d)."
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I wrote about this case on my
tax blog ; you can read about it
here.
What does this case mean?
First, the only way a gambler can deduct "ordinary and reasonable" expenses is filing a Schedule C (that is, being a professional gambler). The IRS wanted to hold that the petitioner wasn't a professional; they conceded that issue
for this case. That's interesting, because the petitioner had substantial outside income.
Olivert is incorrect in stating "The ruling means that even tournament poker 'pros' have to file in the same manner." The IRS (respondent) conceded the issue that the petitioner is a professional gambler. Section 165(d) limits gambling losses to the amount of gambling winnings; the Tax Court upheld that this applies to professional and non-professional gamblers.
Second, it's very clear in reading the decision that the Tax Court (or, at a minimum, Judge Armen) believes that the law pertaining to poker should be changed. Note that he quite clearly states, "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." Only Congress can change the law (the Tax Code is a law, Title 26 of the United States Code).
Third, note the very last sentence of the ruling: "Accordingly, we hold that tournament poker is a wagering activity subject to the limitations of section 165(d)." There was a lot of discussion in the opinion on whether or not tournament poker is a form of gambling. The Court held that it is. It is quite clear that this Court, and
probably every court in the United States would hold that poker is a form of gambling. There's been discussion on this forum and elsewhere that online poker sites are
not in the business of gambling or wagering. The Court held that poker is a form of gambling. Those online sites facilitating poker would likely be held by a court to be in the business of gambling or wagering.
-- Russ Fox
co-author, "Why You Lose at Poker"