Ed Miller's Tax Article

[grapabo]

I'm not a CPA, but I've dug out my old tax textbook and found a 1987 U.S. Supreme Court case that decided on the issue of whether a professional gambler could deduct losses as a business loss. It's not cut and dried; it is possible to do so, and escape the limits that apply to gambling or hobby losses.

Commissioner v. Groetzinger, 480 U.S. 23
http://caselaw.lp.findlaw.com/script...0&invol=23

Groetzinger was a full-time gambler, and it was his only means of making income. After going at length on the history of defining a trade or business, the court (6-3) held that "(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 here are concerned."

The book I got this from is about twelve years old, and I don't live close enough to a law library to see if this has been changed, though I doubt it has been. Also, even if you meet this test but are doing on-line gambling from a place in which it is illegal, you might expect some difficulties because another provision of the Internal Revenue Code disallows deductions that violate public policy.

Hope this helps.

[Mr.K]

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the court (6-3) held that "(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 here are concerned."

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[censored]. How legally important is that reference to full time? Does this imply that the activity must provide a majority of the individual's income? Does it also imply that the activity must be pursued an average of 40 hours a week (or is there some other definition of "full time" in the U.S. Code?

[Foghatlive]

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I don't know about Phil Ivey, but Barry Greenstein, Matthew Hilger and Phil Hellmuth have all stated in interviews that I have seen/read that they file a Schedule C for their gambling income.

I think you missed the important sentence in the first paragraph in the decision:

In redetermining respondent's tax deficiency, the Tax Court held that he was in the "trade or business" of gambling, so that no part of his gambling losses was an item of tax preference subjecting him to a minimum tax for 1978. The Court of Appeals affirmed.

The Supreme Court upheld the decision, therefore gambling can be a trade or business.

Self employment taxes would be calculated on the net. In this case, the IRS was not trying to collect SE tax. The goal here was to hit the taxpayer with AMT because of the gambling deductions.

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They're saying it can be a business as long as you don't lose money. That's a big caveat.

Most businesses lose money in their first year. They can deduct their losses. A "professional" gambler can't.

The IRS seems to be saying that it's ok to call yourself a pro-gambler, file a schedule C, pay the 15% SE tax, but don't expect to write off losses when you have a losing year.

IMO that's not a business.

[broiler]

I agree that it is pretty crappy that you can't have a bad year. This case did show that you can at least get to zero for net income in your bad year and still have a business. This case was a big change because the IRS previously only considered winners to have a business. Even some of those were challenged, see Bobby Baldwin. The Supreme Court in this case stated that gambling can be a business and the gambling losses in that computation of income were not subject to AMT addback.

[Foghatlive]

Let's try this hypothetical:

In 2006 Greg Raymer has a horrible year on the tournament circuit and ends up in the red for 200K.

Do you think the IRS will let him have some of the tax money back that he paid after winning the 2004 WSOP?

[Mr.K]

Having spent some time to read Groetzinger, I found a sentence that comes almost immediately after the one quoted above in the ruling that I think is quite informative: "Constant and largescale 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."

1.) Demonstrating the fact that skill is integral to being a winning poker player, and that an individual has in fact gained and applied skill will surely help a poker player make a Groetzinger claim to Schedule C eligibility. Participation in the 2+2 forums, reading and applying poker literature like TOP and SSH is surely an element of what might be required to meet this standard. In fact, TOP might be the first exhibit a poker playwe would trot out defending his "skill" claim, as you'd have to explain the concept of expected value and the difficulty of regularly creating scenarios in which +EV is achieved in the course of poker play.

2.) The regularity and scale of the gambling enterprise counts. If you play 6 days a week most every week of the year, and play for a reasonable number of hours each day, you would surely be putting in the "constant and largescale effort" the Court cites. An interesting aside here that is peculiar to online poker is this fact: even an occasional online player might play as many hands in a year as a full time B&M pro. The speed of the games, and the ability to multitable means that online players can, with relative ease, get in 8x as many hands in a given period of time as a B&M player (based on 30h/hr B&M versus 60h/hr x 4 tables online).

3.) Demonstrating that a player plays poker "for a living" will also help one make a Groetzinger claim. Hard to say what this means for those that have other income, whether that income is more or less than the individual's poker income. I suppose if you could reasonably show that your living expenses could not be met without poker money (regardless of what other income you had or didn't have), you'd have an easier time making the Groetzinger claim. But note that Groetzinger LOST money and still was eligible, so clearly his actual ability to live, eat, sleep was not conditioned directly on gambling success.

[broiler]

Nope. I agree that it is a terrible subset of rules for gamblers, since they get no carryback or carryforward of losses like any other business in America. The ability to have a business is good in this situation because the recreational gambler rules are even worse for a losing year.

[grapabo]

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the court (6-3) held that "(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 here are concerned."

[/ QUOTE ] (emphasis added)

[censored]. How legally important is that reference to full time? Does this imply that the activity must provide a majority of the individual's income? Does it also imply that the activity must be pursued an average of 40 hours a week (or is there some other definition of "full time" in the U.S. Code?

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I don't know if playing poker full-time or as the only means of earning income are required, but I would predict that playing with some regularity would be a minimum requirement, and if you have a different full-time job, it would be difficult, but not impossible. The trade or business determination is a facts-and-circumstances test. If you think you can make a case and the difference is worth the money, you can become the test case for whether new generation of gamblers are in the business of gambling for tax purposes. [img]/images/graemlins/smile.gif[/img]

[Foghatlive]

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That's why we suggest finding a real CPA that knows the tax law and is familar with the gambling laws, as opposed to going to some random at HR Block that knows less about the tax code than many of us on here.

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The Tax Code is endless. No one knows it all. You can be an expert in one area and know very little about another. In addition, other than Vegas, pro-gamblers are not exactly commonplace. I'm in NYC. Casinos are illegal, and God knows none the people who hang around in OTB make a living betting horses.

You can go find 100 20yr CPAs from around the country, and there's a chance that none of them have ever done the taxes for a professional gambler.

[Big TR]

My post here might help Mister. But I count each day as a session. Good faith effort goes a long way during an audit.

http://forumserver.twoplustwo.com/showfl...e=0#Post3863088