Interesting tax decision for those residing in states...

[JPFisher55]

The IRS does not seem to very often win the hobby v. business cases in which the taxpayer keeps complete and accurate records of his endeavor and seems to try the endeavor repeatedly. I would guess that these factors are not present in most cases because most taxpayers are slobby.
My point is that the IRS usually loses on the issue of whether the activity could ever lead to a profit even though the taxpayer admits that it never has produced a profit. In this case, the Tax Court acknowledged the lack of a profit and seemed to acknowledge the low probability of a profit. Yet, somehow playing slot machines is a business. Maybe this court didn't realize that it is impossible to win at slot machines over any considerable length of time. So now this taxpayer gets to deduct travel expenses etc to casinos. ROFLAO
So if a poker player keeps good records of profits and losses and plays a great deal, how could the IRS ever challenge the poker playing as a hobby and not a profession?

[Russ Fox]

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The IRS does not seem to very often win the hobby v. business cases in which the taxpayer keeps complete and accurate records of his endeavor and seems to try the endeavor repeatedly. I would guess that these factors are not present in most cases because most taxpayers are slobby.

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Absolutely correct. Most taxpayers try to put a hobby on their tax return to write it off as a business. When called to the carpet, they don't have records, don't have a separate bank account, and don't have a business plan...and they don't stand much of a chance at audit, appeals, or at the Tax Court.

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So if a poker player keeps good records of profits and losses and plays a great deal, how could the IRS ever challenge the poker playing as a hobby and not a profession?

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Most poker players don't keep good records. The next time you play, look to see if anyone at the table has a diary/logbook (when they sit down, they should make a note in their log).

The other problem is that even if you do play for "a great deal [of time]," are you playing for your livelihood? That's the standard in the Groetzinger decision. Take the case of a full-time (40/hr week) individual who earns a good salary, and plays poker 20 hours per week. Suppose the individual earns $100,000 year in his day job and $60,000 (net) playing poker. Is that individual playing for his livelihood?

The IRS can argue that he or she isn't. The IRS would likely win at audit and appeals (the latter is very dependent on who you draw as an appeals officer). Then you have to go to Tax Court. You must spend time and money to fight the IRS; if you want professional representation (an attorney or an individual authorized to practice in Tax Court) it can get quite expensive. One possible outcome is a Pyrrhic victory: you win in Tax Court, but it costs you more than the amount of your win. Most cases are settled (with both sides compromising) during appeals because of the expense.

Do I expect the IRS to change its stance? They already have to one extent; the IRS now routinely goes after individuals who show only gambling income on their tax return and attempts to force such individuals to file as a professional. I don't expect the institutional bias at the IRS (a bias that there is no such thing as a professional gambler) to change quickly. The case at question cannot be used as a precedent.

-- Russ Fox

[pokerrookie]

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The case at question cannot be used as a precedent.

-- Russ Fox

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Russ,
Thanks for taking the time to weigh in on this. I'm curious, though, when is a case able to be used as a precedent? And how is this case different in that regard? I am not questioning the statement, as the lawyer that sent me the case stated the same thing, but I was curious about what would qualify.

Also, in the case above, she was making some money at trucking, and zero monies at slots. Is it odd that the IRS allowed her to effectively state that her livelihood depended on slots, in filing as a professional gambler?

[JPFisher55]

Russ, I agree with you in general. I just think the case about slot machines is hysterical. It just cracks me up that the IRS lost this case. A professional slot machine player? Give me a break. Next is a professional roulette or craps player? Isn't it supposed to be possible to make a profit to be considered a profession?
I am not surprised that if someone lists gambling income as most of his income, then the IRS says "you're a professional so pay self-employment tax." But when maybe only a portion like 1/2 is gambling income, then you can't be a professional (you have already paid FICA tax so you will not have to pay much additional self-employment tax) and deduct expenses. Of course, if the income limit on FICA or self-employment taxes is removed, then everyone who gambles much at all will suddenly be a professional. What at tax code.
Since I play online poker, I keep records of my wins or losses by the day. No one knows what a session is for online poker, but I believe that a day will suffice if you have good records. This will be the first year that I have substantial winnings to report. In the past, I have been involved with a couple of disputes with the IRS. Both times the IRS offered a settlement below the cost of litigation. You are right about most cases being settled. I think that the IRS thought that the slot machine case was a sure winner and wanted to make an example of the taxpayer. Their attorney must have been stunned by the Tax Court ruling. I am still giggling. Hehe

[oldbookguy]

Thank you for weighing in on this.

As I see it, from a businessman stand point, state laws are more the root of the problem than any. To be a professional anything, states issue a business licenses; I.E. - Accountant, Lawyer....

Most all states have laws against being in the business of betting / wagering, though they allow you tom do the activity (48 have some form of gambling).

The lack of issuing individuals a 'license' to be in the professional gaming / wagering business in many ways adds to the IRS position.

obg

[Tuff_Fish]

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The other problem is that even if you do play for "a great deal [of time]," are you playing for your livelihood? That's the standard in the Groetzinger decision. Take the case of a full-time (40/hr week) individual who earns a good salary, and plays poker 20 hours per week. Suppose the individual earns $100,000 year in his day job and $60,000 (net) playing poker. Is that individual playing for his livelihood?
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Is this situation handled differently for a gambler as opposed to any other type of side business?

If one has a dog grooming business as a side business and earns $10,000 a year in addition to the 60,000 as a nurse, the IRS treats the dog grooming business as a legitimate business.

Why wouldn't a poker playre be treated the same? Poker is a side business just like hundreds of other secondary endeavors.

Curious?

Tuff

[Legislurker]

Because the IRS wants every bit of income it can get. Im sure they would stand behind you at a $1 slot machine and take out 33% every spin that hit mixed bars. They want to bump people up to pay AMT. Every instance of reportable, taxable income they cna find they want paid. TO them gambling money is discretionary funding you don't need. So what if you lost 10k to win 8k, they want the 8k. Its a rapacious intrusive mentality that is part of their culture.
Agents sit around and brag about what they've seized or taken from people. They simply dont give a [censored] how unfair it is or whose livelihood they degrade. And they are pretty unaccountable. Like Russ said, if you fight them, you lose $ even if you win.

[mo42nyy]

I dont see why she shouldnt be allowed to list herself as apro if she really goes there every day and sets out to win. Most business fail anyway. Ofcourse there is almost a 0 chance she is up at the end of the year. So what? If the gambling tax laws werent so obscene we wouldnt be discussing it anyway.

[Russ Fox]

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Is this situation handled differently for a gambler as opposed to any other type of side business?...Why wouldn't a poker playre be treated the same? Poker is a side business just like hundreds of other secondary endeavors.

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Blame Congress. They wrote the Tax Code--it's law, Title 26 U.S.C.

The IRS used to argue that no one could be a professional gambler. One reason for this is that gambling income is not considered "earned" income. When you are self-employed in, say, a pet grooming business, your income is "earned" income. Gambling income specifically cannot be earned income (per the Tax Code).

However, back in 1987 the Supreme Court ruled in Commissioner v. Groetzinger that you can be a professional gambler if "...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...."

Additionally, Section 165(d) of the Tax Code prohibits, for tax purposes, gambling losses in excess of gambling winnings. Courts have held that this provision of the Tax Code is in effect for both amateur and professional gamblers.

In order for the law to change, Congress will have to act. I'm not holding my breath....

-- Russ Fox

[Tuff_Fish]

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Blame Congress. They wrote the Tax Code--it's law, Title 26 U.S.C.
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The IRS used to argue that no one could be a professional gambler. One reason for this is that gambling income is not considered "earned" income. When you are self-employed in, say, a pet grooming business, your income is "earned" income. Gambling income specifically cannot be earned income (per the Tax Code).
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However, back in 1987 the Supreme Court ruled in Commissioner v. Groetzinger that you can be a professional gambler if "...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...."
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So, if the above paragraph is true in regards to one's poker activities,(whether or not poker is gambling is not at issue here I suppose), then can you demand that your second job, poker, be treated as a trade or a business? If so, then what is the income if not earned? Does it have to be full time, what ever that is, to get business or trade status?
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Additionally, Section 165(d) of the Tax Code prohibits, for tax purposes, gambling losses in excess of gambling winnings. Courts have held that this provision of the Tax Code is in effect for both amateur and professional gamblers.

In order for the law to change, Congress will have to act. I'm not holding my breath....

-- Russ Fox

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