Tax Court decision on tournament poker expenses

[grapabo]

This decision came down from the U.S. tax court earlier this week. Didn't see it posted earlier.

Tschetschot & Tschetschot v. IRS

The taxpayers were arguing that tournament poker wasn't a wagering activity. The decision weighs in on a definition of the term and provides some case cites for some other issues having to do with taxes and gambling. The IRS conceded that Mrs. Tschetschot was a professional, but still argued that her losses from tournament entry fees were limited by the wagering loss limitation. I didn't follow that part, but I haven't filed my taxes as a professional.

The Court also held that it's not unconstitutional to treat the business of gambling different than other businesses.

Here's a Bloomberg article discussing the decision.

Link via TaxProf Blog

[broiler]

This case really brings nothing new to the area of poker. It had previously been decided that a professional gambler cannot reduce their net income below zero and cannot carry a loss back or forward.

The biggest surprise in my reading of this case is that the judge chose to add personal commentary on the loss limitation for professional gamblers. Anyone who reads these decisions will agree that personal commentary of this nature is extremely rare.

[grapabo]

But that's what threw me off in reading thie case. I understand the net operating loss carryover isn't available for gambling losses, even for professionals, but these taxpayers had nongambling income that year, and the disallowance of the (professional) wife's excess expenses resulted in additional tax due.

I was thinking that if you were a professional, you could a) net your gambling income and losses as business income and expenses without having to itemize, and b) if your business losses from gambling exceeded your business income from gambling, the net loss could reduce other (nongambling) income in that year. But if you can't do the latter, then the issue in the case make sense, even if the decision screws professional gamblers over.

[adanthar]

[ QUOTE ]
I was thinking that if you were a professional, you could a) net your gambling income and losses as business income and expenses without having to itemize, and b) if your business losses from gambling exceeded your business income from gambling, the net loss could reduce other (nongambling) income in that year. But if you can't do the latter, then the issue in the case make sense, even if the decision screws professional gamblers over.

[/ QUOTE ]

eh, if I'm ever a losing pro gambler for a calendar year, I think I'll quit [img]/images/graemlins/smile.gif[/img]

Can anybody tell me if I'm reading the decision right and tourney buyins are not a Schedule C expense according to this judge, though? Seems weird.

[broiler]

The taxpayers knew that they couldn't use the net loss to reduce nonbusiness income, which is why they tried to use the equal protection argument. The case law in that area was very clear through Boyd, et al.

[olivert]

[ QUOTE ]
[ QUOTE ]
I was thinking that if you were a professional, you could a) net your gambling income and losses as business income and expenses without having to itemize, and b) if your business losses from gambling exceeded your business income from gambling, the net loss could reduce other (nongambling) income in that year. But if you can't do the latter, then the issue in the case make sense, even if the decision screws professional gamblers over.

[/ QUOTE ]

eh, if I'm ever a losing pro gambler for a calendar year, I think I'll quit [img]/images/graemlins/smile.gif[/img]

Can anybody tell me if I'm reading the decision right and tourney buyins are not a Schedule C expense according to this judge, though? Seems weird.

[/ QUOTE ]

Reading carefully:

1. Tournament winnings go on Form 1040, Line 21 as "Other Income".

2. Tournament buy-ins and associated expenses go on Schedule A as a "Miscellaneous Deduction", but only up to the amount reported on Form 1040, Line 21.

That's the way "non-pros" who have gotten W2-Gs after cashing from a poker tournaments have filed in the past. The ruling means that even tournament poker "pros" have to file in the same manner.

Disclaimer: I am not a tax attorney. Consult your attorney or tax professional before taking any action.

[broiler]

The gambling losses are a Schedule C expense for a professional. Page 5 is poorly worded and quite a run-on paragraph.

The IRS wanted to move the gambling expenses to Schedule A. However, they conceded that her treatment of the expense was appropriate on Schedule C. It would have read much easier as two seperate paragraphs and seems to have caused much confusion.

[adanthar]

does this actually have any consequences to a winning gambler if true?

also, reading this very carefully indeed...it doesn't say *what* expenses. it's clear she won some money and lost some more money, but it's unclear whether the disallowed 29K consisted of buyins, travel expenses, or both.

I have no idea what that means though.

[olivert]

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)."

[Russ Fox]

[ QUOTE ]
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)."

[/ QUOTE ]

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"