Myers v. Comm'r ( 2007 )

T.C. Summary Opinion 2007-194
UNITED STATES TAX COURT
LINDA M. MYERS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23664-05S. Filed November 19, 2007.
Kathryn J. Sedo and Christine Rittberg, for petitioner.
Lisa R. Woods, for respondent.
KROUPA, Judge: This case was heard pursuant to the
provisions of section 74631 of the Internal Revenue Code in
effect at the time the petition was filed. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case.
1
All section references are to the Internal Revenue Code in
effect for the year at issue, unless otherwise indicated.
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Respondent determined a $5,266 deficiency in petitioner’s
Federal income tax for 2003 and determined that petitioner was
liable for a $1,055 accuracy-related penalty under section
6662(a). After concessions,2 the sole issue for decision is
whether petitioner was in the trade or business of gambling in
2003. We hold that she was.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated by this reference. Petitioner resided in South
Saint Paul, Minnesota, at the time she filed the petition.
Petitioner’s Activities
Petitioner spent nearly all of her time during 2003 pursuing
two activities, a trucking business that she owned and operated,
and her gambling activity. She spent 25 to 35 hours per week
working at the trucking business and about 40 hours per week on
the gambling activity.
Petitioner oversaw the management and operations functions
of her trucking business, which employed eleven drivers for eight
trucks in 2003. She worked diligently to maintain the
documentation required to run a successful trucking business,
such as licenses, maintenance logs, and insurance matters.
Petitioner retained an accountant to assist her with financial
2
Respondent concedes that petitioner is not liable for the
accuracy-related penalty under sec. 6662(a).
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recordkeeping. Petitioner received a $28,000 salary and $36,000
nonemployee compensation from the trucking business in 2003.
Petitioner’s gambling activity consumed the rest of her
time. In fact, a typical day for petitioner involved working at
the trucking business until 1 or 2 p.m., followed by a trip to
the casino that typically lasted until 2 a.m. to 6 a.m.
Petitioner would then return home and sleep for a little while
before arising the next day to follow the same routine.
Petitioner’s children, who had lost their father in an automobile
accident, were extremely worried about petitioner’s early morning
drives home from the casino, particularly in the wintertime.
Nevertheless, petitioner gambled and made these late night trips
home nearly every day.
Petitioner originally began gambling in 1992 after her
husband’s death, focusing on the $1 slot machines. When she
first began gambling, petitioner would occasionally talk with
other gamblers. Petitioner became increasingly serious about her
gambling pursuits as time progressed and as she became accustomed
to the casinos and learned more about their operations. She
considered herself a professional gambler by 2000. Petitioner
viewed herself as a gambling expert but found no pleasure in
gambling. Instead, she considered gambling stressful, tiring,
and time consuming. She did not go to the casino with friends or
companions and was focused on doing everything she could to win
while she was there.
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Petitioner developed certain strategies she felt would
maximize her odds of winning. Petitioner’s primary strategy was
essentially to locate and play those slot machines that were due
to make a payout. Petitioner strategized that the more money put
into a machine without a payout increased the odds of a payout.
Petitioner would speak with the casino attendants upon arriving
at the casino to determine which slot machines to play. The
attendants would describe what had happened so far that day,
which slot machines were played most heavily but had made no
payouts, and which slot machines had made payouts. The
attendants knew this information because they made the payouts by
hand to gamblers who won over a certain amount. Petitioner also
sometimes watched other gamblers playing slot machines to learn
the slot machines’ patterns. After learning this information,
petitioner identified those slot machines petitioner considered
“ripe” for a payout and played them.
Petitioner gambled about $500 in each of five slot machines
that she felt were good candidates to make payouts on a typical
day at the casino. Petitioner would carefully watch the results
of each machine once she began using it. If the slot machine
began giving her free plays, doubles, or triples, she viewed that
as a very good sign and an indication that the slot machine was
about to make a large payout. These results validated
petitioner’s choice of slot machine and convinced petitioner to
continue playing that machine. Petitioner also strategized from
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her experience that a slot machine would stay “hot” for a few
weeks once it started paying.
Documentation of the Gambling Activity
The casinos gave petitioner Forms W-2G, Certain Gambling
Winnings, when she won $1,200 or more on the slot machines. The
casinos also provided petitioner a player card that she could
insert into the slot machines to track her activities. The
player card, when inserted into the machine, would record the
amounts petitioner gambled and the amounts she won. Each year,
the casinos would process the player card information to generate
an annual profit and loss statement for petitioner. While
petitioner used her player card most of the time, she did not use
it every single time. The profit and loss statements were thus
not a complete reflection of petitioner’s gambling activities
because they lacked any gambling petitioner did without the
player card.
Petitioner was not interested in the non-recordkeeping
benefits the player card offered, such as free lodging and meals.
She only wanted it to track her profits. In fact, petitioner was
disappointed when the casino offered her a free trip to Las Vegas
because she thought she must have been losing too much money at
her gambling activity for the casino to offer her such a trip and
an opportunity to lose more.
Petitioner did not find it necessary to keep her own written
set of separate gambling records. She knew in her head how much
she had won or lost each day. In addition, the casinos
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documented her activities through the player card system.
Petitioner did retain bank statements, canceled checks, credit
card statements, the Forms W-2G, and the profit and loss
statement, which documented the gambling activities. Petitioner
did not make a budget for the gambling activity but generally
knew how much she entered the casino with each time.
Success of Petitioner’s Gambling Activity
Petitioner did not report an overall profit from her
gambling activities in the 3 years before and the year after the
year at issue. She has won large jackpots several times,
however, including $50,000 twice. She won jackpots of $1,200 or
more over 300 times during 2003. Petitioner also has taken home
as much as $45,000 profit from 1 day’s gambling.
Despite the occasional large jackpots, petitioner was
concerned that she continued to lose money. She changed her
strategy accordingly. Petitioner tried to focus on winning a
little bit at a time rather than try to earn back large losses in
one night. For example, if petitioner won money early in the
afternoon, petitioner would go home rather than stay at the
casino and play more to try to recoup old losses.
Petitioner’s Returns
Petitioner has treated herself as a professional gambler on
her income tax returns since at least 2000. Petitioner used the
same accountant that helped with the trucking business to assist
her with matters related to the gambling activity and to prepare
her individual returns.
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Petitioner filed her return for 2003 reporting that she was
in the trade or business of gambling. She deducted her gambling
losses as an expense to the extent of her gambling winnings,
totaling $1,408,740 in 2003. Respondent examined petitioner’s
return for 2003 and issued a deficiency notice. Petitioner
timely filed a petition.
Discussion
The sole issue for decision is whether petitioner was in the
trade or business of gambling in 2003. If petitioner was in the
trade or business of gambling, she may deduct her wagering losses
to the extent allowable in computing adjusted gross income.3 See
sec. 62. If petitioner was not in the trade or business of
gambling, on the other hand, she may only deduct the wagering
losses to the extent allowable as an itemized deduction to
compute taxable income. See Calvao v. Commissioner, T.C. Memo.
2007-57.
All ordinary and necessary expenses paid or incurred during
the taxable year in carrying on a trade or business are generally
deductible. Sec. 162(a). An activity must be conducted with
continuity, regularity, and the primary purpose of earning a
profit to be considered a trade or business under section 162.
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987). Whether the
3
While sec. 165(a) generally permits the deduction of losses
from gross income, there is a special rule limiting the deduction
of gambling losses. Losses from wagering transactions may only
be deducted to the extent of gains from wagering transactions.
Sec. 165(d).
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taxpayer is carrying on a trade or business depends on the facts
and circumstances.4 Id. at 36.
Respondent has conceded that petitioner’s gambling activity
was conducted with the required continuity and regularity during
2003. The parties dispute, however, whether petitioner’s primary
purpose for engaging in the activity was to earn a profit. See
id.; Miller v. Commissioner, T.C. Memo. 1998-463, affd. without
published opinion 208 F.3d 214 (6th Cir. 2000).
We examine whether the taxpayer engaged in the activity with
the actual and honest objective of making a profit. See Evans v.
Commissioner, 908 F.2d 369, 373 (8th Cir. 1990), revg. T.C. Memo.
1988-468; Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer
v. Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion
702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.
While a taxpayer’s expectation of profit need not be reasonable,
there must be a good faith objective of making a profit. Allen
v. Commissioner, 72 T.C. 28, 33 (1979); sec. 1.183-2(a), Income
Tax Regs. We give greater weight to objective facts than to a
taxpayer’s statements of intent. Dreicer v. Commissioner, supra
at 645; sec. 1.183-2(a), Income Tax Regs.
4
At trial, we denied petitioner’s motion to shift the burden
of proof under sec. 7491 because the outcome of this case is
determined on the preponderance of the evidence, making it
unnecessary to determine who has the burden of proof. See
Topping v. Commissioner, T.C. Memo. 2007-92. The Court invited
the parties to address this issue on brief. We have carefully
reviewed the parties’ arguments on brief and stand by our ruling
denying petitioner’s motion to shift the burden of proof to
respondent. Instead, we shall determine the outcome of this case
on the preponderance of the evidence. See id.
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We structure our analysis around nine nonexclusive factors.
Sec. 1.183-2(b), Income Tax Regs. The nine factors are: (1) The
manner in which the taxpayer carried on the activity; (2) the
expertise of the taxpayer or his or her advisers; (3) the time
and effort expended by the taxpayer in carrying on the activity;
(4) the expectation that the assets used in the activity may
appreciate in value; (5) the success of the taxpayer in carrying
on other similar or dissimilar activities; (6) the taxpayer’s
history of income or loss with respect to the activity; (7) the
amount of occasional profits, if any, which are earned; (8) the
financial status of the taxpayer; and (9) whether elements of
personal pleasure or recreation are involved. Id.
No factor or set of factors is controlling, nor is the
existence of a majority of factors favoring or disfavoring a
profit objective necessarily controlling. Hendricks v.
Commissioner, 32 F.3d 94, 98 (4th Cir. 1994), affg. T.C. Memo.
1993-396; Brannen v. Commissioner, 722 F.2d 695, 704 (11th Cir.
1984), affg. 78 T.C. 471 (1982); sec. 1.183-2(b), Income Tax
Regs. The individual facts and circumstances of each case are
the primary test. Keanini v. Commissioner, supra at 46; Allen v.
Commissioner, supra at 34; sec. 1.183-2(b), Income Tax Regs.
We now examine each of the nine nonexclusive factors.
Manner in Which the Taxpayer Carried On the Activity
We begin by examining the manner in which petitioner carried
on her gambling activity. The fact that a taxpayer carries on
the activity in a businesslike manner may indicate a profit
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objective. Sec. 1.183-2(b)(1), Income Tax Regs. In determining
whether a taxpayer conducted an activity in a businesslike
manner, we consider whether the taxpayer maintained complete and
accurate books and records, whether the taxpayer conducted the
activity in a manner substantially similar to those of comparable
businesses that are profitable, and whether the taxpayer
attempted changes in an effort to earn a profit. Engdahl v.
Commissioner, 72 T.C. 659, 666-667 (1979); sec. 1.183-2(b)(1),
Income Tax Regs.
The casinos maintained profit and loss tallies for
petitioner through the player card system. Petitioner thus did
not find it necessary to keep separate books and records to track
this information. She used her player card most of the time to
enable the casino to perform this tracking function. Petitioner
also did not keep a separate bank account for her gambling
activities but kept a tally of the amount she had with her when
she went to the casino. See Canale v. Commissioner, T.C. Memo.
1989-619; cf. Calvao v. Commissioner, T.C. Memo. 2007-57
(taxpayer claimed he kept daily records of gambling activity but
failed to offer any records into evidence).
Petitioner also had no written budget or business plan,
although she had a strategy she felt would enable her to win.
She explained her strategy in detail to the Court. Petitioner’s
strategy was to identify and play slot machines that were due for
a payout. She implemented the strategy by carefully gathering
information about the playing history of the slot machines in the
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casino and studying their patterns to determine which slot
machines were likely to pay out. Moreover, petitioner testified
that after some initial losses she changed her strategy to help
her win. She decided to try to win just a little at a time
rather than to try to recoup old losses all at once. See Engdahl
v. Commissioner, supra at 669. If petitioner won some money
early in the day, she would take the winnings and return home,
rather than continue to gamble with the money she had just won
and risk losing it. We find that this factor favors petitioner.
Expertise of Taxpayer or His or Her Advisers
We next consider petitioner’s expertise (or the expertise of
her advisers) in the gambling activity. Preparing for the
activity by extensive study of its accepted business, economic,
and scientific practices, and consulting with experts in these
matters may indicate that a taxpayer has a profit objective when
the taxpayer follows that advice. Sec. 1.183-2(b)(2), Income Tax
Regs.
Petitioner considers herself a gambling expert and has
gambled for over 10 years. The continuity and regularity of her
gambling activity strongly suggest that she is an expert at slot
machines. Petitioner also consulted regularly with casino
employees to further her gambling strategy and watched other
gamblers to understand what she believed to be slot machine
payout patterns. We find that this factor favors petitioner.
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Time and Effort Expended by the Taxpayer in Carrying On the
Activity
We next consider the time and effort petitioner expended in
carrying on the gambling activity. A taxpayer’s devotion of much
time and effort to conducting an activity, particularly if the
activity does not have substantial personal or recreational
aspects, may indicate an intention to derive a profit. Sec.
1.183-2(b)(3), Income Tax Regs.
Petitioner spent at least 40 hours per week gambling at the
casinos. Petitioner would often gamble for 12 to 15 hours at a
time, often as late as 2 a.m. to 6 a.m. We acknowledge that
gambling activities are often viewed as recreational, enjoyable
pursuits upon which many people enjoy spending significant time.
See, e.g., Calvao v. Commissioner, T.C. Memo. 2007-57.
Petitioner testified credibly, however, that she did not view
gambling as a mere recreational pursuit. She credibly testified
that she found no pleasure in gambling. Moreover, petitioner did
not go to the casino with others and while there, was focused on
winning as much money as possible. We find that this factor
favors petitioner.
Expectation That the Assets Used in the Activity May Appreciate
in Value
Another factor to be considered is the expectation that the
assets used in the activity may appreciate in value. Sec. 1.183-
2(b)(4), Income Tax Regs. The parties agree that this factor
does not apply.
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Success of the Taxpayer in Carrying On Other Similar or
Dissimilar Activities
We next examine petitioner’s success in carrying on other
similar or dissimilar activities. If a taxpayer has previously
engaged in similar activities and made them profitable, this
success may show that the taxpayer has a profit objective, even
though the current activity is presently unprofitable. Sec.
1.183-2(b)(5), Income Tax Regs. A taxpayer’s success in other,
unrelated activities also may indicate a profit objective.
Daugherty v. Commissioner, T.C. Memo. 1983-188. A taxpayer’s
success in a different business enterprise may be evidence of a
profit objective where the taxpayer relied on diligence,
initiative, foresight, and other qualities that generally lead to
success in business activities. Id.
Petitioner has shown that she was capable of running a
successful business through her ownership and operation of the
trucking business. Petitioner’s success with the trucking
business indicates that she had the skills to operate a business
successfully. She relied on the same accountant for her gambling
activities and relied on her player card to track her winnings.
We find this factor favors petitioner.
Taxpayer’s History of Income or Loss With Respect to the Activity
We next examine petitioner’s history of income or loss with
respect to the gambling activity. A history of substantial
losses may indicate that the taxpayer did not conduct the
activity for profit. Golanty v. Commissioner, 72 T.C. 411, 427
(1979), affd. without published opinion 647 F.2d 170 (9th Cir.
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1981); sec. 1.183-2(b)(6), Income Tax Regs. Losses during the
initial or startup stage of an activity do not necessarily
indicate, however, that the taxpayer did not conduct the activity
for profit, but losses that continue to be sustained beyond the
period that is customarily necessary to bring the operation to
profitable status may indicate the taxpayer did not engage in the
activity for profit. Engdahl v. Commissioner, 72 T.C. 668;
sec. 1.183-2(b)(6), Income Tax Regs. Abandoning an activity
after indications that the activity will be unprofitable
signifies that the taxpayer engaged in the activity for profit.
Canale v. Commissioner, T.C. Memo. 1989-619.
Petitioner has not shown a profit from her gambling activity
for the 3 years before and the year after the year at issue.
Petitioner persisted in the activity despite the ongoing pattern
of losses, although she did change her strategy to some extent.
This factor favors respondent.
Amount of Occasional Profits, If Any, Which Are Earned
We next consider the amounts of occasional profits, if any,
that petitioner earned. Occasional profits the taxpayer earned
from the activity, in relation to the amount of losses incurred,
the amount of the taxpayer’s investment, and the value of the
assets used in the activity provide useful criteria in
determining the taxpayer’s intent. Sec. 1.183-2(b)(7), Income
Tax Regs. A practical possibility that a taxpayer could earn
enough money in a year to exceed expenses also can indicate a
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profit objective. Bolt v. Commissioner, 50 T.C. 1007, 1014-1015
(1968).
Petitioner has occasionally won jackpots as large as $50,000
from her gambling activity. Petitioner won sums of $1,200 or
more over 300 times in 2003. Her frequent wins and occasional
big wins indicate the possibility that petitioner could have
earned enough to cover her expenses in a year. This factor
favors petitioner.
Financial Status of the Taxpayer
We next examine petitioner’s financial status. If a
taxpayer does not have substantial income or capital from sources
other than the activity in question, it may indicate that the
taxpayer engages in the activity for profit. Sec. 1.183-2(b)(8),
Income Tax Regs. Conversely, substantial income from sources
other than the activity, especially if the losses generate large
tax benefits, may indicate that the taxpayer is not conducting
the activity for profit. Id. Those with substantial income from
other sources have a much greater tax incentive to incur large
expenditures in a hobby type of business. Jackson v.
Commissioner, 59 T.C. 312, 317 (1972).
Petitioner earned $64,000 from the trucking business in
2003. Merely because petitioner had another source of income in
2003 is not dispositive, however. See Calvao v. Commissioner,
supra. None of petitioner’s income from the trucking business
could be offset by gambling losses due to the limitation on
deducting gambling losses only to the extent of winnings. See
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sec. 165(d). Petitioner thus had no tax incentive to engage in
the gambling activity to shield income from other endeavors. We
conclude that this factor is neutral.
Whether Elements of Personal Pleasure or Recreation Are Involved
We next examine whether elements of personal pleasure or
recreation were involved in the gambling activity. The presence
of recreational or pleasurable motives in conducting an activity
may indicate that the taxpayer is not conducting the activity for
profit. Sec. 1.183-2(b)(9), Income Tax Regs.; see Calvao v.
Commissioner, T.C. Memo. 2007-57 (taxpayer’s gambling strategy
and desire to win found consistent with gambling for
entertainment or recreational purposes). That the taxpayer
derives personal pleasure from engaging in the activity is
insufficient to cause the activity to be classified as not
engaged in for profit if other factors show that the activity is
conducted for profit. Jackson v. Commissioner, supra; sec.
1.183-2(b)(9), Income Tax Regs.
We acknowledge that gambling at a casino is an activity
commonly understood to be a pleasant amusement. Petitioner
testified credibly, however, that she found no pleasure in
gambling. It was work. Petitioner testified that she found
gambling to be stressful, tiring, and time consuming. She
further testified that she always went to the casino alone and
that no friends or family members accompanied her to add any
entertainment element to her activities. We find her testimony
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thoughtful and credible. On balance, we find this factor favors
petitioner.
Conclusion
Taking into account the above factors and considering the
facts and circumstances relating to petitioner’s gambling
activity, we conclude that petitioner engaged in the gambling
activity with the actual and honest objective of making a profit
in 2003. As the parties have agreed that petitioner conducted
the gambling activity with continuity and regularity, we conclude
that petitioner was in the trade or business of gambling during
2003. Accordingly, petitioner may deduct her gambling expenses
under section 162(a) to the extent allowable under section
165(d).
To reflect the foregoing,
Decision will be entered
for petitioner.