A taxpayer who consistently lost money playing the slots at two casinos in California was found not to have an actual and honest profit objective and could not deduct her gambling losses on Schedule C, Profit or Loss From Business (Sole Proprietor) (Chow, T.C. Memo. 2014-49). Because losses from gambling not pursued as a trade or business are limited to the amount of winnings, the taxpayer could not deduct all her losses and had to report her gambling activity on Schedule A, Itemized Deductions.
Esther Chow listed her profession as “Gambler” or “Professional Gambler” on her Schedule Cs for the years at issue (2006–2008), but she consistently lost money. In 2006, the deficiency from the disallowed losses was $480,025.00; in 2007, it was $179,439.70; and in 2008, it was $186,303.64.
Applying a facts-and-circumstances analysis, the court concluded that Chow lacked a profit motive because she had no business plan or budget, did not maintain a separate bank account, did not change her slot machine methods to try to make them more profitable or research better methods, did not consult with slot machine gambling experts on ways to make a profit, and did not otherwise approach gambling in a businesslike manner.
The court also noted that Chow had been in the court before on the same issue and had won, with the Tax Court finding in the earlier case that she had gambled with a profit motive, although the court said it was a close call (Chow, T.C. Memo. 2010-48). This time Chow’s luck turned. Although the court had accepted that she intended to make a profit in earlier litigation, involving 2004 and 2005, she now had five years of large net losses to show for her efforts, and so the court determined that she did not have “an actual and honest objective of making a profit.”
Some other facts in this case probably did not predispose the Tax Court to find for Chow. First, she and her recently deceased husband (a retired doctor) claimed a deduction of $4,062,455 for 2006 and $3,048,418.89 for 2007 for business use of their home on their returns, although they conceded at trial that they did not use their home for any business purpose during those years. Second, the couple filed their returns late. For the 2006 tax year, after they got an extension to Oct. 15, 2007, they did not file until May 14, 2008. They filed their 2008 return late as well, filing it Feb. 5, 2010, after getting an extension to Oct. 15, 2009.
—Sally P. Schreiber (firstname.lastname@example.org) is a JofA senior editor for tax.