A Hard Night at the Casino

In a summary opinion, the Tax Court ruled that a woman who operated a trucking business by day and played casino slot machines by night was a professional gambler, allowing her to deduct $1.4 million in gambling losses as a business expense rather than as a miscellaneous itemized deduction. A key factor the court found in her favor was that although she usually gambled into the early morning hours and sometimes all night, she took no pleasure in it.

The IRS assessed the woman, Linda Myers of South St. Paul, Minn., a $5,266 deficiency and $1,055 penalty on her 2003 return. She argued that she had developed strategies for playing the slot machines that she believed would maximize her odds of winning. Although she didn’t report an overall profit from gambling in the three years preceding 2003 or the year after, she had won several large jackpots, including $50,000 twice and ones exceeding $1,200 more than 300 times in 2003. She had begun gambling in 1992 and by 2000 considered herself a professional. Myers also owned and operated a trucking business at which she worked 25 to 35 hours a week. Starting around 2 p.m. most days, she would spend the next 12 hours or more at a local casino.

An activity may be considered a trade or business if it is conducted with continuity, regularity and with the primary purpose of earning a profit. The continuity and regularity of Myers’ gambling were not disputed, but her profit motive was. The court analyzed it by the nine nonexclusive factors of Treas. Reg. § 1.183-2(b). One factor, the taxpayer’s history of income or loss from the activity, was held to favor the government. Two more factors were neutral or didn’t apply: Myers did have substantial income ($64,000) from another source, her trucking business. In other situations, this could indicate a motive for claiming offsetting losses. But since IRC section 165(d) limits deductions for gambling losses to the extent of winnings, they would not avail her for this purpose. Likewise, an expectation that assets used in the activity may appreciate in value was held not to apply.

The remaining six factors were held to favor Myers:

1. The manner in which the taxpayer carried on the activity . She retained her bank and credit card statements and copies of casino records, including a player card account and IRS forms W-2G, Certain Gambling Winnings. Although she didn’t maintain separate books on her gambling, she kept a daily tally of how much money she took to the casino.  
2. The expertise of the taxpayer or his or her advisers . The continuity and regularity of her play, coupled with her study of the machines and other gamblers, indicated she had gained expertise.  
3. Success of the taxpayer in other activities . Myers had succeeded in the trucking business, the court said.  
4. Amount of any occasional profits . The court noted her occasional large wins and frequent smaller ones.  
5. Time and effort expended by the taxpayer on the activity . The court said her gambling regimen satisfied this factor, in light of the next one:  
6. Whether elements of personal pleasure or recreation were involved . The court noted that casino gambling is commonly thought to be recreational. But it considered credible Myers’ testimony that she found no pleasure in gambling and considered it not just work, but stressful, tiring and time-consuming toil.

Although this ruling may not be appealed by the IRS and may not be treated as precedent, it does provide one illustration of how an activity may be conducted as a trade or business for tax purposes. For a contrasting decision, see Jose Calvao v. Commissioner , TC Memo 2007-57.

Linda M. Myers v. Commissioner , TC Summary Opinion 2007-194

Prepared by Tina Quinn, CPA, Ph.D., chair and associate professor of accounting, Arkansas State University, Jonesboro, Ark.