The Tax Court held that the nonwagering expenses of a taxpayer who frequently gambled were not deductible because his gambling activity lacked the profit motive necessary for him to be considered a professional gambler. The court determined the taxpayer's gambling activity lacked a profit motive, after examining the nine factors of Regs. Sec. 1.183-2(b) used to determine whether an activity is engaged in for profit.
Facts: James Boneparte, a resident of Newark, N.J., had worked for the Port Authority of New York and New Jersey since 1981, earning $78,821 in 2012 and $82,350 in 2013. During 2012 and 2013, he frequently gambled in Atlantic City, N.J., spending approximately half of his nights in hotels in Atlantic City. He did not keep a contemporaneous written record of his wagering activity; however, casino statements showed that his wagers exceeded his winnings by $14,887 in 2012 and $12,609 in 2013. When completing his 2012 and 2013 federal income tax returns, he prepared a Schedule C, Profit or Loss From Business, with "professional gambler" shown as his business or profession. On it, he reported for 2012 and 2013, respectively, $18,000 and $10,000 of gross receipts, offset by $18,000 and $10,000 of wagering losses, and business expenses of $89,116 and $85,783.
In 2014, the IRS sent Boneparte deficiency notices for 2012 and 2013 that disallowed his nonwagering business expenses related to his gambling activity for both years, along with other adjustments. Boneparte petitioned the Tax Court for relief.
Issues: Professional gamblers are allowed to deduct losses from wagering transactions only to the extent of gains from other wagering transactions. However, professional gamblers are also allowed to deduct nonwagering expenses from their gambling activity and create a tax loss. Other gamblers (casual gamblers) include gains from wagering transactions in gross income and deduct losses (to the extent of the wagering gains) from other wagering transactions as an itemized deduction.
To be a professional gambler, the taxpayer must gamble with the intent to make a profit. Regs. Sec. 1.183-2(b) lists nine factors to evaluate whether an activity is undertaken with a profit motive. They are (1) the manner in which the activity is conducted; (2) the taxpayer's expertise; (3) the time and effort spent on the activity; (4) the expectation that the activity's assets will appreciate; (5) the taxpayer's success in other business activities; (6) the activity's history of profit and losses; (7) the amount of occasional profits; (8) the taxpayer's financial status; and (9) the presence of recreational or personal elements related to the activity. Based on these factors, the IRS contended that Boneparte was not a professional gambler but instead a casual gambler.
Holding: The court held that the taxpayer was not a professional gambler after it concluded that eight factors weighed against Bonaparte and one factor (the expectation the activity's assets will appreciate) was neutral. According to the court, the following factors weighed against the taxpayer, thus indicating a lack of profit motive: The taxpayer kept no records other than win/loss statements from the casinos that could be used to test the success of any of his gaming techniques. The taxpayer's purchase of books and videos on how to win at slot machines was no different than a similar purchase by a casual gambler. Despite his frequent gambling, Boneparte gambled only in his spare time and received a great deal of personal pleasure and recreation from his gambling. He had no history of success in other business activities other than his job as a tunnel bridge agent. He gambled from 2009 to 2013, always had losses, and never showed a profit. He had substantial income from another source, his job, and if he were treated as a professional gambler, his tax liability would be reduced greatly.
Because the court held that the taxpayer was a casual gambler in 2012 and 2013, his wagering gains were included in his gross income for each year, and he was allowed an itemized deduction each year for his wagering losses to the extent of the gains included in that year's gross income. The court also held that he was liable for the 20% accuracy-related penalty since he did not seek advice from a tax professional and could not explain how he concluded that he was a professional gambler for 2012 and 2013.
- Boneparte, T.C. Memo. 2017-193
— By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota—Duluth.