From a tax perspective, one of the benefits to filing as a “professional” gambler instead of as a “recreational” gambler is that only the former may deduct gambling-related business expenses that exceed the taxpayer’s “net” gambling winnings. This proposition is supported by a recent U.S. Tax Court decision from January. Earlier today, the U.S. Tax Court disallowed a taxpayer’s business loss from gambling in 2006 because the court held that the taxpayer was not a professional gambler in 2006.

In 2006, Randy Moore of North Carolina worked approximately 40 hours per week as a traveling x-ray technician, earning $63,619. During his downtime, he liked to gamble, primarily playing slot machines. He was issued twelve Form W-2Gs from two casinos for the year, totaling $25,534.

To his 2006 tax return, Moore attached a Schedule C and filed as a “pro gambler,” claiming zero “net” gambling winnings (Moore reported $25,534 of wagering losses), and $15,455 of assorted business expenses, reflecting an overall business loss of $15,455. The IRS challenged Moore’s professional gambler status, taking the position that he could not claim the business loss, and that he must itemize his wagering losses of $25,534 on Schedule A.

What’s noteworthy here is how the case likely began. The IRS first raised the professional gambler status issue in its answer to the taxpayer’s petition. The notice of deficiency claimed that the taxpayer failed to report $25,534 in gambling winnings. The IRS later conceded that he did report such, but likely only after an explanation that the winnings were offset by gambling losses. It’s this explanation that probably resulted in the IRS taking notice of the taxpayer’s business loss from gambling.

Because the IRS first raised the professional gambler status issue in its answer, the burden of proof was on the IRS to prove that Moore was not a professional gambler. Accordingly, the IRS was required to demonstrate that Moore did not gamble with the intent to profit. Here are the factors the court considered to make its analysis:

Manner in which the taxpayer carries on the activity;

The expertise of the taxpayer or his advisors;

The time and effort expended by the taxpayer in carrying on the activity;

Expectation that assets used in activity may appreciate in value;

The success of the taxpayer in carrying on other similar or dissimilar activities;

The taxpayer’s history of income or losses with respect to the activity;

The amount of occasional profits, if any, which are earned;

The financial status of the taxpayer; and

Elements of personal pleasure or recreation.

From the evidence presented, the decision was easy for the court to make. He didn’t keep records of his gambling activity. Big mistake. Also, he had never profited from gambling, and did not seek possible ways to improve upon his performance.

As an aside, I find it rather interesting that the IRS conceded the deductibility of the taxpayer’s $25,534 in wagering losses, despite the taxpayer failing to maintain any records of his gambling activity. We can’t glean the entire history of the audit from this tax opinion alone. It’s possible the concession from the IRS was a product of audit negotiations. I wouldn’t expect the IRS to concede gambling losses without substantiation in most audits, however, particularly with reported gambling losses of six figures or greater.

This case is informative for a taxpayer who asks the question: Can I file as a professional gambler? Remember, a taxpayer doesn’t have a choice. It’s a matter of whether he/she can show that the above factors as applied to particular facts and circumstances demonstrate one engaged in gambling for profit. If not, winnings and losses are reported in separate places on the tax return.

Case: Moore v. Commissioner, T.C. Memo 2011-173.