T.C. Summary Opinion 2001-85
UNITED STATES TAX COURT
ELDRON U. ERBS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1890-00S. Filed June 13, 2001.
Eldron U. Erbs, pro se.
James M. Klein and Mark J. Miller, for respondent.
DINAN, Special Trial Judge: The proceedings in this case
were conducted pursuant to the provisions of section 7463 of the
Internal Revenue Code in effect at the time the petition was
filed. The decision to be entered is not reviewable by any other
court, and this opinion should not be cited as authority. Unless
otherwise indicated, subsequent section references are to the
Internal Revenue Code in effect for the year in issue, and all
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Rule references are to the Tax Court Rules of Practice and
Procedure.
Respondent determined a deficiency in petitioner’s Federal
income tax of $2,532 for the taxable year 1996.
The issue for decision is whether petitioner was engaged in
the trade or business of gambling in 1996.
This case was submitted fully stipulated pursuant to Rule
122. All of the facts stipulated are so found. The stipulations
of fact and the attached exhibits are incorporated herein by this
reference. Petitioner resided in Oakdale, Wisconsin, on the date
the petition was filed in this case. Petitioner’s audit
commenced on July 2, 1998.
Petitioner is semiretired. During the year in issue, he was
engaged in a business in which he purchased and sold antiques.
He incurred a loss of $3,415 in this business. Also during 1996,
petitioner visited the Ho-Chunk Casino in Baraboo, Wisconsin, on
at least 89 occasions. Ho-Chunk Casino produced a Player Coin
Report which indicates petitioner had “coin-in” and “coin-out”
amounts during the year of $368,166.95 and $341,530.20,
respectively. Petitioner made bank withdrawals from automated
teller machines in connection with his Ho-Chunk gambling activity
on 88 separate dates. The following summarizes on a monthly
basis the number of days he made withdrawals:
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
3 11 3 3 11 6 9 13 10 17 2 0
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We treat these numbers as the approximate number of times
petitioner visited the casino in each month. He would normally
visit the casino during late evening and early morning hours,
averaging 9 hours per visit.
Petitioner received six Forms 1099 in 1996 for gambling
winnings. On his 1996 Federal income tax return, he reported the
amounts indicated on the Forms 1099 as his only winnings from
gambling. He reported this income of $10,538 on Schedule C,
Profit or Loss From Business, claiming no cost of goods sold or
expenses other than gambling losses of $10,538, resulting in zero
net profit. Petitioner reported $27,865 in adjusted gross
income, consisting of the following:
IRA distributions $26,600
Social Security benefits 3,052
Interest 1,628
Business loss (antique sales) (3,415)
Adjusted gross income 27,865
In addition, petitioner received $9,530 in nontaxable net Social
Security benefits. The occupation stated on his return was
“retailer”.
Respondent determined that petitioner’s gambling activity
was not an activity entered into for profit. Accordingly,
respondent recharacterized petitioner’s gambling income and
determined that petitioner’s gambling losses were deductible as
an itemized deduction rather than as a trade or business expense.
Respondent also determined that petitioner was entitled to
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itemized deductions in lieu of the claimed standard deduction and
allowed petitioner an additional itemized deduction for the
payment of taxes. Finally, a computational adjustment was made
to the amount of taxable Social Security benefits. Petitioner
disputes respondent’s determination that he was not engaged in
the trade or business of gambling.
Ordinary and necessary expenses paid in carrying on a trade
or business generally are deductible under section 162(a). A
taxpayer who is engaged in the trade or business of gambling may
deduct gambling losses and expenses, if otherwise permitted, only
to the extent of the taxpayer’s gambling winnings. See secs.
162(a) and 165(d); Valenti v. Commissioner, T.C. Memo. 1994-483.
A taxpayer who is not engaged in the trade or business of
gambling also may deduct such losses and expenses to the extent
of their winnings, but must do so under section 165(a). A
deduction under section 165(a) reduces a taxpayer’s taxable
income only if the taxpayer elects to forgo the standard
deduction. See sec. 63.
Resolving the question whether a taxpayer is engaged in a
trade or business “requires an examination of the facts in each
case.” Commissioner v. Groetzinger, 480 U.S. 23, 36 (1987)
(quoting Higgins v. Commissioner, 312 U.S. 212, 217 (1941)). The
Supreme Court in Commissioner v. Groetzinger, supra, addressing
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the question whether a full-time gambler who gambled solely for
his own account was engaged in a trade or business, stated:
to be engaged in a trade or business, the taxpayer must be
involved in the activity with continuity and regularity and
* * * the taxpayer’s primary purpose for engaging in the
activity must be for income or profit. A sporadic activity,
a hobby, or an amusement diversion does not qualify. * * *
we conclude that if one’s gambling activity is pursued full
time, in good faith, and with regularity, to the production
of income for a livelihood, and is not a mere hobby, it is a
trade or business within the meaning of the statutes with
which we are here concerned. Respondent Groetzinger
satisfied that test in 1978. Constant and large-scale
effort on his part was made. Skill was required and was
applied. He did what he did for a livelihood, though with a
less-than-successful result. This was not a hobby or a
passing fancy or an occasional bet for amusement. Id. at
35-36.
After his employer terminated his position in February 1978, the
taxpayer in Groetzinger devoted the remainder of the year to
parimutuel wagering, primarily on greyhound races. During this
time, he spent 6 days a week for 48 weeks at the track and spent
a substantial amount of time studying racing forms, programs, and
other materials. In all, he devoted 60 to 80 hours each week to
gambling-related activities. After February, he had no
employment or profession other than gambling. He received $6,498
in non-gambling income from interest, dividends, capital gains,
and salary earned prior to termination.1
1
That the taxpayer in Groetzinger gambled “with a view to
earning a living from such activity” was not disputed by the
Commissioner. See Groetzinger v. Commissioner, supra at 24 n.2
(quoting Groetzinger v. Commissioner, 82 T.C. 793, 795 (1984)).
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In this case, petitioner’s visits to the casino were not
continuous or regular. Petitioner points to the total number of
hours he spent at the casino over the course of the year, and
argues that he averaged 20 hours per week gambling. However, his
visits to the casino throughout the year were very sporadic. The
number of monthly visits rose as high as 17 in October, but in
December he made no visits and in several other months he made
only 2 or 3. Petitioner also argues that the amount of time he
spent in his antique sales business is similar to the amount of
time he spent in the gambling activity.2 The aggregate amount of
time spent in the activity is not as determinative as the fact
that petitioner had little continuity or regularity to his
visits. Finally, petitioner argues that the sporadic nature of
his gambling was dictated by his knowledge of “how the machines
were cycling or if the machines were being adjusted to reduce
players odds.” We do not accept this argument, both because it
is not supported by any evidence and because we do not find it
plausible that petitioner had knowledge of when the video poker
machines were producing higher payoffs which was sufficiently
accurate or specific to dictate when he should visit the casino.
The primary purpose of petitioner’s gambling activity was
for amusement, not for profit: His activity, although
2
Respondent has not challenged petitioner’s deduction of the
loss from the antiques business, so we need not address the
accuracy of petitioner’s treatment of the activity as a business.
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substantial, was more consistent with a hobby than a trade or
business. He argues that he spent a significant amount of time
studying “cycles” of video poker machines, reading publications
relating to video poker, and practicing on his own video poker
machine in order to “achieve greater success while gambling.”
These efforts would be consistent with a desire to win money.
However, the desire to win money is consistent with gambling
purely for its entertainment or recreational aspects, and we find
that petitioner gambled primarily for this reason rather than
primarily for profit.
Finally, we note that petitioner is semiretired and in 1996
received a substantial amount of income: Excluding his business
loss of $3,415, he received over $40,000 in interest, individual
retirement account distributions, and Social Security benefits.
This income and petitioner’s semiretired status indicate that he
was not relying upon gambling for his livelihood.
In his trial briefs, petitioner discusses the material
participation requirements of section 469 and the regulations
thereunder. First, petitioner points to the references in these
provisions to 500 hours of participation in an activity, arguing
that he was in the trade or business of gambling because he
devoted nearly twice that amount of time. See, e.g., sec. 1.469-
5T(a)(1), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25,
1988). These provisions govern whether a trade or business is
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passive and do not address the more fundamental question of
whether an activity constitutes a trade or business. Second,
petitioner argues that instructions for the Schedule C provide
that there are no “limitations on losses” for nonpassive
activities (i.e., activities which meet the material
participation requirements). It is true that section 469 imposes
no additional limitations on such losses, but the losses are
still subject to the more general limitations discussed above.
We hold that petitioner was not engaged in the trade or
business of gambling in 1996.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.