T.C. Summary Opinion 2006-24
UNITED STATES TAX COURT
JAMES CASTAGNETTA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22132-03S. Filed February 13, 2006.
James Castagnetta, pro se.
Frank J. Jackson, for respondent.
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the year in issue. Rule references
are to the Tax Court Rules of Practice and Procedure. The
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decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority.
Respondent determined a deficiency of $863 in petitioner’s
2001 Federal income tax.1 The issue for decision is whether
petitioner’s gambling activity constituted a trade or business
during the taxable year in issue.
Background
Some of the facts have been stipulated and are so found.
Petitioner was not married and had no children during, or as of
the close of, the year in issue. At the time the petition was
filed in this case, petitioner resided in Mt. Kisco, New York.
Petitioner is a college graduate with a bachelor’s degree in
economics. He lives with a roommate in a rented condominium and
describes his lifestyle as “modest”.
During 2001, petitioner was employed, part time, as a truck
driver delivering produce to area restaurants. Typically, he
worked on Monday, Tuesday, and Friday, 5 a.m. to noon. He was
not paid for holidays or vacations and his 2001 wages from his
part-time employment totaled $17,785.
Petitioner became interested in horseracing at an early age.
One of his relatives introduced him to handicapping horseraces.
He has been handicapping horseraces in some capacity for more
1
The amount in the notice of deficiency was incorrectly
computed to be $683. The parties stipulate that the correct
calculation of the proposed deficiency is $863.
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than 25 years. Petitioner has been “seriously” handicapping
horseraces for approximately 11 years.
Petitioner bets on horseraces via a closed circuit simulcast
at Yonkers Raceway (Yonkers). From Wednesday through Sunday,
Yonkers simulcasts horseraces from several alternating race
tracks. Typically, petitioner spends approximately 40 hours per
week handicapping and betting on horseraces. During 2001,
petitioner spent more than 250 days handicapping races and
betting at Yonkers.
Petitioner keeps a detailed account of his daily gambling
transactions. This includes his daily wagers and winnings, as
well as a cumulative total of his yearly winnings and losses.
He also spends a considerable amount of time handicapping races
and studying racing programs and other materials. As part of
handicapping horseraces, petitioner prepares his own “speed
figures”.2 Using a number of criteria, including track length,
track conditions, and weather conditions, as well as his
observations during the races, petitioner determines a final
“speed figure” for the winning horse in each race and compares
the “speed figure” to other horses. Petitioner maintains a
detailed chronological record of his “speed figures” for the
winner of each horserace.
2
“Speed figures” can also be purchased from a third party.
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Prior to 2001, petitioner maintained handwritten tables for
the “speed figures” he prepared. During 2001, petitioner began
using a commercially available computer spreadsheet program to
maintain and prepare the tables for his “speed figures”.
Generally, petitioner makes hand-recorded notes during the race
and then later enters the information into the spreadsheet
program. In addition to maintaining detailed “speed figures”,
petitioner keeps copies of racing forms, racing programs, and
betting tickets as part of his record keeping. He does not
maintain a separate checking account with respect to his gambling
activity.
Petitioner does not advertise that he handicaps horseraces,
nor does he sell the “speed figures” he prepares. He does,
however, offer advice to, and solicit advice from, other regular
gamblers. Petitioner also watches videotapes of the races so he
can “closely” review each race.
Petitioner does not use any wages from his job as a truck
driver to finance his gambling activity. Instead, his wagers are
a fixed percentage of his “bankroll”. Petitioner’s “bankroll”
consists solely of his cumulative winnings at the race track.
Generally, petitioner bets 2.5 percent of his “bankroll” on each
race. During 2001, petitioner earned a 4-percent return on each
dollar bet he placed; i.e., petitioner won on average of $1.04
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for each dollar bet he placed. According to petitioner, Yonkers
typically pays back about 83 cents for each dollar bet placed.
Petitioner’s 2001 Federal income tax return was timely
filed. The taxable income and income tax liability shown on that
return take into account the standard deduction applicable to
petitioner’s filing status. Included with that return is a
Schedule C, Profit or Loss From Business, which lists his
principal business activity as “Parimutuel Wagering”.
On the Schedule C, petitioner reported the following
amounts:
Gross receipts
from wagers $52,501
Total wagered 50,725
Gross Income 1,776
Total expenses (1,542)
Net Profit 234
Petitioner’s total expenses consisted of supplies of $162 and
forms and programs of $1,380.3
In the notice of deficiency respondent determined that
petitioner’s gambling activity did not constitute a trade or
business during 2001. The gambling income reported on the
Schedule C was recharacterized as “other income”, and the
wagering losses were allowed as a miscellaneous itemized
deduction in lieu of the standard deduction.
3
Respondent does not contest that petitioner incurred
these gambling-related expenses.
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Discussion
The issue in this case is whether petitioner’s gambling
activity constituted a trade or business for purposes of section
162 during 2001. If petitioner were engaged in a trade or
business of gambling, wagering losses, to the extent deductible
under section 165(d),4 would be deducted in computing adjusted
gross income. See sec. 62. On the other hand, if petitioner
were not in a trade or business of gambling, wagering losses, to
the extent deductible under section 165(d), would be deductible
as an itemized deduction in the computation of taxable income.
4
In general, sec. 165(a) allows a taxpayer to deduct “any
loss sustained during the taxable year and not compensated for by
insurance or otherwise.” Losses from wagering transactions,
however, are “allowed only to the extent of the gains from such
transactions.” Sec. 165(d); sec. 1.165-10, Income Tax Regs. We
construed the phrase “losses from wagering transactions” to
include not only losing wagers but also for other expenses
incurred in connection with gambling transactions. See Estate of
Todisco v. Commissioner, 757 F.2d 1 (1st Cir. 1985), affg. T.C.
Memo. 1983-247; Offutt v. Commissioner, 16 T.C. 1214 (1951); see
also Praytor v. Commissioner, T.C. Memo. 2000-282 (citing
Kochevar v. Commissioner, T.C. Memo. 1995-607 (holding that slot-
machine players, even if construed to be in the trade or business
of gambling, could deduct gambling losses and expenses, including
automatic teller charges, office supplies, travel mileage, and
meals, only to the extent of the their winnings)); Valenti v.
Commissioner, T.C. Memo. 1994-483 (holding that a deduction for
losses incurred in wagering transactions is subject to sec.
165(d) regardless of the fact that the taxpayer was in the trade
or business of gambling); Kozma v. Commissioner, T.C. Memo. 1986-
177 (construing the phrase “losses from wagering transactions” as
used in sec. 165(d) to include expenses incurred by a
professional gambler for transportation, meals, lodging,
admission fees, and office supplies).
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See Gajewski v. Commissioner, 84 T.C. 980, 982 (1985); Johnston
v. Commissioner, 25 T.C. 106, 108 (1955).
Consistent with the manner in which petitioner reported the
income and expenses attributable to his gambling activity on his
Federal income tax return for the year in issue, petitioner
claims that his gambling activity constitutes a trade or
business. Respondent argues, in part, that petitioner’s gambling
activity does not constitute a trade or business because he did
not engage in that activity with the requisite intent to profit.
In general, section 162(a) allows a deduction for all
ordinary and necessary expenses paid or incurred during the
taxable year in carrying on a trade or business. The term “trade
or business” is not precisely defined in the Internal Revenue
Code or the regulations promulgated thereunder; however, it is
well established that in order for an activity to be considered a
taxpayer’s trade or business for purposes of section 162, the
activity must be conducted “with continuity and regularity” and
“the taxpayer’s primary purpose for engaging in the activity must
be for income or profit.” Commissioner v. Groetzinger, 480 U.S.
23, 35 (1987). It is clear that in a single taxable year, a
taxpayer may be in engaged in more than one trade or business.
Curphey v. Commissioner, 73 T.C. 766 (1980); Barrish v.
Commissioner, T.C. Memo. 1984-602.
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We are satisfied that petitioner’s gambling activity was
conducted with the requisite continuity and regularity during the
taxable year to allow for treatment as a trade or business within
the meaning of section 162(a). Nevertheless, in order for an
activity to be considered a trade or business within the meaning
of that section, a taxpayer’s primary purpose fo engaging in the
activity must be for income or profit. See Commissioner v.
Groetzinger, supra; Miller v. Commissioner, T.C. Memo. 1998-463,
affd. 208 F.3d 214 (6th Cir. 2000). Furthermore, as was the
situation in Groetzinger, the activity in question must be the
taxpayer’s “intended livelihood source”. Commissioner v.
Groetzinger, supra at 33.
The test of whether a taxpayer conducted an activity for
profit is whether he or she entered into, or continued, the
activity with an actual or honest objective of making a profit.
Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer v.
Commissioner, 78 T.C. 642, 644-645 (1982), affd. without opinion
702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.
Although a reasonable expectation of profit on a taxpayer’s part
is not required, the profit objective must be bona fide, as
determined from a consideration of the surrounding facts and
circumstances. Keanini v. Commissioner, supra; Dreicer v.
Commissioner, supra at 645; Golanty v. Commissioner, 72 T.C. 411,
425-426 (1979), affd. without published opinion 647 F.2d 170 (9th
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Cir. 1981); Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965),
affd. 379 F.2d 252 (2d Cir. 1967).
Whether petitioner engaged in his gambling activity with an
actual and honest objective of realizing a profit must be
redetermined year-to-year, taking into account all of the
relevant facts and circumstances. Golanty v. Commissioner,
supra at 426; sec. 1.183-2(a) and (b), Income Tax Regs. More
weight is given to objective facts than to petitioner’s statement
of his intent. Engdahl v. Commissioner, 72 T.C. 659, 666 (1979);
sec. 1.183-2(a), Income Tax Regs.
The following factors, which are nonexclusive, should be
considered in the determination of whether an activity is engaged
in for profit: (1) The manner in which the taxpayer carried on
the activity; (2) the expertise of the taxpayer or his or her
advisers; (3) the time and effort expended by the taxpayer in
carrying on the activity; (4) the expectation that assets used in
the activity may appreciate in value; (5) the success of the
taxpayer in carrying on other similar or dissimilar activities;
(6) the taxpayer’s history of income or losses with respect to
the activity; (7) the amount of occasional profits, if any,
which are earned; (8) the financial status of the taxpayer; and
(9) elements of personal pleasure or recreation. Sec. 1.183-
2(b), Income Tax Regs.
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No one factor is determinative in and of itself, and our
conclusion with respect to petitioner’s profit objective does not
depend upon merely counting up those factors that suggest the
presence of a profit motive and comparing the number to those
factors that indicate the opposite. Sec. 1.183-2(b), Income Tax
Regs. These factors are nonexclusive, and not every factor is
relevant in every case. Vandeyacht v. Commissioner, T.C. Memo.
1994-148; Borsody v. Commissioner, T.C. Memo. 1993-534, affd. per
curiam 92 F.3d 1176 (4th Cir. 1996); sec. 1.183-2(b), Income Tax
Regs.
Turning to the relevant factors enumerated in section 1.183-
2(b), Income Tax Regs., we find that petitioner’s gambling
activity was operated in a businesslike manner. Petitioner
regularly attended the horseraces at Yonkers. In addition to
keeping copies of betting slips and racing forms and programs,
petitioner kept detailed records with respect to his gambling
activity. Petitioner kept a detailed account of his daily
wagers, as well as a cumulative total of his yearly winnings and
losses. Petitioner also maintained numerous statistics for each
horserace in the form of “speed figures” and used this
information for handicapping horseraces. Petitioner reviewed
videotapes of the horseraces for further study. During the
taxable year in issue, petitioner also began to use a computer to
maintain a significant amount of his records with respect to his
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gambling activity. Although petitioner maintained only a single
bank account, his gambling winnings and losses were accounted for
separately. Accordingly, this factor favors petitioner.
A profit objective might be indicated where the taxpayer
carries on an activity in accordance with practices learned from
extensive study of accepted business and economic practices, or
consultation with experts involved therein. Sec. 1.183-2(b)(3),
Income Tax Regs. Petitioner has been gambling on horseraces for
more than 25 years. Petitioner has been “seriously” handicapping
horseraces for 11 years. This includes preparing detailed “speed
figures” for the winner of each race. Petitioner sought advice
from, as well as provided advice to, other individuals who
gambled on a regular basis. Finally, through the years
petitioner has read numerous books published on gambling and
handicapping horseraces. This factor favors petitioner.
A profit objective might be indicated where the taxpayer
uses much of his personal time and effort to carry on the
activity. Sec. 1.183-2(b)(4), Income Tax Regs. Petitioner
spends about 40 hours pursuing his gambling activity. During
2001, he spent approximately 250 days gambling and handicapping
horseraces. Petitioner’s detailed records, including the self-
prepared “speed figures”, are evidence of the time and effort
expended by petitioner away from the race track. We are
convinced that petitioner spent a significant amount of time
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and effort in pursuit of this activity. This factor favors
petitioner.
A profit objective is strongly indicated where the taxpayer
has experienced a series of profitable years. Sec. 1.183-
2(b)(6), Income Tax Regs. Detailed financial information about
petitioner’s other taxable years is not available on this record.
An opportunity to earn a substantial ultimate profit in a highly
speculative venture is ordinarily sufficient to indicate that the
activity is engaged in for profit even though losses or only
occasional small profits are actually generated. Sec. 1.183-
2(b)(7), Income Tax Regs. Although it was modest in amount,
petitioner enjoyed a profit from gambling during the year in
issue. This factor is neutral or slightly favors petitioner.
The next factor significant in our inquiry is the financial
status of the taxpayer. A profit objective might be indicated
where the taxpayer does not have substantial income from sources
other than the activity. Sec. 1.183-2(b)(8), Income Tax Regs.
Petitioner held no substantial investments during 2001, and his
part-time employment as a delivery truck driver was his only
other source of income. Under the circumstances, the amount of
his wages gives little insight into his profit objective. On
balance, we consider this factor to be neutral.
A lack of profit objective might be indicated where there
are personal motives for carrying on the activity, especially
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where the motive is personal pleasure or recreation. Sec. 1.183-
2(b)(9), Income Tax Regs. Profit need not be the only objective,
however, and personal motives may coexist with an actual and
honest intent to derive a profit. A taxpayer’s enjoyment of an
activity does not necessarily indicate that the taxpayer lacks a
profit objective if the activity is conducted for profit as shown
by other factors. See Jackson v. Commissioner, 59 T.C. 312, 317
(1972); sec. 1.183-2(b)(9), Income Tax Regs. The fact that
petitioner may have also enjoyed betting on horseraces does not
mean that he did not engage in the activity for profit. This
factor is neutral.
Taking into account the above factors and considering the
facts and circumstances relating to petitioner’s gambling
activity, we conclude that petitioner engaged in his gambling
activity with the bona fide intent of making a profit. Having
found that petitioner conducted his gambling activity with
continuity and regularity, we conclude that petitioner was in the
trade or business of gambling during the taxable year in issue.
Accordingly, petitioner’s gambling expenses are deductible under
section 162(a), to the extent limited by section 165(d).
The parties are cautioned, however, that our holding in this
case does no more than resolve the year here in issue. See sec.
1.183-2(a) and (b), Income Tax Regs. Petitioner’s betting
strategy (2.5 percent of his “bankroll”) raises some question
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whether his gambling activity was his “intended livelihood
source”, Commissioner v. Groetzinger, 480 U.S. at 33, as his
bankroll was described as “cumulative winnings” with no mention
about withdrawals for “livelihood” expenditures. Maintaining a
“bankroll” used exclusively for gambling purposes strongly
suggests that his gambling activity does not constitute a trade
or business. To the extent that petitioner’s betting strategy
remains consistent over the years, a different result might well
be reached.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for petitioner.