TO: Dr. Green
FROM: Kecia Carter
DATE: November 28, 2010
RE: Tax Memo #1/Gambling Activities
Dr. Green is a practicing physician in Chicago who, as an avid blackjack and slot machine player, travels to Las Vegas bi-weekly to gamble. He would like to know what criteria are used to determine whether his gambling activities constitute a trade or business for federal income tax purposes and whether or not you think his gambling activities qualify for trade or business status. Law
The Internal Revenue Service (IRS) reminds taxpayers to follow appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or is engaged in as a hobby. The term “trade or business” is not defined in the Internal Revenue Code or the regulations. With that being said, it is well established that in order for an activity to be considered a trade or business for the 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). Taxpayers bear the burden of proving that they engaged in the activity with an actual and honest objective of realizing a profit. Hendricks v. Comr., 32 F.3d 94 (4th Cir. 1994), aff’g T.C. Memo 1993-396, Comr. v. Groetzinger, 480 U.S. 23, 35 (1987); Bot v. Comr., 353 F.3d 595, 599 (8th Cir. 2003), aff’g 118 T.C. 138 (2002); Am. Acad. Of Family Physicians v. U.S., 91 F.3d 1155, 1157-58 (8th Cir. 1996). Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Hulter v. Commissioner, 91 T.C. 371, 392 (1988); Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982), affd. without published opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs. Although a reasonable expectation of a profit is not required, the taxpayer’s profit objective must be actual and honest. Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a), Income Tax Regs. Whether a taxpayer has an actual and honest profit objective is a question to be answered based on all the relevant facts and circumstances. Hulter v. Commissioner, supra at 393; Hastings v. Commissioner, T.C. Memo. 2002-310; sec. 1.183-2(a), Income Tax Regs. Greater weight is given to objective facts than to a taxpayer’s simple statement of intent. Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a), Income Tax Regs. The taxpayer bears the burden of establishing he or she had the required profit objective.10 Rule 142(a); Keanini v. Commissioner, supra at 46; Hastings v. Commissioner, supra. The regulations provide a list of factors that may be considered in deciding whether a profit objective exists. These factors include such matters as: the manner in which the taxpayer carries on the activity, the taxpayer’s history of income or losses with respect to the activity, and the financial status of the taxpayer. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit. An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses). If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations. Conclusion
Since Dr. Green does not conduct his gambling activities in the same manner and with the same intent to treat this activity as a profitable business as he does with his medical practice, nor does he need to rely on any gambling winnings to maintain his day to day living expenses, this can...