In Tschetschot v. Commissioner, 93 TCM 914 (2007), the tax court ruled that taxpayer’s losses from participating in tournament poker were limited to the amount of her winnings. The court held that tournament poker is, despite its differences from other types of poker, essentially a wagering activity and therefore should not be treated differently from other forms of gambling for tax purposes. The court also rejected the taxpayer’s equal protection argument to treat tournament poker as sports, on the basis of the policy decisions of the congress to treat business based on wagering activities differently.
Gambling is becoming increasingly popular in today’s society. Major casinos and online gambling sites attract countless people who are lured by the fortune, fascinated by the chance, and entertained by the excitement offered by gambling. With the popularity on the rise, the skills of professional gamblers as well as the form of organizing gambling activities also evolve, and various gambling tournaments emerge as a result. Tournament poker, in particular, is probably the most well known and widely participated one. Numerous tournaments are held, either in casinos or online, and professional players gain celebrity status as the games are televised and watched by people from all over the world. Tournament poker, different from “live-action” poker normally played in casinos or elsewhere, consists of a series of individual events. Each participant pay an entrance fee to the organizer of the tournament, and the collective amount is used to administrate the event and form the prize “pot” that will be ultimately paid to the winners. Generally each participant begins with a same number of chips and plays with others. A player cannot exit halfway through the game until he or she has lost all of his or her chips, and the tournament ends when there is one player left with all of the chips. The organization of the tournament, however, also raised questions about the tax effects on players as a result of competing in the tournaments, especially their losses. In Tschetschot v. Commissioner, 93 TCM 914 (2007), such a question of how the losses from participating in tournament poker events should be deducted on the individual tax return was brought to the tax court. The court ruled that these losses should not be treated differently from other gambling losses based on the reasoning that tournament poker is essentially still a wagering activity which predicates its tax treatment. Before analyzing the tax court’s decision, however, a brief overview of the current provision regulating the deduction of gambling losses is necessary.
Overview of Current Provision
Currently, the deduction of gambling losses is identified in Section 165(d) of the Internal Revenue Code of 1986, as amended (Code). While the general rule of Code §165 stated that any loss sustained during the tax year and not covered by insurance or otherwise compensated should be allowed as a deduction, Code §165(d) specifically provides that “[l]osses from wagering transactions shall be allowed only to the extent of the gains from such transactions.” (emphasis added) Though the word wagering has different meanings depending on the context, legislative history of the Code suggests that this term is synonymous with “gambling.” Therefore, while Code §165 generally allows losses to be deducted from a taxpayer’s gross income in Schedule C, one can only deduct gambling losses when itemizing deductions, and the deduction is limited to the amount of the winning, i.e. if a taxpayers has a net gambling loss for the tax year, that amount is not deductible. The difficulties involved with Code §165(d) is usually due to the fact that neither the Code nor the regulations define what constitutes a wagering activity, and it is often left to the court to differentiate wagering and related activities from other activities. And Tschetschot is no exception: the main...