Tax Court: Tournament Poker Is Gambling Subject to § 165(d), Not a Sport

The Tax Court held yesterday that tournament poker is gambling subject to the § 165(d) limitation and is not a sport.  As a result, the taxpayer could not deduct her poker losses in excess of her winnings.  Tschetschot v. Commissioner, T.C. Memo. 2007-38:

Similar to live-action poker, ... a player’s tournament success depends on a combination of both luck and skill. [Fn 3: A court in England recently had the opportunity to decide whether Texas Hold ‘Em was a game of chance or a game of skill, and the jury decided on the former.] A player might have a decent hand, but as Kenny Rogers tells us in “The Gambler”, he or she would still have to “know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run” to actually be a success.] ...

For 2000, the taxable year in issue, Mrs. Tschetschot earned approximately $49,000 in wages. She also participated in nine poker tournament series, winning in excess of $11,000. Mrs. Tschetschot claimed a net loss of $29,933 from her "professional gambler" activity in 2000 on her Schedule C, Profit or Loss From Business. ...

Petitioners contend that Mrs. Tschetschot's professional tournament poker playing activity is more properly classified as "entertainment and professional sports" than professional gambling and should bear the resulting tax treatment; i.e., that her net loss should not be limited by section 165(d) restricting losses from wagering activities. ...

Central to petitioners' contention is the thesis that tournament poker, unlike other types of poker, is not a wagering activity. The term "wagering" has different meanings depending on the context in which the term is used. More often than not, and as it is used in the Internal Revenue Code, the term is synonymous with "gambling". Congress has made a policy decision such that, while section 165 generally allows losses to be deducted from gross income, "[l]osses from wagering transactions shall be allowed only to the extent of the gains from such transactions." [Fn 7:  Sec. 165(d) applies to both professional and recreational gamblers.]  Sec. 165(d); see also sec. 165(a). However, neither the Internal Revenue Code nor the regulations define what constitutes a wagering activity. ...

[C]ourts have routinely held that poker is a wagering activity. ... [P]etitioners ask us to treat tournament poker differently than other kinds of poker. ... After a careful review of the record, it is clear that while there are differences between tournament poker and other types of poker, none rise to the level of meaningful, substantive differences that would warrant different tax treatment under the current Internal Revenue Code. ...

Petitioners argue that tournament poker is conducted in much the same way as other professional sporting tournaments. Participants pay an entry fee and compete to win prizes through their good fortune and superior skill. But simply because a sport or activity is played or conducted in a tournament setting does not transform the underlying activity into something different. ...

Petitioners also raise an equal protection argument and argue that there is no valid reason to treat tournament poker differently, for tax purposes, from tournament golf or tennis. Petitioners argue that the benefits of being able to offset "exaggerated income" from very successful years by losses sustained in less successful years should be available to professional tournament poker players as much as they are to other professions. Congress made a policy decision to treat businesses based on wagering activities differently. In the absence of Congressional action, we are not free to correct any perceived unfairness stemming from a rationally based policy choice.