Tax Court Cites Wikipedia 8 Times, Says Taxpayer Who Spent 1,000 Hours Per Year Playing Video Poker Is Not a Professional Gambler

The Tax Court yesterday held that a taxpayer was not engaged in the trade or business of gambling and thus was not a professional gambler, even though he spent over 1,000 hours per year playing video poker.  Ferguson v. Commissioner, T.C. Summ. Op. 2007-30 (2/28/07).  The case is interesting for two reasons.

First, the court may have set a record by citing Wikipedia eight times in its extended discussion of the mechanics of video poker.

Second, the court suggests that playing viedo poker can never constitute a trade or business for § 162 purposes:

[P]etitioner was employed full-time as a building operating engineer in Chicago and earned approximately $51,840 from his employment in 2003. In addition to his employment, petitioner spent a good deal of time playing video poker. ...

Some people, including petitioner, think that if one were to play video poker in a mathematically and theoretically perfect manner, eventually one would realize a profit. ... He further testified that despite his hours of practice on a computer and diligent study of the perfect way to play the game, “it didn’t work.” [Fn: The Court suspects that petitioner’s strategy did not work because, while some video poker games may have a payback rate at or in excess of 100%, assuming "error-free, perfect play," most games offer a payback rate of less than 100%, even when played with perfect strategy. Of course, consistently error-free, perfect play is nearly impossible, and most players will lose a few cents or fractions thereof for each dollar bet over the long term. That said, short-term results do not always follow long-term statistical probabilities, which is why people still gamble.] ...

The issue in this case is whether petitioner’s gambling activity in 2003 constituted a trade or business under § 162. ... Petitioner testified at trial that playing video poker totally consumed his free time and caused him to lose a lot of money. But simply spending all of one’s free time on an activity does not transform that activity into a trade or business, nor does it make the participant a professional. Occasionally, devoting all of one’s free time to a particular activity may be a sign of addiction. ... Given the facts and circumstances in this case, we find that petitioner’s gambling activity in 2003 was not a trade or business.[Fn: H&R Block, petitioner’s tax preparer, determined that petitioner was a professional gambler because he spent more than 20 hours per week on the activity.]...

Although petitioner expended a great deal of time and effort engaged in his gambling activity, spending more than 1,000 hours gambling in 2003, he did not seek additional assistance with or adjust his gaming strategy, even when it became apparent that he never had a winning year. We are additionally unconvinced that petitioner’s gambling activity meets the standard for being a trade or business because we are not persuaded that an individual who gambles against a machine that is programmed by a casino can have, as his or her primary purpose, income or profit. After all, such a machine is on the floor to make money for the casino and is not there to provide income or profit for the casino’s patrons. For most individuals, gambling against a machine that is programmed to make money for the casino constitutes what the Supreme Court in Commissioner v. Groetzinger, 480 U.S. 23 (1987), characterized as a sporadic activity, hobby, or amusement diversion. For other individuals, gambling against such a machine may become a habit or an addiction. In neither scenario is it a trade or business with the participant’s primary purpose being income or profit.

Update:  For more, see:

• Russ Fox
• Joe Kristan