What Other Factors Go Into Establishing Whether or Not Someone is a Professional Gambler? Mercier V US Tax Court June 6, 2023

Nevada taxpayers claimed that they had “extensive” knowledge of VIDEO POKER, and employed a strategy based on statistical information, and based on this, considered themselves to be professional gamblers.

Husband owned an appliance repair business, wife was an accountant.

Wife failed to report the gambling winnings from W2-G on their tax returns.  Wife mistakenly thought that because there were gambling losses, that gambling income was not needed to be reported.

What is not addressed here is not necessarily if the gambling income was for a Professional Gambler, but if the income was reported, the expenses could also be reported on Schedule A.   Taxpayer made the error of not reporting the income, which a professionial gambler would or not.  However there are special provisions for Professional Gamblers that did not necessarily impact this return.  Thus the tax court likely considered this a throwaway case as the return was not prepared correctly as a professional gambler or non-professional gambler.

The court stated the issue is whether they may deduct their gambling losses on Schedule C as professional gamblers, which would zero out their gambling income, or whether they must deduct their losses on Schedule A as casual gamblers, which would derive no tax benefit due to the standard deduction being higher.

The court stated a nine-factor test is used to determine whether a gambling activity was
for the primary purpose of earning a profit:

1) Whether the activity was carried out in a business-like manner. For example, the
taxpayer kept records,
2) The taxpayer’s expertise,
3) The time and effort the taxpayer spent gambling,
4) The expectation that assets used in the activity may increase in value,
5) The taxpayer’s success in non-gambling activity,
6) The taxpayer’s history of winnings and losses,
7) The amount of the occasional profits from gambling,
8) The taxpayer’s financial status, and
9) The presence of elements of personal pleasure or recreation

Court did not side with the taxpayers, as they did not attempt to offset their gambling winnings with losses on Schedule C until after receiving the IRS’s Notice of Deficiency for the 2019 tax year.
Accordingly, the court ruled the taxpayers were not professional gamblers.