Tax Court Finds in Favor of Couple that Claimed to be Professional Gamblers

The U.S. Tax Court has ruled in favor of taxpayers who used “Feng Shui” to determine their lucky days for gambling. The taxpayers had claimed to be professional gamblers and had claimed their gambling losses on Schedule C (business return for a sole proprietor) rather than as an itemized deduction on Schedule A.

For casual gamblers (which is the overwhelming majority of us), gambling winnings are reported as income on the front side of the 1040, and gambling losses (up to the amount of gambling winnings) are reported as itemized deductions on Schedule A. Professional gamblers report winnings and losses on Schedule C. Without going into detail (that’s another blog post for another day), the difference in reporting is significant.

In this case, the taxpayers took up gambling to create another source of income after the husband learned that his employer planned to move the business to Costa Rica. He and his wife would drive 130 miles one way to Nevada on Friday nights to gamble, and would gamble most of the weekend. According to the Tax Court report, the couple would only sleep three or four hours a night, and would return home on Monday morning. They were both born in Vietnam, and used Feng Shui and other religious beliefs to determine which one was having a “lucky day,” and that person would bet the heaviest that day.

In 2006 (the year being contested in Tax Court), the taxpayers had gambling winnings of about $850,000, and gambling losses of over $1 million. The taxpayers claimed to be professional gamblers that year, and the IRS disagreed. The IRS said the gambling activity was not a business because it wasn’t conducted full-time and because the taxpayer’s Feng Shui approach was “not businesslike and that it was irrational.”

The Tax Court sided with the taxpayer. In the ruling, the Court said the time spent by the taxpayers on weekends was close to the amount of time the husband devoted to his day job during the week. The Court also disagreed with the idea that the approach wasn’t businesslike, saying that the taxpayer’s profit motive was legitimate.

The ruling saved the couple almost $9,400 dollars in taxes and another $1,880 in penalties.

But before you all run out to become professional gamblers: this ruling is not necessarily a happy ending for the couple. They gave up on trying to be professional gamblers in early 2007 after they realized that they were almost $200,000 in debt. They had withdrawn money from retirement accounts and took out loans to finance their failed attempt at making a living as professional gamblers.