T.C. Summary Opinion 2019-16
UNITED STATES TAX COURT
THEODORE JAMES ZALESIAK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2416-18S. Filed July 15, 2019.
Theodore James Zalesiak, pro se.
Eugene A. Kornel, for respondent.
SUMMARY OPINION
ARMEN, Special Trial Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect when the -2-
petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not
reviewable by any other court, and this opinion shall not be treated as precedent
for any other case.
For 2015 respondent determined a $7,961 deficiency in petitioner’s Federal
income tax and a $1,592 accuracy-related penalty under section 6662. The
deficiency in tax is principally attributable to the disallowance of “total expenses”
of $19,811 claimed by petitioner on a Schedule C, Profit or Loss From Business,
in respect of his gambling activity. Of the $19,811 amount, $16,841 relates to
gambling losses and the balance relates to nonwagering expenses (i.e., car, travel,
and book expenses).
The parties agree that petitioner is entitled to $16,841 in deductible
gambling losses for 2015. However, the parties do not agree, and the principal
issue for decision by the Court is, whether petitioner is entitled to deduct such
gambling losses (and allowable nonwagering expenses) on his Schedule C as a
professional gambler, or whether he may deduct his gambling losses (and
allowable nonwagering expenses) only on Schedule A, Itemized Deductions, as a
nonprofessional (amateur) gambler. Further, after concessions by respondent and
1 All subsequent section references are to the Internal Revenue Code (Code) in effect for 2015, the taxable year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. -3-
without regard to purely mechanical matters,2 the Court must decide whether
petitioner has substantiated deductions for nonwagering expenses, namely, car
expenses and travel expenses, that he claims were related to his gambling activity.
Background
Some of the facts have been stipulated, and they are so found. The Court
incorporates by reference the parties’ stipulations of facts and accompanying
exhibits.
Petitioner resided in the State of Illinois when the petition was timely filed
with the Court.
Petitioner received a bachelor of science degree in education and social
policy from Northwestern University. In or around 2008, near the end of his
college education, petitioner began playing poker online, at in-person
2 Respondent concedes that petitioner may deduct on either Schedule C or Schedule A, depending on petitioner’s status as either a professional gambler or an amateur gambler, nonwagering expenses for (a) car and travel, but only to the extent both are allowable by law and properly substantiated, and (b) books in the amount of $38 (the amount claimed by petitioner). Respondent also concedes that if petitioner was an amateur gambler, petitioner is not subject to self-employment tax under sec. 1401 (and is not entitled to a deduction for one-half of such tax under sec. 164(f)). Further, respondent concedes that petitioner is not liable for the accuracy-related penalty under sec. 6662. Finally, the adjustment in the notice of deficiency regarding the amount of the deduction claimed by petitioner for student loan interest is mechanical. -4-
tournaments, and at cash games. At some time during 2009 petitioner stopped
working at a small job when he became successful playing online poker.
Around 2010 petitioner took a year off from playing poker “to establish a
different career” with the intention of resuming playing poker after finding an
alternative source of income. He obtained full-time employment as a construction
manager in Chicago, a position that he has held with various companies through
the date of trial. In 2011 petitioner passionately pursued poker on nights and
weekends, and his construction manager position provided him with a substantial
financial support system to “chase what * * * [he] really wanted to do full time”.
Although petitioner reported a small profit from poker in 2011, he did not profit
from playing poker in 2012, 2013, or 2014.
Petitioner’s income tax returns for the five years immediately preceding
2015, the taxable year in issue, listed his occupation as “manager” and reported
the following: -5-
2010 2011 2012 2013 2014 Wages per return $25,195 $37,759 $25,338 $34,504 $43,750 “Total income” 1 1 per return $24,398 $41,660 $31,885 $36,055 $43,158 Wages/“Total income” (percent) 100 90.6 79.5 95.7 100 Gross income from gambling (per Schedule C) (2 ) $33,020 $30,289 $110,314 $15,835 Gambling losses (per Schedule C) (2) ($29,119) ($30,289) ($110,314) ($15,835) Net profit (per Schedule C) (2 ) $3,901 -0- -0- -0- 1 “Total income” is less than wages because of a reported capital loss. 2 There is no entry on line 12 (“Business income or (loss)”) of Form 1040, U.S. Individual Income Tax Return, consistent with the fact that around 2010 petitioner took a year off from playing poker.
In 2015, the taxable year in issue, petitioner worked as a construction
manager for approximately 30 hours per week on average, with about one-third of
his time working onsite. Petitioner occasionally engaged in poker-related
activities when he was working remotely or when he had a break.
During the year in issue petitioner played poker in private games (i.e., at
private residences) and at casinos, principally the Horseshoe Casino in Hammond, -6-
Indiana.3 The Horseshoe Casino is about 20 miles from his home in Chicago.
Petitioner claimed deductions for car expenses on the basis of mileage to and from
the locations at which he played poker. Almost invariably petitioner went from
his residence to the casino or another location and would return to his residence
afterwards.
Between May and September 2015 petitioner did not play poker or engage
in poker-related activities because of his busy work schedule as a construction
manager. In contrast, during December 2015, having accumulated enough leave at
work and because of a slowdown in construction projects during that time of the
year, petitioner traveled out of State. Petitioner tailored his December 2015 travel
around poker tournaments or casinos located near family or friends. For example,
he played poker on Thanksgiving in Indiana while he was visiting family; he
participated in a poker tournament in Baltimore, Maryland, while visiting an uncle
in northern Virginia; and he played poker at a casino in Florida on Christmas after
having dinner with his grandmother. Petitioner’s December 2015 travel “worked
out perfectly that * * * [he] was able to get two birds with one stone”, i.e., visit
friends and family and play poker at various casinos and other locations.
3 Petitioner did not play any online poker in 2015. -7-
Petitioner alleges that he “spent about 271 days gambling, reviewing * * *
[his] results, and studying relevant poker literature.” Out of the 271 days that
petitioner contends that he engaged in poker-related activities, he spent
approximately 75 days playing poker. On the days he did not actually play poker,
he watched videos, read books, and listened to podcasts. He did not track his time
spent on poker-related activities.
Petitioner did not gamble in other forms (e.g., gambling on horse racing).
Although petitioner wished to be a profitable poker player, he did not have a
formal business plan regarding his poker activities, he did not teach poker in an
official capacity, he did not accept any endorsements in relation to playing poker,
and he was not featured in any televised poker tournaments. Petitioner, however,
readily offered poker advice to others without charge.
Petitioner contemporaneously compiled a spreadsheet reflecting his poker
activities, recording game locations, winnings, losses, and expenses (i.e., mileage,
tolls, and hotel). He did not, however, have a separate bank account in which he
deposited his winnings or withdrew funds to play poker.
Petitioner timely filed a 2015 Form 1040 reporting $58,999 of wages, which
constituted 98.1% of his total reported income. Petitioner did not attach a
Schedule A to his 2015 return but rather claimed the standard deduction. He did -8-
attach to his 2015 return a Schedule C, Profit or Loss from Business, on which he
reported a net profit of $1,119 from poker, calculated as follows:
Gross income $20,930 Less: Car $2,561 Travel 371 Other: Books 38 Gambling losses 16,841 16,879
“Total expenses” (19,811) Net profit 1,119
In Part IV (“Information on Your Vehicle”) of Schedule C, petitioner indicated
that his vehicle was available for personal use and that in 2015 he drove 3,790
miles for “business”, zero miles for “commuting”, and 28,210 miles for “other”.
At the start of 2017 petitioner lost a job that “allowed * * * [him] to have
the time available for * * * [poker].” After reflecting on his lack of meaningful
financial success playing poker in recent years4 and the number of hours he put
into the activity, he decided it was preferable to move on to other endeavors,
friends, family, and hobbies. Although he still loves watching poker and visiting
4 Petitioner’s reporting history for 2010 through 2015 from playing poker appears in the text. See supra pp. 4-5. On his Schedule C for 2016 petitioner reported a net profit from playing poker of $34. -9-
friends whenever they are doing well in tournaments, he no longer competes at the
poker table.
Discussion
A. Burden of Proof
Generally, respondent’s determinations in a notice of deficiency are
presumed correct, and the taxpayer bears the burden of proving that those
determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111,
115 (1933). The taxpayer likewise bears the burden of proving his entitlement to
deductions allowed by the Code and of substantiating the amounts of items
underlying claimed deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992). Section 7491(a) may place the burden of proof on the Commissioner as
to a factual issue if the taxpayer introduces credible evidence with respect to that
issue and satisfies certain other requirements. Petitioner did not allege that section
7491(a) applies, nor did he satisfy the requirements of that section. Accordingly,
section 7491(a) does not apply, and petitioner bears the burden of proof.
B. Amateur Versus Professional Gambler
In general, section 162(a) allows a deduction for all ordinary and necessary
expenses paid or incurred during the taxable year in carrying on a trade or
business. The term “trade or business” is not defined in the Code or regulations. - 10 -
That said, caselaw makes clear that in order for an activity to be considered a trade
or business for purposes of section 162, the activity must be conducted with
“continuity and regularity” and “the taxpayer’s primary purpose for engaging in
the activity must be for income or profit.” Commissioner v. Groetzinger, 480 U.S.
23, 35 (1987). A sporadic activity or a hobby does not qualify. Id.
Thus, to be a professional gambler, the taxpayer must have engaged in
gambling with the objective of making a profit. Sec. 183(a), (b), and (c);
Commissioner v. Groetzinger, 480 U.S. at 35; sec. 1.183-2(a), Income Tax Regs.
The amount of time spent engaged in the activity is not the most significant aspect
of the trade or business analysis; what is more important is the taxpayer’s actual or
honest objective of making a profit. See Keanini v. Commissioner, 94 T.C. 41, 46
(1990); Hulter v. Commissioner, 91 T.C. 371, 392 (1988); sec. 1.183-2(a), Income
Tax Regs.; see also Dreicer v. Commissioner, 78 T.C. 642, 643-644 (1982), aff’d,
702 F.2d 1205 (D.C. Cir. 1983). Whether a taxpayer has an actual and honest
profit objective is a question of fact to be answered on the basis of all of the
relevant facts and circumstances. Hastings v. Commissioner, T.C. Memo. 2002-
310; sec. 1.183-2(a), Income Tax Regs.
The pertinent regulations set forth a nonexhaustive list of facts that may be
considered in deciding whether a profit objective exists. These factors include: - 11 -
(1) the manner in which the taxpayer carries on the activity, (2) the expertise of the
taxpayer or his adviser, (3) the time and effort expended by the taxpayer in
carrying on the activity, (4) the expectation that assets used in the activity may
appreciate in value, (5) the success of the taxpayer in carrying on other similar or
dissimilar activities, (6) the taxpayer’s history of income or losses with respect to
the activity, (7) the amount of occasional profits, if any, which are earned, (8) the
financial status of the taxpayer, and (9) the elements of personal pleasure or
recreation. Sec. 1.183-2(b), Income Tax Regs.; see Golanty v. Commissioner, 72
T.C. 411, 426 (1979), aff’d, 647 F.2d 170 (9th Cir. 1981); Boneparte v.
Commissioner, T.C. Memo. 2015-128, at *10.
No single factor or group of factors is determinative. Golanty v.
Commissioner, 72 T.C. at 426; sec. 1.183-2(b), Income Tax Regs. Although the
focus of the test for whether a taxpayer engaged in the activity with intent to make
a profit is on the subjective intent of the taxpayer, greater weight is given to
objective facts than to the taxpayer’s mere statement of his or her intent. Sec.
1.183-2(a), Income Tax Regs. In addition, not every factor is relevant to every
case. See generally Vandeyacht v. Commissioner, T.C. Memo. 1994-148.
Consequently, we do not analyze in depth all of the factors enumerated in the
regulation but focus on some of the more important ones that inform our decision. - 12 -
Petitioner testified at trial that engaging in poker-related activities
consumed his nights and weekends for the year in issue. But simply spending all
of one’s free time on an activity does not transform the activity into a trade or
business, nor does it make the participant a professional. In addition, petitioner
stopped engaging in poker-related activities for a substantial period during the
year in issue because his job as a construction manager would not permit him to
continue playing poker at that time. He also took a trip in December 2015 and
played poker in various cities, but it was possible only because he accrued enough
leave to do so; and, notably, he visited family and friends in those cities during the
trip (i.e., he “was able to get two birds with one stone”).
Most importantly, petitioner relied on his full-time employment to
substantially support his pursuit of poker. In 2015 petitioner’s wages constituted
98.1% of his total income. Without his wages as a construction manager he could
not have paid his rent or otherwise have supported himself, nor could he have
indulged his passion for poker. Furthermore, he recognized the need for wage
income, and he looked to employment, not poker, for his livelihood. Petitioner’s
reliance on employment for his livelihood is consistent with his characterization
on his returns of his occupation as a “manager”. Indeed, petitioner testified at trial - 13 -
that self-describing himself as a “manager” “was always something that I would
tell people that I was doing if they would ask me on a professional level.”
In the five years immediately preceding the taxable year in issue petitioner’s
wages ranged from a low of 79.5% of his total income to 100%. Indeed, other
than in 2015 and 2011, no part of petitioner’s total income was attributable to
gambling during the six-year period from 2010 through 2015. And even for those
two years, income from gambling was a minor, if not a de minimis, percentage of
petitioner’s total income, as demonstrated by the fact that for 2015 his net profit
from gambling was less than 2% of his total income and for 2011 it was less than
10%. See Commissioner v. Groetzinger, 480 U.S. at 35; Boneparte v.
Commissioner, T.C. Memo. 2017-193; sec. 1.183-2(b)(6) and (7), Income Tax
Regs.
The Court does not question that petitioner wished to win at poker.
Nevertheless, for the reasons previously discussed and giving greater weight to
objective facts than to petitioner’s mere statement of intent, the Court holds that
petitioner did not have the requisite profit objective to qualify his gambling
activity as a trade or business for 2015. Lacking the requisite profit objective, - 14 -
petitioner may deduct his poker-related losses and any allowable expenses only on
Schedule A.5
C. Gambling Losses, Car Expenses, and Travel Expenses
Having decided that petitioner was not a professional gambler in 2015, the
Court turns now to the issue of substantiation.
Deductions are a matter of legislative grace, and taxpayers must prove
entitlement to any deductions claimed. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. at 84. Taxpayers are required to identify each deduction,
show that they have satisfied all requirements, and keep books or records to
substantiate items underlying the deductions. Sec. 6001; sec. 1.6001-1(a), Income
Tax Regs.
In the case of an activity not engaged in for profit, section 183(a) allows no
deduction other than as allowed in section 183(b). As applicable to the present
case, section 183(b)(2) allows “a deduction equal to the amount of the deductions
which would be allowable * * * if such activity were engaged in for profit”. See,
e.g., Boneparte v. Commissioner, at *9-*10.
5 Because petitioner is not considered a professional gambler, he is not (consistent with respondent’s concession, see supra note 2) subject to self- employment tax, see secs. 1401 and 1402(a), or entitled to the deduction for one- half of such tax, see sec. 164(f). - 15 -
The parties agree that petitioner is entitled to $16,841 in deductible
gambling losses for 2015, and respondent has conceded that petitioner is entitled
to a $38 deduction for the purchase of books. Thus, the Court must decide
whether petitioner would be entitled to deductions for car expenses and for travel
expenses if his poker activities had been engaged in for profit. Here a number of
fundamental principles inform our decision.
As previously stated, under section 162(a) a deduction is allowed for
ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business. However, personal, living, or family expenses
are generally nondeductible. Sec. 262(a). In particular, expenses of daily
commuting (unlike travel expenses, see sec. 162(a)(2)) are generally not
deductible because such expenses constitute personal expenses. See sec. 1.262-
1(b)(5), Income Tax Regs.; see also sec. 1.162-2(e), Income Tax Regs. Although
there are exceptions to this general rule, see, e.g., Rehman v. Commissioner, T.C.
Memo. 2013-71, at *13-*14, a taxpayer typically bears the burden of proving that
an exception exists permitting the deduction of commuting expenses. Petitioner
did not allege that any such exception applies, and the record does not support a
finding sufficient to invoke any such exception. - 16 -
Further, section 274(d) prescribes more stringent substantiation
requirements that must be satisfied before a taxpayer may deduct certain
categories of expenses, such as travel expenses (including meals and lodging
while away from the taxpayer’s home overnight) and car expenses. Thus, no
deduction is allowed for such categories of expenses unless the taxpayer
substantiates, by adequate records or by sufficient evidence corroborating the
taxpayer’s own statement, each of the following elements: (1) the amount of each
separate expenditure; (2) the time and destination city or town, the date of return,
and the time spent on business; and (3) the business reason or expected business
benefit from the travel. See sec. 274(d); Niv v. Commissioner, T.C. Memo. 2013-
82, at *9-*10.
Petitioner incurred car expenses when driving between his residence and
poker venues such as the Horseshoe Casino in Hammond. Such expenses are
personal expenses in the nature of commuting and do not qualify as deductible
expenses. See sec. 1.262-1(b)(5), Income Tax Regs.; see also sec. 1.162-2(e),
Income Tax Regs. On a few occasions petitioner may have driven to a poker
venue directly from his employer’s worksite; however, the Court may not estimate
either the number of such instances or the mileage incurred given the strictures of - 17 -
section 274(d). See Schladweiler v. Commissioner, T.C. Memo. 2000-351, aff’d,
28 F. App’x 602 (8th Cir. 2002).
Finally, petitioner incurred expenses traveling in December 2015. That
travel appears to have been motivated more by personal considerations related to
visiting family and friends over the holidays than by the desire to make money by
playing poker, as petitioner could have played (and would have had more time to
play) poker close to home had he not embarked on a multistate journey. See
Henry v. Commissioner, 36 T.C. 879, 884 (1961). Accordingly, the Court holds
that petitioner is not entitled to a deduction for his December 2015 travel
expenses.
Conclusion
In order to reflect the Court’s disposition of the disputed issues, as well as
respondent’s concessions, see supra note 2,
Decision will be entered
under Rule 155.