Attorney-at-Law

THE GOOFY REGULATION PLAYS THE SLOTS

In Uncategorized on 10/25/2019 at 17:36

Before retiring from the US Air Force, Hope Snead “attained the rank of first lieutenant” as a nurse. The Air Force pay couldn’t come close to her and her husband’s gross income from gambling for the three years at issue, namely, $513,939, $1,220,393, and $92,867. But their offsetting losses equaled their gains, so their deficiencies for those years didn’t aggregate $25K, and IRS drops both chops and additions.

But Hope wants their gambling losses above-the-line, like Sched C, rather than below-the-line, like Sched A. If so, Hope and hubby Jim would have no AGI. And no tax.

Judge Morrison goes off the bench in James E. Snead and Hope R. Snead, Docket No. 7556-18S, filed 10/25/19. It’s Hope’s story, and she claims to be a professional gambler. At the slots. Now it doesn’t take an old-time casino hound to know that “slot gambling has a negative value on a long-term, probabilistic basis no matter what strategy is used.” Transcript, at p. 8.

If you’re claiming you’re in it to win it and cart off the boodle in one of those plastic buckets, slots might could be not the way to go.

So we have Judge Morrison going with the “goofy regulation,” Reg. 1.183-2(b), and furnishing further material for me and my colleague, Peter Reilly, CPA, a hobby loss aficionado.

First is businesslike manner. Since if you play long enough, you can’t win at the slots (the payout is less than the odds, and strictly random), if you do it long enough to show continuity, you do it for fun, not profit.

Next, Hope spoke to some unidentified poker player (where skill does matter) and watched some videos. “However, we are not impressed with the idea that Mrs. Snead accumulated expertise in the field of slot gambling or engaged in significant consultation with experts.” Transcript, at p. 8. As mathematically no strategy, other than rigging the machines, could produce a net win over a long enough run of play, I also am unimpressed.

Hope spent a long time gambling, to the detriment of her family life. But she did hold down a full-time job, so spending time gambling doesn’t rule out treating it as a hobby.

Hope has no assets that could appreciate. And she had no success gambling; even though her winnings went up between two of the years at issue, her net didn’t. Her success as a nurse in the Air Force has nothing to do with slot machines.

She always lost. Though in one month in her biggest year she hit five (count ‘em, five) jackpots, “temporary winning streaks are to be expected given the high frequency with which she gambled and the random nature of slot payoffs.” Transcript, at pp. 9-10. And she supported herself on her Air Force pay.

Now personal pleasure is a key factor in the Goofy Reg Stakes. Hope claims she hadn’t any. “Gambling was not a pleasurable pursuit for Mrs. Snead but instead was a way to deal with mental anguish. That gambling was not a pleasurable pursuit but a way to deal with mental anguish does not suggest to us that Mrs. Snead gambled primarily to earn a profit.

“We hold that Mrs. Snead did not gamble primarily to earn a profit. She therefore was not a professional gambler. Other than their argument that Mrs. Snead was a professional gambler, the Sneads did not raise any other dispute about the determinations in the notice of deficiency with respect to their gambling activities.” Transcript, at p. 10.

I’ve often echoed Tax Court Judges, saying you don’t have to suffer to be in business for profit. But it seems that if you do suffer, it doesn’t help you if you don’t make a profit. Neither too much fun nor too much pain helps much in the Goofy Reg Stakes.

Hope and Jim claim some charitables, but fall at the $250 fence; no papers.

Hope and Jim also claim some miscellaneous itemized deductions (of the kind now deep-frozen by the TCJA of 2017, but still alive when Hope and Jim were trying for them), but the 2% AGI floor would wipe them out, because their gambling losses are below the line Sched As.

Takeaway- Ya gotta be really rich or really lucky to win at the Section 1.183-2(b) slot machine.

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