My colleague Peter Reilly, CPA, has exhaustively examined the anfractuosities and interstices of Reg. Section 1.183-2(b), the hobby loss provision that the late Judge Richard Posner of 7 Cir characterized as “the goofy regulation.”

Today STJ Eunkyong (“N’Yawk”) Choi applies such of the nine (count ’em, nine) factors that the goofy regulation enumerates as are necessary to deny professional gambler status to Susan E. Mercier & James H.  Mercier, Docket No. 7499-22S, filed 6/6/23. And she doesn’t need more than a couple.

Sue is an accountant for a charter school, and Jim runs his own business repairing appliances. Living in or around Las Vegas, they gamble at video poker with a system they worked out their own selves. This offers the best odds and involves skill.

Of course, they lose. In more ways than one.

Their W-2G winnings are unreported income. And their net losses cannot be deducted on Sched A, because their AGI with winnings included wipe out Sched A in favor of the post-TCJA enhanced standard deduction. So they don’t report the W-2Gs, claiming it’s unfair to be taxed on winnings that aren’t.

STJ Choi says that may be, but that’s the law.

Unless.

There’s always an exception. Whatever would we practitioners do without exceptions?

Sue & Jim can claim professional gambler status. If they qualify, they can file Sched C, deduct losses against winnings like any other self-employed businessperson, and carry the net loss over to their 1040 MFJ.

Except.

“We find that although Petitioners are serious about gambling, they were not professional gamblers. Petitioners are both sophisticated in that they are an accountant and a previous business owner. Petitioner wife acknowledged that as an accountant, she would advise a taxpayer operating a business to keep records. Petitioner husband acknowledged that for his appliance repair business, he did keep records.

“Petitioners did not personally keep track of their gambling activity in [year at issue] choosing, instead, to rely on third-party information from casinos, even though they further acknowledge that the casinos record may be incomplete, as only jackpot winnings, not smaller winnings, are reported. Petitioners also did not keep a separate bank account to manage gambling winnings and expenses, but used their personal account, which is further evidence of the casual nature of their gambling.” Transcript, at pp. 9-10.

And in prior years, pre-TCJA, Sue & Jim did take losses on Sched A. Though Sue & Jim claim they didn’t know they could go pro and file Sched C for gambling, Jim filed Sched C for appliance repair. And they didn’t claim Sched C pro gambling until after the SNOD.

Takeaway- Open a separate bank account for whatever business you claim, even if you no longer get a toaster for opening the account. Even the monthly service charges (if any) are deductible. Put in every penny of income. And get some cheap online recordkeeping software. The deduction you save may be your own.