Today, in Tschetschot v. Commissioner, the tax court ruled that taxpayers where not entitled to treat tax losses from tournament poker different than tax losses from live-action poker.
Facts & Procedural History
In Tschetschot, the taxpayer had earned $49 thousand dollars from her day job and $11 thousand dollars from gambling. The taxpayer claimed a $29 thousand dollar loss, which offset all of her $11 thousand dollar gambling winnings and part of her $49 thousand dollar income.
On audit, the IRS denied all of the taxpayer’s gambling expenses (before the tax court litigation commenced, the IRS attorney conceded that the taxpayer was entitled to deduct losses in an amount up to her gambling winnings).
The issue before the court was whether tournament poker is a “wagering activity.” The taxpayer argues that tournament poker is not a wagering activity, rather, it is an “entertainment and professional sport.” The taxpayers based their position on the argument that tournament poker is different than regular poker because the game only requires an entry fee, the game lasts several days, and the winner is accorded part of the entry fee paid by other contestants. As can be expected, the IRS disagreed.
Since the applicable tax code section and regulations do not define “wagering activity,” the tax court applied the plain meaning of the term “wager” (the court used the Random House College Dictionary this time, instead of the more commonly used Merrim-Webster Dictionary).
The definition of “wager” used by the court was “something risked or staked on an uncertain event” or “a bet.”
Tax Court Conclusion
In applying the definition of the term “wager,” the tax court concluded that tournament poker was a “wagering activity.” The court reasoned that the context in which the game is played (i.e., as a paid sporting event or in a tournament setting) does not negate that the transaction involves a “bet.” Because there was a “bet” involved, the court held that the taxpayer’s taxable gambling losses were limited to the taxpayer’s gambling winnings (much like the hobby loss rules).
Applying the court’s “bet” analysis it appears that expenses associated with a 100% advertiser-paid poker event would result in the contestant’s expenses being allowed (but limited) to their poker earnings – even though the contestants did not put any money into the endeavor in order to participate — in tax terms, the contestants would not have any burden or economic risk (but they may have incurred other significant expenses, such as travel and room and board).
Similarly, applying the court’s “bet” analysis, it appears that losses associated with a documentary film production that filmed a poker tournament could even be limited because they would constitute a “wagering activity.”
What Is And Is Not Considered “Wagering Activity”
Another way for determining what is and is not a “wagering activity” might include whether the taxpayer put any money into the game in order to participate and possibly win (i.e., a focus on the first part of the court’s dictionary definition, rather than on the second part).
The court probably did not want to focus on this analysis because it could present a number of tax planning opportunities for taxpayers.
For example, taxpayers could structure these tournaments so that the entry fees are allocated 100% to the administrative fees to carry out the operation (i.e., paying the dealers and for the electricity, rent, etc.) and having the host company put up the funds to pay the winners (in a way to avoid the step-transaction doctrine, possibly by having the host company maintain a continual pool of funds for multiple tournaments) or taxpayers could pool their monies in a partnership and then have the partnership compensate members based on the amount of services that each partner provides (i.e., the partners that last longer or win more hands provide more services and are entitled to get paid more).
Of course, these options would raise a whole host of other tax issues (and tax planning opportunities)….