Are tournament poker losses subject to the same tax rules as live-action poker losses?
This question turns on whether tournament poker is a “wagering activity.” Despite the amount of money at stake and the importance to taxpayers who gamble, the term wagering activity is not defined.
This is where the recent Today, in Tschetschot v. Commissioner, T.C. Memo. 2007-38, case comes in. The U.S. Tax Court addresses whether tournament poker is different than live-action poker as it is a wagering activity.
Facts & Procedural History
The taxpayer was a database engineer. She was also a professional tournament poker player.
She earned $49,000 dollars from her day job and $11,000 dollars from gambling in 2000. On her 2000 tax return, the taxpayer claimed a $29,000 dollar loss, which offset all of her $11,000 dollar gambling winnings and part of her $49,000 dollar income.
On audit by the IRS, the IRS denied all of the taxpayer’s gambling expenses. Before the tax court trial, the IRS attorney conceded that the taxpayer was entitled to deduct losses in an amount up to her gambling winnings.
This left only the issue of whether the taxpayer’s tournament poker losses were limited by Section 165(d) to the amount of her tournament poker winnings. This turned on whether tournament poker is a “wagering activity.”
What is “Wagering Activity”
This case involves the tax loss rules in Section 165. Section 165 generally allows losses to be deducted from gross income.
Section 165(d) says that losses from wagering transactions shall be allowed only to the extent of the gains from such transactions. To be a wagering transaction, one has to be engaged in a “wagering activity.”
The taxpayer argued that tournament poker is not a wagering activity, rather, it is an “entertainment and professional sport.” The taxpayer’ based her position’s argument is based on the idea 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 expected, the IRS did not agree.
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 Merrim-Webster Dictionary that the court typically cites).
The definition of “wager” used by the court was “something risked or staked on an uncertain event” or “a bet.” 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).
There are still several open questions regarding what constitutes a “wagering activity” and the implications of the Tschetschot v. Commissioner ruling.
One question involves whether expenses associated with a 100% advertiser-paid poker event would be allowed as deductions, even though the contestants did not put any money into the endeavor. Another question is whether losses from a documentary film production that filmed a poker tournament could be limited due to constituting a “wagering activity.” The courts have said that video poker is not gambling.
Additionally, the court’s focus on the second part of the dictionary definition of “wager” leaves open the possibility of a different approach that considers whether the taxpayer put money into the game in order to participate and win. The court may have avoided this analysis because it could present tax planning opportunities for taxpayers, such as structuring tournaments to allocate entry fees to administrative fees or pooling monies in a partnership based on services provided.
The U.S. Tax Court held that the taxpayer’s tournament poker losses were limited by Section 165(d) to the amount of her tournament poker winnings. The court determined that tournament poker was a “wagering activity” based on the plain meaning of the term “wager” and the context in which the game is played. This ruling has implications for taxpayers who engage in activities that may be considered a “wagering activity” and highlights the need for careful consideration of tax rules and regulations when reporting losses from such activities. The court’s analysis also leaves open questions regarding what constitutes a “wagering activity” and presents potential tax planning opportunities for taxpayers.