Slot Player Held To Be Professional Gambler, Can Deduct Losses

written by I. Nelson Rose

#121 © Copyright 2007, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose,

A full-time, professional poker player has tax breaks that we part-time amateurs don’t have. They can take off all their travel and other expenses involved in playing poker as costs of doing business.

In 1986, the U.S. Supreme Court ruled that a full-time handicapper of greyhound dog races could be in the “trade or business” of gambling for tax purposes.

But what about other gamblers?

The Minnesota Supreme Court has given a startling answer, holding that a slot machine player could also be considered a professional gambler, even though she did not have a reasonable expectation of making a profit.

The 1986 case, Commissioner of Internal Revenue v. Groetzinger, is considered a somewhat important case by tax professionals. Up until that time, there was a question of whether not only gamblers, but anyone who spent their whole time managing their own investments, could take their losses and expenses off their taxes. Some courts had held that to be in a trade or business, a taxpayer had to offer a service, such as buying and selling stocks for other investors, not just for themselves. The Supreme Court ruled that Groetzinger, who spent his full time, 60-80 hours a week, at the track and handicapping at home, was in the business of gambling. This was true even though he ended up losing money at the end of the year.

I believe the Groetzinger case is much more important than a mere tax case. It was the first time the nation’s highest court declared that being a gambler can be an actual occupation, not merely a sinful pastime. It recognized that gambling has become a legitimate part of American business and culture. It also indicated, at least indirectly, that laws that date from a time when all gambling was not only outlawed, but considered immoral, should not control modern society. And this was in 1986, when casino gambling was limited to Nevada and New Jersey.

The gambler in Groetzinger was a race handicapper. He might not have been a good one, but everyone conceded that he had an objective, reasonable belief that through skill and hard work he could show a profit.

The Minnesota Supreme Court has now taken the next logical step. It held that Estelle Busch, who started playing slots at Mystic Lake Casino in 1999 when she turned 65 and retired from her other job, could also be in the business of gambling, even though only she believed she could make money. The Court agreed with the state Commissioner of Revenue that Busch’s belief was irrational. But the Court ruled that spending 40-60 hours every week playing slots and keeping detailed records did qualify as a business.

Although the case involved gambling, the Minnesota Court knew the next case would involve some other activity. The Court did not want to require taxpayers to have a reasonable expectation of profit to qualify their activity as a business. This would not only stifle innovation, but would prove too difficult to enforce: If it were easy to know when a new enterprise has a realistic expectation of profit, no one would ever go bankrupt.

Instead, the Minnesota Court looked to the discussion of what constitutes a trade or business in Groetzinger, and the tests laid down in IRS regulations. These are not binding, because those involve federal tax laws and Busch is only concerned with state taxes. But they are persuasive, particularly for close cases.

The U.S. Supreme Court declared that if a person “devotes his full-time activity to gambling, and it is his intended livelihood source, it would seem that basic concepts of fairness… demand that his activity be regarded as a trade or business.” The Court looked at the enormous amount of time and effort Groetzinger put in, the skill that was required and applied, and his intent to make a living off of betting at the track. “This was not a hobby or a passing fancy or an occasional bet for amusement.”

The IRS has published a list of factors to be considered when determining whether an activity is a trade or business. These include the Groetzinger factors, plus others, such as carrying on the activity in a businesslike manner, the amount of money made, and “elements of personal pleasure or recreation.” The Minnesota Supreme Court did not necessarily buy Busch’s testimony that her gambling was “just plain hard work;” although 60 hours a week of playing slots does not sound like a fun time. The Court focused on the time she spent, how she “scrupulously kept records and reported income,” and, of course, her intent.

Even after losing hundreds of thousands of dollars, Busch “believed she had a knack for predicting payouts.”

This does not mean that every gambler can now deduct their losses and expenses as business expenses on Schedule C, “Profit or Loss From Business,” of their tax returns. A taxpayer who spent 35 hours every week at a horse track after losing his job as a salesman and who was seeking a new sales job qualified as a professional gambler. But a flower shop owner, appropriately named Pansy Panages, who only spent 20-25 hours a week after she closed her shop playing slots at a local Reno-area Smith’s, could not deduct $6,000 in tips she paid the grocery store’s employees for information on which machines were “due” to hit. A housewife who wised up after 66 days of playing, and losing, slot machines on an Iowa riverboat was ruled not to be even a short-term professional gambler.

A pro makes gambling a full-time business, meaning 35 or more hours a week, conducted in the same manner in which any other business is conducted, with a sincere belief that he or she will make a profit.

There were two other factors at work in the Busch case. Her tax returns had actually already been audited by the IRS. The federal government accepted her contention that her gambling was a business. Although this was not binding on the state, it would have appeared at least unfair for her gambling to be a business for federal taxes but not for nearly identical state taxes.

But the greatest unfairness is the Minnesota tax law itself. The Minnesota Alternative Minimum Tax requires taxpayers to report all of their gambling winnings, but does not allow them to deduct their gambling losses. Busch won $79,482 in 1999, $430,280 in 2000, and $972,980 in 2001. But she lost much more each year. Under Minnesota law, she was supposed to pay tax on all those gambling winnings, without taking into account the fact that there was no income.

The only way the Court could prevent this injustice was to find that the gambling losses were business expenses, because those can be deducted.

I think the case is another breakthrough for the growing legitimacy of legal gaming.

But it also shows that determination can pay off.

For Estelle Busch, now 72 years old, represented herself in front of the Supreme Court of Minnesota. And she beat the Attorney General, Commissioner of Revenue and the State itself.

Now that’s a player who knows her business.

© Copyright 2007. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, Gaming Law: Cases and Materials and Internet Gaming Law, are available through his website,

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