Citing
a bit of wisdom from Kenny Rogers, the U.S. Tax
Court ruled that tournament poker is gambling,
not a sport, and thus not exempt from the
Section 165(d) limitations of the tax code.
In a matter brought by George
and Gloria Tschetschot of Cedar Rapids, Iowa,
the couple argued that Gloria’s professional
tournament poker playing was not gambling, and
thus was not subject to limitations on losses
from gambling.
The Internal Revenue Service
had cited a deficiency in the couples’ joint
federal income tax return for 2000 of just over
$10,000, and assessed an accuracy-related
penalty for the understatement of just over
$2,014.
At trial, the Tschetschots
conceded that George was not a professional
gambler, but said that Gloria’s poker playing
should not be classified as gambling due to the
specific rules of the particular game of
poker.
Unlike “live-action”
poker, poker tournament participants cannot exit
the game by cashing out partway through the
tournament; the events are played until there is
one player left with all of the chips and can
last anywhere from days to weeks. The
Tschetschots expanded on that point, providing a
number of reasons for why tournament poker
should be classified as "entertainment and
professional sports" and not a wagering
activity -- meaning that Gloria’s net losses
(approximately $30,000) should be treated the
same as those of any other professional sport
participants.
But in its decision, the court
noted that, similar to live-action poker, a
player’s tournament success depends on a
combination of both luck and skill -- a point
cited by a British court that recently found
poker to be a game of chance. And that’s where
country crooner Kenny Rogers enters the picture.
“A player might have a
decent hand, but as Kenny Rogers tells us in ‘The
Gambler,’ he or she would still have to, ‘know
when to hold ‘em, know when to fold ‘em,
know when to walk away and know when to run,’
to actually be a success,” the court wrote in
its response.
The Tschetschots did win one
point however -- Gloria’s business expenses
related to the professional gambling activity
are deductible, though instead of being
classified as Schedule C, “Profit or
Loss from Business,” the court said they
should fall under Schedule A, “Itemized
Deductions,” but only to the extent of her
winnings (about $11,000). The court returned the
matter to the IRS and the couple to determine
whether there was still a substantial
understatement of income.
The full decision is available
at www.ustaxcourt.gov/InOpHistoric/Tschetschot.TCM.WPD.pdf.
