                  T.C. Memo. 2007-38



                UNITED STATES TAX COURT



   GEORGE E. AND GLORIA TSCHETSCHOT, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 9498-03.             Filed February 20, 2007.




     R disallowed losses in excess of Ps’ winnings from
gambling and determined both a deficiency and a penalty
for substantial understatement for 2000. After
conceding that H’s net gambling losses were not
properly deductible, Ps argued that, as a professional
tournament poker player, W’s net losses should be
treated the same as those of any other professional
sport participants.

     Held: W’s net gambling losses are not exempt from
the limitations of sec. 165(d), I.R.C.

     Held, further: We leave for the parties to
determine as part of their computations under Rule 155,
Tax Court Rules of Practice and Procedure, whether
there was a substantial understatement for the taxable
year in issue; if so, Ps are liable for the accuracy-
related penalty.
                               - 2 -


     Gloria Tschetschot, pro se.

     J. Anthony Hoefer, for respondent.


              MEMORANDUM FINDINGS OF FACT AND OPINION


     ARMEN, Special Trial Judge:   Respondent determined a

deficiency in petitioners’ Federal income tax for the taxable

year 2000 of $10,071, as well as an accuracy-related penalty for

a substantial understatement of income tax of $2,014.     The

grounds for the deficiency were the limitations of section 165(d)

as applied to Gloria Tschetschot’s (Mrs. Tschetschot)

professional tournament poker playing and George E. Tschetschot’s

(Mr. Tschetschot) status as a nonprofessional gambler.1    At

trial, petitioners conceded that Mr. Tschetschot was not a

professional gambler but argued that Mrs. Tschetschot’s

professional tournament poker playing is not gambling and thus

not subject to the limitations of section 165(d) on losses from

gambling.   Respondent conceded that Mrs. Tschetschot’s business

expenses related to her professional gambling activity were

deductible.   Thus, the two issues for decision are:    (1) Whether

Mrs. Tschetschot’s tournament poker losses are limited by section

165(d) to the amount of her tournament poker winnings, and (2)



     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                - 3 -

whether a penalty under section 6662(a) for a substantial

understatement of income tax is appropriate.

                          FINDINGS OF FACT

     At the time the petition was filed, petitioners resided in

Cedar Rapids, Iowa.

     Mrs. Tschetschot is a database project engineer.      She was

also a professional tournament poker player in 2000.2      Mr.

Tschetschot is not a professional gambler but occasionally plays

slot machines and blackjack while accompanying his wife on her

poker tournament trips.

     Tournament poker is somewhat different from “live-action”

poker.    A poker tournament consists of a series of individual

events hosted by a casino, and it can last anywhere from several

days to 2 weeks.    Unlike live-action poker, tournament

participants cannot exit the game by cashing out partway through

the tournament; tournaments are played until there is one player

left with all of the chips.

     All tournaments have a “buy-in”, or entrance fee, that is

paid by the tournament participants to the tournament organizer.

A portion of this amount is an administrative fee kept by the

casino hosting the event, and the remainder goes directly into

the prize fund “pot” that will ultimately be paid out to the


     2
          Respondent stipulated this fact for purposes of this case
only.    There are no substantiation issues in this case.
                                 - 4 -

tournament’s winners.   No portion of the administration fee is

included in the prize fund, and the entire prize fund is

dispersed to winning participants.       The buy-in may or may not

correlate dollar-for-dollar with the amount of chips received at

the start of the tournament, and the chips themselves have no

intrinsic monetary value.   Although “re-buys” are sometimes

allowed, tournament play contemplates that each player has only a

fixed number of chips and that each player begins the tournament

with the same number of chips.    When a player runs out of chips,

he or she is out of the game.    Cash prizes are awarded to a

predetermined number of finishing places in the tournament.

Because of the buy-in system, the only monetary loss a tournament

participant may incur will be the amount of the buy-ins and any

re-buys the participant might make; no participant will be able

to bet--or subsequently lose--any greater amount.       Similar to

live-action poker, however, a player’s tournament success depends

on a combination of both luck and skill.3      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.


     3
        A court in England recently had the opportunity to decide
whether Texas Hold ‘Em was a game of chance or a game of skill,
and the jury decided on the former. See
http://news.bbc.co.uk/1/hi/england/london/6267603.stm.
                               - 5 -

     For 2000, the taxable year in issue, Mrs. Tschetschot earned

approximately $49,000 in wages.   She also participated in nine

poker tournament series, winning in excess of $11,000.4

     Mrs. Tschetschot claimed a net loss of $29,933 from her

“professional gambler” activity in 2000 on her Schedule C, Profit

or Loss From Business.   Mr. Tschetschot claimed a net loss of

$9,000 from his “professional gambler” activity in 2000 on his

Schedule C.

     Respondent determined a deficiency of $10,071 based on the

view that the deductions claimed by petitioners related to their

gambling activities were not appropriately Schedule C deductions,

but rather deductions allowable on Schedule A, Itemized

Deductions, but only to the extent of petitioners’ winnings.

Respondent also determined an accuracy-related penalty under

section 6662(a) of $2,014.

     At trial, petitioners conceded the issue as to Mr.

Tschetschot but disputed the determination as to Mrs.

Tschetschot.   Respondent conceded Mrs. Tschetschot’s status as a

professional, as well as the corresponding treatment of certain

expenses related to her professional gambling activity.


     4
        The amount of Mrs. Tschetschot’s stipulated winnings
totals $13,269, whereas she reported only $11,708. Respondent
discusses this discrepancy in his posttrial brief by saying that
“Respondent did not adjust this discrepancy because the
unreported winnings would have been offset by allowance of losses
that were disallowed.”
                               - 6 -

      Respondent maintains that section 165(d) limits Mrs.

Tschetschot’s losses and that petitioners remain liable for an

accuracy-related penalty.   Petitioners contend that Mrs.

Tschetschot’s professional tournament poker playing activity is

more properly classified as “entertainment and professional

sports” than professional gambling and should bear the resulting

tax treatment; i.e., that her net loss should not be limited by

section 165(d) restricting losses from wagering activities.

Petitioners also contend that they do not meet the threshold

amount for the imposition of an accuracy-related penalty based on

a substantial understatement of income tax.

                              OPINION

I.   Tournament Poker5

      Central to petitioners’ contention is the thesis that

tournament poker, unlike other types of poker, is not a wagering

activity.

      The term “wagering” has different meanings depending on the

context in which the term is used.     More often than not, and as

it is used in the Internal Revenue Code, the term is synonymous

with “gambling”.6

      5
        The issue related to tournament poker is essentially
legal in nature; accordingly, we decide it without regard to the
burden of proof.
      6
        The legislative history of sec. 23(g) of the Revenue Act
of 1934, ch. 277, tit. I, 48 Stat. 680, 689 (subsequently
                                                   (continued...)
                               - 7 -

     Congress has made a policy decision such that, while section

165 generally allows losses to be deducted from gross income,

“[l]osses from wagering transactions shall be allowed only to the

extent of the gains from such transactions.”7   Sec. 165(d); see

also sec. 165(a).   However, neither the Internal Revenue Code nor

the regulations define what constitutes a wagering activity.

     When a term is not defined, we must apply the term’s “plain,

obvious, and rational meaning.”   Liddle v. Commissioner, 103 T.C.

285, 293 n.4 (1994), affd. 65 F.3d 329 (3d Cir. 1995); see also

Boyd v. United States, 762 F.2d 1369, 1373 (9th Cir. 1985).

According to the dictionary, a “wager” is defined as “something

risked or staked on an uncertain event” or “a bet”.     Random House

College Dictionary (1968).   Similarly, “to wager” is




     6
      (...continued)
redesignated sec. 23(h) by the Revenue Act of 1938, ch. 289, 52
Stat. 461 and then continued as such in the 1939 Code until
enacted as sec. 165(d) in the 1954 Code) uses the terms
“wagering” and “gambling” interchangeably.
     7
        Sec. 165(d) applies to both professional and recreational
gamblers. See, e.g., Boyd v. United States, 762 F.2d 1369 (9th
Cir. 1985); Offutt v. Commissioner, 16 T.C. 1214 (1951);
Heidelberg v. Commissioner, T.C. Memo. 1977-133. One of the
consequences to professional gamblers is that the loss carryover
provisions of sec. 172 are unavailable for amounts attributable
to wagering activity. That is not an issue in this case as Mrs.
Tschetschot had other income to absorb her expenses properly
deductible as a professional. One of the consequences to
nonprofessionals is that they may only deduct gambling losses if
they itemize deductions on their tax returns. Sec. 62(a); see
also Heidelberg v. Commissioner, supra.
                               - 8 -

defined as:   (1) Something risked or staked on an uncertain

event; bet; (2) the act of betting.    Random House College

Dictionary (1973).   Courts have often had to differentiate

between wagering and related activities on the one hand and those

activities not falling into that category on the other.     See,

e.g., Allen v. U.S. Govt. Dept. of Treas., 976 F.2d 975 (5th Cir.

1992) (“tokes” paid as tips to casino dealers are not gains from

wagering transactions); Offutt v. Commissioner, 16 T.C. 1214

(1951) (betting on horse races is wagering); Libutti v.

Commissioner, T.C. Memo. 1996-108 (gambler’s receipt of

complimentary goods from a casino was sufficiently tied to

gambling participation that they were gains from wagering

transactions); Whitten v. Commissioner, T.C. Memo. 1995-508

(expenses incurred to be a contestant on Wheel of Fortune were

not wagering expenses); Heide v. Commissioner, 2 B.T.A. 451

(1925) (playing bridge for stakes is wagering).    However, courts

have routinely held that poker is a wagering activity.    See,

e.g., Boyd v. United States, supra.    But here, petitioners ask us

to treat tournament poker differently than other kinds of poker.

     After a careful review of the record, it is clear that while

there are differences between tournament poker and other types of

poker,8 none rise to the level of meaningful, substantive

     8
        The most significant difference is that unlike playing in
a live-action poker game, when one buys into a tournament game,
                                                   (continued...)
                                 - 9 -

differences that would warrant different tax treatment under the

current Internal Revenue Code.

     A.   Tournament Poker as a Sporting Event

     Petitioners argue that tournament poker is conducted in much

the same way as other professional sporting tournaments.

Participants pay an entry fee and compete to win prizes through

their good fortune and superior skill.    But simply because a

sport or activity is played or conducted in a tournament setting

does not transform the underlying activity into something

different.9

     Tournament poker play, much like live-action poker,

necessitates the use of the word “bet” or “wager” even to

describe how the game is played.    Petitioners argue that the

usage of the word “bet” in this context is insignificant.    The

Court sees it differently.

     Betting is so intrinsic to poker that it is nearly

impossible to avoid using a word that implies gambling in any way

     8
      (...continued)
each player receives the same fixed amount of chips. The game is
played, and when a player runs out of chips, the player is out of
the tournament. The playing continues until one player has all
of the chips. It may take a different skill set to play
tournament poker because no endless stream of funds is available,
and endurance is a crucial factor to a participant’s success.
     9
        Similarly, a casino’s decision to issue a Form W2-G,
Certain Gambling Winnings, or a Form 1099-Misc., Miscellaneous
Income, does not affect the nature of the winnings for tax
purposes.
                              - 10 -

when discussing the topic.   Bets are placed on each hand, and

each round of betting has consequences.     Whether or not the chips

being used to make these bets have immediate and tangible

monetary value does not change the fact that the players are

still placing bets, hoping to win.     This is true even in a

tournament setting.

     Petitioners agree that the first poker tournaments held

were, in fact, “wagering events”.    For example, in those early

games, “Each participant put up $10,000 and received $10,000 in

chips.”   The fact that the chips being used to place bets in

tournament poker today only bear some fractional relationship to

the dollar values of the prizes and/or entry fees does not change

the basic nature of the game as a wagering activity.

     B.   Professional Tournament Poker as a Business

     Petitioners also raise an equal protection argument and

argue that there is no valid reason to treat tournament poker

differently, for tax purposes, from tournament golf or tennis.

Petitioners argue that the benefits of being able to offset

“exaggerated income” from very successful years by losses

sustained in less successful years should be available to

professional tournament poker players as much as they are to

other professions.

     Congress made a policy decision to treat businesses based on

wagering activities differently.    In the absence of Congressional
                              - 11 -

action, we are not free to correct any perceived unfairness

stemming from a rationally based policy choice.   In Valenti v.

Commissioner, T.C. Memo. 1994-483, the Court noted that treating

businesses based on wagering and gambling differently from other

businesses is a rational differentiation and not one that rises

to the level of being violative of due process or equal

protection.   See also Steward Mach. Co. v. Davis, 301 U.S. 548,

584 (1937) (holding that Congress, like the states, has the

freedom to tax businesses differently).   Thus, it has been held:

      [A] classification that differentiates the business of
      gambling from other business has “a rational basis, and when
      subjected to judicial scrutiny, it must be presumed to rest
      on that basis if there is any conceivable state of
      facts which would support it.” * * *

Valenti v. Commissioner, supra (quoting Carmichael v. Southern

Coal Co., 301 U.S. 495 (1937)).

II.   Substantial Understatement of Tax

      With respect to a taxpayer’s liability for any penalty,

section 7491(c) places on the Commissioner the burden of

production, thereby requiring the Commissioner to come forward

with sufficient evidence indicating that it is appropriate to

impose the penalty.   See Higbee v. Commissioner, 116 T.C. 438,

446-447 (2001).   Once the Commissioner meets his burden of

production, the taxpayer must come forward with persuasive

evidence that the Commissioner’s determination is incorrect.    See
                                - 12 -

id. at 447; see also Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933).

     Section 6662(a) imposes a penalty equal to 20 percent of the

amount of any underpayment attributable to a substantial

understatement of income tax.    Sec. 6662(b)(2).   An

understatement is the amount by which the correct tax exceeds the

tax reported on the return.   Sec. 6662(d).   The understatement is

substantial if it exceeds the greater of $5,000 or 10 percent of

the tax required to be shown on the return.    Sec.

6662(d)(1)(A)(i) and (ii).

     Section 6664(c)(1) provides that no penalty shall be imposed

if the taxpayer demonstrates that there was reasonable cause for

the underpayment and the taxpayer acted in good faith.    The

determination of whether a taxpayer acted with reasonable cause

and in good faith depends on the facts and circumstances of the

situation and includes an “honest misunderstanding of fact or

law”.   Sec. 1.6664-4(b)(1)(c), Income Tax Regs.    Insofar as Mr.

Tschetschot is concerned, petitioners have not demonstrated

either good faith or that there was reasonable cause for their

position.   As to Mrs. Tschetschot, petitioners were clearly aware

of the mandate of section 165(d); their wish that it be

inapplicable to tournament poker does not constitute the type of

misunderstanding contemplated by the statutes or the regulations.
                              - 13 -

     An understatement is reduced by the portion of the

understatement that is attributable to the tax treatment of an

item for which there is substantial authority or with respect to

which there is adequate disclosure and a reasonable basis.    See

sec. 6662(d)(2)(B); sec. 1.6662-4(a), Income Tax Regs.    However,

no substantial authority exists to support petitioners’ position

as to either the inapplicability of section 165(d) to tournament

poker or Mr. Tschetschot’s status as a professional gambler.

Substantial “authority [exists] for the tax treatment of an item

only if the weight of the authorities supporting the treatment is

substantial in relation to the weight of authorities supporting

contrary treatment.”   Sec. 1.6662-4(d)(3)(i), Income Tax Regs.

Types of authority on which a taxpayer may rely include the

Internal Revenue Code and regulations, revenue rulings and

procedures, technical advice memoranda, and private letter

rulings.   See sec. 1.6662-4(d)(3)(iii), Income Tax Regs.

Additionally, whether or not there was adequate disclosure, there

is no reasonable basis to support petitioners’ position on

tournament poker given the clear mandate of section 165(d) and

the existing caselaw interpreting it.   Accordingly, we are not

permitted to make a reduction in the understatement attributable

to respondent’s determination on that issue.

     In view of respondent’s concession that Mrs. Tschetschot’s

expenses are deductible, it is unclear whether there exists a
                               - 14 -

substantial understatement of income tax.    We therefore leave for

the parties to determine as part of the Rule 155 computation

whether there was, in fact, a substantial understatement for the

taxable year in issue.   If a substantial understatement exists

for the year in issue, petitioners are liable for the accuracy-

related penalty.

III.   Conclusion

       The moral climate surrounding gambling has changed since the

tax provisions concerning wagering were enacted many years ago.

Not only has tournament poker become a nationally televised

event, but casinos or lotteries can be found in many States.

Further, the ability for the Internal Revenue Service to

accurately track money being lost and won has improved, and some

of the substantiation concerns, particularly for professionals,

no longer exist.    That said, the Tax Court is not free to rewrite

the Internal Revenue Code and regulations.   We are bound by the

law as it currently exists, and we are without the ability to

speculate on what it should be.   Accordingly, we hold that

tournament poker is a wagering activity subject to the

limitations of section 165(d).
                        - 15 -

To reflect the foregoing,


                                 Decision will be entered

                            under Rule 155.
