                                  No. 2—08—1011
                            Opinion filed January 28, 2011
_________________________________________________________________________________

                                               IN THE

                               APPELLATE COURT OF ILLINOIS

                                SECOND DISTRICT
_________________________________________________________________________________

JERRY H. BYRD and MARYLOU               ) Appeal from the Circuit Court
E. BYRD,                                ) of McHenry County.
                                        )
      Plaintiffs-Appellants,            )
                                        )
v.                                      ) No. 07—MR—40
                                        )
BRIAN A. HAMER, Director of Revenue,    )
and THE DEPARTMENT OF REVENUE,          ) The Honorable
                                        ) Maureen P. McIntyre,
      Defendants-Appellees.             ) Judge, Presiding.
_________________________________________________________________________________

       JUSTICE BIRKETT delivered the judgment of the court, with opinion.
       Presiding Justice Jorgensen and Justice Bowman concurred in the judgment and opinion.

                                             OPINION

       Plaintiffs, Jerry and MaryLou Byrd (Byrds), brought an action for administrative review of

the decision of the Illinois Department of Revenue (Department) that the Byrds’ gambling winnings

for tax years 1999, 2000, 2001, and 2002 are taxable income under Illinois law and that their

gambling losses for those years are not deductible under Illinois law. The Byrds contend that the

Department erred in finding that they were not engaged in gambling as a trade or business for those

tax years but were recreational gamblers and, as such, not entitled to a deduction for gambling losses.

The Byrds alternatively raise various constitutional challenges to the tax scheme in Illinois that

permits deduction of gambling losses for individuals who gamble as a trade or business but not for
No. 2—08—1011


those who gamble for recreation. For the reasons stated below, we confirm the decision of the

Department.

                                          I. BACKGROUND

        The following is a sketch of the relevant facts, which will be set forth in greater detail below.

The Byrds, who are married, gambled at several casinos during tax years 1999, 2000, 2001, and

2002. Most of their gambling occurred at Hollywood Casino in Aurora and Grand Victoria Casino

in Elgin. The Byrds played mostly slot machines, and they accumulated substantial winnings and

losses. The Byrds filed Illinois and federal tax returns for years 1999, 2000, and 2001, and a federal

return for year 2002. As of the Department’s decision in this case, the Byrds had not filed a 2002

Illinois return. After the Department reviewed the Illinois returns, it sent the Byrds a series of original

and amended tax deficiency notices (NODs) claiming that the Byrds’ reported income on their Illinois

returns for 1999 to 2001 improperly excluded their gambling winnings. The Department likewise

claimed that the Byrds’ Illinois tax liability for 2002 included tax on their gambling winnings for that

year. The Byrds challenged the NODs, and the Department ultimately found the Byrds liable for

$60,382 in additional taxes. The trial court affirmed the Department’s decision, and the Byrds

appealed to this court.

          A. Treatment Under Federal and Illinois Law of Gambling Winnings and Losses

        The facts of this case are best understood against the backdrop of federal and Illinois tax law

concerning gambling winnings and losses. We begin by delineating that tax scheme.

        The parties agree that Illinois tax law has no specific provision for gambling winnings or

losses. Nevertheless, as the parties recognize, there are tax consequences for an Illinois taxpayer who

incurs gambling winnings or losses. Part of the reason gambling has tax consequences for an Illinois

taxpayer though Illinois law makes no specific provision for them is that the Illinois income tax law

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No. 2—08—1011


“ ‘piggy-backs’ onto the federal calculation of income and uses federal taxable income as the premise

for tax liability.” Rockwood Holding Co. v. Department of Revenue, 312 Ill. App. 3d 1120, 1124

(2000). By virtue of this derivative relationship, Illinois taxpayers can enjoy the benefit of certain

federal income tax exclusions or deductions that have no express parallel under Illinois law. See

Bodine Electric Co. v. Allphin, 81 Ill. 2d 502, 509 (1980). This scheme works as follows for

gambling winnings and losses. The Internal Revenue Code (IRC) (26 U.S.C. §61(a) (2006)) defines

“gross income” for purposes of federal taxation as “all income from whatever source derived.”

Gambling winnings must be reported as gross income on the federal tax return. McClanahan v.

United States, 292 F.2d 630, 631-32 (5th Cir. 1961). The only component of gambling winnings that

a federal taxpayer may exclude from gross income is the cost of winning wagers, which is nontaxable

as the recovery of capital. Shollenberger v. Commissioner of Internal Revenue, 98 T.C.M. (CCH)

667, 669 (2009) (a gambler’s “gross income from a wagering transaction should be calculated by

subtracting the bets placed to produce the winnings, not as a deduction in calculating adjusted gross

income or taxable income but as a preliminary computation in determining gross income”); Hochman

v. Commissioner, 51 T.C.M. (CCH) 311, 313 (1985) (“[t]o the extent that the cost of his winning

ticket is included in the payoff which [the taxpayer] receives at the cashier’s window on a winning

race, *** [the taxpayer] has only recovered his capital, and is entitled to exclude the amount of that

winning ticket from his gross receipts in order to arrive at gross income within the meaning of [the

IRC]”). The cost of a wager that did not result in a win is considered a loss and is not excluded from

gross income. Shollenberger, 98 T.C.M. (CCH) at 669. As one treatise has noted:

               “The cost of placing a winning bet or wager isn’t a deductible loss, but is rather a tax-

       free return of capital. The amount of income from a winning bet or wager is the full amount



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No. 2—08—1011


        of the winnings less the cost of placing that winning bet or wager.” 33A Am. Jur. 2d Federal

        Taxation §13258.1 (2005).

To illustrate:

                 “C plays a slot machine that takes $5 tokens. He makes ten ‘pulls.’ He loses nine

        times, but on the tenth pull, he wins $100. The amount of his winning income is $95—the

        $100 win, less the cost of the $5 winning token. The $45 spent on losing tokens is a

        gambling loss.” Id.

        While gambling losses are not excluded from gross income, they are deductible under federal

law with certain restrictions. How this deduction figures in the computation of federal tax depends

on whether the gambling was recreational or rather in the nature of a trade or business. Gambling

losses that qualify as trade or business losses are recorded on Schedule C of the federal tax return and

are deducted from the taxpayer’s “gross income” or “total income” in determining “adjusted gross

income.” 26 U.S.C. §62(a)(1) (2006) (calculation of adjusted gross income takes into account

“deductions *** which are attributable to a trade or business carried on by the taxpayer”); 26 U.S.C.

§162 (2006) (“There shall be allowed as a deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or business ***.”); Torpie v. Commissioner,

79 T.C.M. (CCH) 2064 (2000). As such, they are an “above the line” deduction. LaPlante v.

Commissioner, 98 T.C.M. (CCH) 305, 307 (2009). Gambling losses not qualifying as trade or

business losses do not figure in the calculation of total or gross income. Id. Rather, they are factored

later, and thus are a “below the line” deduction. Id. Losses in casual gambling are among the

itemized deductions taken from adjusted gross income to arrive at “taxable income.” Id.; see 26

U.S.C. §63(a) (2006). This is a less favorable deduction than if those losses were deducted in the

determination of gross or total income, as they would be in the case of a professional gambler.

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No. 2—08—1011


LaPlante, 98 T.C.M. (CCH) at 307. Regardless, however, of whether the taxpayer is a professional

or a casual gambler, “Losses from wagering transactions shall be allowed only to the extent of gains

from such transactions.” 26 U.S.C. §165(d) (2006).

       As the parties agree, the Illinois Income Tax Act (Act) (35 ILCS 5/101 et seq. (West 2008))

has no specific provision for gambling winnings and losses. By virtue, however, of the Act’s

carryover of income figures from the taxpayer’s federal return, the Act incorporates for state tax

purposes the federal tax treatment of gambling winnings and losses. The incorporation is not

wholesale, however. The starting figure for computing income tax under the Act is the taxpayer’s

“base income,” which is “an amount equal to the taxpayer’s adjusted gross income.” 35 ILCS

5/203(a)(1) (West 2008). “[A]djusted gross income” is in turn defined as the “amount of ***

adjusted gross income *** properly reportable for federal income tax purposes for the taxable year

under the provisions of the Internal Revenue Code” (35 ILCS 5/203(e)(1) (West 2008)). Thus, the

Act takes federal adjusted gross income as the “starting point” for calculation of state income tax.

Bodine, 81 Ill. 2d at 510. “To the extent that federally allowed deductions enter into the computation

of this figure, they are relevant under the *** Act.” Id. However, the carryover of federal adjusted

gross income does not create a set of Illinois deductions parallel to the federal deductions. Id.

Rather, section 203(a)(2) of the Act (35 ILCS 5/203(a)(2) (West 2008)) provides that adjusted gross

income as carried over from the federal return may be modified by the addition of certain amounts.

Some of these are add-backs of amounts deducted from federal gross income to reach adjusted gross

income. For instance, section 203(a)(2)(D) (35 ILCS 5/203(a)(2)(D) (West 2008)) provides for an

add-back in “[a]n amount equal to the amount of the capital gain deduction allowable under the

Internal Revenue Code, to the extent deducted from gross income in the computation of adjusted

gross income.” Also added back is (unsurprisingly) an amount equal to the amount of tax imposed

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No. 2—08—1011


under the Act “to the extent deducted from gross income in the computation of adjusted gross income

for the taxable year.” 35 ILCS 5/203(a)(2)(B) (West 2008). Section 203 provides no add-back,

however, for trade or business losses deducted from federal gross income to reach federal adjusted

gross income. If section 203 does not specify a certain add-back, it does not exist in the Act. See

35 ILCS 5/203(h) (West 2008) (“Except as expressly provided by this Section there shall be no

modifications or limitations on the amount of income, gain, loss or deduction taken into account

***.”). Thus, a deduction for gambling losses by professional gamblers is sub silentio incorporated

into the concept of adjusted gross income under the Act.

       The Act does not in the same respect incorporate a deduction for losses by casual gamblers.

The starting point for the Act is federal adjusted gross income, but the itemized deduction for losses

incurred in casual gambling comes later on the federal return and applies against adjusted gross

income to calculate taxable income. See 26 U.S.C. §63(a) (2006); LaPlante, 98 T.C.M. (CCH) at

308. Thus, the deduction appears too late in the computation of federal tax to be carried over onto

the Illinois return. Moreover, though section 203 of the Act provides for certain deductions from

adjusted gross income, it does not explicitly allow a deduction of losses by casual gamblers. The

omission is decisive. See 35 ILCS 5/203(h) (West 2008) (no modification of adjusted gross income

unless expressly permitted in section 203); Bodine, 81 Ill. 2d at 509 (Act makes no express provision

to “allow a State taxpayer to compute a net operating loss on a State tax return”).

       To summarize, a deduction for losses incurred in professional gambling is carried over onto

a taxpayer’s Illinois return, and the Act does not require that the deduction be added back in

computing Illinois tax. By contrast, a deduction for losses incurred in casual gambling is not carried

over onto the Illinois return and the Act itself does not provide for such a deduction. This tax scheme

is the context for the Byrds’ claims in this case.

                                                     -6-
No. 2—08—1011


                                        B. Factual Background

        The relevant facts are not disputed. The Byrds filed Illinois and federal income tax returns

for tax years 1999, 2000, and 2001, and a federal return for tax year 2002. As of the Department’s

decision in this case, the Byrds had not filed a 2002 Illinois return. On each of the four federal returns

in question, the Byrds reported wages, gambling winnings, and gambling losses. The Byrds reported

the winnings as part of their gross income. The Byrds claimed the gambling losses not as trade or

business losses, but as itemized deductions taken from adjusted gross income. The Byrds’ federal tax

returns showed the following figures for the four years at issue:

                Tax         Wages          Gambling         Adjusted           Gambling
                Year                       Winnings       Gross Income1         Losses2
                1999     $209,195.12      $739,034.84      $207,141.30        $739,034.84
                2000     $259,441.32      $530,710.00      $788,432.00        $528,635.00
                2001     $250,508.18       $47,450.00      $295,351.00          $47,450.00
                2002     $270,598.42      $132,585.00      $400,224.00        $132,585.00

All four returns claimed to state gambling winnings as reported on Internal Revenue Service Form

W-2G. A casino must submit Form W-2G to the IRS whenever it makes a payout of $1,200 or more

from a slot machine. See Treas. Reg. §7.6041—1 (____). The Department acknowledges in this

appeal that the Byrds’ gambling winnings reported on their federal returns accurately reflect the

gambling winnings reported to the IRS on Form W-2G.




        1
            Included in adjusted gross income were amounts besides wages and gambling winnings.
        2
            In every year but 2000, the Byrds’ gambling losses equaled or exceeded their winnings.

                                                   -7-
No. 2—08—1011


       The Byrds’ Illinois returns for years 1999-2001 each required them to carry over their federal

adjusted gross income as the starting point for calculation of Illinois tax. See 35 ILCS 5/203(a)(1),

(e) (West 2008). The Byrds reported the following adjusted gross income for those years:

                                        Tax        Adjusted
                                        Year     Gross Income
                                        1999     $207,141.30
                                        2000     $250,901.00
                                        2001     $259,797.00

       Between 2002 and 2005, the Department issued NODs to the Byrds for underreporting their

income on their Illinois returns. For tax years 1999 and 2001, the Department issued an original

NOD and one amended NOD. For tax years 2000 and 2002, the Department issued an original NOD

and two amended NODs. The NODs claimed that the Byrds failed to report the following income

to Illinois and that they owed the following additional tax (including interest).

                       Original NOD:        1st Amended NOD:          2nd Amended NOD:
           Tax     Omitted income/total     Omitted income/total      Omitted income/total
           Year    tax deficiency              tax deficiency            tax deficiency
           1999    $739,042 / $26,232      $3,288,589 / $159,902               ------
           2000    $528,635 / $18,230      $1,582,687 / $68,625      $3,672,687 / $159,517
           2001        ????3 / $1,644      $1,351,957 / $52,857                ------
           2002    $400,224 / $14,276      $1,907,187 / $70,129      $1,272,992 / $46,948




       3
           The original NOD for 2001 did not state what amount of income was claimed to have been

omitted.

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No. 2—08—1011


According to the original NODs, the Byrds owed a total deficiency of $60,382. According to the

amended NODs, the Byrds omitted $9,586,225 in total income and owed $419,224 in total

deficiency.

        The parties appear to agree as to why the amended NODs show vastly greater amounts of

unreported income than the original NODs. According to the parties, the original NODs were based

on simple discrepancies between the Byrds’ adjusted gross income as reported on their federal returns

and as represented on their Illinois returns. The gambling winnings reported on the federal returns

were based on the W-2G forms submitted by the casinos that the Byrds patronized during the relevant

years. As noted, a casino must issue a W-2G form whenever a slot machine makes a payout of

$1,200 or more.

        During discovery, however, the Byrds tendered documents that purported to record all

payouts (not just those of $1,200 or more) that the Byrds received from Hollywood Casino and

Grand Victoria Casino, where the Byrds gambled the most during the relevant years. These casinos

had issued the Byrds “players cards” that enabled the casinos to electronically record the Byrds’

activity at slot machines. The documents tendered during discovery included year-end reports from

Hollywood Casino and Grand Victoria Casino. The reports, which were admitted into evidence at

the administrative hearing and are part of the appellate record, contain year-end figures based on

activity recorded by use of the players cards. These reports show columns for “coin in,” “coin out,”

and “jackpots.” The “coin in” totals reflect all sums the Byrds paid into the slot machines. The

reports show separate totals for the “coin out” and “jackpots.” While no one from the casinos

testified at the administrative hearing, plaintiff Jerry Byrd testified that the “coin out” and “jackpots”

totals are exclusive of each other and must be combined to determine the total sums paid out to the

Byrds from the slot machines. (The “jackpots,” notably, comprise more than those payouts that

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No. 2—08—1011


qualify for reporting via Form W-2G, for several of the jackpots are below the $1,200 minimum.)

When combined, the “coin out” and “jackpots” columns for each year exceed the aggregate W-2G

payouts for that year. Based on the casino reports, the Department issued amended NODs claiming

markedly higher levels of unreported income and tax deficiencies than in the original NODs.

        The Byrds contested the amended NODs, and the case proceeded to a hearing before an

administrative law judge (ALJ) on April 19, 2006. The parties stipulated to the authenticity of a large

body of documents including: (1) the Byrds’ federal tax returns for 1999-2002, and their Illinois

returns for 1999-2001; (2) W-2G forms from Hollywood Casino, Grand Victoria Casino, Harrah’s

Casino in Joilet, and Rio Suite Hotel & Casino in Las Vegas; (3) year-end reports from Hollywood

Casino and Grand Victoria Casino; (4) records of ATM and credit card transactions at the casinos;

and (5) records of markers, or lines of credit, extended to the Byrds by the casinos.

        The sole witness at the hearing was Jerry Byrd. Jerry testified that he has been employed in

the graphic arts field for 38 years and that his current position is manager of a graphic arts firm. Jerry

held that same position during tax years 1999 to 2002. 4 Jerry testified that, during the tax years in

question, his wages from his managerial position ranged between $210,000 and $250,000 per year.

(Jerry’s W-2 forms for these years show wages between $209,195 and $270,598.) During this

period, the Byrds’ “primary income” came from Jerry’s employment. His wife, MaryLou, did not

work outside the home.

        Jerry testified that he was first exposed to gambling in 1998 on a golf trip to Las Vegas. Jerry

testified that, from 1999 to 2002, he and his wife frequented casinos and played mostly slot machines.

The Illinois casinos they patronized most were Grand Victoria Casino and Hollywood Casino. Jerry



        4
            In their brief, the Byrds confirm that this employment was full time.

                                                   -10-
No. 2—08—1011


testified that he and his wife went to Grand Victoria Casino on a weekly and sometimes daily basis.

(Jerry did not say how often he or his wife went to Hollywood Casino.) The Byrds played mostly

slot machines. Jerry explained that Grand Victoria Casino and Hollywood Casino each issued Jerry

and his wife “players cards” that enabled the casinos to electronically record the Byrds’ activity at slot

machines. Jerry testified that the players cards allow him to keep careful records of his gambling

activity. Jerry explained that there is no electronic recording of activity at table games in casinos.

Patrons are not allowed to take notes while paying table games. Rather, casino employees monitor

the tables and give a patron a win-loss tally when he leaves a table. Jerry testified that this tally is just

“an estimation” and is not for tax purposes. Jerry further noted that W-2G forms are not issued for

table winnings.

        Jerry identified the reports from Hollywood Casino and Grand Victoria Casino showing yearly

totals of “coin in,” “coin out,” and “jackpots” from their slot machines for the years in question. The

records from Grand Victoria identify each date the Byrds had gaming activity at the casino.

According to these records, the Byrds were active at Grand Victoria on 97 separate dates in 1999,

68 dates in 2000, 51 dates in 2001, and 53 dates in 2002. The records from Grand Victoria do not

record dates of activity. The reports from both casinos, however, show yearly totals of money the

Byrds paid into slot machines (the “coin in” totals) and money dispensed to them (the “coin out” and

“jackpots” totals combined). As reported, these yearly totals were:

                                 Grand Victoria     Grand Victoria
                      Year          Casino -           Casino -               Net
                                   Money In          Money Out
                      1999       $2,059,377.00       $1,955,457.00       -$103,920.00
                      2000       $1,438,681.00       $1,324,079.00       -$114,602.00

                      2001         $503,494.90         $473,627.40        -$29,867.50


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No. 2—08—1011


                      2002       $777,316.70       $759,419.40       -$17,897.30
                      Total    $4,778,869.60     $4,512,582.80     -$266,286.805


                                 Hollywood        Hollywood
                      Year        Casino -         Casino -              Net
                                 Money In         Money Out
                      1999       $980,339.00       $999,410.00      +$19,071.00
                      2000     $2,416,299.00     $2,321,258.00       -$95,041.00
                      2001       $940,231.00       $876,981.00       -$63,250.00
                      2002       $665,718.00       $633,247.00       -$32,471.00
                      Total    $5,002,587.00     $2,741,896.00      -$171,691.00

The Byrds’ total net losses at Grand Victoria Casino and Hollywood Casino for 1999 to 2002 were

$437,977.80.

       Jerry testified that, despite their “substantial losses,” the Byrds “enjoy” gambling:

                 “We put five kids through college, nobody at home. We make a lot of money at

                 my—my job position and [gambling] is an activity that we enjoy and have enjoyed

                 doing ***.”

Jerry testified that the money the Byrds spend at casinos comes from his wages. Jerry noted that the

Byrds pay their bills regularly and have never been behind on their mortgage.

       Jerry described his approach to playing slot machines. Byrd likened playing slots to trading

stocks as both are combinations of skill and luck. Jerry explained that “laws of probability” are

programmed into each slot machine and that it is possible to predict how soon a machine will pay out:


       5
           According to the Byrds’ tabulation, their net loss from Grand Victoria was $30,754. Our

own calculation shows a far greater net loss. This does not, however, affect our analysis of the

Byrds’ claims.

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No. 2—08—1011


     “[T]he slot machines are initiated so that every 100 spins they recycle and start the probability

     over again ***. So if I’m playing a slot machine, I watch what it’s doing. I count every time

     the [reel] spins, and, for instance, I wouldn’t walk away from a machine that hasn’t paid

     anything if I was at like an 80 or 90 count. I would put more money in, finish out that count

     of 100 because my odds of hitting something in those last ten or 15 spins are—are almost

     twice as great as the earlier spins and then you start over again. So yes, there is different

     levels of skills.

             There are people that peek through the corner on a machine and look at the total

     number. Top number says coin in, the bottom number says coin out, and they look at the

     third number as whether it’s positive or negative. If a machine is negative, that means it’s

     paying out more coins tha[n] it’s taking in and then it’s up to you. Do you think you want

     to play a machine that is already overpaid or do you think there is going to be continued

     overpay[?]

             So it was—there is a lot of thought that goes into it. It’s not just walking up and

     randomly sitting down and you putting whatever in and hitting the spin button.

             Based on where you’re at in the count on the machine, if it’s a three coin machine and

     you’re on the last—your count is at 80, then you will know to playing two or three coins on

     the last spin if you were playing minimal coins on the earlier spin.

             And then if you’re playing a machine that has a—a progressive jackpot, you typically

     wouldn’t waste your time playing one coin. You select your machine, you read the numbers

     on the side of the machine and then you’re playing that machine and you play three coins at

     a time because that increases your—your opportunity to hit a large jackpot.”



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No. 2—08—1011


       Byrd also testified to how he manages his money at the casinos. Byrd testified that he does

not carry cash into a casino. Instead, he withdraws cash from an ATM inside the casino and limits

himself to that amount so that he knows how much money he gambled that day. For recordkeeping

purposes, Byrd compares his ATM receipts for a particular day with reports from the casinos showing

his activity for that day. Byrd acknowledged that, though as a matter of practice he never uses ATM

cash other than at the casino where he withdraws it, he is nonetheless free to use that cash wherever

he wishes. Byrd testified that he also funds his gambling by use of markers, which are basically cash

advances that a casino makes upon verification of adequate funds in the patron’s bank account. Byrd

testified that, though there is no bar to a patron using funds from a marker outside the casino, if the

casino does not see gambling activity in the amount of the marker, it will revoke the patron’s marker

privileges. One of the means by which the casino monitors the activity of marker holders is through

the players cards. Byrd explained that, when his ATM and marker limits are exceeded, he uses his

credit card to obtain cash. The Byrds introduced into evidence documentation of their ATM

withdrawals, marker extensions, and credit card transactions at Hollywood Casino, Grand Victoria

Casino, and other casinos the Byrds patronized during the years 1999-2002.

       In their briefs to the ALJ, the Byrds first argued that they gambled on a professional basis

during the years in question and hence could deduct their losses as business losses. The Byrds

compared themselves to the taxpayer in Commissioner of Internal Revenue v. Groetzinger, 480 U.S.

23 (1987), whose gambling the United States Supreme Court held was in the nature of a trade or

business. The Byrds argued in the alternative that, if the Department determined that they were

recreational gamblers, they were still entitled to a deduction for their losses. To this end, the Byrds

contended that the Act, which incorporates the federal deduction for professional gamblers but does

not follow federal tax law in allowing recreational gamblers a deduction, violates federal and Illinois

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No. 2—08—1011


constitutional guarantees of due process and equal protection as well as the Illinois constitutional

guarantee of uniformity of taxation. The Byrds argued that the Illinois treatment of gambling losses

is on its face a violation of due process because (1) it taxes all “coin out,” even that which is a

payback of funds that have already been subject to income tax, and so results in double taxation; and

(2) it bears “no reasonable relationship to any realistic concept of income” because, to the extent that

a recreational gambler’s winnings are offset by losses, they cannot be considered true income.

        The Byrds further argued that the Act violates due process as applied to them because, though

they suffered “explosive” losses far in excess of their winnings, the Act nonetheless would impose on

them, according to the amended NODs, a half-million-dollar tax burden. The Byrds also argued that

the Act violates equal protection and tax-uniformity prescriptions because it creates three

unreasonable classifications: (1) between professional gambling and recreational gambling; (2)

between slot machine play, which generates W-2G forms, and other forms of gambling such as table

games, which do not have such reporting requirements; and (3) between recreational gambling, for

which the Act allows no loss deductions, and stock trading, for which the Act allows loss deductions.

        The ALJ issued his recommended disposition, which was later adopted by the Department.

In the adopted decision, the Department rejected all of the Byrds’ contentions. The Department first

found that the Byrds were not professional gamblers and so their losses did not qualify as deductible

trade or business losses:

                “Since [the Byrds] are recreational gamblers and not professional gamblers, they are,

        in essence, engaged in a very expensive hobby. *** The money they spend on losing

        wagering transactions constitutes part of the expenses they choose to make when engaging

        in their chosen hobby. Some of the other expenses associated with their hobby might be, for

        example, travel and hotel expenses when they go to Las Vegas to gamble. They incur such

                                                 -15-
No. 2—08—1011


          expenses for recreation; for fun. [The Byrds] pay the expenses associated with their hobby

          using income Jerry Byrd earns in the form of wages, as well as the gain that [the Byrds] earn

          when they have winnings from their hobby.”

          As for the constitutional questions, the Department noted that it had no power to declare any

part of the Act unconstitutional. See Cinkus v. Village of Stickney Municipal Officers Electoral

Board, 228 Ill. 2d 200, 214 (2008) (“To be sure, an administrative agency lacks the authority to

declare a statute unconstitutional, or even to question its validity.”). The Department nonetheless

noted that it would have upheld the Act if it had the power to review its constitutionality.

          Addressing first the due process argument, the Department opined that the Act is not facially

invalid, because it contains a failsafe provision mandating an exclusion from Illinois taxation for any

“amounts *** exempt from taxation by this State either by reason of its statutes or Constitution or

by reason of the Constitution, treaties or statutes of the United States” (35 ILCS 5/203(a)(2)(N)

(West 2008)).         Impliedly addressing and rejecting the Byrds’ double-taxation argument, the

Department noted that, in reporting gambling winnings for federal total income or gross income, a

federal taxpayer is permitted to exclude the cost of the winning wager as the return of capital. 6

          As for the as-applied due process claim, the Department disagreed with the Byrds that there

was no rational ground for the Act to consider all gambling winnings as income despite any offsetting

losses:

          “[T]here is nothing irrational about being able to distinguish between winning wagering

          transactions and losing wagering transactions. Winning wagering transactions produce



          6
              The Department found that the Byrds waived their opportunity to take this exclusion because

they did not take it on their federal returns.

                                                     -16-
No. 2—08—1011


       taxation income [citations], and losing wagering transactions—by definition—are not related

       to a winning wagering transaction.

               Further, [the Byrds] fail to cite any case holding that the United States or Illinois

       Constitutions have granted to recreational gamblers the right to shield from taxation the

       amounts they choose to spend on gambling. This is not surprising, since it would be hard to

       imagine that a constitutional right exists to guarantee to persons the ability to shield from

       state taxation certain of the amounts they choose to spend on hobbies. Thus, there seems

       nothing irrational about the Illinois General Assembly’s policy decision to not grant an

       express deduction for some hobbyists (recreational gamblers) for certain hobby expenses

       (amounts spent on gambling losses).

                                                ***

               *** Every gain from a winning gambling transaction constitutes an accretion of

       wealth that is includable within the definition of gross income and, for recreational gamblers,

       such amounts are included within their [adjusted gross income].”

       As for the Byrds’ equal protection argument, the Department noted that the Act simply

follows Congress’s classification for tax purposes between business and nonbusiness, and that the

“United States Supreme Court has consistently upheld Congress’ power to create such

classifications.” As for the different reporting requirements for different forms of gambling, the

Department noted that these, too, are creatures of federal law, specifically Department of Treasury

regulations, and that the Byrds failed to explain how these reporting requirements violated their equal

protection rights.

       The Department addressed last the Byrds’ argument that the Act violates the Illinois

Constitution’s guarantee of uniformity of taxation. The Department relied again on the fact that the

                                                 -17-
No. 2—08—1011


distinction between business and nonbusiness was created by federal law and simply followed by the

Act. This classification, the Department noted, has been upheld by federal courts and by the Illinois

Supreme Court in Thorpe v. Mahin, 43 Ill. 2d 36 (1969). The Department further noted that there

is no deduction under Illinois law for losses incurred in any kind of recreational gambling, and so the

Act creates no classification between different forms of gambling.

       After discussing (in dicta, necessarily) the Byrds’ constitutional challenges, the Department

went on to address an evidentiary matter, which, the Department observed, would moot the

constitutional issues. The Department wrote:

               “Most of [the Byrds’] constitutional arguments are premised upon the tax proposed

       in the amended NODs, and because of the manner by which the Department calculated the

       tax proposed to be due in the amended NODs. [Citation.] The propriety of the amended

       NODs, however, does not require a resolution of any constitutional question. In re S.G.,

       [175 Ill. 2d 471, 479 (1997)] (‘ “A court should avoid constitutional questions where the case

       may be decided on other grounds” ’).”

The Department noted that the original NODs were based simply on discrepancies between the

Byrds’ adjusted gross income as reported on their federal returns and as represented on their Illinois

returns. The Department explained that the amended NODs, by contrast, were issued after the

Department reviewed the reports from Hollywood Casino and Grand Victoria Casino showing the

total amount of payouts to the Byrds. The Department then ruled that these year-end reports were

not competent evidence, because they contained disclaimers that they were not definitive accounting

records. Accordingly, the Department cancelled the amended NODs and based its order on the

original NODs showing a total tax deficiency of $60,382.



                                                 -18-
No. 2—08—1011


       The Byrds filed in the trial court a petition for administrative review under the Illinois

Administrative Review Law (735 ILCS 5/3—101 et seq. (West 2008)). The trial court affirmed the

Department’s decision. The court agreed with the Department that the Byrds’ activity during the

years in question was not a trade or business:

       “[The Byrds] did not pursue gambling full time and did not pursue it for the production of

       income for a livelihood. [Jerry] testified repeatedly he and [his wife] enjoyed gambling.”

The trial court further noted that the Byrds did not claim on their federal returns an “above the line”

deduction for their gambling losses, and hence “they in essence acknowledged their status as

recreational gamblers.”

       Unlike the Department, the trial court adjudicated the Byrds’ constitutional claims. In

rejecting those challenges, the trial court employed much of the same reasons the Department had

cited in dicta. The court summarily rejected the Byrds’ argument that the Act is on its face a

violation of due process:

               “[The Byrds] have failed to show that the [Act’s] use of Federal Adjusted Gross

       Income as the starting point for computing Illinois taxes was invalid in all circumstances. The

       Byrds do not argue that the Act has no legitimate regulatory purpose or that there are not

       procedural protections afforded by the Act.”

       The court held that the Byrds’ as-applied due process challenge failed as well, because the

Byrds did not show that the Act’s disallowance of a deduction for losses incurred in recreational

gambling was not a reasonable means of serving the public interest:

       “The Act does allow a limited number of deductions/credits, which include a credit for

       property taxes, educational expense credit and earned income credit. The Act does not allow

       for many of the deductions sanctioned under the Federal Income Tax Regulations. For

                                                 -19-
No. 2—08—1011


       instance, Illinois does not allow deductions for mortgage interest and charitable

       [contributions]. Deductions are a matter of legislative grace and not a constitutional

       requirement. [Citation.] Gambling is not a fundamental constitutional right. A deduction for

       gambling loss is permissive, but not required under the law.”

       The trial court also found no merit in the Byrds’ equal protection and tax-uniformity

challenges. First, the court rejected the Byrds’ suggestion that the Act creates an unreasonable

classification between gambling and other activities where luck and skill are combined, specifically

stock trading. The court reasoned:

       “There is a difference between gamblers and day traders and stock investors. Day traders and

       stock investors are purchasing stocks. They are allowed to offset the cost of their stock. The

       difference in the taxing method employed is a result of the nature of the transaction.”

The court found equally unsound the Byrds’ claim that the Act created a distinction between different

forms of gambling:

       “Both the Federal laws and Illinois laws require gamblers to report all income/winnings. The

       reporting requirements the casinos must follow [do] differ depending on the gaming activity.

       *** The reporting requirements may differ given the nature of the types of gambling, but the

       regulations do not exempt all gamblers from reporting their gambling winnings as income.

       The [Act] does not create separate classifications for slot machine players and table game

       players.”

The court concluded that the “only classification” made by the Act with respect to gambling is

between a professional gambler and a recreational gambler. The court found that this classification

“is based on a real and substantial difference.” Citing Thorpe, the court held that “[t]he distinct



                                                -20-
No. 2—08—1011


treatment of income earned from a trade or business and income not so earned is not discriminatory

policy.” The Byrds filed a timely appeal in this court.

                                           II. ANALYSIS

       The Byrds renew before us the arguments they made to the Department. The Byrds raise

diverse issues, to which different standards of review apply. As for the Department’s decision on

whether the Byrds’ gambling was in the nature of a trade or business for the years in question, we

note that the facts are not in dispute. The only dispute is over the legal effect of those facts, and on

this issue we will reverse the Department’s determination only if it is clearly erroneous. See Cook

County Republican Party v. Illinois State Board of Elections, 232 Ill. 2d 231, 243-44 (2009) (“An

agency’s application of a rule of law to established facts is a mixed question of law and fact and will

not be reversed unless it is deemed ‘clearly erroneous.’ [Citation.]”). A decision is clearly erroneous

only if the reviewing court is left with a definite and firm conviction that a mistake has been

committed. Id. We review de novo, however, the Byrds’ various constitutional challenges to the

Act. See Du Page County Airport Authority v. Department of Revenue, 358 Ill. App. 3d 476, 484

(2005) (applying de novo standard of review to constitutional issues arising on administrative review).

       We address first the Byrds’ claim that the Department clearly erred in concluding that the

Byrds’ gambling activity during tax years 1999 to 2002 did not constitute a trade or business. The

Department, we note, seeks to forestall that analysis altogether, arguing that the Byrds are too late

in seeking a business loss deduction since they did not claim that deduction in calculating their

adjusted gross income on their federal returns. The Department reasons that federal adjusted gross

income is the starting figure for computation of Illinois tax, and that the Byrds, unless they amend

their federal returns, are bound by their federal adjusted gross income as stated on their current

federal returns. We think there is a genuine issue whether the Department is empowered to adjust

                                                 -21-
No. 2—08—1011


a taxpayer’s taxable Illinois income by an amount corresponding to federal deductions that the

taxpayer failed to claim in computing federal adjusted gross income. Compare 35 ILCS 5/403(a)

(West 2008) (“To the extent not inconsistent with the provisions of this Act or forms or regulations

prescribed by the Department, each person making a return under this Act shall take into the account

the items of income, deduction and exclusion on such return in the manner and amounts reflected in

such person’s federal income tax return for the same taxable year.”) with 35 ILCS 5/203(a)(2)(N)

(West 2008) (providing that adjusted gross income shall be reduced by “[a]n amount equal to all

amounts included in such total which are exempt from taxation by this State either by reason of its

statutes or Constitution or by reason of the Constitution, treaties or statutes of the United States”)

and Wolters v. Johnson, 114 Ill. App. 3d 546, 548 n.1 (1983) (recognizing that section 203(a)(2)(N)

allows for “modification in adjusted gross income”).

       The Department further suggests, however, that, because the Byrds took the deduction on

their federal returns for losses sustained in recreational gambling, they are estopped from now

characterizing their gambling as a trade or business.

       We decline to resolve these issues, as we can just as readily demonstrate that the Department

did not clearly err on the merits in finding that the Byrds do not qualify for the federal deduction

because their gambling activities for the tax years in question were not in the nature of a trade or

business. The Byrds rely solely on Groetzinger in claiming that the Department erred. The Supreme

Court in Groetzinger was asked to determine whether the respondent’s gambling for tax year 1978

met the definition of “trade or business” (26 U.S.C. §162(a) (2006)). The Court stated the facts in

the case succinctly:

       “[Respondent] had worked for 20 years in sales and market research for an Illinois

       manufacturer when his position was terminated in February 1978. During the remainder of

                                                -22-
No. 2—08—1011


       that year, respondent busied himself with parimutuel wagering, primarily on greyhound races.

       He gambled at tracks in Florida and Colorado. He went to the track six days a week for 48

       weeks in 1978. He spent a substantial amount of time studying racing forms, programs, and

       other materials. He devoted from 60 to 80 hours each week to these gambling-related

       endeavors. He never placed bets on behalf of any other person, or sold tips, or collected

       commissions for placing bets, or functioned as a bookmaker. He gambled solely for his own

       account. He had no other profession or type of employment.

               Respondent kept a detailed accounting of his wagers and every day noted his

       winnings and losses in a record book. In 1978, he had gross winnings of $70,000, but he bet

       $72,032; he thus realized a net gambling loss for the year of $2,032.

               Respondent received $6,498 in income from other sources in 1978. This came from

       interest, dividends, capital gains, and salary earned before his job was terminated.”

       Groetzinger, 480 U.S. at 24-25.

       The Court began its analysis by noting the basic concept of a trade or business as “ ‘[t]hat

which occupies the time, attention and labor of men for the purpose of a livelihood or profit.’ ” Id.

at 28 (quoting Flint v. Stone Tracy Co., 220 U.S. 107, 171 (1911)). The Court fleshed out the

concept:

       “[T]o be engaged in a trade or business, the taxpayer must be involved in the activity with

       continuity and regularity and *** the taxpayer’s primary purpose for engaging in the activity

       must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does

       not qualify.” Id. at 35.




                                                -23-
No. 2—08—1011


The Court emphasized that whether an activity meets these criteria depends on the individual facts

of each case. Id. at 36. The Court held that gambling, depending on how it is conducted, can meet

the test of a trade or business:

        “[I]f one’s gambling activity is pursued full time, in good faith, and with regularity, to the

        production of income for a livelihood and is not a mere hobby, it is a trade or business within

        the meaning of the statutes with which we are here concerned.” Id. at 35.

The Court determined that the respondent’s gambling activity in 1978 met this standard:

        “Constant and large-scale effort on his part was made. Skill was required and was applied.

        He did what he did for a livelihood, though with a less-than-successful result. This was not

        a hobby or a passing fancy or an occasional bet for amusement.” Id. at 36.

        The Byrds argue that their gambling activities for 1999 to 2002 clearly meet Groetzinger’s

definition of a trade or business. They claim they gambled with the “continuity and regularity” that

Groetzinger requires of an activity for it to qualify as a trade or business. Id. at 35. First, the Byrds

cite the frequency of their visits to Grand Victoria Casino and Hollywood Casino as indicated in the

year-end reports from those casinos. As noted, the reports from Grand Victoria Casino specify the

dates the Byrds visited the casino but the reports from Hollywood Casino do not. We calculate that

the Byrds averaged 67 visits to Grand Victoria Casino each year between 1999 and 2002. The Byrds

suggest that their win/loss figures from Hollywood Casino indicate that they must have visited it at

least as often as Grand Victoria Casino. If this is true, then the Byrds averaged 2.57 casino visits per

week—comparable to weekend trips, as one might expect since Jerry had full-time employment. (The

Byrds do not attempt to estimate the number of their visits to the other casinos they patronized from

1999 to 2002.) By contrast, the respondent in Groetzinger visited the dog track six days a week for

48 weeks in 1978. The respondent in Groetzinger spent 60 to 80 hours per week at gambling-related

                                                  -24-
No. 2—08—1011


efforts such as research. Id. at 24. Perhaps the Byrds as well spent time researching gambling

methods, but they did not attempt to estimate the hours they put toward such activity. The Byrds

have not shown that they engaged in gambling nearly as frequently as the respondent in Groetzinger.

        The Byrds caution against a mechanical, point-by-point comparison of the facts here with

those in Groetzinger. They suggest that the Court in Groetzinger did not intend for the particular

facts in that case to set the minimum standard for all taxpayers who claim to gamble as a trade or

business. They note the Court’s emphasis that whether gambling, or any other activity, constitutes

a trade or business is a fact-bound, case-by-case inquiry. See id. at 36. We understand what the

Court meant to convey, but we note that Groetzinger is the only decision the Byrds have cited on this

issue even though a veritable universe of case law has developed since Groetzinger was decided in

1987. We judge the Byrds’ argument as it is presented to us, and the Byrds have not convinced us

that they pursued their activity with the regularity exemplified in Groetzinger.

        At the same time, we stress that we are not holding that a taxpayer must devote any certain

number of weekly hours to an activity for it to constitute a trade or business. If, however, the

taxpayer is spending considerable time away from the activity because the taxpayer is otherwise

occupied earning income, then it becomes questionable whether the taxpayer is relying on the activity

for “the production of income for a livelihood” (id. at 35) as was the respondent in Groetzinger.

        We recognize that, despite their less than full-time attention to gambling, the Byrds wagered

on an enormous scale (nearly $10 million between Hollywood Casino and Grand Victoria Casino

alone for the years 1999 to 2002). These expenditures far surpassed those of the respondent in

Groetzinger. Nonetheless, we cannot agree with the Byrds’ assertion that, based on the frequency

and sheer enormity of their gaming, it would be “disingenuous” to suggest that their gaming was

pursued “for anything other than a profit motive, or expectation of winning at the activity.” First, this

                                                  -25-
No. 2—08—1011


claim does not jibe with Jerry Byrd’s testimony. Jerry never testified that he and his wife had an

income or profit motive for gambling. The sole motive he identified was the pleasure motive. When

Jerry was asked why he continued to gamble despite his “substantial losses,” he said:

               “We put five kids through college, nobody at home. We make a lot of money at

       my—my job position and [gambling] is an activity that we enjoy and have enjoyed doing

       ***.”

       The Byrds argue that Jerry’s admission that he and his wife enjoy gambling is no bar to finding

that activity to be a trade or business, because “[e]njoyment of one’s profession or career certainly

does not make it any less a career.” The problem for the Byrds is not simply that they took pleasure

in gambling. Indeed, we have no doubt that the Byrds not only enjoyed gambling for its own sake

but hoped and—with Byrd’s seemingly in-depth knowledge of slot machine mechanics—indeed

expected to win. What is required, however, is not simply the hope or expectation of winning but

reliance on gambling for “the production of income for a livelihood.” Id. The Court in Groetzinger

expressly noted that the respondent gambled “for a livelihood.” Id. at 36. By contrast, Jerry’s

testimony revealed not that gambling was the Byrds’ means of support but, conversely, that Jerry’s

substantial wages supported a lifestyle that included lavish wagering. Jerry acknowledged that his

income for the years in question came primarily from his wages. He also acknowledged that the

money he and his wife spent on gambling came from his wages. Jerry never claimed that his wagering

was subsidizing itself let alone supporting him and his wife. The Byrds’ almost ghastly losses for

1999 to 2002 would belie that claim, in any case.

       We recognize that even an unprofitable activity may constitute a trade or business, and we

are not evaluating the Byrds’ claim by their overall lack of success at gambling for 1999 to 2002.

Even in Groetzinger the gambling had “a less-than-successful result.” Id. Yet, however unwise it

                                                -26-
No. 2—08—1011


might have been in retrospect, the taxpayer in Groetzinger did in 1978 rely on gambling for a

livelihood as he had no other employment. The same cannot be said of the Byrds. Perhaps the Byrds

in 1999 to 2002 were contemplating a future run at gambling for a livelihood, but it is clear that they

had not yet taken that step but were still relying on Jerry’s wages.

        So far we have based our analysis exclusively on the relatively brief discussion in Groetzinger,

for that is all the Byrds rely on. In fact, a large body of authority has developed since Groetzinger

that seeks to amplify and formalize, in the context of gambling, the criteria the Court set forth. The

Department cited this authority in its response brief, but the Byrds filed no reply brief and hence never

addressed it. We have found no case in this post-Groetzinger outgrowth finding a taxpayer’s

gambling to constitute a trade or business where the taxpayer continued to pursue another

occupation, devoting substantial time outside of gambling to earning income. Compare Merkin v.

Commissioner, 95 T.C.M. (CCH) 1576, 1580 (2008) (taxpayer was employed as a physician and did

not rely on his gambling winnings to support himself and his wife but, instead, the disposable income

from his medical practice allowed him “to cover the expenses associated with two residences as well

as [his] spending while at Mohegan Sun [Casino]”), and Calvao v. Commissioner, 93 T.C.M. (CCH)

988, 990 (2007) (“Unlike the taxpayer in Groetzinger, petitioner spent approximately 20 to 25 hours

per week working [as president of] Caltex. Additionally, petitioner’s livelihood did not depend on

playing the slot machines. His primary income came from his salary of $42,000 and the passthrough

of income of $99,790 from Calltex ***.”), with Chow v. Commissioner, 99 T.C.M. (CCH) 1193,

1196 (2010) (“Petitioners *** were retired, and the record suggests that the sale of [their rental

property] eliminated a substantial source of rental income. Petitioners’ other income would not

permit petitioner to sustain [the gambling] losses indefinitely in the future. Petitioners’ situation is

distinguishable from cases *** in which other sources of income allowed taxpayer to pursue an

                                                  -27-
No. 2—08—1011


activity as a hobby, without expectation of profit.”), and Busch v. Commissioner of Revenue, 713

N.W.2d 337, 348 (Minn. 2006) (taxpayer’s “income came entirely from other sources, specifically

her savings and retirement funds, but she had no occupation other than her claimed gambling

occupation during the relevant tax years. This suggests that [taxpayer] intended to devote herself to

gambling as a possible means of earning a living and was simply unsuccessful in making any money.”).

       We conclude that, because the evidence shows that the Byrds did not devote themselves full

time to gambling but that Jerry Byrd continued to work full time in the graphic arts industry where

he drew a comfortable salary that supported the Byrds’ gambling, there was no clear error in the

Department’s determination that the Byrds’ gambling activity was a pastime, not a trade or business.

       Next, the Byrds claim that, even if their gambling was recreational, they are nonetheless

entitled to a deduction for their gambling losses. The Byrds concede that section 203 of the Act

contains no provision for a deduction for gambling losses. The Byrds, however, claim on various

grounds that it would be unconstitutional to deny them the deduction. Many of these contentions are

devoid of analysis or citation to legal authority and therefore are forfeited for appellate review. See

Ill. S. Ct. R. 341(h)(7) (eff. Sept. 1, 2006) (appellant’s brief “shall contain the contentions of the

appellant and the reasons therefor, with citation of the authorities *** relied on,” and “[p]oints not

argued are waived”); Palm v. 2800 Lake Shore Drive Condominium Ass’n, 401 Ill. App. 3d 868, 881

(2010) (“ ‘The well established rule is that mere contentions, without argument or citation of

authority, do not merit consideration on appeal.’ [Citation.]”). The remainder are marginally

developed and can be disposed of in short order.

       “Statutes carry a strong presumption of constitutionality.” Arangold Corp. v. Zehnder, 204

Ill. 2d 142, 146 (2003). “The party challenging a statute carries the burden of rebutting that

presumption and ‘clearly establishing’ its unconstitutionality.” Id. (quoting Russell v. Department

                                                 -28-
No. 2—08—1011


of Natural Resources, 183 Ill. 2d 434, 441 (1998)). A reviewing court has a duty to uphold the

constitutionality of a statute whenever reasonably possible. Id.

        The Byrds claim first that substantive due process principles dictate that Illinois grant them

a deduction for their gambling losses. They assert that the Act is unconstitutional on its face in

denying any taxpayer a deduction for losses incurred in recreational gambling. They alternatively

claim that the Act is unconstitutional as applied to them and their particular gambling losses.

        The Byrds, however, make no effort to distinguish their facial challenge from their as-applied

challenge. They cite no law on the difference between the two types of challenges, though the

distinction is fundamental. “An ‘as-applied’ challenge represents a plaintiff’s protest against how the

statute was applied in the particular context in which the plaintiff acted or proposed to act, while a

‘facial’ challenge represents a plaintiff’s contention that a statute is incapable of constitutional

application in any context.” Lamar Whiteco Outdoor Corp. v. City of West Chicago, 355 Ill. App.

3d 352, 365 (2005). “This distinction is important because facts surrounding the plaintiff’s particular

circumstances are relevant only in an as-applied challenge.” Id.

        In fact, the Byrds support their due process claims with nothing more than citations to general

standards governing due process challenges to statutes. Notably, the Byrds do not claim membership

in a suspect class or assert that a fundamental right is at stake, but invoke the least exacting of the due

process standards, that of “rational basis review” (Arangold Corp., 204 Ill. 2d at 147). Under this

test, the enactment “must bear a rational relationship to the public interest sought to be served and

the means adopted to accomplish the goal must be reasonable.” Id. Rational basis review is limited

and highly deferential. Id. “As long as there is any reasonably conceivable state of facts showing that

the legislation is rational, it must be upheld.” Id. “Whether a statute is wise or whether it is the best

means to achieve the desired result are matters left to the legislature, not the courts.” Id.

                                                   -29-
No. 2—08—1011


        Though we would be justified in rejecting the Byrds’ due process claims for lack of

development because it is not our obligation to act as advocate for a party or to search the record for

error (U.S. Bank v. Lindsey, 397 Ill. App. 3d 437, 459 (2009)), we will nonetheless briefly review

them. For their facial challenge, the Byrds appear to make two related claims: (1) the absence of a

deduction for gambling losses bears “no reasonable relationship to any realistic concept of income”

because, to the extent that losses offset winnings, “there is no accretion to wealth”; and (2) the Illinois

tax scheme results in “double taxation,” because the taxpayer who gambles is “not even allowed to

deduct the additional capital deriving from his employment income, which is already taxed at both

the state and federal levels.”

        We can readily dispose of the second claim. By “double taxation,” the Byrds appear to mean

taxation of that portion of their winnings that represents their winning wagers. This claim is

misconceived. Gambling winnings that represent the return of capital are not taxable under federal

law and thus are excluded from gross income, before adjusted gross income is determined. See

Hochman, 51 T.C.M. (CCH) at 313. As explained above, federal adjusted gross income is the base

figure for calculating Illinois tax. While section 203 of the Act contains various add-backs of

deductions or exclusions recognized under federal law, there is no add-back for amounts representing

the return of winning wagers (presumably because Illinois, too, recognizes the “distinction between

income and the recoupment of capital” (In re Marriage of Worrall, 334 Ill. App. 3d 550, 554

(2002))). Thus, if an Illinois taxpayer pays Illinois tax on recovered winning wagers, it is only by his

largesse, negligence, or inadvertence. The Act, which follows the federal treatment of gambling

winnings, certainly does not require an Illinois taxpayer to pay tax on gambling winnings that

constitute the return of capital.



                                                   -30-
No. 2—08—1011


        The Byrds’ other claim, that gambling winnings do not reasonably constitute income to the

extent offset by losses, is in reality an attack on the basic concept of income. Under Illinois law,

“income represents a gain or profit that is generally understood to be a return on an investment of

labor or capital, thereby increasing the recipient’s wealth.” In re Marriage of Tegeler, 365 Ill. App.

3d 448, 455 (2006). Gambling winnings have long been considered income under federal tax law (see

McClanahan, 292 F.2d at 631-32), and Illinois law has acceded to that characterization by not

permitting exclusion of gambling winnings from adjusted gross income as carried over from the

federal return. The Byrds, however, contend that, to the extent their winnings are diminished by

losses, they are by definition not income. It is perhaps no surprise that the Byrds cite no law by which

they would have us upset decades of well-established law. We note that even those who gamble for

a profession, such as the Byrds claim to be, must report all gambling winnings (except those that

constitute recovery of capital) as income and then, if permitted, claim a deduction for gambling losses.

See id. (rejecting taxpayer’s contention that only gambling winnings that exceed losses must be

reported as income). The Byrds, we conclude, have not convinced us of any facial deficiency in the

Act.

        The Byrds next claim that the Act is unconstitutional as applied to them. They question the

fundamental fairness of a tax scheme whereby they “could sustain massive losses in excess of

$200,000 during the relevant tax years and still face forfeiture of nearly half a million dollars”

(according to the amended NODs). Here again the Byrds cite no authority but simply appeal to this

court’s sense of fairness. We appreciate the scale of the Byrds’ losses in relation to their tax liability,

but given our holding that the Byrds gambled as a pastime, not as a trade or business, we find their

protests unappealing. The Byrds’ losses represent not a failed enterprise of self-support but a simple

hobby pursued for the Byrds’ pleasure and funded by Jerry Byrd’s substantial employment income.

                                                   -31-
No. 2—08—1011


The Byrds describe their activity at the casinos as “pulling handles, pushing buttons, and cycling

hundreds of thousands of dollars through those ‘one-armed bandits.’ ” The Byrds knew the risk

involved in each button push and each handle pull and could have stopped far short of the losses they

ultimately incurred. The Byrds did not need to incur such risks for the sake of long-term gain, for

they had ample support already in Jerry Byrd’s wages. See Winkler v. United States, 230 F.2d 766,

774 (1st Cir. 1956) (noting that one “very real distinction[] between the activities of the professional

and the casual gambler” is that the latter “has no inevitable losses”). We reject the Byrds’ as-applied

challenge to the Act.

          Next, the Byrds argue that the Act creates several classifications that violate guarantees of

equal protection and tax uniformity. The equal protection clauses of the Illinois and federal

constitutions (U.S. Const., amend XIV; Ill. Const. 1970, art. I, §2) provide identical protection. In

re R.C., 195 Ill. 2d 291, 309 (2001). Both provisions require “that the government treat similarly

situated individuals in a similar manner.” Id. The tax uniformity clause of the Illinois Constitution

(Ill. Const. 1970, art. IX, §2) states:

                 “In any law classifying the subjects or objects of nonproperty taxes or fees, the classes

          shall be reasonable and the subjects and objects within each class shall be taxed uniformly.

          Exemptions, deductions, credits, refunds and other allowances shall be reasonable.”

The uniformity clause imposes a more restrictive limitation on nonproperty tax classifications than

do the equal protection clauses of the Illinois and federal constitutions. Arangold Corp., 204 Ill. 2d

at 153.

          We address first the Byrds’ tax uniformity claims. As we hold that the classifications they

challenge do not violate tax uniformity, we do not analyze them under the lesser standard of equal

protection. See Geja’s Café v. Metropolitan Pier & Exposition Authority, 153 Ill. 2d 239, 247

                                                   -32-
No. 2—08—1011


(1992) (“If a tax is constitutional under the uniformity clause, it inherently fulfills the requirements

of the equal protection clause.”).

       “To survive scrutiny under the uniformity clause, a nonproperty tax classification must (1) be

based on a real and substantial difference between the people taxed and those not taxed, and (2) bear

some reasonable relationship to the object of the legislation or to public policy.” Arangold Corp.,

204 Ill. 2d at 153. “Although the uniformity clause imposes a more stringent standard than the equal

protection clause, the scope of a court’s inquiry under the uniformity clause remains relatively

narrow.” Allegro Services, Ltd. v. Metropolitan Pier & Exposition Authority, 172 Ill. 2d 243, 250

(1996). “One challenging a nonproperty tax classification has the burden of showing that it is

arbitrary or unreasonable, and if a state of facts can reasonably be conceived that would sustain the

classification, it must be upheld.” Id. at 250-51.

       The first classification the Byrds challenge is between those who gamble as a trade or business

and those who gamble casually or for recreation. As the Byrds note, the Act, though tacitly

incorporating the deduction allowed for gambling losses that qualify as business losses, departs from

the federal tax code in not permitting a deduction for losses sustained in recreational gambling. The

Byrds argue that the federal scheme avoids the “absurdity” of “turn[ing] a blind eye to over $200,000

in gambling losses and impos[ing] a more than $60,000.00 ‘income tax’ on the activity.” The Byrds

fail to recognize that federal law itself distinguishes between professional gamblers and recreational

gamblers and affords the former a more favorable deduction of losses. See LaPlante, 98 T.C.M.

(CCH) at 307. This distinction has long existed in federal tax law and has withstood constitutional

challenge. See Gajewski v. Commissioner, 84 T.C.M. (CCH) 980, 983-85 (1985) (rejecting

constitutional argument against differential tax treatment of losses incurred in casual and in

professional gambling); Winkler, 230 F.2d at 774, 776 (noting “two very real distinctions between

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the activities of the professional and the casual gambler” and noting that professional gamblers enjoy

certain constitutional protections from the taxing power). The Byrds do not engage this case law.

They do not dispute the well-entrenched difference between trades or businesses and other activities.

They do not challenge the grounds on which courts have distinguished gambling as a trade or business

from gambling for recreation. Rather, the Byrds appear to believe that the magnitude of their losses

squelches any basis on which they might be distinguished from professional gamblers. Under federal

law, however, the distinction between professional and casual gambling exists despite the potential

for enormous losses in the course of casual gambling. The Byrds do not address this fact despite their

insistence that Illinois mirror the federal system. The Byrds have failed to persuade us that no “state

of facts can reasonably be conceived that would sustain” (Allegro Services, 172 Ill. 2d at 250-51)

Illinois’s decision to press the federal distinction further to eliminate any deduction for losses incurred

in casual gambling.

        The next classification the Byrds claim the Act creates is between different forms of gambling

activity. The Byrds note Jerry’s testimony that W-2G forms are required for slot machine payouts

but not for payouts in table games, and that a player of table games is not allowed to take notes while

playing. (Jerry also testified, however, that casino personnel monitor table play and give the player

a win-loss tally at the end of the gaming session.) The Byrds argue that the different reporting

requirements for gambling winnings amounts to a tax differentiation for which no justification exists.

This argument is afflicted foremost by a lack of development. Other than the testimony of Jerry, who

was never qualified as an expert on tax law, the Byrds cite no source for their claim that different

reporting requirements exist for different forms of gambling. The Department has partially filled the

breach by citing authority that the difficulty of tabulating gambling winnings depends on the nature

of the gambling activity and affects the nature of reporting requirements. See, e.g., Shollenberger,

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98 T.C.M. (CCH) at 669 (“This Court has also recognized the practical difficulties of tracking the

basis of each wager individually in a series of like play.”). The Department also brings to our

attention that Treasury regulations require a casino to send Form W-2G to the IRS whenever it makes

a payout of $1,200 or more from a slot machine. See Treas. Reg. §7.6041—1 (____).

        The Byrds appear to claim that a tax differentiation exists because it is easier to track income

from slot machines than from other games, and because the government aids slot machine players in

reporting their winnings by requiring casinos to submit W-2G forms stating gambling winnings. This

argument fails. We recognize that the players cards the Byrds used at the casinos enable the

electronic recording of slot machine activity. No matter, however, the sophistication reached in the

recording of certain gambling activities, the government requires all income to be reported. Income

can be derived from myriad sources, and the Byrds cite no authority that the government must ensure

that all income be tracked with the same ease or else its reporting demands are invalid. As for the

W-2G form, which is required for certain slot machine winnings, neither party has cited any authority

suggesting that casinos have no like obligation to report winnings from other gambling activities.

        The final classification the Byrds attack is between recreational gambling and what the Byrds

claim are comparable activities in that “they [all] rely upon utilization of capital in an arena combining

both luck and skill with the hope and ultimate goal of achieving a profit from the endeavor.” The

Byrds mean specifically “stock pickers or day traders, [whose] losses are deductible from gains or

payouts.” The Byrds, however, do not cite any source for their claims about how stock transactions

are taxed. Their challenge would fail in any event. The differential treatment of gambling and other

activities has been addressed by the federal courts. Under federal law, gambling losses, whether

incurred in professional or in casual gambling, are deductible only to the extent of gambling gains.



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26 U.S.C. §165(d) (2006). Rejecting an equal protection challenge to this differentiation, one court

has said:

               “There is certainly ample basis for singling out gambling for treatment different from

       that available to other trades or business. The history of gambling was discussed at length in

       Skeeles v. United States, 118 Ct.Cl. 362, 365-368, 95 F.Supp. 242, 242-44 (1951), tracing

       it back millennia, as far back as the Talmud, which, the Court noted, ‘classes gambling

       winnings with thievery.’ The Court of Claims also recounted moral opposition by churches

       generally, and discussed anti-gambling legislation over the years. Further, we take judicial

       notice of the fact that although gambling has many defenders and sponsors, there is also

       widespread public opposition to professional gambling, and that there is at least some public

       perception that organized crime has infiltrated the business world of gambling.” Valenti v.

       Commissioner, 68 T.C.M. (CCH) 838, 841 (1994).

We think these concerns over the nature of gambling justify Illinois not only in tacitly following the

federal model by limiting the deduction for the losses of professional gamblers, but also in denying

any deduction for the losses of recreational gamblers.

       The Byrds’ final argument is that the Department erred in cancelling the amended NODs as

based on incompetent evidence: the casino reports that were, by the casinos’ own acknowledgment,

not definitive accounting documents. This, of course, is a dangerous argument for the Byrds to make

since the amended NODs claim a substantially higher tax deficiency than the original NODs. At the

risk of being paternalistic, we venture that the Byrds do not really want the amended NODs reinstated

but simply want the Department forced to embrace the logical conclusion of its reading of the Act.

They claim the Department cancelled the amended NODs disingenuously:



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       “[The Byrds] respectfully submit that it was only by finding the year[-]end summaries

       unreliable that the Administrative Law Judge was able to avoid imposing over a half million

       dollars of tax liability upon taxpayers who could demonstrate actual losses in excess of

       $200,000.00.

                                                ***

               *** Perhaps the ALJ and Department were trying to cut the [Byrds] a break at the

       expense of the public treasury. It is more likely, however, that they believe they have a far

       better chance convincing a tribunal which does have the power to declare absurdities like this

       unconstitutional if the [Byrds] are only being taxed an additional $100,000.00 in penalt[ies]

       and interest as opposed to half a million dollars. In other words, by lessening the impact of

       the outcome to the taxpayers, they increase their odds that the patent unfairness of this

       taxation scheme will be less apparent to this Court.”

We are at a loss to see how one can “respectfully” make such remarks. As in their prior arguments,

the Byrds couple their bombast with virtually no citations to legal authority. The Byrds criticize the

Department for cowardly refusing to face the “absurdity” of taxing the Byrds on every coin paid out

to them by the machines, but the Byrds have not demonstrated why that outcome would be absurd.

In any case, since the Department adopted the ALJ’s ruling and the Byrds’ challenge is tongue-in-

cheek, we do not review the ruling.

       For the foregoing reasons, we hold that the Department did not err in determining that the

Byrds’ gambling activity did not meet the criteria of a trade or business and that they were not

otherwise entitled to a deduction for their gambling losses. We therefore confirm the decision of the

Department.

       Confirmed.

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