                  T.C. Summary Opinion 2007-194



                      UNITED STATES TAX COURT



                  LINDA M. MYERS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23664-05S.            Filed November 19, 2007.



     Kathryn J. Sedo and Christine Rittberg, for petitioner.

     Lisa R. Woods, for respondent.


     KROUPA, Judge:   This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

effect at the time the petition was filed.   Pursuant to section

7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent

for any other case.




     1
      All section references are to the Internal Revenue Code in
effect for the year at issue, unless otherwise indicated.
                                  -2-

     Respondent determined a $5,266 deficiency in petitioner’s

Federal income tax for 2003 and determined that petitioner was

liable for a $1,055 accuracy-related penalty under section

6662(a).    After concessions,2 the sole issue for decision is

whether petitioner was in the trade or business of gambling in

2003.    We hold that she was.

                             Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    Petitioner resided in South

Saint Paul, Minnesota, at the time she filed the petition.

Petitioner’s Activities

     Petitioner spent nearly all of her time during 2003 pursuing

two activities, a trucking business that she owned and operated,

and her gambling activity.    She spent 25 to 35 hours per week

working at the trucking business and about 40 hours per week on

the gambling activity.

     Petitioner oversaw the management and operations functions

of her trucking business, which employed eleven drivers for eight

trucks in 2003.    She worked diligently to maintain the

documentation required to run a successful trucking business,

such as licenses, maintenance logs, and insurance matters.

Petitioner retained an accountant to assist her with financial




     2
      Respondent concedes that petitioner is not liable for the
accuracy-related penalty under sec. 6662(a).
                                 -3-

recordkeeping.    Petitioner received a $28,000 salary and $36,000

nonemployee compensation from the trucking business in 2003.

     Petitioner’s gambling activity consumed the rest of her

time.   In fact, a typical day for petitioner involved working at

the trucking business until 1 or 2 p.m., followed by a trip to

the casino that typically lasted until 2 a.m. to 6 a.m.

Petitioner would then return home and sleep for a little while

before arising the next day to follow the same routine.

Petitioner’s children, who had lost their father in an automobile

accident, were extremely worried about petitioner’s early morning

drives home from the casino, particularly in the wintertime.

Nevertheless, petitioner gambled and made these late night trips

home nearly every day.

     Petitioner originally began gambling in 1992 after her

husband’s death, focusing on the $1 slot machines.   When she

first began gambling, petitioner would occasionally talk with

other gamblers.   Petitioner became increasingly serious about her

gambling pursuits as time progressed and as she became accustomed

to the casinos and learned more about their operations.   She

considered herself a professional gambler by 2000.   Petitioner

viewed herself as a gambling expert but found no pleasure in

gambling.   Instead, she considered gambling stressful, tiring,

and time consuming.    She did not go to the casino with friends or

companions and was focused on doing everything she could to win

while she was there.
                                 -4-

     Petitioner developed certain strategies she felt would

maximize her odds of winning.    Petitioner’s primary strategy was

essentially to locate and play those slot machines that were due

to make a payout.    Petitioner strategized that the more money put

into a machine without a payout increased the odds of a payout.

Petitioner would speak with the casino attendants upon arriving

at the casino to determine which slot machines to play.     The

attendants would describe what had happened so far that day,

which slot machines were played most heavily but had made no

payouts, and which slot machines had made payouts.    The

attendants knew this information because they made the payouts by

hand to gamblers who won over a certain amount.    Petitioner also

sometimes watched other gamblers playing slot machines to learn

the slot machines’ patterns.    After learning this information,

petitioner identified those slot machines petitioner considered

“ripe” for a payout and played them.

     Petitioner gambled about $500 in each of five slot machines

that she felt were good candidates to make payouts on a typical

day at the casino.   Petitioner would carefully watch the results

of each machine once she began using it.    If the slot machine

began giving her free plays, doubles, or triples, she viewed that

as a very good sign and an indication that the slot machine was

about to make a large payout.    These results validated

petitioner’s choice of slot machine and convinced petitioner to

continue playing that machine.    Petitioner also strategized from
                                -5-

her experience that a slot machine would stay “hot” for a few

weeks once it started paying.

Documentation of the Gambling Activity

     The casinos gave petitioner Forms W-2G, Certain Gambling

Winnings, when she won $1,200 or more on the slot machines.      The

casinos also provided petitioner a player card that she could

insert into the slot machines to track her activities.     The

player card, when inserted into the machine, would record the

amounts petitioner gambled and the amounts she won.    Each year,

the casinos would process the player card information to generate

an annual profit and loss statement for petitioner.    While

petitioner used her player card most of the time, she did not use

it every single time.   The profit and loss statements were thus

not a complete reflection of petitioner’s gambling activities

because they lacked any gambling petitioner did without the

player card.

     Petitioner was not interested in the non-recordkeeping

benefits the player card offered, such as free lodging and meals.

She only wanted it to track her profits.    In fact, petitioner was

disappointed when the casino offered her a free trip to Las Vegas

because she thought she must have been losing too much money at

her gambling activity for the casino to offer her such a trip and

an opportunity to lose more.

     Petitioner did not find it necessary to keep her own written

set of separate gambling records.     She knew in her head how much

she had won or lost each day.   In addition, the casinos
                                -6-

documented her activities through the player card system.

Petitioner did retain bank statements, canceled checks, credit

card statements, the Forms W-2G, and the profit and loss

statement, which documented the gambling activities.    Petitioner

did not make a budget for the gambling activity but generally

knew how much she entered the casino with each time.

Success of Petitioner’s Gambling Activity

     Petitioner did not report an overall profit from her

gambling activities in the 3 years before and the year after the

year at issue.   She has won large jackpots several times,

however, including $50,000 twice.     She won jackpots of $1,200 or

more over 300 times during 2003.    Petitioner also has taken home

as much as $45,000 profit from 1 day’s gambling.

     Despite the occasional large jackpots, petitioner was

concerned that she continued to lose money.    She changed her

strategy accordingly.   Petitioner tried to focus on winning a

little bit at a time rather than try to earn back large losses in

one night.   For example, if petitioner won money early in the

afternoon, petitioner would go home rather than stay at the

casino and play more to try to recoup old losses.

Petitioner’s Returns

     Petitioner has treated herself as a professional gambler on

her income tax returns since at least 2000.    Petitioner used the

same accountant that helped with the trucking business to assist

her with matters related to the gambling activity and to prepare

her individual returns.
                                 -7-

     Petitioner filed her return for 2003 reporting that she was

in the trade or business of gambling.     She deducted her gambling

losses as an expense to the extent of her gambling winnings,

totaling $1,408,740 in 2003.    Respondent examined petitioner’s

return for 2003 and issued a deficiency notice.    Petitioner

timely filed a petition.

                             Discussion

     The sole issue for decision is whether petitioner was in the

trade or business of gambling in 2003.    If petitioner was in the

trade or business of gambling, she may deduct her wagering losses

to the extent allowable in computing adjusted gross income.3      See

sec. 62.   If petitioner was not in the trade or business of

gambling, on the other hand, she may only deduct the wagering

losses to the extent allowable as an itemized deduction to

compute taxable income.    See Calvao v. Commissioner, T.C. Memo.

2007-57.

     All ordinary and necessary expenses paid or incurred during

the taxable year in carrying on a trade or business are generally

deductible.   Sec. 162(a).   An activity must be conducted with

continuity, regularity, and the primary purpose of earning a

profit to be considered a trade or business under section 162.

Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).     Whether the



     3
      While sec. 165(a) generally permits the deduction of losses
from gross income, there is a special rule limiting the deduction
of gambling losses. Losses from wagering transactions may only
be deducted to the extent of gains from wagering transactions.
Sec. 165(d).
                                   -8-

taxpayer is carrying on a trade or business depends on the facts

and circumstances.4   Id. at 36.

     Respondent has conceded that petitioner’s gambling activity

was conducted with the required continuity and regularity during

2003.    The parties dispute, however, whether petitioner’s primary

purpose for engaging in the activity was to earn a profit.        See

id.; Miller v. Commissioner, T.C. Memo. 1998-463, affd. without

published opinion 208 F.3d 214 (6th Cir. 2000).

     We examine whether the taxpayer engaged in the activity with

the actual and honest objective of making a profit.        See Evans v.

Commissioner, 908 F.2d 369, 373 (8th Cir. 1990), revg. T.C. Memo.

1988-468; Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer

v. Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion

702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.

While a taxpayer’s expectation of profit need not be reasonable,

there must be a good faith objective of making a profit.        Allen

v. Commissioner, 72 T.C. 28, 33 (1979); sec. 1.183-2(a), Income

Tax Regs.    We give greater weight to objective facts than to a

taxpayer’s statements of intent.         Dreicer v. Commissioner, supra
at 645; sec. 1.183-2(a), Income Tax Regs.


     4
      At trial, we denied petitioner’s motion to shift the burden
of proof under sec. 7491 because the outcome of this case is
determined on the preponderance of the evidence, making it
unnecessary to determine who has the burden of proof. See
Topping v. Commissioner, T.C. Memo. 2007-92. The Court invited
the parties to address this issue on brief. We have carefully
reviewed the parties’ arguments on brief and stand by our ruling
denying petitioner’s motion to shift the burden of proof to
respondent. Instead, we shall determine the outcome of this case
on the preponderance of the evidence. See id.
                                -9-

     We structure our analysis around nine nonexclusive factors.

Sec. 1.183-2(b), Income Tax Regs.     The nine factors are:   (1) The

manner in which the taxpayer carried on the activity; (2) the

expertise of the taxpayer or his or her advisers; (3) the time

and effort expended by the taxpayer in carrying on the activity;

(4) the expectation that the assets used in the activity may

appreciate in value; (5) the success of the taxpayer in carrying

on other similar or dissimilar activities; (6) the taxpayer’s

history of income or loss with respect to the activity; (7) the

amount of occasional profits, if any, which are earned; (8) the

financial status of the taxpayer; and (9) whether elements of

personal pleasure or recreation are involved.     Id.

     No factor or set of factors is controlling, nor is the

existence of a majority of factors favoring or disfavoring a

profit objective necessarily controlling.     Hendricks v.

Commissioner, 32 F.3d 94, 98 (4th Cir. 1994), affg. T.C. Memo.

1993-396; Brannen v. Commissioner, 722 F.2d 695, 704 (11th Cir.

1984), affg. 78 T.C. 471 (1982); sec. 1.183-2(b), Income Tax

Regs.   The individual facts and circumstances of each case are

the primary test.   Keanini v. Commissioner, supra at 46; Allen v.
Commissioner, supra at 34; sec. 1.183-2(b), Income Tax Regs.

     We now examine each of the nine nonexclusive factors.

Manner in Which the Taxpayer Carried On the Activity

     We begin by examining the manner in which petitioner carried

on her gambling activity.   The fact that a taxpayer carries on

the activity in a businesslike manner may indicate a profit
                                -10-

objective.    Sec. 1.183-2(b)(1), Income Tax Regs.   In determining

whether a taxpayer conducted an activity in a businesslike

manner, we consider whether the taxpayer maintained complete and

accurate books and records, whether the taxpayer conducted the

activity in a manner substantially similar to those of comparable

businesses that are profitable, and whether the taxpayer

attempted changes in an effort to earn a profit.     Engdahl v.

Commissioner, 72 T.C. 659, 666-667 (1979); sec. 1.183-2(b)(1),

Income Tax Regs.

     The casinos maintained profit and loss tallies for

petitioner through the player card system.    Petitioner thus did

not find it necessary to keep separate books and records to track

this information.    She used her player card most of the time to

enable the casino to perform this tracking function.    Petitioner

also did not keep a separate bank account for her gambling

activities but kept a tally of the amount she had with her when

she went to the casino.    See Canale v. Commissioner, T.C. Memo.

1989-619; cf. Calvao v. Commissioner, T.C. Memo. 2007-57

(taxpayer claimed he kept daily records of gambling activity but

failed to offer any records into evidence).

     Petitioner also had no written budget or business plan,

although she had a strategy she felt would enable her to win.

She explained her strategy in detail to the Court.    Petitioner’s

strategy was to identify and play slot machines that were due for

a payout.    She implemented the strategy by carefully gathering

information about the playing history of the slot machines in the
                                 -11-

casino and studying their patterns to determine which slot

machines were likely to pay out.    Moreover, petitioner testified

that after some initial losses she changed her strategy to help

her win.    She decided to try to win just a little at a time

rather than to try to recoup old losses all at once.      See Engdahl

v. Commissioner, supra at 669.     If petitioner won some money

early in the day, she would take the winnings and return home,

rather than continue to gamble with the money she had just won

and risk losing it.   We find that this factor favors petitioner.

Expertise of Taxpayer or His or Her Advisers

     We next consider petitioner’s expertise (or the expertise of

her advisers) in the gambling activity.      Preparing for the

activity by extensive study of its accepted business, economic,

and scientific practices, and consulting with experts in these

matters may indicate that a taxpayer has a profit objective when

the taxpayer follows that advice.       Sec. 1.183-2(b)(2), Income Tax

Regs.

     Petitioner considers herself a gambling expert and has

gambled for over 10 years.   The continuity and regularity of her

gambling activity strongly suggest that she is an expert at slot

machines.   Petitioner also consulted regularly with casino

employees to further her gambling strategy and watched other

gamblers to understand what she believed to be slot machine

payout patterns.   We find that this factor favors petitioner.
                               -12-

Time and Effort Expended by the Taxpayer in Carrying On the
Activity

     We next consider the time and effort petitioner expended in

carrying on the gambling activity.    A taxpayer’s devotion of much

time and effort to conducting an activity, particularly if the

activity does not have substantial personal or recreational

aspects, may indicate an intention to derive a profit.    Sec.

1.183-2(b)(3), Income Tax Regs.

     Petitioner spent at least 40 hours per week gambling at the

casinos.   Petitioner would often gamble for 12 to 15 hours at a

time, often as late as 2 a.m. to 6 a.m.    We acknowledge that

gambling activities are often viewed as recreational, enjoyable

pursuits upon which many people enjoy spending significant time.

See, e.g., Calvao v. Commissioner, T.C. Memo. 2007-57.

Petitioner testified credibly, however, that she did not view

gambling as a mere recreational pursuit.    She credibly testified

that she found no pleasure in gambling.    Moreover, petitioner did

not go to the casino with others and while there, was focused on

winning as much money as possible.    We find that this factor

favors petitioner.

Expectation That the Assets Used in the Activity May Appreciate
in Value

     Another factor to be considered is the expectation that the

assets used in the activity may appreciate in value.    Sec. 1.183-

2(b)(4), Income Tax Regs.   The parties agree that this factor

does not apply.
                               -13-

Success of the Taxpayer in Carrying On Other Similar or
Dissimilar Activities

     We next examine petitioner’s success in carrying on other

similar or dissimilar activities.     If a taxpayer has previously

engaged in similar activities and made them profitable, this

success may show that the taxpayer has a profit objective, even

though the current activity is presently unprofitable.     Sec.

1.183-2(b)(5), Income Tax Regs.   A taxpayer’s success in other,

unrelated activities also may indicate a profit objective.

Daugherty v. Commissioner, T.C. Memo. 1983-188.     A taxpayer’s

success in a different business enterprise may be evidence of a

profit objective where the taxpayer relied on diligence,

initiative, foresight, and other qualities that generally lead to

success in business activities.     Id.

     Petitioner has shown that she was capable of running a

successful business through her ownership and operation of the

trucking business.   Petitioner’s success with the trucking

business indicates that she had the skills to operate a business

successfully.   She relied on the same accountant for her gambling

activities and relied on her player card to track her winnings.

We find this factor favors petitioner.

Taxpayer’s History of Income or Loss With Respect to the Activity
     We next examine petitioner’s history of income or loss with

respect to the gambling activity.     A history of substantial

losses may indicate that the taxpayer did not conduct the

activity for profit.   Golanty v. Commissioner, 72 T.C. 411, 427

(1979), affd. without published opinion 647 F.2d 170 (9th Cir.
                                 -14-

1981); sec. 1.183-2(b)(6), Income Tax Regs.      Losses during the

initial or startup stage of an activity do not necessarily

indicate, however, that the taxpayer did not conduct the activity

for profit, but losses that continue to be sustained beyond the

period that is customarily necessary to bring the operation to

profitable status may indicate the taxpayer did not engage in the

activity for profit.   Engdahl v. Commissioner, 72 T.C. at 668;

sec. 1.183-2(b)(6), Income Tax Regs.      Abandoning an activity

after indications that the activity will be unprofitable

signifies that the taxpayer engaged in the activity for profit.

Canale v. Commissioner, T.C. Memo. 1989-619.

     Petitioner has not shown a profit from her gambling activity

for the 3 years before and the year after the year at issue.

Petitioner persisted in the activity despite the ongoing pattern

of losses, although she did change her strategy to some extent.

This factor favors respondent.

Amount of Occasional Profits, If Any, Which Are Earned

     We next consider the amounts of occasional profits, if any,

that petitioner earned.   Occasional profits the taxpayer earned

from the activity, in relation to the amount of losses incurred,

the amount of the taxpayer’s investment, and the value of the

assets used in the activity provide useful criteria in

determining the taxpayer’s intent.      Sec. 1.183-2(b)(7), Income

Tax Regs.   A practical possibility that a taxpayer could earn

enough money in a year to exceed expenses also can indicate a
                                  -15-

profit objective.    Bolt v. Commissioner, 50 T.C. 1007, 1014-1015

(1968).

     Petitioner has occasionally won jackpots as large as $50,000

from her gambling activity.    Petitioner won sums of $1,200 or

more over 300 times in 2003.      Her frequent wins and occasional

big wins indicate the possibility that petitioner could have

earned enough to cover her expenses in a year.       This factor

favors petitioner.

Financial Status of the Taxpayer

     We next examine petitioner’s financial status.       If a

taxpayer does not have substantial income or capital from sources

other than the activity in question, it may indicate that the

taxpayer engages in the activity for profit.       Sec. 1.183-2(b)(8),

Income Tax Regs.    Conversely, substantial income from sources

other than the activity, especially if the losses generate large

tax benefits, may indicate that the taxpayer is not conducting

the activity for profit.    Id.    Those with substantial income from

other sources have a much greater tax incentive to incur large

expenditures in a hobby type of business.        Jackson v.
Commissioner, 59 T.C. 312, 317 (1972).

     Petitioner earned $64,000 from the trucking business in

2003.    Merely because petitioner had another source of income in

2003 is not dispositive, however.        See Calvao v. Commissioner,

supra.    None of petitioner’s income from the trucking business

could be offset by gambling losses due to the limitation on

deducting gambling losses only to the extent of winnings.        See
                                  -16-

sec. 165(d).   Petitioner thus had no tax incentive to engage in

the gambling activity to shield income from other endeavors.      We

conclude that this factor is neutral.

Whether Elements of Personal Pleasure or Recreation Are Involved

     We next examine whether elements of personal pleasure or

recreation were involved in the gambling activity.     The presence

of recreational or pleasurable motives in conducting an activity

may indicate that the taxpayer is not conducting the activity for

profit.   Sec. 1.183-2(b)(9), Income Tax Regs.; see Calvao v.

Commissioner, T.C. Memo. 2007-57 (taxpayer’s gambling strategy

and desire to win found consistent with gambling for

entertainment or recreational purposes).     That the taxpayer

derives personal pleasure from engaging in the activity is

insufficient to cause the activity to be classified as not

engaged in for profit if other factors show that the activity is

conducted for profit.      Jackson v. Commissioner, supra; sec.

1.183-2(b)(9), Income Tax Regs.

     We acknowledge that gambling at a casino is an activity

commonly understood to be a pleasant amusement.     Petitioner

testified credibly, however, that she found no pleasure in

gambling.   It was work.    Petitioner testified that she found

gambling to be stressful, tiring, and time consuming.     She

further testified that she always went to the casino alone and

that no friends or family members accompanied her to add any

entertainment element to her activities.     We find her testimony
                                 -17-

thoughtful and credible.   On balance, we find this factor favors

petitioner.

Conclusion

     Taking into account the above factors and considering the

facts and circumstances relating to petitioner’s gambling

activity, we conclude that petitioner engaged in the gambling

activity with the actual and honest objective of making a profit

in 2003.   As the parties have agreed that petitioner conducted

the gambling activity with continuity and regularity, we conclude

that petitioner was in the trade or business of gambling during

2003.   Accordingly, petitioner may deduct her gambling expenses

under section 162(a) to the extent allowable under section

165(d).

     To reflect the foregoing,


                                            Decision will be entered

                                        for petitioner.
