                  T.C. Summary Opinion 2007-30



                     UNITED STATES TAX COURT



                 MICHAEL FERGUSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21315-05S.              Filed February 28, 2007.


     Michael Ferguson, pro se.

     Julie A. Jebe, for respondent.



     ARMEN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.1   The decision to be entered




     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2003,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                 - 2 -

is not reviewable by any other court, and this opinion should not

be cited as authority.

     Respondent determined a deficiency in petitioner’s Federal

income tax for 2003 of $3,068.    Petitioner timely filed a

petition with the Court.    The sole issue for decision is whether

petitioner’s gambling activity constituted a trade or business

under section 162 and, consequently, whether he was a

professional gambler in 2003.

                             Background

     Some of the facts have been stipulated, and they are so

found.    We incorporate by reference the parties’ stipulation of

facts at trial and accompanying exhibits.

     At the time the petition was filed, petitioner resided in

Berwyn, Illinois.

     During the taxable year in issue, petitioner was employed

full-time as a building operating engineer in Chicago and earned

approximately $51,840 from his employment in 2003.

     In addition to his employment, petitioner spent a good deal

of time playing video poker.    It was his only form of gambling.

Petitioner bet an average of $25 on each hand.    He began playing

video poker in 1997 and spent an increasing amount of time

engaged in the activity.

     Video poker is a “casino game based on five card draw

poker.”    Http://en.wikipedia.org/wiki/Video_poker.   Players bet
                                 - 3 -

money or credits and then play poker against a computerized

machine.    See id.   One does not play against other players but

simply tries to obtain the best hand.    After the player’s draw,

“the machine evaluates the hand and offers a payout if the hand

matches one of the winning hands in the posted pay schedule.”

Id.

      Some people, including petitioner, think that if one were to

play video poker in a mathematically and theoretically perfect

manner, eventually one would realize a profit.    Petitioner

testified that he tried to only play on machines with an expected

payout value of a 100-percent return, meaning he thought he would

never lose money;2 he also testified that the only way to get a

return of more than 100 percent is to play on a “progressive”

machine.3   He further testified that despite his hours of

practice on a computer and diligent study of the perfect way to

play the game, “it didn’t work”.4


      2
        A payout value or payback rate is the expected return a
particular game will provide when played over a long enough
period of time. See http://en.wikipedia.org/wiki/Expected_value.
      3
        A progressive machine is one which contributes to a
progressive jackpot. A progressive jackpot, the highest payoff
possible for a gaming machine, arises from a group of several
gaming machines linked together. See
http://en.wikipedia.org/wiki/Progressive_jackpot. A small amount
from every game played on each of the machines increases the
value of the jackpot, and the jackpot winner receives money
pooled from the entire group of linked machines. See id.
      4
          The Court suspects that petitioner’s strategy did not
                                                     (continued...)
                               - 4 -

     Petitioner spent time traveling to and from the casinos,

scouting machines, and studying strategy.   He obtained a tutoring

program to learn how to play and avoid mistakes.   Sometimes he

would observe other players and watch for a “positive” machine.5

He would be involved in video poker and related activities two or

three times during the workweek and again on weekends.

     Petitioner hit at least two big jackpots--approximately

$60,000 each--but overall always lost money.   Because he lost

more money than he made in 2003, he used some of his savings to

support himself.

     Petitioner filed a Schedule C, Profit or Loss From Business,

for the taxable year 2003.   Reporting as a professional gambler,6

he claimed $1,311,200 in gross income from gambling, and a




     4
      (...continued)
work because, while some video poker games may have a payback
rate at or in excess of 100 percent, assuming “error-free,
perfect play”, most games offer a payback rate of less than 100
percent, even when played with perfect strategy. See, e.g.,
http://en.wikipedia.org/wiki/Video_poker. Of course,
consistently error-free, perfect play is nearly impossible, and
most players will lose a few cents or fractions thereof for each
dollar bet over the long term. That said, short-term results do
not always follow long-term statistical probabilities, which is
why people still gamble.
     5
        A “positive” machine is a machine with a payout rate of
100 percent or better.
     6
        H&R Block, petitioner’s tax preparer, determined that
petitioner was a professional gambler because he spent more than
20 hours per week on the activity.
                                    - 5 -

corresponding $1,311,200 in gambling losses.7       For the year in

issue, petitioner did not keep books and records of his win/loss

activity and instead relied on the casinos’ yearly statements to

track his activity for him.

       Respondent determined that petitioner was not a professional

gambler in 2003.       Accordingly, his gambling winnings should have

been reported on line 21 of the Form 1040, U.S. Individual Income

Tax Return (Other income).       Respondent also determined that the

gambling losses should have been claimed on Schedule A, Itemized

Deductions.

                                 Discussion

       The issue in this case is whether petitioner’s gambling

activity in 2003 constituted a trade or business under section

162.       If petitioner were engaged in the trade or business of

gambling, his wagering losses, to the extent deductible under

section 165(d),8 would be deducted in computing adjusted gross

income.       See sec. 62.   On the other hand, if petitioner were not

in the trade or business of gambling, wagering losses, to the



       7
        In addition to the $1,311,200 in income and losses from
gambling, petitioner also reported $3,000 of “Other income” and
$2,820 of “Car and truck expenses” on his Schedule C, neither of
which is contested by respondent. Respondent did not raise any
substantiation issues as to any of the amounts.
       8
        While sec. 165(a) generally allows losses to be deducted
from gross income, sec. 165(d) provides that “losses from
wagering transactions shall be allowed only to the extent of the
gains from such transactions.”
                               - 6 -

extent deductible under section 165(d), would be deductible as an

itemized deduction in the computation of taxable income.    See,

e.g., Gajewski v. Commissioner, 84 T.C. 980, 982 (1985); Johnston

v. Commissioner, 25 T.C. 106, 108 (1955); see also secs. 67(a),

68(a), 151(d)(3).

     In general, section 162(a) allows a deduction for all

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on a trade or business.    The term “trade

or business” is not defined in the Internal Revenue Code or the

regulations.   That said, it is well established that in order for

an activity to be considered a trade or business for the purposes

of section 162, the activity must be conducted with “continuity

and regularity” and “the taxpayer’s primary purpose for engaging

in the activity must be for income or profit.”     Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987).

     Petitioner testified at trial that playing video poker

totally consumed his free time and caused him to lose a lot of

money.   But simply spending all of one’s free time on an activity

does not transform that activity into a trade or business, nor

does it make the participant a professional.   Occasionally,

devoting all of one’s free time to a particular activity may be a

sign of addiction.9   Further, the amount of time spent engaged in


     9
        At trial, petitioner testified that he had himself barred
from his usual casinos for 5 years to prevent him from continuing
to gamble there.
                               - 7 -

the activity is not the most significant aspect of the trade or

business analysis.   More important is the taxpayer’s actual or

honest objective of making a profit.    Keanini v. Commissioner, 94

T.C. 41, 46 (1990); Hulter v. Commissioner, 91 T.C. 371, 392

(1988); Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982),

affd. without published opinion 702 F.2d 1205 (D.C. Cir. 1983);

sec. 1.183-2(a), Income Tax Regs.

     Although a reasonable expectation of a profit is not

required, the taxpayer’s profit objective must be actual and

honest.   Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a),

Income Tax Regs.   Whether a taxpayer has an actual and honest

profit objective is a question of fact to be answered from all

the relevant facts and circumstances.   Hulter v. Commissioner,

supra at 393; Hastings v. Commissioner, T.C. Memo. 2002-310; sec.

1.183-2(a), Income Tax Regs.   Greater weight is given to

objective facts than to a taxpayer’s mere statement of intent.

Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a), Income

Tax Regs.   The taxpayer bears the burden of establishing he or
                               - 8 -

she had the requisite profit objective.10    Rule 142(a); Keanini

v. Commissioner, supra at 46; Hastings v. Commissioner, supra.

     The regulations set forth a nonexhaustive list of factors

that may be considered in deciding whether a profit objective

exists.   These factors include such matters as:    The manner in

which the taxpayer carries on the activity, the taxpayer’s

history of income or losses with respect to the activity, and the

financial status of the taxpayer.     See sec. 1.183-2(b), Income

Tax Regs.

     No single factor, not even the existence of a majority of

factors favoring or disfavoring the existence of a profit

objective, is controlling.   See id.    In addition, not every

factor is relevant in every case.11    Vandeyacht v. Commissioner,

T.C. Memo. 1994-148; Borsody v. Commissioner, T.C. Memo. 1993-

534, affd. per curiam 92 F.3d 1176 (4th Cir. 1996).     Rather, the

relevant facts and circumstances of the case are determinative.

     10
        Generally the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving those
determinations wrong. Rule 142(a); INDOPCO, Inc. v Commissioner,
503 U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115
(1933). Under sec. 7491, the burden of proof may shift from the
taxpayer to the Commissioner if the taxpayer produces credible
evidence with respect to any factual issue relevant to
ascertaining the taxpayer’s tax liability. Sec. 7491(a)(1). In
this case there is no such shift because petitioner neither
alleged that sec. 7491 was applicable nor established that he
fully complied with the requirements of sec. 7491(a)(2). The
burden of proof remains on petitioner.
     11
        Consequently, we do not analyze in depth all of the
factors enumerated in the regulation but rather focus on some of
the more important ones that lead to our decision.
                               - 9 -

See Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd.

without published opinion 647 F.2d 170 (9th Cir. 1981).     Given

the facts and circumstances in this case, we find that

petitioner’s gambling activity in 2003 was not a trade or

business.   See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Petitioner did not carry on his video poker activity in a

businesslike manner.   See sec. 1.183-2(b)(1), Income Tax Regs.

He did not maintain adequate books or records, instead relying on

casino records to track his wins and losses from the activity,

even though he was aware that there was a threshold amount below

which amounts were not reported.

     Although petitioner expended a great deal of time and effort

engaged in his gambling activity, spending more than 1,000 hours

gambling in 2003, see sec. 1.183-2(b)(3), Income Tax Regs., he

did not seek additional assistance with or adjust his gaming

strategy, even when it became apparent that he never had a

winning year, see sec. 1.183-2(b)(2), (6), Income Tax Regs.

     We are additionally unconvinced that petitioner’s gambling

activity meets the standard for being a trade or business because

we are not persuaded that an individual who gambles against a

machine that is programmed by a casino can have, as his or her

primary purpose, income or profit.     After all, such a machine is

on the floor to make money for the casino and is not there to

provide income or profit for the casino’s patrons.    For most
                               - 10 -

individuals, gambling against a machine that is programmed to

make money for the casino constitutes what the Supreme Court in

Commissioner v. Groetzinger, 480 U.S. 23 (1987), characterized as

a sporadic activity, hobby, or amusement diversion.12   For other

individuals, gambling against such a machine may become a habit

or an addiction.    In neither scenario is it a trade or business

with the participant’s primary purpose being income or profit.

     The fact that petitioner did not have the requisite profit

objective to qualify his gambling activity as a trade or business

is by no means to say that petitioner did not wish to make money

gambling.    But:

            [N]ot every income-producing and profit-making
            endeavor constitutes a trade or business. * * *
            [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.




     12
        While we acknowledge that a taxpayer can be
simultaneously engaged in more than one trade or business, the
facts in the present case are different from those in
Commissioner v. Groetzinger, 480 U.S. 23 (1987). There, the
Supreme Court was heavily influenced by the fact that the
taxpayer, following the termination of his 20-year employment in
February of the taxable year in issue, spent the balance of the
year engaged in parimutuel wagering and looked to such wagering
for his livelihood. In contrast, petitioner was employed
throughout the year on a full-time basis and relied on his wages
to support himself; he did not make his living playing video
poker.
                             - 11 -

                           Conclusion

     Because petitioner did not have the requisite profit

objective, we decide that petitioner’s gambling activity in 2003

was not a trade or business, and consequently, that petitioner

was not a professional gambler in the taxable year in issue.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect our disposition of the disputed issue,


                                   Decision will be entered

                              for respondent.
