Originally published on Forbes.com Oct 2nd, 2013
As I contemplate the federal government shutdown, I have to wonder if we have a bunch of gamblers trying to run the country, but I’ve really got nothing original to say on the shutdown, so I’ll stay the course, with the topics I have planned. I have a JD Salinger piece in the works, but those things take a long time. So here is the Massachusetts Appellate Tax Board decision in the case of Elias Chahwan. The case is about gambling.
Why Professional Gambler Status Can Be A Big Deal ?
Even if your gambling activity is positive or break-even, professional status can be a very big deal if you live in certain states, Massachusetts among them. On federal returns anybody who itemizes is allowed an itemized deduction for gambling losses to the extent of gambling winnings. This does not necessarily make break-even gambling a wash for federal income tax purposes. The higher adjusted gross income affects other computations that can raise or, in rare instances, lower your federal tax. Generally it will be close enough to a wash not to worry you much. Massachusetts and some other states only want to partner with you on your winning bets. So even if you are overall a big loser, Massachusetts will tax you like a winner, unless you are gambling as a trade or business. Then your losses reduce your adjusted gross income.
Can Playing The Slots Be A Business ?
That is what Mr. Chahwan argued. Mr. Chahwan was the general manager of a car dealership in New London Connecticut and lived in North Attleboro, Massachusetts . That’s an hour and a half commute according to MapQuest. There are two major casinos Mohegan Sun and Foxwoods although not exactly on the way at least kind of in between. The Rhode Island portion of the tri-state journey might tempt you with other vices, but that is neither here nor there.
In 2007, Mr. Chahwah visited Mohegan Sun with a friend, who is a professional gambler. He won a substantial amount of money playing slots that day. I remember a wise old fellow that I worked with who once told me that when you win money gambling, it’s only a loan. Apparently Mr. Chahwah never heard that advice or failed to heed it if he did. He formed the impression that day that gambling could be a lucrative career.
Mr. Chahwah began studying gambling primarily by watching youtube videos. There are quite a few of those. Here is an example
He developed his own theory:
Mr. Chahwan additionally described how, as part of his professional gambling strategy, he tracked the payouts made by the casinos each day and also inspected the parking lots to see how crowded the casinos were. According to Mr. Chahwan, if the casinos had paid out $5,000,000 by 6:00 p.m., it was a “good day,” meaning that the casinos were “paying out.”
The method has some similarity to that of Clarance Jones, who did convince the Massachusetts Appellate Tax Board that he was a professional gambler.
When asked where he gambled, the appellant responded, “I do the whole state,” as well as out of state. He testified that, in his opinion, Massachusetts has “the easiest lottery system” for a regular gambler to successfully play. He explained some of his methodologies, like buying Lottery tickets in the middle of a pack where, he believed, the winning tickets were grouped, and purchasing tickets at stores that have had recent large winnings, because, in his opinion, those stores have a higher chance of selling winning tickets.
From there the cases diverge.
An Exception To A Rule
One of the rules we used have at Joseph B Cohan and Associates taught to us by Herb Cohan who probably learned it from his eponymous father, who continued coming into the office into his nineties, but was no longer involved in the accounting firm, was the hog theory. One formulation was “Pigs get fed. Hogs get slaughtered.” The other was “Don’t be a khazer.” As a Holy Cross graduate I could understand the latter, but could never quite get the pronunciation right. The essence of the message was to be aggressive, but not too aggressive.
Ironically the Board held it against Mr. Chahwan that he was not aggressive enough
Further, Mr. Chahwan did not keep track of or take deductions for expenses relating to his gambling “business” during the tax years at issue other than his gambling losses. Given the amount of time that he claims to have spent gambling in a professional capacity during the tax years at issue, and even though he received some hotel stays and meals on a complimentary basis from the casinos, the Board found it highly unlikely that Mr. Chahwan would not have incurred some out-of-pocket expenses for travel, meals, lodging, supplies, materials, or any other kind of business expense related to his gambling. Moreover, he failed to report the complimentary perks given to him by the casinos as taxable income.
So the Board is saying that it might have allowed all of Mr. Chahwan’s expenses, if he had claimed more. I’ve never seen such a thing before.
You Have To Be Trying
There was no evidence, however, that Mr. Chahwan used the records maintained by the casino to inform his decisions about his purported gambling business, or that he consulted those records for any purpose other than to report winnings and losses for tax purposes.
This is probably the concept that is fatal to most hobby loss cases. You can’t keep making the same mistakes. Continuing losses have to be supported by new mistakes.
And Acting Like You Have A Business
Mr. Chahwan did not establish a separate bank account or budget for his gambling activities. Instead, he testified that the money that he designated for gambling was the “extra had after the bills were paid.” The money that he won from gambling was not deposited into a bank account, as were his earnings from his job at the car dealership. Instead, he testified that the cash he won from gambling was placed in a shoe box in his bedroom closet. Mr. Chahwan stated that he and his wife had access to the shoe box, and if either of them took money out of it, they would write down the amount on a piece of notepaper. Eventually, he testified, the notepapers were thrown out. Mr. Chahwan testified that he did not carefully keep track of the money in the shoe box because “it wasn’t important” to him.
Lessons Learned
Generally speaking the courts will not second guess your money making ideas. Trieu M. Lee and his spouse played the slots using the principles of Feng Shui and were recognized as engaging in a trade or business by the United States Tax Court. You have to be ready to show, however, that you are modifying your plan based on experience. Other trappings of business such as separate accounts are also very helpful. All in, when you are claiming gambling as a trade or business, you are really taking a chance. I guess you are used to that or you would have just gotten a part-time job.
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