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TAX TREATMENT OF TOURNAMENT POKER
In Tschetschot v. Commissioner, 93 TCM 914 (2007), the plaintiff, Mrs. Tschetschot, a professional poker player, sought to deduct her losses from playing poker tournaments s as an “ordinary and necessary expense” of her trade under Code § 162(a). The United States Tax Court held that tournament poker is a gambling activity subject to the limitation under Code § 165(d). As a result, Mrs. Tschetschot could not deduct her poker losses in excess of her winnings. Mrs. Tschetschot argued that her losses from poker tournaments s should not be limited to her winnings because tournament poker, unlike traditional poker, is conducted the same way as other professional sporting tournament and thus it is not a wagering activity. The Court, however, held that simply because a activity is conducted in a tournament setting does not transform the tournament poker into something different from other forms of gambling for tax purposes.
Today, tournament poker has transformed to the mainstream in the world of professional gambling while it is becoming increasingly common and accessible. Anyone over the age of 21, with a $10,000 buy-in, can gain a seat in the World Series of Poker's Main Event. Over time, publicity for the poker tournaments has spread from among the casinos to card rooms across the nation. Gamblers who were professional poker players have won the most prestigious and profitable poker tournaments in the nation.
In a tournament poker, each player pays an entry fee that is divided up into two portions. A smaller portion used to organize the event and a larger portion used to form the “prize pot” which is awarded to the grand winner at the end of the tournament. The player receives the same number of chips and is eliminated after losing all chips. As opposed to a regular poker game, tournament poker players cannot cash out the chips or exit halfway through the game. The tournaments can last anywhere from several days to two weeks until there is a winner left with all of the chips.
The main tax issue revolving around tournament poker is whether the losses from participating in poker tournaments are deductible as an “ordinary and necessary expense” of trade or business under Section 162(a) of the Internal Revenue Code. The same issue was brought by George and Gloria Tschetschot in Tschetschot v. Commissioner, 93 TCM 914 (2007). In this case, Mrs. Tschetschot argued that tournament poker was not wagering, and thus the losses should be deducted as business losses on the Schedule C. The Court rejected her argument and ruled that tournament poker falls into the category of wagering activities and therefore the losses should be subject to the limitation on deducting “losses from wagering transactions” in Section 165(d) of the Internal Revenue Code.
OVERVIEW OF THE CURRENT PROVISIONS RELEVANT TO TSCHETSCHOT v. COMMISSIONER
Under the general rule of Section 165 of the Internal Revenue Code, any loss sustained during the taxable year and not compensated for by insurance or otherwise shall be allowed as a deduction. In addition, Code § 165(d) specifically indicated that “losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.” However, as stated in the Tax Court’s opinion, “neither the Internal Revenue Code nor the regulations define what constitutes a wagering activity” “The term ‘wagering’ has different meanings depending on the context in which the term is used. More often than not, and as it is used in the Internal Revenue Code, the term is synonymous with ‘gambling’”. The unclear definition of “wagering” or “gambling” led to the main argument in this case that whether tournament poker losses are considered gambling losses under Code § 165(d), and therefore subject to limitation, or they are akin to professional sporting events, and thus fully deductible as an ordinary and necessary business expense. Tschetschot, 93 T.C.M.at 6-7.
TSCHETSCHOT v. COMMISSIONER
The facts in Tschetschot v. Commissioner are not complex. First, it is necessary to set forth the facts that are more relevant to the issue in analyzing the reason behind the Court’s holdings. Mrs. Tschetschot, was a database project engineer and also was a professional tournament poker player in 2000. She earned approximately $49,000 in wages and won in excess of $11,000 from participating in nine poker tournament series in 2000. Mrs. Tschetschot claimed a net loss of $29,933 from her "professional gambler" activity on her Schedule C as business losses. The commissioner determined that because tournament poker is gambling, the related deductions should be subject to the limitation provided in Code § 165(d) as an itemized deduction, to the extent of the Mrs. Tschetschot’s winnings. Based on that, the commissioner assessed a deficiency of income tax of $10,071 as well as an accuracy-related penalty of $2,014.
Mrs. Tschetschot asserted that professional tournament poker playing should be more properly classified as "entertainment and professional sports" than professional gambling. The reasoning behind her assertion is that both professional sports and poker tournaments are conducted in the same way which requires participants to pay an entry fee and compete to win prizes through their superior skills. If professional athletes are allowed to deduct entry fees and related costs for tournaments, she should be given the same tax treatment under Code § 162(a), instead of being subject to the limitation on deductions in Code § 165(d).
In order to determine the nature of tournament poker, the Court first defined the term “wagering” applied in Code § 165(d) by finding its “plain, obvious, and rational meaning” from the dictionary. In the Random House College Dictionary, “wagering” is defined as “something risked or staked on an uncertain event.” The Court concluded that there were no meaningful differences between tournament poker and other forms of poker in that they both involve betting. In a footnote, the Court referred to a recent case in England in which the Court held Texas Holdem poker was a game of chance instead of a game of skills. As Judge Robert N. Armen stated further in his case summary, ““tournament poker play… necessitates the use of the word ‘bet’ or ‘wager’ even to describe how the game is played” and “Betting is so intrinsic to poker that it is nearly impossible to avoid using a word that implies gambling in any way when discussing the topic.” The Court made this ruling based upon the judgment that “bet” is used tremendously throughout the poker game which outweighs the professional poker player’s skill sets. Tschetschot, 93 T.C.M.at 9-10.
At the time Code § 165(d) was enacted, gambling was considered immoral and dangerous. Congress didn’t want to encourage gambling and subsidize gamblers’ losses by allowing a taxpayer to deduct gambling losses in full. In addition, when gambling was first introduced, it was very difficult to keep track of all the gains and losses. While given the rapid development of the gambling industry, technologies have risen sharply and given IRS the ability to track all the gains and losses from gambling activities. The derogatory label of gambling no longer exists and governments have turned to the promoters of gambling. However, Congress was unable to foresee the rapid development of gambling and clearly define what constitutes a “wagering activity” in the existing tax code or/and regulations.
The lack of definition also led to an inconsistent application of the tax law to professional gamblers. In Commissioner v. Groetzinger, 480 U.S. 23 (1987), the Supreme Court held that a fulltime gambler who makes wagers for his own account may be engaged in a “trade or business” under Code § 162(a) while in Tschetschot v. Commissioner, the Tax Court adopted the decision based on contrary cases such as Nitzberg v. Commissioner, 580 F.2d 357, 358 (1978), Boyd v. Commissioner. 28 T.C. 564 (1957) and Kozma v. Commissioner, T.C. Memo.1986-177, all of which disallowed professional gamblers from deducting their gambling losses in excess of their winnings. Several Courts subsequently adopted that determination in Tschetschot v. Commissioner and applied the Code § 165(d) limitation to the sum of a gambler’s wagering losses and business expenses.
The Tax Court’s decision in Tschetschot v. Commissioner is greatly unfavorable to professional poker players, by holding that despite the differences between tournament poker play and other types of poker, the basic nature of the game remains a wagering activity, therefore the losses incurred during the games are subject to the limitations provided in Code § 165(d). The Court also stated that it is not unconstitutional to treat gambling losses differently from losses in sports tournaments, but it implied that Congress might want to loosen the restriction on gambling losses given the fact that “the moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many years ago…and the ability for the Internal Revenue Service to accurately track money being lost and won has improved”. Hopefully, Congress could be aware of the “perceived unfairness” in the case of Tschetschot v. Commissioner, and changed the tax standard to treat professional poker player with all the same rights that other self-employed taxpayers enjoy. Tschetschot, 93 T.C.M.at 14.
Tschetschot v. Commissioner, 93 T.C.M. 914 (2007)
26 U.S.C. § 162
26 U.S.C. § 165
Remennik, George, “Mrs. Tschetschot’s Busted Hand, Poker and Taxes: The Inconsistent
Application of Tax Laws on a Game of Skill,” Cardozo Public Law, Policy & Ethics Journal, Spring 2010
Commissioner v. Groetzinger, 480 U.S. 23 (1987)
Nitzberg v. Commissioner, 580 F.2d 357, 358 (1978)
Boyd v. Commissioner. 28 T.C. 564 (1957)
Kozma v. Commissioner, T.C. Memo.1986-177
TAX TREATMENT OF TOURNAMENT POKER