MARIAN BLANK HORN, District Judge.
Plaintiff, Enrique Free Pacheco, a Mexican citizen and nonresident of the United States, brought suit to recover a tax refund in excess of $16,360,455.00, not including interest, withheld by the United States Internal Revenue Service (IRS). This sum, according to plaintiff, represents the amount the IRS automatically withheld from plaintiff's jackpot winnings while plaintiff gambled at slot machines in Las Vegas from 2007 through 2010.
Plaintiff, Enrique Free Pacheco, is a "nonresident alien" under the terms of I.R.C. § 871, who lives in Los Mochis, Sinaloa, Mexico. Due to his poor health, plaintiff was not able to travel or give video testimony during the trial. Plaintiff's attorney filed a declaration, which included reports by two medical professionals, indicating to the court that plaintiff has been suffering from [redacted medical issues]. Defendant, therefore, agreed to take video testimony of plaintiff in lieu of trial testimony. On May 22, 2012, plaintiff's counsel conducted a "Videotaped Interview" of plaintiff in San Diego, California, which was conducted under oath. Plaintiff's and defendant's counsel were present during the interview. The next day, on May 23, 2012, defendant's counsel conducted a "Videotaped Deposition" of plaintiff in San Diego, California, which similarly was conducted under oath. Plaintiff's and defendant's attorneys were also present for the May 23, 2012 deposition. On August 16, 2012, approximately three months later, the parties returned and conducted another joint, videotaped deposition of plaintiff, under oath, once again in San Diego, California. Both parties questioned plaintiff during the August 16, 2012 deposition. The interview and both depositions were conducted with the assistance of a translator, given Mr. Free's limited, English fluency. On December 20, 2012, plaintiff's attorney filed another declaration, which included a report by a medical professional, informing the court that plaintiff's condition had worsened [redacted], and that it was recommended to plaintiff not to travel away from his home in Mexico. The parties agreed, and the court admitted, plaintiff's earlier videotaped interview and deposition testimony into the record, instead of taking live testimony at the trial. Mario Uriel Ramos Vazquez, one of plaintiff's sons-in-law, likewise was not able to testify at trial. The court, with the parties' consent, also agreed to admit the transcript of Mr. Vazquez's deposition into the record.
On multiple occasions, the court and counsel for both parties discussed the impact of using plaintiff's videotaped interviews and depositions. Plaintiff's counsel stated: "I think that myself and Mr. Crombie [defendant's counsel] did a good job of addressing most, if not all, of the issues that we needed to address," and that the videotaped interview and depositions provide "an impression of Mr. Free, how credible he was when he testified." Plaintiff's counsel stated that "although there were some occasions during the testimony where, for example, everything seemed to be about 10 to 12 years ago," errata sheets were provided, and, nonetheless, "from a factual standpoint, I think that a lot of his testimony correlates to the documents. It was consistent with the other folks' testimony. So I don't have any real concerns back in May. And again, we came back in August, and the issues that we addressed at that time, I think they were accurate." Plaintiff's counsel also stated that Mr. Free, in his interview and depositions, "was lucid, coherent, and understood those questions when he was testifying that he was pursuing this as a trade or business." Plaintiff's counsel further indicated that that there was no difference between the interview and depositions in terms of the validity of plaintiff's statements.
Plaintiff stated at his interview that he is married to Maria Ines Wong Gonzalez, and has three daughters, Maria Dolores Free Wong, Diana Free Wong, and Deyra Erika Free Wong, all of whom live close to plaintiff in Mexico. Although plaintiff stated at his interview that he only completed up to his second year of middle school in Mexico, he indicated that he has had a successful career as a businessman, first in construction in Chihuahua, Mexico, and then in agriculture in Los Mochis, Mexico. Plaintiff also stated that he established a potato farming business, Tenabri,
Plaintiff further testified at his deposition that he ran the company without any written business plan, instead relying on experience learned from fifty years of work and from his parents, who were farmers. Plaintiff stated at his interview that it was a successful business. Plaintiff further stated that he retired ten to twelve years ago because of "the financial situation and because of my physical condition." Plaintiff testified at his deposition that, additionally, "the business [Tenabri] was not that good anymore." Plaintiff and Mr. Vazquez both suggested that Tenabri in recent years has been doing worse and currently may not be profitable.
Plaintiff testified at his deposition that, before retirement, he held an approximately sixty to seventy percent interest in the business, which was organized as a limited liability company. Plaintiff further indicated at his deposition that he sold the business to his family, including his daughters and their husbands. According to plaintiff's interview statements and deposition testimony, plaintiff currently owns between twenty to thirty percent of the company. Mr. Vazquez testified that plaintiff currently has a "small percentage" of the business. Mr. Llamas testified at trial and Mr. Vazquez indicated at his deposition that the two now manage the "day-to-day" operations of Tenabri since plaintiff's retirement. Plaintiff confirmed this during his interview. Plaintiff, Mr. Llamas, Mr. Vazquez, and Ms. Dolores Free Wong all stated that plaintiff still had played a role in the business between 2007 and 2010, as an advisor, but was not actively involved in Tenabri outside of advising. Plaintiff testified, and the two sons-in-law, Mr. Vazquez and Mr. Llamas, corroborated, that from 2007 through 2010 plaintiff helped advise on "what type of plants they should grow . . . what type of seeds we're going to use." Plaintiff stated in his interview that advising for Tenabri currently takes up "very little" of his time, but testified at his deposition that advising for Tenabri takes up ten to fifteen percent of his time, or one to two days a week. According to Mr. Llamas' testimony, between 2007 and 2010, plaintiff would spend two hours weekly consulting with him on the business. Mr. Vazquez did not testify as to how much time he spent with plaintiff. Although Mr. Vazquez testified at his deposition that plaintiff never received any compensation between 2007 and 2010, both plaintiff and Mr. Llamas testified that plaintiff received a dividend from the business in 2007, but no information was offered as to the amount of that dividend, or about any other dividend plaintiff received.
In addition to advising at Tenabri, plaintiff stated at his interview, and repeated at his deposition, that he actively traded stocks on the Mexican stock exchange. Plaintiff testified at his deposition that he traded in both "[i]ndividual stock [sic] and the index of the stock market" between 2007 and 2010. Plaintiff testified at his deposition that "right now most of my money's invested in mining companies as GMEXICO, as commercial entities like Walmart. I have a diversity of investments." Plaintiff and Mr. Llamas both indicated at some point during their statements that plaintiff's stock market activities were a "business." At other times, however, plaintiff testified that he "played" the stock market or that he made personal investments. Plaintiff, additionally, testified at his deposition that at the relevant time he had financial advisors, "which I just listen to, but the decisions I make myself."
Mr. Free stated at his interview that he had a personal assistant, Nereyda Campos, who handled multiple aspects of his affairs. According to plaintiff, Ms. Campos' work included creating financial statements, such as balance sheets, gambling records, and tax-related documentation, as well as performing other administrative activities, such as trip planning, for him. Plaintiff stated at his interview that Ms. Campos' salary was approximately Mex$15,000.00 per month. Plaintiff testified at his deposition that he paid most of Ms. Campos' salary. Plaintiff also testified that part of her salary was "paid by the agricultural business for the work she does for the business." Mr. Llamas, plaintiff's son-in-law, testified, however, that Ms. Campos did no work for the agricultural business. Mr. Llamas testified that Tenabri paid her salary, and that this arrangement was in order to enable Ms. Campos to receive specific government benefits that were only available if she was employed through Tenabri.
Ms. Campos testified that she understood plaintiff's work to be in the "[b]etting business." Although Ms. Campos claimed to be hired to assist plaintiff's alleged "betting business," Ms. Campos testified that she also handled a number of plaintiff's personal tasks. According to Ms. Campos' testimony, this included scheduling vacations for plaintiff and his family, such as trips to his beach house three to four times a year, as well as other trips for fishing, golfing, and hunting. Ms. Campos testified that she maintained expenses for trips to the beach house, each of which took fifteen to twenty hours to plan. Ms. Campos also testified that she managed plaintiff's medical appointments, including travel, which occurred three to four times a year, increasing in 2009 and 2010. These appointments required two to three days on average to plan, according to Ms. Campos.
Ms. Campos also testified that, among other activities, she helped "manage his shares in the stock market." According to Ms. Campos, although it only involved a "minimum amount of time," this included carrying out plaintiff's investment decisions, keeping spreadsheet records in order to cross-check plaintiff's records with bank records, and providing plaintiff monthly bank statements about his investments. Plaintiff also testified at his deposition that Ms. Campos arranged "the daily register of the transactions in the stock market." Plaintiff testified at his deposition that in managing his investments he looked at the monthly records as well as daily market reports, tracked expenses, and had a goal to make a fifty percent profit on his investments. According to his deposition testimony, plaintiff made investment decisions based on the interest rate of bank capital, the information from his records, and stock price trends. In particular, plaintiff testified at his deposition that he checked to see if the price of a specific company was "low and if I know that it is a good company." Plaintiff testified at his deposition that he never reviewed financial statements about his investments, but read articles on companies in which he wanted to invest.
The parties stipulated that plaintiff reported the following as his net income on his 2007 through 2010 Mexican tax returns:
From a review of the record, the reported income appears to have come primarily from plaintiff's Mexican stock market investments and his Tenabri dividend. Additionally, plaintiff testified that, sometime between 2007 and 2010, he was able to sell one hectare of land for one million Mexican pesos. In addition, both plaintiff and Ms. Campos testified that they believed stock market income was not taxed in Mexico.
Plaintiff testified at his deposition that he started gambling at slot machines twenty-five to thirty years ago, when he came with relatives to Las Vegas. He testified that "at that time I didn't consider myself a professional gambler because I — at that time I didn't gamble often. It was not often and it was only small amounts." Plaintiff testified at his deposition that his gambling during that period was about $500.00 to $1,500.00 per day, and that he played on slot machines "very similar to the slot machines that they have right now," including "[t]he sevens or the progressive"
Although plaintiff never offered a precise date as to when he claims to have started slot gambling as an alleged business, he did testify at his May 23, 2012 deposition that he "started to gamble in Las Vegas" in response to his taking a less active role in Tenabri "ten or 12 years ago." Mr. Llamas testified that he understood plaintiff to be in the "betting business" around ten years before March 2013, which would place the start date of plaintiff's alleged gambling business at around 2003. Ms. Campos estimated that plaintiff started his alleged gambling business at about the same time period, around 2003. Plaintiff's daughter, Ms. Dolores Free Wong, testified, however, that plaintiff started slot machine gambling as a profession "[s]ince 2007, when he started to leave his agricultural work behind." Plaintiff testified that he retained the law firm of Procopio, Cory, Hargreaves & Savitch LLP (Procopio) for his tax work related to his Las Vegas gambling seven years before his May 23, 2012 deposition, around 2005.
Between 2007 and 2010, the years at issue in the above captioned case, the parties stipulated that plaintiff travelled to Las Vegas the following times:
Plaintiff claims that he travelled to Las Vegas less after 2007 "because I didn't get my money back from the taxes[
According to the record, it appears that the vast majority, if not all, of plaintiff's gambling occurred in Las Vegas, Nevada. Plaintiff did state, however, during his interview, that he also played slot machines at least one time in Phoenix, Arizona. Plaintiff and Ms. Campos both indicated that his travel to Phoenix was primarily for a medical visit. Plaintiff elaborated that "I had some extra time" and "got bored." Ms. Campos noted in her testimony that the trip was not recorded in plaintiff's business records and was not treated as business activity, and, instead, that the Phoenix gambling was "just as a diversion." Plaintiff stated at his interview that he preferred Las Vegas because "the plane trips were easier and the jackpots were big." Additionally, plaintiff stated that he believed his winnings would not be taxed if he travelled to Las Vegas. Plaintiff further stated in his interview that had he not been refunded his returns in 2005, he would not have continued playing through 2010, "[b]ecause I [plaintiff] thought that — that the returns were normal and more safe. If I would have known that, I wouldn't have continued playing."
Plaintiff stated at his interview that he arranged his trips to Las Vegas through his secretary, Ms. Campos. According to plaintiff, he would decide to travel "[s]ometimes one month before, sometimes three or four days" before, and that he himself specified the hotel where he would want to stay. Ms. Campos indicated that plaintiff would inform her to arrange a trip "two and three weeks before." Based on plaintiff's financial reports in the record, as well as his interview statements and deposition testimony, between 2007 and 2010, plaintiff played at the Aria, Bellagio, MGM Grand, Mirage, Treasure Island, Venetian, and Wynn, all located in Las Vegas. Plaintiff testified, however, that most of plaintiff's time and resources were spent at the Bellagio, Mirage, and Wynn, with the Aria becoming equally popular only in 2010. An examination of plaintiff's gambling records reflects that the majority of Mr. Free's time over the years at issue was spent at those four casinos.
Ms. Campos testified that she arranged plaintiff's trips through casino contacts assigned to plaintiff's accounts in Las Vegas. For travel to the Mirage casino, Ms. Campos testified that the contact was Antonio Aguilar. At the time of trial, Mr. Aguilar testified that he was the Director of Latin American Marketing for the MGM Grand, but from 2007 through 2010, he was first a "Marketing executive" and then "Director of Latin America" for the Mirage casino. He testified that Ms. Campos would reach out to him "anywhere from a month up to the next day" to arrange plaintiff's visits. For travel to the Wynn casino, Ms. Campos testified that she reached out to Anne Barbara Morejon. Ms. Morejon testified that she was a casino host at the Wynn casino from 2004, and was still a casino host at the Wynn at the time of the trial. She testified that Ms. Campos would give notice of plaintiff's travel "[m]aybe a couple weeks" in advance. For travel to the Bellagio casino, Ms. Campos testified that she reached out to Arturo DeCastroverde, who testified that he was the Vice President of Latin American Marketing at the Bellagio from the November of 2009 to 2012, and before then, at the Mirage casino from October 22, 1989. Mr. DeCastroverde testified that he would also assist plaintiff while he worked at the Mirage casino. Mr. DeCastroverde stated that he was informed about plaintiff's travel to the Bellagio or the Mirage "[u]sually a week, two weeks" in advance.
Plaintiff stated at his interview that he perceived himself to be a professional gambler for "the last ten years, approximately." Plaintiff testified at his deposition that he believed he was a professional gambler because of his frequency and amount of play.
Mr. DeCastroverde testified that "[h]e did tell me a long time ago that he was a professional player," although he didn't testify if that was at the Mirage or at the Bellagio casinos. As mentioned above, Ms. Campos, and two members of plaintiff's family, Ms. Dolores Free Wong, and Mr. Llamas, also testified that they understood plaintiff's job to be that of a professional gambler.
Plaintiff further stated at his interview that one of his desires was to attain a very large jackpot:
Plaintiff further stated in his interview:
Mr. Free also stated at his interview: "I thought that I could win big amounts because the prizes are big, the jackpots," and that the "big amounts" were equal to "[f]ive to $10 million." Plaintiff indicated at his deposition that he wanted to get a "big jackpot," but also noted that winning was "practically impossible."
When asked about his profit target at his interview, plaintiff responded: "I would like to win a large price with a lot of money, but it's very difficult." Plaintiff stated in his interview, however, that he believed he could be profitable, and also testified at his deposition: "Well, my whole life, my expectation was to win and make a lot of money."
The court found no evidence in the record that plaintiff had conducted research or created a written business plan for his alleged gambling business. In fact, plaintiff testified at his deposition that he never had a written business plan in connection with his stock market activities or agricultural business. Plaintiff also stated at his interview that he never had an expectation or goal for a yearly income or a profit margin per trip. When asked at his deposition if he had ever set a target profit margin of, for example, ten or twenty percent, plaintiff responded: "Well, I wanted the 100 percent, but that never happened." According to plaintiff's statements during his interview, "depending on my capital, I decide what percentage I'm willing to risk in Las Vegas." Plaintiff's later deposition testimony suggests, however, that plaintiff gambled until he ran out of money. Plaintiff stated:
Ms. Campos also testified that plaintiff never returned with money, and instead, would "always come back in debt." Plaintiff also testified at his deposition that he could not recall an instance returning with cash. Plaintiff stated that he never attempted to discern a payout rate, profit, or loss based on play from individual machines, or between different types of slot machines. Plaintiff further testified at his deposition that he never attempted to discern if there was a pattern to the machines themselves, and that he never attempted to compare his gambling profits to his profits from the stock market.
Ms. Campos testified that, working with other individuals hired by plaintiff, she created win/loss reports for plaintiff on a per-trip and yearly basis. At his deposition, however, plaintiff indicated that he used this financial information to a limited extent outside of tax filing purposes:
Plaintiff also testified at his deposition that, despite having lost money in 2007 and 2008, he never changed the way he played slot machines. Plaintiff testified at his deposition, after being asked why he did not change his strategy after suffering losses in 2007 and 2008: "I don't know. But I just didn't." He also testified at his deposition that he never altered his gambling habits based on losses, explaining that, "[w]hat happened is that there was no way to alter anything."
At his interview, plaintiff stated that before each trip, plaintiff did "practically nothing" to prepare. He also testified at his deposition that he only read one book about slot machines, titled
The eighty-page
Plaintiff also testified that he never requested anyone to assist him in researching slot machines, and further testified that he never read the charts on the slot machines themselves to determine what the winning combinations were. Plaintiff stated that he did not ask for more advice or information, "because nobody knows how to play, otherwise they would do that themselves." Mr. Vazquez testified at his deposition that plaintiff never asked him to provide any help, including advice or research, on slot machines. At trial, Ms. Campos could not recollect any instance in which she was requested by plaintiff to purchase any books or conduct research about slot machines. Mr. Aguilar, speaking about his time at the Mirage, testified that he could not recollect if he was ever asked by plaintiff about books or magazines on slot machines, and that he never saw plaintiff alter his playing style from 2007 through 2010. Ms. Morejon, from the Wynn, testified that she was never asked about how to play slots, did not often observe plaintiff having conversations with other players, and never observed him taking notes about the machines. She also testified that she never saw plaintiff play slot machines differently than others. Mr. DeCastroverde also testified that, while working at either the Mirage or the Bellagio casinos, he was never asked by plaintiff about books or articles on slot machine gambling, and never saw plaintiff take notes or change his method of play between 2007 and 2010.
At his deposition, plaintiff testified that he occasionally inquired about the mechanics of slot machines with casino employees, asking them, for example, "how often the machines will pay out," and "which machine they thought was the best or better, but normally they don't know." Plaintiff additionally testified at his deposition that he also took mental notes of others that played slots around him, to see "the type of machine, the amount they're betting." Plaintiff testified at his deposition that he learned from a casino employee "that the machines had millions and millions of combinations and that there was no way to know a certain pattern." Although plaintiff testified at his deposition that he watched others around him play slot machines, he stated it was "[b]ecause I like to watch when they got the jackpots."
Plaintiff also testified at his deposition that he believed for a time that all machines had the same volatility and "gave you back 12 percent" of the money put in, but he later found that out not to be true. It is unclear how plaintiff came to the twelve percent figure. Plaintiff testified, however, that the
In lieu of more formal research and preparation, plaintiff indicated at his deposition that his overarching strategy was, "you have to feed them [the slot machines] in order to get a good jackpot." He testified that "[y]ou had to put in a lot of money to get a return," that "the more money the machine gets in, the more often it pays," and that, "the money in the places where I played or in the casinos that I played at in some way has to be doled out for the — the jackpots." Plaintiff also stated:
Plaintiff testified at his deposition that he came up with this strategy based on his "own experience, from so many years gambling." Plaintiff also testified that he had no other strategy, and that "I just played on days that there were a lot of people and put a lot of money in the machines." When gambling, plaintiff stated that he typically made $100.00 wagers on slot machines, with a double play, resulting in an average wager of $200.00 per play. Plaintiff stated at his interview that, on limited occasions, he would raise the stakes up to $5,000.00 per play, when he wanted to "recover some money."
It appears from plaintiff's deposition testimony that he attempted to operationalize his strategy through a number of what he called "hunches." One of plaintiff's hunches was to travel during higher-traffic times of the year, because the "more people go there and so they play more and you have more chances to win what other people put in." Plaintiff testified at his deposition that he preferred to travel "in springtime, vacation time, New Year's, Christmas, how you call it, the Vet- — the Veteran's day here, those are the days where you find more people in Las Vegas and I like that." Additionally, plaintiff noted that he considered the September 15, November 1, Christmas, New Year's, and July 4 dates as also higher-traffic times. Plaintiff testified at his deposition that at least one of his visits was driven by an invitation to a $25,000.00 buy-in slot machine tournament. From the record before the court, it appears that plaintiff did not consult anyone or any resource in determining when Las Vegas was busier than usual, but instead indicated his determinations came from personal observations. He stated that he made his determinations, "[b]ecause the time when I have come is when I see more people."
Mr. Vazquez recalled travelling with plaintiff on "[s]ummer vacations, New Year's; September 16 — it's a holiday in Mexico, Independence Day, probably two or three times," and noted that plaintiff "likes to go when it's more crowded." Mr. Aguilar testified that plaintiff typically visited the Mirage during "[t]he Mexican holidays primarily," including Cinco de Mayo (May 5), and the Mexican Independence Day (September 16), as well as plaintiff's birthday, July 16. Mr. DeCastroverde, who previously worked at both the Mirage and the Bellagio from 2007 through 2010, testified that Mr. Free typically travelled to Las Vegas around plaintiff's birthday.
The parties disagree as to whether plaintiff actually followed his stated strategy or hunches. Both plaintiff and defendant elicited testimony from casino employees as to what days of the year were the busiest for the casinos. Mr. Aguilar, who worked at the Mirage during the years at issue, testified that both Cinco de Mayo and the Mexican Independence Day are boxing dates, which increases attendance to the casinos. Additionally, he testified that the period around New Year's Eve is "extremely busy." Ms. Morejon testified that "New Year's, Super Bowl, whenever we have an event," like a boxing match, increases casino attendance. Gregory R. Hudson, who at the time of the trial, was the Director of Slot Operations at the Wynn, and before 2010, slot manager at the Wynn, confirmed that, "certain events like boxing matches or UFC [Ultimate Fighting Championship] fights or concerts, those can also impact the busy-ness [sic] of the hotel." Additionally, Mr. Hudson stated that the Super Bowl, Memorial Day weekend, Labor Day weekend, as well as slot events were busy periods. Lawrence Whelan, the Director of Casino Accounting at the Wynn since 2005, testified that "New Year's is busy, the holidays are busy," as well as when there are events in town such as boxing matches, UFC fights, and concerts. Mr. DeCastroverde, speaking about his time at the Bellagio, testified that slot tournaments, large concerts, and boxing matches would increase casino traffic. John M. Clinton, the Vice President of Slots at the Bellagio, and before then the Executive Director of Slots and Director of Slot Marketing at the Bellagio, further testified:
Plaintiff indicated at his deposition that he had another hunch, to play slot machines in the high-traffic areas of the casino. He testified that, "the machine located in a place where people pass by or in holidays I think you have more possibilities." Plaintiff testified at this deposition that he determined whether an area was high traffic through experience, "[b]ecause normally you know the hallways — the aisles, I should say, and sometimes you see when the people passing by." Plaintiff also testified at his deposition that he played in both the regular slot machine areas, as well as the high limit area, but primarily in the "high limit" area.
Whether or not plaintiff actually played in high traffic areas, however, is contested. Both plaintiff and defendant elicited testimony from casino employees as to the level of traffic in the areas where plaintiff played. Mr. Hudson testified that, at the Wynn, plaintiff's preference for $100.00-$200.00 slot machines made him a "high limit player," requiring "high denom [denomination]" machines, which are located in areas that are less travelled. According to Mr. Hudson's testimony, "I wouldn't say it's high traffic where a lot of players would play. I'd say high traffic would be a penny, nickel, quarter area." Mr. Hudson instead referred in his testimony to an area with high denomination machines as a "low traffic area." Mr. Hudson, however, did note that he never saw plaintiff in the special high limit room that the casino also offered, but in the area with high denomination machines on the casino floor itself, and that this area has restaurants and a corridor where more people would travel. Ms. Morejon from the Wynn stated that she saw plaintiff sometimes on the casino floor, and sometimes in the high limit room, but that "[h]e played a lot more in our high limit slot area," in reference to the high-limit slot room. Mr. DeCastroverde remarked that, at the Mirage, "[t]he high limit slots area is usually in a room by itself," walled on two sides, which is a "[r]elatively low traffic area." Mr. Aguilar testified that plaintiff played primarily in the high-limit area at the Mirage, and on the main floor about five to ten percent of the time. He also stated that the high-limit area was "[l]ow-traffic," and that "[y]ou would have to look for it." Mr. Clinton stated that at the Bellagio plaintiff "played machines mostly in what's called our high-limit slot room," and that area of the casino is "normally a low-traffic area." Plaintiff's family, when they visited plaintiff while he was playing the slot machines, testified that they saw him in a high limit room or area, as opposed to on the main floor.
Finally, plaintiff responded affirmatively to a question at his deposition as to whether he had a hunch to play machines that were "due to hit because somebody else had lost a lot of money at that machine," based on his theory that "the more money the machines get fed the more money they return." Plaintiff indicated at his deposition that he based his theory on his impressions, and generally "thought it was logical." Plaintiff and defendant provided expert testimony about the effectiveness of this and other slot machine strategies, which is discussed further below.
Plaintiff also testified that he had a "notion," "[i]n that usually, you could win more in some casinos over others." Plaintiff did not always choose casinos ahead of schedule. Plaintiff elaborated that, between 2007 and 2010, "maybe half of the times I — the trips were planned and the other half were just.... spur of the moment. Sometimes I am flying and I decide which casinos I'm going to go to." Plaintiff stated at his interview that he would change casinos during a trip because "sometimes the machines are very hard — hard to — to give you jackpot, so I have a preference for four or five casinos, not only one." Plaintiff also testified that he would change casinos because "the machines felt hard or I felt like playing a different type of machine because somehow the machines are different in every casino." Plaintiff clarified that a machine felt "hard" if it "didn't give you any jackpot for a certain period of time." Additionally, plaintiff testified at his deposition that he considered the credit lines available to him in deciding what casino to stay at, and that it took him "one week up to four months" to pay off a casino credit line, but that this by itself did not prevent plaintiff from going to Las Vegas. He stated at his interview that "because since I use many different casinos and I have a credit line in many casinos so I can get money also from another one."
Plaintiff also maintained a preference for the types of machines he played. As discussed above, plaintiff stated at his interview that he preferred $100.00 denomination machines. Testimony from casino employees and the expert witnesses confirms that the high limit areas plaintiff frequented contained machines in that denomination. Plaintiff also expressed a preference to play "[t]he sevens or the progressive ones when they have a bonus price." Plaintiff's stated preference for both types of slot machines appears to be consistent with his stated preference for "machines that they have a big — the bigger or highest jackpot price." Plaintiff described during his interview the "sevens" as the "figures," and noted that, with the sevens machines, "the bonuses, when there is a bonus, you get — you have the opportunity to play 15 or 20 times automatically." During plaintiff's deposition, plaintiff testified that, "almost all of the slot machines have sevens." Plaintiff's expert witness, John Robison, indicated that progressive machines produce larger dollar value jackpots than non-progressive machines. According to plaintiff's interview statements, plaintiff preferred progressive machines "when they have progressive [sic] within the same casino." Plaintiff's expert witness termed these machines in his report as "in-house progressive" slot machines. Whether plaintiff actually adhered to any preferences is contested and unclear in the record. Plaintiff also testified that he may have played "Double diamonds" machines, as well as testified that, "I played everything." Additionally, plaintiff stated at his interview that he preferred "machines that I know and where I have played and gambled at some other time."
Ms. Dolores Free Wong, plaintiff's daughter, testified that, based on her observations, plaintiff "like[d] sevens and the ones that have large amounts of money." Mr. Vazquez, plaintiff's son-in-law, similarly testified that, based on his observations, plaintiff "prefers sevens figures and he likes the progressives, the ones with bonuses," and in particular that plaintiff liked the progressives "that give you bonuses and that increases your possibility 15 to 20 times automatically." Mr. Llamas, another of plaintiff's sons-in-law, testified, however, that based on his observations, plaintiff "usually played — and it's a newer machine — multiple options or multiple choices, multiple choice. And before that, when those didn't exist, he would play sevens." Mr. Aguilar, according to his testimony, did not notice a preference by plaintiff between machines at the Mirage within the high-limit area, but testified that the high-limit area contained progressive machines. Mr. Clinton testified that, at the Bellagio, plaintiff played the machines in the high limit room, with the most common games in the room being the "Top Dollar as well as other games called Double Diamonds, Triple Double Diamonds, traditional reel machines with spinning reels."
Multiple witnesses testified that plaintiff evidenced dedication to his gambling activity when in Las Vegas. Plaintiff's daughter, Ms. Dolores Free Wong stated that, "[o]nce he [plaintiff] arrived, we would register with the hotel. They would give him his key, and then he would get to playing." Mr. Llamas, plaintiff's son-in-law, testified that plaintiff would start gambling approximately half an hour after he received his room key. Mr. Vazquez, another son-in-law, put the time between plaintiff's arrival and when plaintiff started gambling at "10 to 15 minutes." Casino staff recalled a similar pattern. According to Mr. Aguilar, at the Mirage, "we try to have everything ready for him to just go shake hands, sign, and get him going to the slot machines." Mr. Aguilar recollected that plaintiff would be gambling within twenty minutes of arrival at the casino, and that there are times plaintiff brought cash so as to start gambling immediately. Ms. Morejon, from the Wynn casino, recalled that plaintiff would start gambling "[r]ight away," within minutes after arriving at the casino. Mr. DeCastroverde, speaking about his time at both the Mirage and the Bellagio, similarly recalled it taking only "20, 30 minutes" between plaintiff's arrival to when he started gambling. Plaintiff testified at his deposition that he brought $6,000.00 to $8,000.00, but not over $10,000.00, with him to Las Vegas in order to "start gambling while the line of credit was authorized." Ms. Campos, from the Wynn, confirmed in her testimony that plaintiff would typically bring approximately $5,000.00 to Las Vegas, which she would withdraw for him.
Plaintiff stated during his interview that he never travelled to Las Vegas alone. Plaintiff testified at his deposition that he travelled with family and friends, including his wife. Mr. Llamas testified at trial that a reason he travelled with others was due to "the language, and later because of his health." At his deposition, plaintiff put the number of total travelers in his group, whether family or friends, at usually "six to eight." Ms. Morejon, from the Wynn, put the typical number of travelers with plaintiff at eight, although Mr. Aguilar, speaking about his time working at the Mirage, saw "[n]o less than ten" with plaintiff. Mr. Vazquez put the total size of his party in Las Vegas in December of 2007 at twelve. According to Mr. Vazquez, plaintiff typically travelled with his family more than with friends, and when plaintiff travelled with friends, it generally was once a year, usually on a Mexican holiday. Plaintiff also testified at his deposition that his physician accompanied plaintiff to Las Vegas in 2009 and in 2010.
Plaintiff's family and friends enjoyed the benefits of plaintiff's "complimentary goods and services provided to Mr. Free in connection with his gambling activities," while in Las Vegas, also known as "comps." As explained during the trial, comps are issued by a casino as a reward for playing at their casino. Although each casino's program is slightly different, comps generally can be used to pay for hotel amenities such as accommodations, food and beverage, show and event tickets, spa services, and plane flights. The parties jointly stipulated to "the total amount of complimentary goods and services provided to Mr. Free" as $82,650.00 in 2007, $106,220.00 in 2008, $81,156.00 in 2009, and $102,821.00 in 2010. Plaintiff's family members, Maria Dolores Free Wong, Mario Uriel Ramos Vazquez, and Fernando Medina Llamas, all testified that their rooms, food and beverages, and many of their activities, such as shows, were paid for through plaintiff's comps when they travelled with him to Las Vegas. In addition, plaintiff's daughter, Ms. Dolores Free Wong, and plaintiff's son-in-law, Mr. Llamas, both testified that plaintiff also gave them "[b]etween $4,000 and $5,000" each trip for personal use. According to the record, plaintiff himself only used his comps for his room, food, and to attend one boxing match and one show during the period of 2007 through 2010. Plaintiff stated at his interview that he gave away tickets he had to events in order to continue gambling. Mr. Vazquez testified that he never once saw plaintiff attend shows, go to the pool, or go shopping with the family.
The exact amount of time plaintiff spent each day gambling is unclear. Plaintiff testified at his deposition that he gambled sixteen hours a day, but this included his breaks of between three to five hours to have meals with family. Plaintiff stated at his interview that he would start gambling at "4:00 or 5:00 a.m." and go to bed at "[a]round 10:00 pm and 11:00 pm." Defendant, however, alleges that documents provided by the Bellagio, Mirage, and Wynn indicate that plaintiff gambled approximately an average of 10.3 hours per day while in Las Vegas. Mr. Llamas observed plaintiff getting up "very early" from the hotel room, before breakfast, to go gamble. Based on conversations with plaintiff, Mr. Vazquez testified that plaintiff "would get up at probably 5:00 am, 6:00 am" to start gambling, and generally go to sleep at around 8:00 to 9:00 pm. Plaintiff's family members, Ms. Dolores Free Wong, Mr. Vazquez, and Mr. Llamas testified that they only saw him just at breakfast, dinner, and when they visited him at the slot machines. Mr. Vazquez testified that plaintiff would eat dinner with the family "[o]n very few occasions." Mr. Llamas, however, testified that plaintiff would join the family for breakfast and dinner "the majority of the time." When plaintiff sat down to eat breakfast and dinner with the family, according to Mr. Llamas, he would only stay for forty five minutes, enough to order and eat. Mr. Vazquez put the time plaintiff stayed to eat for dinner at just twenty to thirty minutes. According to Ms. Morejon, from the Wynn, plaintiff played slot machines "[a]t all hours. In the morning, afternoon, night." Mr. DeCastroverde, speaking about his time at the Mirage and the Bellagio, testified that plaintiff "played during the day, during the night. He was always there. He had to go eat, then he went back."
Mr. Vazquez, plaintiff's son-in-law, testified at his deposition that he would visit plaintiff two to three times a day, and that each time, he would be in the high limit area gambling, not on the main casino floor or doing any another activity. Mr. Vazquez stated that plaintiff would drink "a lot of coffee" and eat snacks while playing. Plaintiff's daughter, Maria Dolores Free Wong testified that she visited plaintiff approximately five to ten times a day, and that when she visited he would be in the high limit area. Ms. Dolores Free Wong further testified that when she visited plaintiff, "he would be very focused on what he was doing at his job. He didn't like to talk much. And so I would just see in, see if he was okay, if he needed anything, and then I'd go." She commented that plaintiff did not seem to be enjoying himself. Mr. Llamas, plaintiff's son-in-law testified at trial that he visited plaintiff four to five times a day, and saw him "[a]t the high limit" area, drinking coffee, a malt, or cocoa, and having chocolate. Mr. Llamas further testified that plaintiff "was concentrated on his business" and not enjoying himself. When plaintiff won a jackpot, Mr. Llamas and Ms. Dolores Free Wong both testified that plaintiff would not react or celebrate his success, but just switch to the next machine while the jackpot was being processed. Plaintiff stated at his interview that he occasionally drank alcohol, but from other witness statements it did not appear to be frequent. Casino employees corroborate plaintiff's statements and family observations. Mr. Aguilar and Ms. Morejon both testified that plaintiff did not require much support. According to Mr. Aguilar, when he observed plaintiff play slot machines at the Mirage, he observed that plaintiff was "a man of few words. I've never seen him laugh out loud. I've never seen him get upset." Mr. Hudson, from the Wynn, testified that plaintiff never appeared excited when he won a jackpot.
Mr. Aguilar testified that, at the Mirage, when plaintiff hit a jackpot at a slot machine the machine would lock up and the casino staff would issue plaintiff his tax documentation before giving him his payout, and at that point the casino would take out a thirty percent tax on plaintiff's entire jackpot winnings from that wager. Mr. Aguilar also testified that when a machine locked up, plaintiff started playing at another machine until the prior machine was unlocked.
Plaintiff stated at his interview that he relied on casino credit lines to fund his gambling activities. Plaintiff further stated that he relied on the credit lines approximately "[t]en to one" over his credit cards. Mr. Aguilar, speaking about his time at the Mirage, testified that cash extended through a credit line "is strictly for play" at the Mirage. He explained further that, although the casino staff cannot necessarily control where the money goes after it has been given out, any violations of the policy would limit a player's ability to obtain credit on future trips. Mr. Aguilar also testified that, when extending future credit, Mr. Aguilar would check to see if all of his prior credit from the credit line had been expended on gambling. Ms. Morejon from the Wynn also testified that if plaintiff wanted to extend his line of credit at the Wynn, the staff first would check to see if his previously allocated credit line was used at the casino first. Mr. Whelan, also of the Wynn casino, testified that, at the end of each trip, a player's credit line and players card information are examined. He stated that players who do not use their credit lines to gamble at the Wynn will be approached by the casino and are less likely to receive credit from the Wynn in the future. Ms. Morejon testified that she was not aware of any instance when she, or any other Wynn employee, ever had to confront plaintiff for not using Wynn credit lines for gaming at the Wynn. Mr. Clinton testified that at the Bellagio, when a customer draws money from a credit line, the "understanding is that it is intended for play at the Bellagio...." Mr. Clinton further testified that the casino can use players card wagering data to make a determination whether a credit line was used for gambling.
Plaintiff testified at his deposition that when he was unable to draw from his credit lines, he would take cash advances from his personal credit cards to continue gambling. Plaintiff also testified at his deposition that he used credit card advances to fund his gambling activities. The documents in the record indicate that defendant withdrew $2,549,306.00 in credit card advances in 2007 to fund his gambling activities, but significantly less in the years following. Plaintiff testified that he did not maintain a separate credit card account for gambling. Plaintiff also testified, and the record indicates, that plaintiff's credit card cash advances, typically, would result in an additional charge of three percent if the amount advanced was over $2,000.00. Mr. Aguilar testified that, at the Mirage, when plaintiff advanced money from a credit card, a casino cannot track how that money is used. Ms. Morejon testified similarly that at the Wynn, when money is advanced from a credit card, the casino cannot track whether or not that money was used for gambling. Mr. Clinton, from the Bellagio, also indicated that the casino has no involvement in managing credit card advances, or determining how they are used. Mr. Hudson, from the Wynn, testified, however, that certain large cash transactions between a casino and patron, such as when a patron converted cash or took money from an ATM from inside a casino "cage" area to buy slot tickets, are logged at casinos using Currency Transaction Reports. According to Mr. Hudson, at the Wynn, transactions of a "single incident of $10,000 or more multiple incidents of $10,000" over a single day would trigger a Currency Transaction Report. Currency Transaction Reports in the record from the Mirage, Wynn, and Bellagio indicate that plaintiff, on multiple instances, converted cash, or withdrew money from casino facilities, to purchase "casino chips, tokens, or other gambling instruments."
Plaintiff testified at his deposition that when he returned from his travels, he paid off his credit lines within "one week up to four months," and paid off his credit card advances when they came due. Ms. Morejon testified that plaintiff paid off his credit line at the Wynn "[w]ithin 60 days." Mr. DeCastroverde also testified that plaintiff paid back his credit line at the Bellagio within two months. Plaintiff testified at his deposition that he did not maintain bank accounts specifically for gambling, although it was suggested by others to do so, and, instead, paid off these credit lines using his personal accounts. Plaintiff testified that, "[f]rom 2007 to 2009 the account at Merrill Lynch was the principal account, but I also used others." Ms. Campos testified that, in 2011, plaintiff paid back certain of his credit lines using his daughter's account, because the "exchange rate was very high in Mexico." Ms. Campos testified that plaintiff later paid back his daughter for those amounts.
Plaintiff indicated at his deposition that he relied on his players card to track his gambling "taxes, gain and losses." Mr. Clinton described in his testimony what a players card is and how it operates at the Bellagio. He stated:
Mr. Clinton further testified that a players card, when inserted, tracks all of a player's coin-in, coin-out, and jackpots. Mr. Clinton indicated that a players card looks like an ATM card, and that when it is properly inserted the light on the receptor turns from orange to green. He added that any time a machine is used without a players card in the system, that play is not tracked. Mr. Clinton testified that players use a players card to
Mr. Aguilar testified that a players card operates at the Mirage in a similar fashion, and records a player's wagers and play on a particular machine. He also testified that it was not possible to record this information without the players card inserted into the machine. Ms. Morejon also testified that the players card at the Wynn, likewise, operates as described above.
Plaintiff testified at his deposition that he decided to use a players card "[b]ecause the — the hotels offered that to you there on the tables and also you — you get points and you get more." Plaintiff testified at his deposition that he inserted his players card into a slot machine before use, and understood how it operated. Plaintiff, however, went on to testify that "sometimes the — the machine doesn't register it because you inserted it wrong, the wrong way," but added that this happened "maybe two, three percent of the time, but very few times, really." Plaintiff testified that he did not notice those instances also "[b]ecause many times we don't pay attention those — to those little details." Mr. Free testified that he did not notice any difference in the slot machine's operation with or without the player's card inserted. Mr. Aguilar, speaking about his time at the Mirage, testified that plaintiff made an effort to use his players card, and upon arriving at the casino, would ask for multiple players cards. Ms. Morejon, from the Wynn, testified that plaintiff used his players card, but that on "[i]nfrequent" occasions it would be inserted improperly. Mr. DeCastroverde, who worked at both the Mirage and the Bellagio between 2007 through 2010, testified that plaintiff made an effort to try to use his players card.
From the record, it appears that the efforts of multiple people were involved in preparing and managing plaintiff's travels to Las Vegas, managing plaintiff's records after his travel, and filing plaintiff's United States 1040NR tax returns. Plaintiff indicated through his interview statements and deposition testimony that he hired Roberto Dominguez
Ms. Campos testified at the trial that Mr. Dominguez was an accountant, who was in charge of plaintiff's Mexican tax returns, and who supervised Ms. Campos' work in relation to creation of the spreadsheet of Form 1042-S information. Plaintiff stated that he had an office that Mr. Dominguez would work out of, with "five, six, rooms, with air-conditioning, computers and everything." Plaintiff testified at his deposition that he paid for Mr. Dominguez's and Ms. Campos' office space. Ms. Campos testified that she and plaintiff would work out of that office as well, and that she would see plaintiff in that office from Monday through Saturday.
Ms. Campos also testified that she was hired by plaintiff to work on "the administrative aspect of his betting business." She described her work in accordance with Mr. Free's gambling activities as "very stressful." Ms. Campos testified that there had not been a year since she started working for plaintiff in which she did not schedule multiple trips for plaintiff to go to Las Vegas. When plaintiff decided to go on a trip, Ms. Campos testified she would be informed "between two and three weeks before," and that Mr. Free would specify who was going, where, when, and the number of rooms. She stated that she would arrange all flights and rooms, although, on occasion, the family would book rooms on their own. Ms. Campos testified that she would also arrange for plaintiff's lines of credit with the casinos to be available. Additionally, she testified that she arranged with plaintiff's banks so that his credit cards were paid off and available for use in Las Vegas. Ms. Campos testified that this took approximately thirty hours per trip on average. Ms. Campos claimed that the "hard work" began after plaintiff's return from Las Vegas. According to Ms. Campos' testimony, plaintiff would hand over, or Ms. Campos would be mailed, all the Form 1042-S records plaintiff had obtained related to his jackpot winnings. She stated that plaintiff would also return with other documentation showing his charges from his stay in Las Vegas, including "his card statements that showed the withdrawals" from his credit or debit accounts. Ms. Campos also stated, however, that "sometimes they [the withdrawal receipts] were missing because he withdraws money and then gets gambling and . . . [t]he money disappears in the machine." Ms. Campos testified that she would organize the Form 1042-S records by casino, date, and bets, and then proceed to enter the data from the Form 1042-S records into a spreadsheet. After creating the spreadsheet, she testified that she would double-check the data and enter it into their accounting system, titled "MS-2," in order to create a record for each trip. After every trip, Ms. Campos testified that she would also manage the payment of plaintiff's credit lines from the casinos. Ms. Campos stated that she also helped plaintiff pay off his credit cards, and incorporated his credit card withdrawals into the accounting reports. Ms. Campos testified that she spent eighty hours per trip on these tasks.
Ms. Campos further testified that she also created an annual "state of results" report, based on the casinos' year-end reports and plaintiff's Form 1042-S information. According to Ms. Campos and plaintiff, the casinos would submit both the casinos' spreadsheet of plaintiff's Form 1042-S records, as well as separate year-end reports that contained the jackpots, coin-in, and coin-out information obtained from plaintiff's players card activity throughout the year. In calculating plaintiff's jackpot totals, Ms. Campos explained that she would compare the Form 1042-S spreadsheets submitted by the casinos with their own records and reconcile any differences. She explained that any discrepancies between their records and those of the casinos, regarding plaintiff's total jackpot amount, were usually due to the casino forgetting to send a Form 1042-S after plaintiff's travels. Unlike with plaintiff's jackpot data, however, Ms. Campos testified that she had to accept at face value the casinos' year-end reports regarding plaintiff's coin-in and coin-out amounts, which were derived from plaintiff's players card data, because there was no other source of information available. The "state of results" reports created by Ms. Campos included plaintiff's "REVENUE PER GAME," "COST OF REVENUE PER GAME," "GROSS PROFIT," "OVERHEAD EXPENSES," which included travel costs, and "NET PROFIT OR LOSS." (capitalization in original). The 2010 "state of results" report also included plaintiff's comps earned as "OTHER PRODUCTS." From a review of Ms. Campos' testimony and the record, it appears that none of plaintiff's reports accounted for the expenses related to the time of the people involved in preparing the forms. Ms. Campos testified that she would work daily with Mr. Dominguez to prepare the per-trip and annual accounting summaries. She also testified that he would make decisions on what to include in the annual reports. In total, Ms. Campos estimated that she spent approximately fifty to eighty percent of her time per week on activities related to plaintiff's gambling activities, although she made no effort to segment her time between her gambling-related and other work for plaintiff. Plaintiff stated during his interview that Ms. Campos, between 2007 through 2010, spent about fifty percent of her time, on average, but sometimes up to eighty percent of her time, on his gambling activities.
Attorney Jon Schimmer, a partner at the Procopio law firm, testified that he was the primary attorney responsible for plaintiff's United States tax filings. Mr. Schimmer testified that he had not previously represented any nonresident aliens who operated a gambling business. Mr. Schimmer testified that after being contacted by plaintiff, his firm analyzed whether or not a slot machine player could be in a trade or business. Mr. Schimmer testified that he "did research, evaluated the existing case law, and there was case law out there that somebody could in fact be a professional gambler by playing slot machines." Mr. Schimmer testified that the firm also analyzed whether or not plaintiff would be a resident or nonresident for the purposes of his tax returns, and that the firm concluded he was not a resident under I.R.C. § 7701(b).
Mr. Schimmer explained that he would collect the per-trip and year-end spreadsheets and reports created by Ms. Campos and Mr. Dominguez, as well as the original documents, such as the credit and debit card ATM withdrawal receipts and casino credit line markers.
Mr. Schimmer testified that plaintiff's accounting information would then be transmitted to Celso Jimenez, an accountant in the United States, who prepared plaintiff's 1040NR income tax forms. Mr. Jimenez testified that he personally never confirmed or examined Ms. Campos' numbers for accuracy. Mr. Jimenez testified:
Using the information provided by Mr. Schimmer, Mr. Jiminez testified that he would complete plaintiff's 1040NR returns, treating plaintiff's gambling activity as a business, with his annual wagering costs deducted from his annual gambling winnings as business expenses. Mr. Jiminez testified that he would pass the completed return to Mr. Schimmer, who would eventually file it. Mr. Jimenez stated that he took one to two hours to complete plaintiff's 1040NR, and was compensated directly by plaintiff between $900.00 and $1,000.00 for his effort. Mr. Schimmer testified that, after receiving a draft completed return from Mr. Jimenez, Mr. Schimmer would review the return, and then Mr. Jiminez would finalize it. Mr. Schimmer testified that he would mail the finalized return to the IRS, along with all of plaintiff's original Form 1042-S records attached as substantiation, as well as any spreadsheets which cataloged the 1042-S records. In total, Mr. Schimmer testified that he spent twenty-five to forty hours per year preparing plaintiff's tax returns, at a cost of $300.00 to $420.00 per hour. Plaintiff stated at his interview that, in total, the costs of these accounting, tax, and related services cost him "[a]pproximately $150,000 dollars per year."
During trial, there were some discussions regarding whether plaintiff could have been eligible to be exempt from the automatic tax withholding requirement. Mr. Schimmer testified that an IRS Form W-8ECI (Effectively Connected Income), titled "Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States," Form W-8ECI (Feb. 2006 Rev.), was part of a
Mr. Schimmer testified the casinos are not required to accept the W-8ECI form. Mr. Schimmer testified that he evaluated whether it was appropriate for plaintiff to submit a Form W-8ECI to the casinos, and concluded that, based on his experience, casinos would "[a]bsolutely not" accept the form in plaintiff's case. Mr. Schimmer went on to explain that the "potential penalty exposure for accepting the form and not withholding" could be a deterrent for casinos accepting a form W-8ECI. Nonetheless, Mr. Schimmer testified that he still suggested to plaintiff to ask the casinos if they would accept a Form W-8ECI, "but explained the unlikelihood that it would be accepted." Plaintiff testified at his deposition that he never asked the casinos about a Form W-8ECI, nor ever attempted to claim to the casinos that his winnings were exempt from the withholding requirement. Mr. Aguilar, recalling his time at the Mirage, testified that plaintiff never claimed to be exempt from income tax withholding, but, that he also was not aware of any way a gambler, like plaintiff, could become exempt from withholding taxes. Mr. DeCastroverde, who worked previously at both the Mirage and the Bellagio, also testified that plaintiff never claimed that he was exempt.
Although covering years prior to the years at issue in the above captioned case, and, therefore, not dispositive on the issues before the court, plaintiff reported that he was a "GAMBLING PROFESSIONAL" on his 2004, 2005, and 2006 United States 1040NR tax returns. (capitalization in original). Plaintiff reported on his 2004 tax return a gross business income of $1,405,020.00, "WAGERING EXPENSES" of $1,877,823.00, travel costs of $5,225.00, for a net loss of $478,028.00. (capitalization in original). Plaintiff reported on his 2005 tax return a gross business income of $2,425,479.00, a "WAGERING COST" of $1,697,833.00, and travel expenses of $4,058.00, for a "net profit" of $723,588.00. Mr. Jimenez, plaintiff's accountant, also testified that plaintiff's profit in 2005 was "a little over $720,000." A later stipulation, however, filed in a case plaintiff brought at the United States Tax Court, determined plaintiff's gambling profit for 2005 to be $1,088,004.00. Plaintiff reported on his 2006 tax return a gross business income of $6,813,240.00, a "WAGERING COST" of $6,759,274.00, travel costs of $10,613.00, for a "net profit" of $43,353.00. (capitalization in original).
On the 2004, 2005, and 2006 returns, plaintiff requested a refund of his jackpot winnings withheld by the casinos. According to Mr. Schimmer, plaintiff's 2004 return was accepted by the Internal Revenue Service (IRS), and the requested refund of $421,508.00 was remitted to plaintiff by the IRS "a little over a month after the return was filed." According to Mr. Schimmer, after plaintiff filed his 2005 tax return, in which he requested a refund of $654,669.00, plaintiff was provided a refund in "July or August of 2007." Mr. Schimmer testified that later, after the refund for the 2005 return was already issued, the IRS performed its own examination and submitted a "revenue agent's report" and a "statutory notice of deficiency" to Mr. Schimmer. According to Mr. Schimmer, the statutory notice of deficiency sought to disallow "the wagering costs that were reported on the 2005 tax year." After initial difficulty reaching the IRS, Mr. Schimmer testified that he assisted plaintiff in filing a United States Tax Court petition to contest the statutory notice of deficiency, and stated that "it may have been in early 2008 where we filed the Tax Court petition to basically contest the statutory notice of deficiency." According to Mr. Schimmer, after filing the United States Tax Court petition, but before trial, "in the interim, the case gets transferred to IRS appeals where there's negotiations to discuss the issues and to settle the dispute ideally before trial." Mr. Schimmer testified that "we started working with the IRS, the appeals officer and with the [Internal Revenue Service] attorney, and we were ultimately able to resolve the 2005 Tax Court case with a stipulated decision." The parties in the case before this court stipulated that: "a Stipulated Decision Document was issued, reflecting a net income for Plaintiff of $1,088,004.00 for 2005." Mr. Schimmer also testified that after plaintiff filed his 2006 tax return, in which he requested a refund of $2,038,236.00, he was refunded that amount finally in 2009. Mr. Schimmer testified that a "mixup" at the IRS delayed the refund: "[F]rom what I [Mr. Schimmer] understand, the return was actually misplaced along with all the 1042s that were filed with it, so we had to send another complete set of 1042s . . . ." After receiving the 2006 refund in 2009, Mr. Schimmer testified that he also received a revenue agent's report "about a month later," proposing to disallow all of the wagering costs reported on the 2006 return. Mr. Schimmer testified that after again having trouble reaching the IRS, he was able to utilize a taxpayer advocate and get a "no-change" letter issued by the IRS. Mr. Schimmer testified that the 2005 and 2006 audits did not expressly discuss the status of plaintiff's gambling activities as a trade or business, but were instead "substantiation cases in that they were disallowing or proposing to disallow the wagering expenses." Although the parties stipulate to plaintiff's 2005 net income, defendant disagrees that plaintiff's net income from gambling was $43,353.00 in 2006, and alleges that, "given the flaws in his [plaintiff's] accounting methodology, the [sic] is no reason the Court should find that figure credible." Plaintiff's accounting methodology is discussed further below.
Turning to the tax years at issue in the above captioned case, Mr. Schimmer testified that he filed plaintiff's 2007 through 2010 1040NR tax returns. The parties stipulate that plaintiff submitted his 2007 tax return on October 29, 2008. Plaintiff, in his 2007 tax return, requested a refund of $4,947,055.00 from his withheld taxes. The parties stipulate that plaintiff submitted his 2008 tax return on December 8, 2009. Plaintiff, in his 2008 tax return, requested a refund of $4,310,356.00 from his withheld taxes. The parties stipulate that plaintiff submitted his 2009 tax return "[o]n or about May 21, 2010." Plaintiff, in his 2009 tax return, requested a refund of $3,095,037.00 from his withheld taxes. The parties stipulate that plaintiff submitted his 2010 tax return on December 15, 2011. Plaintiff, in his 2010 tax return, requested a refund of $4,006,647.00 from his withheld taxes.
Mr. Schimmer testified that he was first notified about an issue related to the 2007 and 2008 returns in March of 2010. According to Mr. Schimmer, the IRS requested substantiation of the tax return income and expense items, which, according to Mr. Schimmer, is "where you're essentially providing source support for the numbers that you've put on the tax return." In response, Mr. Schimmer testified that he "put together very voluminous binders with all the expense and income substantiation information." Mr. Schimmer testified that although the IRS agent started with the 2008 return, Mr. Schimmer requested that the 2007 and 2009 tax returns be incorporated into the review as well, "because we had a point of contact and somebody that was working with the casinos and getting amounts confirmed and so forth." Mr. Schimmer testified that, in January of 2011, he first became aware that the scope of the audit was more than substantiation, "when the revenue agent issued an information document request. . . . essentially to evaluate the profit motivation factors under the [I.R.C.] § 183 regulations." Mr. Schimmer testified that he was the main contact person with the tax examiner for plaintiff. Mr. Schimmer generally described his experience with the IRS during this period as "frustrating" because "it just seemed like a lot of different levels of review and substantiation and things were just delay, delay, delay." He testified, however, that he had a "decent working relationship" with the tax examiner for plaintiff's 2007 through 2010 tax returns. Mr. Schimmer testified that he provided all documents requested by the IRS, cooperated with the IRS, and the IRS never complained that documents were not provided in a timely manner or that he was uncooperative. Defendant has not produced any evidence or testimony that indicates plaintiff did not cooperate with the IRS. A January 17, 2012 letter from Mr. Schimmer to Derek Turpin, an IRS examiner responsible for auditing plaintiff's 2007 through 2010 tax returns, indicates that plaintiff was still in discussions with the IRS at the time about his status as a professional gambler. This letter offered arguments as to why plaintiff was in the trade or business of gambling, and requested "the IRS to resolve this issue with a finding that Mr. Free was in the trade or business of gambling during each of the tax years 2007, 2008 and 2009."
On February 22, 2012, plaintiff filed suit in this court, alleging that "[a]s a direct and proximate result of the IRS's refusal to refund the federal taxes owed claims for tax years 2007, 2008, 2009, and to make the appropriate adjustments, TAXPAYER has been damaged in a sum of at least $12,352,448, according to proof, together with interest thereon as provided in the Internal Revenue Code." Plaintiff subsequently amended his complaint to include his 2010 tax refund request. Plaintiff, in his second amended complaint, claimed damages "in a principal sum in excess of $16,359,095," as well as interest, reasonable attorney's fees, the costs of the suit incurred, and for any such relief as the court deems just and proper. Plaintiff alleges that, "[t]he IRS's failure and refusal to fully refund taxes owing to TAXPAYER is without substantial justification." Subsequently, the amount of the claimed refund changed slightly. In plaintiff's post-trial brief, plaintiff alleged the refund amount should be $15,910,455.00. During closing arguments, plaintiff alleged that the refund amount should be $16,360,455.00, and the prior designated amount was in error.
Plaintiff filed suit citing 28 U.S.C. § 1346 (2006), which gives the United States Court of Federal Claims jurisdiction in "[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected." Defendant does not contest jurisdiction.
"[A]mount[s] received from sources within the United States by a nonresident alien individual," not engaged in a trade or business, are taxed at thirty percent. See I.R.C. § 871(a)(1). "[A]mount[s] received" includes "interest (other than original issue discount as defined in [I.R.C.] section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income."
If gamblers, however, are "engaged in a trade or business within the United States," they are taxed pursuant to I.R.C. § 871(b)(1), which results in taxation "in the same manner and at the same rates as that of a U.S. person."
Neither Congress nor the IRS have explicitly defined what constitutes a "trade or business" under I.R.C. § 871. See, e.g., 161 A.L.R. Fed. 245 § 2 (2000) ("Despite the importance of the phrase trade or business. [sic] neither the Internal Revenue Code nor the Internal Revenue Regulations generally defines the phrase trade or business.") (quotations omitted). Available as guidance, the United States Supreme Court discussed what comprises a "trade or business" within section 162 of the Internal Revenue Code, in the seminal case,
Section 162 of the Internal Revenue Code is contained in Chapter 1, Subchapter B of the Internal Revenue Code, titled "
Therefore, without specific legislative or regulatory guidance, the
Defendant initially argues that the activity of slot machine gambling fundamentally cannot be a trade or business, because the chance to make a profit is extremely unlikely. According to defendant, "[a]t its most basic, slot machine gambling is a losing proposition. Slot machines are computerized gambling devices designed with a pre-programmed mathematical advantage that favors the casino . . . ." Defendant claims that, "given a sufficient number of spins, slot machines present not just a losing proposition, but also the virtual guarantee that the player will lose and the casino will win." Defendant estimated that plaintiff made over 700,000 wagers, and concluded those wagers "would constitute long-run activity that, with at least 95% confidence, would not produce any income or profit even if Mr. Free were `very lucky.'" Defendant also states, "[w]ith slots there is no skill a player can leverage to optimize his play and gain the advantage." Defendant's expert witness, Mr. Frank Legato, in his testimony and in his expert report, described in detail how slot machines in Las Vegas are operated using a "random number generator," which produces a result for each wager that is not affected by the player, prior results, or any external circumstances. Mr. Legato also stated in his report that, in his twenty-eight years covering the slot machine industry, he never came across a slot machine professional gambler, because the slot machine random number generator "cannot be predicted and cannot be influenced by any skill or insight of the player." Defendant's expert witness Mr. Legato points to the Nevada Gaming Board Regulation 14.040(2)(a), which, according to Mr. Legato, at the time he filed his expert report, states: "Each possible permutation or combination of game elements which produce winning or losing game outcomes must be available for random selection at the initiation of each play." (emphasis removed). The existence and operation of the random number generator is not disputed by plaintiff's expert witness. Both parties' expert witnesses testified that it would not be difficult to learn about the existence and implications of the random number generator. In fact, the only document that plaintiff ever indicated he had read regarding the operation of slot machines, titled
Both plaintiff's and defendant's expert witnesses testified that slot machines are installed with payback programs that predetermine the casino's theoretical hold and the gambler's overall payback from any machine. Defendant's expert in his report testified that a casino's "theoretical hold" is "the portion of wagers expected to be kept by each slot machine as profit." This is the opposite of a "payback percentage," which was described by defendant's expert witness as the portion of wagers the slot machine returns, or pays back, a gambler over time. Both parties' expert witnesses testified that "payback programs" are installed on slot machines, and that they determine the slot machine's overall, theoretical hold by placing more or less losing combinations on the program's "virtual reel," which is from where the random number generator picks results. According to both experts' testimony, if, for example, a casino wanted to increase its theoretical hold, and therefore decrease its payback percentage to the gambler, it could change its payback program to add more losing combinations to the slot machine's "virtual reel," decreasing the chance that the random number generator would pick a winning combination per wager. No casino employee or expert witness testified that the machines were ever programmed to give a positive theoretical return to the user. Casino representatives testified that changing the hold percentage of a slot machine is a difficult process, involving the Nevada Gaming Commission, and as a result it is not done often, an observation also mentioned in the
Plaintiff points to Treasury Regulation § 1.183-2(c), which he alleges provides an example of a trade or business that operates similar to plaintiff's situation, as follows:
(quoting Treas. Reg. § 1.183-2(c)) (emphasis in original). Plaintiff notes that the potential income from a large slot machine jackpot can be quite high, just as if "A" in the example were to find oil. Plaintiff also points to United States Tax Court decisions which conclude that an activity was a trade or business despite having incredibly low chances of success.
Decisions in the United States Tax Court also have concluded that slot machine gambling can be a trade or business.
As noted above, the analysis of whether an activity is a trade or business "`requires an examination of the facts in each case.'"
Mr. Free claims that he "gambled far more than a player just playing for recreation." Plaintiff gambled 44 days in 2007, 29 days in 2008, 20 days in 2009, and 25 days in 2010, He claims that a mere per-day calculation discounts his true playing time, since his play was more than eight hours a day. According to plaintiff, he "would start gambling first thing in the morning before breakfast, and continue until after dinner, with typically only meal breaks during the day." Plaintiff stated at his interview that he gambled on average fifteen to sixteen hours a day, and, therefore, claims that his days should count as double-shifts. Plaintiff also states that he was limited in how many days he could gamble in Las Vegas for two reasons. First, plaintiff claims that he had to stay in the United States for less than 122 days total per year. Otherwise, he alleges he would have been deemed a United States taxpayer, and taxable on his "worldwide income," including, his Mexican income, citing to I.R.C. § 7701(b), and IRS Publication 519. Additionally, plaintiff stated during his interview that the withholdings not returned by the IRS of his jackpot winnings prevented him from financing further gambling trips. Plaintiff's assistant Ms. Campos also testified that plaintiff took fewer trips because of the lack of tax refunds.
Defendant's response focuses on the language in
Defendant also challenges how long plaintiff spent each day gambling, alleging that plaintiff's players card data indicated he, on average, only played eight to eleven hours a day during his trips between 2007 and 2010. Finally, defendant argues that plaintiff's trips were sporadic, and that they "simply coincided with a holiday or family vacation." Defendant notes that plaintiff sometimes travelled for his birthday, and that his play also coincided with "`summer vacations.'" In addition, defendant alleges that plaintiff travelled on a "`spur of the moment.'" Instead of being held back by withheld taxes, defendant claims that plaintiff decreased his travel to Las Vegas in line with decreasing returns from his Mexican stock exchange activities.
Defendant also maintains that "even if tax withholding were a plausible justification for plaintiff's infrequent gambling . . . . the potential effect of withholding on plaintiff's Las Vegas travel was present only for years after 2007." Defendant claims that the trial testimony supports its argument because, according to defendant, Ms. Campos indicated in her testimony that plaintiff took fewer trips to Las Vegas "[a]fter 2007" because of a lack of return of his withheld jackpot winnings. Defendant also alleges that plaintiff stated he only made less frequent trips "in 2010 . . . because I didn't get my money back from the taxes." (modification in original). According to defendant, even in 2007, "plaintiff's `busiest' gambling year . . . he gambled only 44 days" and that this "does not satisfy the continuity/regularity requirement of Groetzinger." Defendant does not specify, nor does the record indicate, which tax years Ms. Campos and plaintiff were referring to as the years in which the refunds were not returned to Mr. Free, thus precipitating a decrease in plaintiff's gambling trips.
Plaintiff usually gambled in the second half of the year, in particular, every year in July, and most years in August, September, November, and December. The specific dates within the years under review, however, appear chosen somewhat randomly, and more for personal motives, than for business considerations. Moreover, the record suggests that often plaintiff's trips were arranged for plaintiff by Ms. Campos on short notice, "between two and three weeks before." Mr. Aguilar from the Mirage testified that he was informed of plaintiff's travels "anywhere from a month up to the next day," and other casino staff indicated that they were notified only several weeks in advance.
Plaintiff correctly states that, "
In the above-captioned case, the parties stipulate that between 2007 and 2010, plaintiff travelled to Las Vegas, Nevada the following times:
Plaintiff testified at his deposition that he had a method or strategy that would govern his activities and travels: He wanted to play when casinos were more crowded. Looking at the record, however, this strategy may not have been consistent with his actual activity. Plaintiff did not consistently travel during the times that were testified to as busiest for the casinos, such as the New Year, Superbowl, or certain other American holidays. For example, although Mr. Clinton, from the Bellagio casino, stated that "March is a particularly busy month, February with the Superbowl and a few of our other events we hold," plaintiff never travelled to Las Vegas during those two months. Although Mr. Clinton further stated that October and May are good months, the record indicates that plaintiff only travelled during those months in 2007 and 2010, and his trip in 2009 only covered May 31. Although Mr. Aguilar, speaking generally about Las Vegas, testified that the New Year and the Super Bowl holidays are potentially the busiest times of the year in Las Vegas, plaintiff never travelled to Las Vegas during the Super Bowl and did so only once over the New Year holiday, even though plaintiff testified that he preferred to travel during the New Year period because it was busier. Mr. Clinton testified that casinos are less busy in "the second half of August, early September," and the record indicates that plaintiff did travel to Las Vegas in August and September in 2007, 2008, and 2010. In fact, plaintiff testified at his deposition that he travelled to Las Vegas "on less popular weekends." Although plaintiff's post-trial brief argues that Mr. Free's travel coincided with busy times of the year, because the Mexican holidays often have boxing matches, and those make Las Vegas "extremely busy," the record indicates that plaintiff only visited Las Vegas once for Cinco de Mayo, in 2007, and twice for Mexican Independence Day, September 16, in 2007 and 2010, despite testimony from casino employees that these two days of the year are "always a boxing date" and very busy times. Overall, the record indicates that plaintiff primarily chose to travel in line with personal events, like his birthday or family summer vacations. The record indicates, for example, that plaintiff was in Las Vegas on his birthday, July 16, in three of the four years at issue, 2007, 2009, and 2010, although the record does not indicate that this was a normally busy time for the casinos. In addition, plaintiff did not indicate at his deposition or interview that he made long-term or regularized trip planning decisions or that he actively thought about events that would increase casino attendance, such as boxing matches.
Many of plaintiff's trips appear to have been relatively spontaneous, planned, at best, only weeks in advance. In fact, plaintiff testified at his deposition that only half of his trips were "planned." Ms. Campos testified that, generally, she would be notified just two to three weeks before each trip, and casino staff testimony suggests that sometimes she would reach out to the casinos only a day in advance. Plaintiff's daughter testified that, for the most part, his family was notified of trips a week or two before. Plaintiff's statements indicate that he also did not plan the duration of a trip to align with key dates, but appears generally to have gambled until he ran out of money, after which he left. In determining whether plaintiff was in a trade or business, objective facts are more telling than plaintiff's own statements of his intent.
Plaintiff contends that he could only spend 121 days a year in the United States without other tax consequences. This does not mean that plaintiff could not spend any time in Mexico, with continuity or regularity, operating his gambling business. When in Mexico, however, plaintiff stated he did "practically nothing" relating to his gambling activities, although the records were assembled for him in Mexico by Ms. Campos and Mr. Dominguez. Moreover, the record reflects that he did no research or solicit information or advice about how slot machines operate when not in Las Vegas. Plaintiff asserts that, in evaluating continuity and regularity: "What may be `regular and continuous' for a 30-year old is likely not the same as that for a 70-year old." The pattern here, however, with short intensive gambling trips, which concluded when his money ran out, separated by large time gaps, would appear to indicate that his activity was less like "extensive business activity over a substantial period," and more like "sporadic activity."
Plaintiff also claims that, in addition to, or even regardless of, plaintiff's own activity, the work and expenses of those who worked for him should be considered in determining whether his activity was continuous and regular. In particular, plaintiff points to Ms. Campos' time planning plaintiff's trips, sorting documents upon his return, managing his accounts, and creating reports on his play. Plaintiff claims that, in 2007, Ms. Campos worked a significant amount of time on the alleged gambling business, almost daily from May to December. Plaintiff further claims that the work of Mr. Dominguez, Mr. Schimmer, and Mr. Jiminez should also be considered. In support, plaintiff points to
A taxpayer's ordinary business expenses has been considered in determining whether an activity was pursued with continuity and regularity.
Both the
Moreover, in his financial statements, tax returns, and court filings, plaintiff argues that his alleged gambling business was profitable, while at the same time, not deducting these overhead costs. Plaintiff wants the court to consider the efforts of Ms. Campos, Mr. Dominguez, his law firm, and others as part of his business, yet without distinguishing the part time nature of their work for him and work for other clients. Moreover, he appears to have treated portions of their time as for personal or Tenabri matters, not for gambling business costs.
In
In the above captioned case, there is a clear question as to whether the accounting activities undertaken were for maintaining a business or primarily for filing taxes and for personal use. Although Ms. Campos and Mr. Dominguez created numerous reports on plaintiff's gambling activities, plaintiff testified:
There is no evidence in the record that plaintiff used any of these reports to inform his play. In fact, plaintiff testified that he never changed his playing approach from 2007, or analyzed prior results. Casino witnesses testified that plaintiff never mentioned research, or observed that he had a strategy. Although the efforts of others can be a factor in determining whether a taxpayer pursued an activity for the purpose of making a profit,
In analyzing the second prong of the
Both parties also cite to Treasury Regulation § 1.183-2 (2010), which provides a list of nine "factors which should normally be taken into account" when "determining whether an activity is engaged in for profit." Treas. Reg. § 1.183-2. Treasury Regulation § 1.183-2 factors overlap with the
Under Treasury Regulation § 1.183-2, "[i]n determining whether an activity is engaged in for profit, greater weight is given to objective facts than to the taxpayer's mere statement of his intent."
In analyzing whether an activity was engaged in for profit under Treasury Regulation § 1-183.2, the profit motive has to be "overriding."
Treasury Regulation § 1.183-2 clarifies I.R.C. § 183, is titled "
Under Treasury Regulation § 1.183-2, the first factor to consider in evaluating the presence of a taxpayer's profit motive is:
Treas. Reg. § 1.183-2(b)(1) (emphasis in original).
Plaintiff claims that he maintained comprehensive and good records for his gambling activity, and hired help to do so. Plaintiff's post-trial brief indicates: "Mr. Free did not feel he could personally handle the accounting necessary for his gambling business." According to plaintiff, he hired the services of Ms. Campos, Mr. Dominguez, the Procopio law firm, and Mr. Jimenez to help track his records and submit his tax filings. Plaintiff also claims that it was proper to use his players card as part of his record keeping to track gambling records, along with the Form 1042-S data. According to plaintiff, the times when the players card was not inserted were "very small," "maybe two, three percent of the time, but very few times, really." Plaintiff points the court to the United States Tax Court decision in
The parties use different approaches to determine plaintiff's actual profit or loss during the tax years at issue. Plaintiff calculated his gambling profit as revenue minus expenses. Plaintiff determined his gambling revenue to be equal to his coin-out, jackpot winnings, and the value of his comps, combined. Plaintiff determined his gambling expenses to be equal to his coin-in and travel costs.
Using plaintiff's accounting method, it would appear plaintiff lost $832,041.00 over the four years, 2007 through 2010. Plaintiff, using this approach, concludes that his gambling activities were profitable in 2009 and 2010.
The various values plaintiff used to calculate his profit over the four years at issue came from different sources, which, as discussed further below, at times produced inconsistent results. The parties stipulated to the values for plaintiff's "documented" coin-in and coin-out, based on the casino win/loss reports, which were populated using his players card data.
Defendant proposes a different approach: "By taking the amount plaintiff paid to casinos and subtracting therefrom the amount of withholdings remitted to the IRS by the casinos, we can determine the amount of revenue the casinos generated on plaintiff's activity. The inverse of that amount is plaintiff's real net income." This strategy assumes that plaintiff did not return home from his trips to Las Vegas with any cash, which appears from the record to be correct, and, therefore, that the money plaintiff withdrew in Las Vegas either had to be paid to the casinos or given to his family. Under defendant's approach, whatever money was given to the casinos that was not part of an IRS tax withholding was the casino's profit, and, therefore, plaintiff's loss. Defendant, using this accounting method, alleges the following was plaintiff's gambling revenue, expenses, and profit from 2007 through 2010:
Defendant alleges that, over the four tax years at issue, plaintiff lost $3,125,123.00 to the casinos. Defendant did not account for plaintiff's comps or travel in coming to this conclusion. Adding these in facilitates a better comparison with plaintiff's accounting:
Using defendant's accounting approach, accounting for comps and travel, plaintiff lost $2,772,646.00 over the four years at issue, which is $1,940,605.00 more than plaintiff's accounting approach predicts he lost over the same period. Defendant, in addition, concludes that plaintiff never had a profitable year gambling in Las Vegas.
The "total amount" of plaintiff's winnings withheld by the IRS as taxes, the value of plaintiff's comps, and plaintiff's travel expenses were stipulated to by the parties. The parties, however, for the years 2007, 2008, and 2009, did not stipulate to what plaintiff "paid" to the casinos per year gambling. Defendant stated that it calculated this value for each of the three years by directly summing up plaintiff's individual Las Vegas credit line and credit and debit card withdrawal receipts per year, or, when available, used accounting reports prepared by Ms. Campos, in the record before the court, which already had done this summation. Given inconsistencies in plaintiff's accounting from year to year, defendant appears to have used different approaches each year, 2007, 2008, and 2009, to calculate this value. For example, in 2007, defendant was able to refer to trip-by-trip accounting summaries, casino credit line records, as well as testimony by Ms. Campos and casino employees, to calculate what plaintiff paid to the casinos gambling. In 2008, however, defendant was able to rely on a summary report from Ms. Campos, created only for 2008, that listed, directly, plaintiff's payments to the casinos for the year. In 2009, defendant again had to rely on casino credit line records, as well as individual credit and debit card withdrawal receipts; but since there was no confirming testimony, defendant used other documents, such as Currency Transaction Reports, to estimate how much plaintiff paid the casinos in 2009. Defendant asserts that its calculations represent only what plaintiff paid to the casinos through slot machine gambling, and does not include any amounts plaintiff may have given to his family while in Las Vegas.
Defendant claims in 2007 that plaintiff paid $6,093,306.00 to the casinos. Defendant states that it calculated this amount "by combining the amounts plaintiff withdrew from his credit cards and the amounts plaintiff withdrew from his credit lines at each of the casinos" in 2007. Based on a review of the exhibits in the record, in combination with testimony offered by Ms. Campos, plaintiff withdrew $2,549,306.00 solely from his credit cards during his eight trips to Las Vegas in 2007. Ms. Campos indicated in her testimony that $2,549,306.00 in "withdrawals from a credit card" were recorded in her trip-by-trip accounting summaries as "CONTRIBUTIONS FOR GAME" for 2007. (capitalization in original). Ms. Campos further confirmed that the items listed under "CONTRIBUTIONS FOR GAME" in her accounting summaries were "amounts that he [Mr. Free] contributed to his slot machine gambling." (capitalization in original).
A review of the record also indicates that plaintiff withdrew $3,544,000.00 for gambling purposes from plaintiff's credit lines in 2007, and paid this amount to the casinos that year. The record indicates that $870,000.00 was withdrawn from the Bellagio credit line in 2007, which was not paid back through plaintiff's gambling winnings. The record indicates that plaintiff withdrew an additional $1,680,000.00 from his credit line at the Mirage, $840,000.00 from his credit line at the Wynn, and $154,000.00 from his credit line at the Venetian, all of which were not paid back through plaintiff's gambling winnings. The record indicates that the aggregate sum of these credit line withdrawals, $3,544,000.00, was paid back to the casinos through wire transfers by plaintiff, during periods plaintiff was not in Las Vegas, indicating that these were gambling losses plaintiff repaid using his comingled funds.
Although plaintiff argues that the money plaintiff withdrew from the casino credit lines could have been used for a number of things, not just gambling, defendant maintains that, "[a]s witnesses from each of those casinos [the Mirage, Wynn, and Bellagio] testified, credit extended by the casinos is intended to be used solely for gambling and the casino is very vigilant in that regard." The record supports defendant's contention. Mr. Aguilar, speaking about his time at the Mirage, testified at trial that credit line withdrawals are "strictly for play." He further testified that he tracked credit line withdrawals to make sure the amounts withdrawn from the Mirage credit lines were spent gambling, before more credit was issued to plaintiff. Ms. Morejon from the Wynn casino testified, similarly, that credit withdrawn from a credit line at the Wynn is "supposed to be used to play at the Wynn" and that the Wynn tracks withdrawals and play to ensure that this is the case. Mr. Clinton added that, at the Bellagio, when a customer draws money from a credit line, the "understanding is that it is intended for play at the Bellagio and that the markers are being issued for the purposes of gambling. . .," and that the casino can use a players card to track usage. Mr. DeCastroverde also testified that at the Mirage and at the Bellagio plaintiff's credit line withdrawals were, according to the rules of the casinos, to be used for gambling purposes. In sum, the record supports that plaintiff paid $6,093,306.00, the aggregate of his credit line and credit card withdrawals outlined above, to the casinos in 2007 for gambling purposes.
Defendant claims that plaintiff paid $5,406,800.00 to the casinos in 2008. In determining this amount, defendant appears to have relied primarily on a summary report created by Ms. Campos contained in the record before the court.
A review of the record indicates that, of the $5,406,800.00 defendant alleges plaintiff paid to the casinos in 2008, $4,845,000.00 came from casino credit lines, and the remainder, $561,800.00, appears to therefore have come from credit or debit card withdrawals. While many credit and debit card withdrawal receipts are contained in the record, and are appended to the same joint exhibit that contains Ms. Campos' 2008 summary chart, it is unclear if all of the receipts are contained in the record. Plaintiff maintains that it is unclear whether or not Mr. Free used his credit and debit withdrawals from ATMs for gambling purposes. According to plaintiff, "the evidence establishes that Mr. Free would routinely give to his daughters and their husbands thousands of dollars each trip," although Ms. Campos' report reflects that all $5,406,800.00 was put towards gambling purposes.
Defendant claims that plaintiff paid $3,264,500.00 to the casinos in 2009, the vast majority of which defendant maintains was supplied by the casinos' credit lines. Based on a review of the record, in 2009, plaintiff withdrew $1,300,000.00 from his credit line at the Bellagio, $1,110,000.00 from his credit line at the Mirage, and $550,000.00 from his credit line at the Wynn, for a total of $2,960,000.00, all of which was not paid back by gambling winnings, but, instead, through wire transfers from plaintiff's assistant when he was back in Los Mochis, Mexico. As discussed above, the trial testimony indicates that plaintiff's credit line withdrawals were used primarily for gambling purposes.
Defendant claims that the remaining $304,500.00 plaintiff allegedly paid to the casinos in 2009 came from credit and debit card withdrawals. Based on a review of the receipts in record, plaintiff withdrew $210,000.00 from "global cash access" ATM machines at the Bellagio and Wynn casinos in 2009. The record also indicates that plaintiff withdrew an additional $20,000.00 in credit card advances, and an additional $14,500.00 from plaintiff's Merrill Lynch checking account while in Las Vegas in 2009,
The amount plaintiff paid to casinos in 2010 was stipulated to by the parties. Defendant's accounting approach, like plaintiff's, for all the years at issue, does not count as expenses the value of the time of Ms. Campos, Mr. Dominguez, the Procopio law firm, or Mr. Jimenez, the rent or utility costs of plaintiff's office, the costs of the doctor, who occasionally travelled with plaintiff to Las Vegas, any credit card withdrawal fees, or any others costs of plaintiff's travel to Las Vegas that was not comped.
Plaintiff argues that defendant's method of calculating plaintiff's gambling profit is not appropriate under the tax laws. Plaintiff argues that a "taxpayer is required to compute income in accordance with the method that most clearly reflects income," citing I.R.C. § 446 (2006). Plaintiff claims that his method is reliable and has been used "consistently from year-to-year." Plaintiff claims that defendant is merely estimating plaintiff's gambling profits from plaintiff's borrowing in Las Vegas, and that this court only can estimate profits or losses "when it is reasonably certain that net [profits or] losses were in fact sustained, but only its precise amount lacks direct proof," citing
Defendant, in reply, argues that
The burden is on the taxpayer to maintain records.
Decisions in the United States Tax Court cited by plaintiff stand for the proposition that although blind estimates cannot substitute for other forms of recordkeeping, estimates of a taxpayer's profit and loss when reasonably determined from the record before the court are permitted.
A number of United States Tax Court decisions have applied the Cohan rule directly to slot gambling. In
Based on a review of the record, the court finds that plaintiff's record-keeping was incomplete, and comingled gambling and other business as well as personal records. Therefore, a Cohan rule-type estimate of expenses should not be applicable in plaintiff's case. In calculating his profit, plaintiff used casino reports to measure his coin-in and coin-out. Plaintiff, however, derived his jackpot totals separately, using the Form 1042-S records. Plaintiff appears to have achieved a more accurate recording of his jackpot total, given the process plaintiff described of cataloging every Form 1042-S associated with plaintiff's jackpot winnings, and reconciling it with the casinos records. Plaintiff's coin-in and count-out data, however, appears to contain missing entries. Plaintiff admits his players card, the source of plaintiff's coin-in and coin-out data, was not properly inserted "maybe two, three percent of the time," which is not insignificant given the apparently slim profit margins resulting from plaintiff's activity. For example, in 2009, an alleged winning year, the parties stipulated that plaintiff's "documented" coin-in, which was pulled from plaintiff's players card, was $15,634,451.00. Plaintiff's documented coin-out was stipulated to be $5,348,292.00. Plaintiff's jackpot winnings, measured from the Form 1042-S records obtained and cataloged, were stipulated to be $10,401,541.00, almost twice his coin-out winnings. Plaintiff's profit from this alone was alleged to be $115,382.00. Plaintiff then added in his comps as taxable income, and subtracted his travel expenses as an additional cost.
In 2010, plaintiff's other alleged winning year, his documented coin-in was $18,748,132.00, documented coin-out was $5,228,139.00, and documented jackpot winnings were $13,773,967.00, resulting in an alleged profit of $353,873.00 after accounting for travel costs and comps, an alleged profit margin of 1.89%. If plaintiff's coin-in and coin-out were just three percent higher than reported, because plaintiff failed properly to use his players card three percent of the time, his profit would instead turn into a loss of $51,726.79, a loss of 0.27%.
Although plaintiff correctly points out that, "[t]he very nature of a slot machine and its random number generator establishes that a taxpayer cannot estimate, predict or calculate the amount of hypothetical losses during any session," that is why plaintiff has the burden to maintain comprehensive records.
The court concludes that defendant more accurately determined plaintiff's profit and losses from gambling in Las Vegas from 2007 through 2010. Defendant's approach appears to have more comprehensively determined the total amount of money plaintiff obtained in Las Vegas, from his credit line and ATM withdrawals, while plaintiff's accounting approach appears to have incompletely accounted for plaintiff's coin-in and coin-out. Plaintiff appears never to have returned with money from Las Vegas, and appears to have spent all of the money he withdrew in Las Vegas at the casinos, except for a relatively small amount, "[b]etween $4,000 and $5,000," he may have given his family members each trip. The amount of money plaintiff paid the casinos that the casinos did not keep as IRS tax withholdings appears to have become the casinos' profit, and, thereby, plaintiff's losses. Defendant's analysis is relevant because it highlights a large discrepancy between what defendant more accurately accounted for as plaintiff's losses for the four years at issue, and what plaintiff claims it won or lost over those same four years:
As discussed above, defendant has shown that plaintiff paid to the casinos in Las Vegas up to $19,634,756.00 from 2007 through 2010.
Plaintiff's record-keeping also suffered from other lapses and vagaries. Plaintiff did not account, on his tax returns or in his internal records, for the time his accounting team spent as an expense of the business, even though plaintiff stated in his post-trail brief that he "knew he would need help from other professionals given the nature and volume of his activity," and the fact that plaintiff referred to Ms. Campos, Mr. Dominguez, and the Procopio law firm as his "accounting department." Plaintiff stated at his interview that he paid his accounting team "[a]pproximately $150,000 dollars per year." Plaintiff also did not account for other business costs, such as the costs of his office and any expenses for his trips to Las Vegas that were not comped. Plaintiff also failed to account for the two to three percent transaction charge on his cash withdrawals from the casinos. Considering that plaintiff took out $2,549,306.00 using his credit card just in 2007, if the transaction charge was three percent, as it appears, based on the $300.00 and $600.00 fees as seen on plaintiff's $10,000.00 and $20,000.00 withdrawal receipts in the record, this would be another cost of $76,479.18 not accounted for in plaintiff's record keeping just in 2007. Plaintiff appears to have withdrawn less money using credit and debit cards in 2008 through 2010, as he relied increasingly on credit lines for capital, but Mr. Free still withdrew nearly eight hundred thousand dollars from ATMs in 2008 and 2009, which appear to have been subject to the same unaccounted for fees. Plaintiff's failure to account for these costs further casts doubt on plaintiff's intent to generate a profit from his gambling activities. Plaintiff's $150,000.00 in accounting team expenses alone almost eliminates plaintiff's profitability in 2009, even using plaintiff's own estimates of his profits.
Additionally, despite having had prior, significant, successful, business experience, plaintiff failed to keep separate bank accounts and credit cards for his various ventures, despite admitting to being instructed to do so. Plaintiff also stated at his interview, and a review of the record supports, that plaintiff never maintained a written budget or financial forecast for his gambling activities. Such actions would not only have helped plaintiff maintain accurate records, but also would have more clearly indicated a profit motive by plaintiff.
Pursuant to Treasury Regulation § 1.183-2(b)(1), a "change of operating methods, adoption of new techniques or abandonment of unprofitable methods in a manner consistent with an intent to improve profitability may also indicate a profit motive." As indicated in the testimony offered by several casino employees and plaintiff's own statements, Mr. Free never adopted new methods of play, even in the face of his losses in 2007 and 2008. Plaintiff testified, after being asked why he did not change his strategy after suffering losses in 2007 and 2008: "I don't know. But I just didn't." As discussed above, a review of the record indicates that plaintiff did not even stick to the informal strategies or "hunches" he developed. Although plaintiff testified at his deposition that he had a hunch that the slot machines would pay more when the casinos were "extremely busy," the record indicates that he did not necessarily travel to Las Vegas during periods in which the casinos were busier than average. Moreover, plaintiff stated that one of his hunches was to play in high-traffic areas of the casino, and testified at his deposition that "the machine located in a place where people pass by or in holidays I think you have more possibilities." The record indicates, however, that plaintiff played primarily in the "high limit" areas of the casinos, which casino employees testified are areas with less traffic than the casinos' main floors.
Plaintiff argues that he acted in a businesslike manner, but that his business model required that he receive his tax refunds in order to be profitable. In plaintiff's post-trial brief, he argues that "it is clear that Mr. Free expected that a large portion of his withheld taxes would be refunded by the government each year. Mr. Free cannot be profitable without receiving a return of his taxes." Plaintiff then argues that because the IRS did not challenge plaintiff's conduct from 2004 through 2006, plaintiff reasonably relied on the IRS' past actions for his future alleged business: "Although Tax year 2004 was not a profitable year for his business, the return of his refund confirmed to him that this necessary element of his model—the refund of withheld taxes—was in place. At that time, he thought `that the returns were normal and more safe.'" This estoppel-type argument, however, is not persuasive. "It is settled that each tax year is another matter and that the Commissioner may challenge in a succeeding year what he condoned or agreed to in a former year."
Defendant also claims that plaintiff's lack of a written business plan demonstrates that he did not act in a businesslike manner. While no doubt the presence of a business plan might have been more of an indicator of a profit motive, and, thereby, a business activity, the absence or presence of a business plan alone is not dispositive, but, instead, the outcome of the analysis is dependent on the circumstances of each case. Compare
Under Treasury Regulation § 1.183-2, the second factor to consider in evaluating the presence of a taxpayer's profit motive is:
Treas. Reg. § 1.183-2(b)(2) (emphasis in original). Plaintiff argues that one does not need to be an expert on how slot machines work in order to be in that trade or business. At the same time, plaintiff argues that he "has developed what he honestly believes is particular expertise with slot machines" over his years gambling. Plaintiff also notes that he chose to gamble at high-limit reel-type slot machines, which, according to the parties' experts and casino employees, have a lower "theoretical hold" than slot machines of lower denomination. Plaintiff additionally argues that he did research by talking with casino employees near to where he was playing about how the machines operated. In response, defendant argues that plaintiff's expertise, consisting of "hunches," are irrelevant and that "Plaintiff did not spend any measurable amount of time studying any aspect of slot machine gambling." Defendant maintains that "where a plaintiff fails to show that he or she acquired any gambling expertise or consulted experts, that fact indicates that the activity was not engaged in for profit." (citing to
Based on the record before the court, plaintiff appears to have done almost no research on any aspect of slot machine gambling. Plaintiff's own testimony, supported by the observations of the casino staff, indicates that, except for reading the Slot Machine Report many years ago, and asking random questions of casino employees who were by the slot machines he was playing while in Las Vegas, plaintiff did not inquire into slot machine gambling. According to a decision of the United States Tax Court, "[i]n preparing for an activity, a taxpayer need not make a formal market study, but should undertake a basic investigation of the factors that would affect profit."
Plaintiff, however, contends that he followed a series of "hunches," and chose a specific set of a casinos in which he wanted to play. Factor 2 of the Treasury Regulation identifies "accepted business, economic, and scientific practices," as telling on whether the taxpayer intended to make a profit with his activity. See Treas. Reg. § 1.183-2(b). Taxpayers who based their expertise on observation and talking with casino staff were found not to demonstrate expertise.
Plaintiff's approach to slot machine gambling was markedly different than his approach to his Mexican stock market activities. Plaintiff testified at his deposition that, in managing his investments, he looked at monthly records as well as daily market reports, some of which, such as the "daily register of the transactions," appear to have been created by Ms. Campos for him. Plaintiff further testified that he tracked expenses and had a goal to make a fifty percent profit on his stock investments. According to his deposition testimony, plaintiff made stock investment decisions based on his records, as well as research into the interest rate of bank capital and stock price trends, and he checked to see if the price of a specific company was "low and if I know that it is a good company." Although plaintiff stated he did not review financial statements about his investments, his testimony indicates that he read articles on companies in which he wanted to invest. Plaintiff also testified at his deposition that he listened to the advice of his financial advisors for his stock market trading.
In contrast, based only on the little advice that plaintiff acquired, from reading the Slot Machine Report, apparently early in his slot machine gambling activity, and being around slot machines at a number of different casinos in Las Vegas, plaintiff, nonetheless, should have understood that slot machine random number generators are unpredictable. In addition, plaintiff did not even stick to his "hunches" of playing in casinos when they were busiest, or playing where casino traffic and play was higher. Plaintiff travelled at mostly unplanned times, and stuck mostly to the high-limit areas of the casino, where traffic was testified to be significantly lower than in other more active areas. Although plaintiff asserts that there was limited reading material on slot machines available in Spanish, for the slot machine gambler, there is little expertise or control which can be developed regardless, given the random number generator which controls play. This factor weighs against plaintiff's case.
Under Treasury Regulation § 1.183-2, the third factor to consider in evaluating the presence of a taxpayer's profit motive is:
Treas. Reg. § 1.183-2(b)(3) (emphasis in original). Plaintiff argues that the intensity with which plaintiff played slot machines when in the casinos in Las Vegas indicates that he had a profit motive. According to plaintiff, "Mr. Free gambled intensely in the U.S. while keeping his days limited and below 122 to remain a nonresident alien. From the moment he arrived in Las Vegas, Mr. Free would start gambling." Plaintiff argues that the fact that plaintiff did not pursue this activity full time is not dispositive, stating: "For example, the husband and wife taxpayers in
The court notes that the test here is not the same test as whether plaintiff operated with continuity and regularity. The amount of capital plaintiff committed to gambling was high, even if he did not gamble continuously and regularly. According to plaintiff, he pursued gambling more after he stepped back from his prior career at Tenabri. Factor 3 also explicitly considers the general assistance of others. "The fact that the taxpayer devotes a limited amount of time to an activity does not necessarily indicate a lack of profit motive where the taxpayer employs competent and qualified persons to carry on such activity." Treas. Reg. § 1.183-2(b);
The parties agree, and the court accepts, that factor 4, "Expectation that assets used in activity may appreciate in value," Treas. Reg. § 1.183-2(b)(4), is not relevant to plaintiff's case. (emphasis in original).
Under Treasury Regulation § 1.183-2, the fifth factor to consider in evaluating the presence of a taxpayer's profit motive is:
Treas. Reg. § 1.183-2(b)(5) (emphasis in original). Plaintiff argues that his success as a farmer contributed to the skills he utilized as a gambler:
The success of his agricultural business undoubtedly resulted in large part from Mr. Free's diligence, initiative, consistency, foresight, financial and mathematical acumen, willingness to take calculated risks, hiring outside experts and management capabilities. It was not from a text book or an Ivy League education. Mr. Free applied these same factors to his gambling business and the results have been a profit realized in 4 of 7 years.
Defendant responds that "the taxpayer must show how the elements of that previous success translate to the activity in question, and where he fails to make such a showing, the factor either carries no weight or weighs against any profit motive." Defendant also alleges that "plaintiff could not testify to any specific skill that he acquired from potato farming and then applied to slot machine gambling."
A number of United States Tax Court decisions have addressed Treasury Regulation § 1.183-2 factor 5, and have indicated that some transferrable skill needs to be identified for a prior business success to be relevant.
In the above captioned case, it is possible that plaintiff's prior success and risks encountered in building and running his agriculture business, and investing in the Mexican stock market, allowed him to feel comfortable with the risks associated with his gambling activities. The court, however, emphasizes that the text of the Treasury Regulation specifically considers "similar activities." Treas. Reg. § 1.183-2(b)(5). This implies that there must be either a similar challenge, circumstance, skill, or other characteristic involved between the two enterprises. The fact that plaintiff himself did not identify a transferrable skill from his agriculture business does not assist his claim. Plaintiff stated at his deposition:
Plaintiff's skills in the business of potato farming and agriculture in general are hardly relatable to slot gambling in Las Vegas. Regarding his stock market investments, although perhaps also more speculative, plaintiff testified he conducted significant research and consulted advisors when making investment decisions. Although his successes in farming and the Mexican stock market may have taught him diligence and risk-taking, these skills are too general to be the types of similar skills that should be recognized by factor 5 as relevant to slot machine gambling. As the court found in Hastings, the transferability of skills from a skill-based enterprise to a game of chance is suspect.
Under Treasury Regulation § 1.183-2, the sixth factor to consider in evaluating the presence of a taxpayer's profit motive is:
Treas. Reg. § 1.183-2(b)(6) (emphasis in original). The Treasury Regulation states that a "series of years in which net income was realized would of course be strong evidence that the activity is engaged in for profit." Treas. Reg. § 1.183-2(b)(6). Plaintiff argues that his alleged profitability in 2005, 2006, 2009, and 2010 indicate that he pursued this activity with a profit motive. According to defendant, however, plaintiff was not profitable in "any of the years at issue," from 2007 through 2010. As discussed extensively above, the court has found that plaintiff's accounting method and conclusions were inconsistent and not fully documented for the period 2007 through 2010, therefore, plaintiff's profitability is not a foregone conclusion for each of those years.
Treasury Regulation § 1.183-2(b)(6) also states: "[W]here losses continue to be sustained beyond the period which customarily is necessary to bring the operation to profitable status such continued losses, if not explainable, as due to customary business risks or reverses, may be indicative that the activity is not being engaged in for profit."
Under Treasury Regulation § 1.183-2, the seventh factor to consider in evaluating the presence of a taxpayer's profit motive is:
The last sentence of the regulatory subsection describing factor 7 states that, "an opportunity to earn a substantial ultimate profit in a highly speculative venture is ordinarily sufficient to indicate that the activity is engaged in for profit even though losses or only occasional small profits are actually generated."
Defendant is correct that the factor 7 test in the Treasury Regulation looks for comparisons of the amount of profits "in relation to" losses and investment. Even taking plaintiff's representation of the facts at face value, which the court does not necessarily accept, at best, plaintiff achieved one to two percent returns in 2009 and 2010, and larger losses in 2007 and 2008, indicating that his ultimate profit potential was likely negative. See
Under Treasury Regulation § 1.183-2, the eighth factor to consider in evaluating the presence of a taxpayer's profit motive is:
Treas. Reg. § 1.183-2(b)(8) (emphasis in original). Plaintiff alleges that this factor is of little value, because its genesis is in preventing income tax sheltering. "The legislative history of IRC § 183(a) and (b) indicates a particular concern about wealthy individuals attempting to generate paper losses for the purpose of sheltering unrelated income." (citing
There is no indication in the regulation's language that this factor only applies to tax shelter situations. The United States Tax Court on multiple occasions has looked to this factor without regard to whether the taxpayer's activities created any tax shelter benefits.
The plaintiff argues that his non-gambling income sources do not preclude his gambling activity as being for a profit motive, because his net income from his farming business and Mexican stock market activities constitute only "a small percentage of his total gross income when including his gambling revenue." Plaintiff maintains that his gambling income was never less than eighty-four percent of his total gross income for any of the years at issue. Plaintiff presents the following chart in his post-trial brief, comparing his United States slot machine "
(emphasis in original). Defendant argues, in response, that plaintiff's Mexican stock market income "was more than sufficient to allow plaintiff to sell his agricultural business to family members at a `cheap' discount and still enjoy a comfortable retirement while financing his gambling activities." Defendant argues that plaintiff's gambling activities correlated with income derived from his stock market returns, and that his gambling activities declined in line with lower stock market returns in 2008 and 2009, indicating that plaintiff's gambling was a luxury afforded when stock market returns allowed for it.
The plaintiff's argument, that his non-gambling income comprised only "a small percentage of his total gross income when including his gambling revenue," is inaccurate. In his post-trial brief, plaintiff states that he is comparing his gambling "
The court is not attempting to conclude how much plaintiff earned each year from his gambling or other activities. Considering the above comparison, however, even accepting plaintiff's alleged profits from slot machine gambling as correct, plaintiff's stock market activities still provided far more net income than plaintiff's Las Vegas, slot machine gambling activities for all the years at issue.
When discussing his strategy for playing slot machines, plaintiff indicated that he based his play on how much money was available from his Mexican stock market returns, and did not indicate that his gambling would promote his income pool or that he would reinvest his winnings in his gambling activities. Plaintiff testified at his deposition, when asked how he determined how much to spend gambling per trip, that "the extra money that I have every month for my capital and those were the amounts that I would gamble with." Plaintiff also stated at his interview that he started gambling less after 2007 "because I didn't get my money back from the taxes and also the — the stock market in 2008 was really bad. It lost 50 percent of its value, so that's the reason I traveled less." Plaintiff further stated that one reason he stopped gambling in September of 2011 was "the lack of money from taxes and because the year in the stock market has not been that good and all that." Based on the record, the court finds that plaintiff had significant income from sources other than his Las Vegas slot machine gambling activity, and that that income "supported a lifestyle that included lavish wagering."
Under Treasury Regulation § 1.183-2, the ninth factor to consider in evaluating the presence of a taxpayer's profit motive is:
Treas. Reg. § 1.183-2(b)(9) (emphasis in original). Plaintiff tries to maintain that he did not enjoy gambling, and points to the testimony of plaintiff's family and casino employees. According to plaintiff's post-trial brief, "Mr. Free was in Las Vegas to gamble for business—nothing more." Plaintiff also stated at his interview that his trips to Las Vegas were "as business," and not as a vacation. Plaintiff points out that his hobbies outside of Las Vegas did not typically include gambling. Plaintiff maintains that the trips to Las Vegas were fun for plaintiff's family, but that they were merely beneficiaries on plaintiff's business trips. In addition, plaintiff argues that "the fact that a taxpayer derives personal pleasure from engaging in the activity is not sufficient to cause the activity to be classified as not engaged in for profit." Defendant responds that "
Plaintiff's use of comps and that he brought his family and frieds along on his trips are not dispositive, but are among the considerations when weighing the evidence. The record before the court indicates that plaintiff concentrated on gambling when in Las Vegas. Plaintiff's daughter Ms. Dolores Free Wong, his sons-in-law Mr. Vasquez and Mr. Llamas, Mr. Aguilar, speaking from when he worked at the Mirage, and Mr. Hudson from the Wynn, all testified that plaintiff did not show signs of enjoyment, "not even a smile, anything," but was instead "very focused at what he was doing" while gambling. A taxpayer's enjoyment of an activity, or lack thereof, however, also is not dispositive as to the profit motive.
Plaintiff's focus on capturing the large jackpot, and plaintiff's preference for high-limit progressive machines, almost as a hunt, suggests a gaming purpose that was more important than deriving a profit. The facts before the court, including plaintiff's preference for high-limit progressive machines, support an overriding gaming reason for plaintiff's gambling. It appears plaintiff, who lived off his other income, would be willing to take losses for years for the chance to get the "deer," regardless if, overall, plaintiff would not make a profit from his activities. As noted, the United States Tax Court has found that just because an activity can turn a profit does not mean that the activity was intended to turn a profit. In
In sum, an evaluation of the record as a whole, measured against the Treasury Regulation § 1.183-2 factors and the case law, leads the court to conclude that plaintiff has not engaged in gambling for a profit motive during the years at issue, nor has plaintiff carried his burden of proof on the
Plaintiff argues that he should benefit from a presumption that his activity was engaged in for profit, pursuant to I.R.C. § 183(d). Plaintiff alleges that section 183(d) "provides a presumption that an activity is engaged in for profit if the activity is profitable for three (3) years of a consecutive 5-year period." Plaintiff maintains that, since by joint stipulation he had a positive net income from gambling in 2005 and 2006, and because his gambling activities were, according to plaintiff, profitable in 2009 and 2010, this presumption should be operative when reviewing his 2009 refund request (because of profitability in 2005, 2006, and 2009), and 2010 refund request (because of profitability in 2006, 2009, and 2010). Defendant argues that plaintiff is not entitled to this presumption because his gambling was not profitable in 2009 and 2010. Defendant also maintains that, "more importantly, § 183 has no application to this case, which falls under § 871 and pertains to the taxation of nonresident alien income." According to defendant, "Section 183 pertains to the computation of taxable income and limits the deduction of losses from an `activity not engaged in for profit,' and in particular, distinguishes such activities from a bona fide `trade or business' for which all ordinary and necessary expenses are deductible under [I.R.C.] § 162(a)."
I.R.C. § 183(d) states in relevant part:
Plaintiff explains that
The relevant portion of the statute, I.R.C. § 7491(a) (2006), states:
I.R.C. § 7491(a) (emphasis in original).
Plaintiff maintains that the requirement for "credible evidence" under I.R.C. § 7491 is "`the quality of evidence, which after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted,'" quoting from
Plaintiff also maintains that he cooperated with the IRS in a timely manner, and that "Defendant does not dispute that Mr. Free has cooperated with reasonable requests by the IRS for, among other things, information and documents."
Defendant responds that a "`shift in the burden of preponderance has real significance only in the rare event of an evidentiary tie." (quoting
The evidence in plaintiff's case currently before the court is not in equipoise, or in an "evidentiary tie."
After the trial, plaintiff presented a new legal theory to the court, to address a relatively recent decision by the United States Court of Appeals for the District of Columbia Circuit in
Plaintiff in the above captioned case now contends that, as a result of the District of Columbia Circuit's "correct" interpretation of I.R.C. § 871(a), even if plaintiff is not found to be a professional gambler pursuant to I.R.C. § 871(b), the general thirty percent tax under I.R.C. § 871(a) should only be applied on plaintiff's net "gain" from gambling over a specific period of time. Plaintiff alleges that the tax on "gains" in I.R.C. § 871(a) does not ask for a flat thirty percent tax on all proceeds from each individual wager, or a tax "per-bet." Instead, plaintiff argues that a nonresident recreational gambler should be able to offset his or her gambling losses from gambling winnings over a trip or a day, and be taxed on the "per-session" gains from that gambling.
In response, defendant raises a jurisdictional issue with regards to plaintiff's most recent legal theory, which was also subsequently addressed by the parties. Defendant argues that plaintiff's new legal theory is barred by the "substantial variance" doctrine, citing to
Plaintiff responds that the substantial variance doctrine only applies (1) "to prevent a taxpayer from attempting to raise an issue that was entirely separate and apart from any issue listed in the administrative claim for refund," and (2) "to prevent a taxpayer from litigating a refund claim when its administrative claim was so vague or so general that the IRS could only guess at the precise nature of the taxpayer's claim." Plaintiff maintains that, in the above captioned case, plaintiff's new argument is permissible because it is "`
Plaintiff also maintains that the key factor in the application of the substantial variance doctrine is whether or not new facts are required to resolve the additional question presented. Plaintiff acknowledges that "a taxpayer may not substantially vary at trial the
Finally, plaintiff argues, "[t]he purpose of the Variance Doctrine is to ensure that the government has `notice as to the
Whether or not the court can consider plaintiff's latest theory must be considered within the context of the jurisdictional requirements for plaintiffs to sue the United States for tax refunds. It is well established that "`subject-matter jurisdiction, because it involves a court's power to hear a case, can never be forfeited or waived.'"
Regarding a tax refund suit, "[n]o suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax . . . until a claim for refund or credit has been duly filed with the Secretary [of the Treasury]." I.R.C. § 7422 (2006).
Congress has provided strict statutory guidelines laying out the statute of limitations for the filing of a federal tax refund claim:
"[N]ew claims or theories raised subsequent to the initial refund claim are not permitted where they substantially vary from the theories initially raised in the original claim for refund."
As a Judge of this court has stated:
"The doctrine permits consideration of a claim for refund despite failure to timely file detailed formal claims with the IRS when a substantial variance from the requirements of the regulation is not involved."
The first three exceptions to the substantial variance doctrine, as well as the fifth exception, do not apply to plaintiff. First, neither party alleges that there were any technical or formal defects in plaintiff's refund claim with the IRS. Second, there is no evidence that the IRS considered plaintiff's new theory beforehand in prior dealings with plaintiff. Indeed, it is unlikely this theory was discussed prior to the issuance of the appellate decision in
The fifth exception to the substantial variance doctrine also does not apply. The purpose of the "equitable recoupment" doctrine is to allow the taxpayer a chance to introduce new theories and evidence in response to a new counterclaim filed by the government, after the case has left the jurisdiction of the IRS, and when "`the Government has taxed a single transaction, item, or taxable event under two inconsistent theories.'"
The principle underlying equitable recoupment, as articulated by the Ninth Circuit in a related context, is that "[i]t would be unfair to allow the Government to assert a new defense to a taxpayer's claim at pretrial and simultaneously to prevent the taxpayer from making appropriate responses to it, because the taxpayer had not previously anticipated the defense."
Plaintiff's new legal theory, also, is not allowed under the fourth exception to the substantial variance doctrine.
The origin of the "germaneness doctrine" lies in the United States Supreme Court decision in
In order to determine whether or not Mr. Free was engaged in a trade or business, the court examined the trial testimony and exhibits in detail, including the records of plaintiff's travels to Las Vegas, plaintiff's trip-by-trip spending, all of his available credit line and credit card withdrawals, and plaintiff's revenue, losses, and net profits at a granular level. Plaintiff's credit card and credit line withdrawals are recorded down to the day and, sometimes, the minute. Not only yearly activity summaries, but also trip-by-trip activity summaries, are in the record. Although the "amount of taxes withheld in connection with Plaintiff's gambling activities" was stipulated to by the parties on a per-year basis, all of plaintiff's 1042-S submissions were presented to the court, each of which records the day and minute the tax withholding was taken out by the casinos. Given the record developed during the trial, it would be possible for the parties and the court to recalculate plaintiff's IRS withholdings on a per-session basis.
A more critical issue, however, is the timeliness of plaintiff's new legal theory. The Federal Circuit's germaneness doctrine has generally only been applied "while the IRS still has jurisdiction over the claim."
Plaintiff tries to argue that his new legal theory was "implied" within, or integral to, his original claim in front of the IRS, and, therefore, proper notice to the IRS was given. (emphasis in original). Plaintiff argues that, "[b]y definition, a recreational gambler analysis and investigation has to be undertaken by Defendant as part of any refund claim by a taxpayer who asserts he or she is in a trade or business of gambling." Just because two legal questions are similar or appear related to each other, however, does not mean one implies the other, or is integral to the other. A good example can be found in a decision by a Judge of this court in
In the above captioned case, while the parties did not make the full record of their past interactions with the IRS available to the court for any of the years at issue, from the record available to this court, in particular the January 17, 2012 letter from Mr. Schimmer to Mr. Turpin at the IRS, it is apparent that the discussion centered around whether or not plaintiff's activity constituted a "trade or business" under I.R.C. § 871(b). As in
Plaintiff separately argues that his new "per session" legal theory only impacts the amount of recovery, not the right of recovery, and, therefore, should be allowed, despite being presented after the case left IRS jurisdiction. (internal quotation omitted). The United States Court of Claims considered a similar argument in
Neither the United States Court of Federal Claims, nor the United States Court of Appeals for the Federal Circuit, appear to have addressed this particular circumstance in a tax case, when the grounds for the new legal theory first become apparent after the case has left the jurisdiction of the IRS. The record indicates that plaintiff made a good faith effort to be open and fair in its discussions with the IRS, despite suffering numerous delays and the need to make repeated inquiries. Nonetheless, the United States Court of Appeals for the Federal Circuit has been explicit that the exception carved out of the substantial variance doctrine only applies to germane new legal theories introduced "while the IRS still has jurisdiction over the claim."
Based on a review of the testimony and record developed at trial, plaintiff has not carried his burden of proof that his slot machine gambling activities during the years of 2007 through 2010 constituted a trade or business, pursuant to I.R.C. § 871(b). Plaintiff's activity was not carried out with continuity and regularity, and plaintiff did not demonstrate a sufficient intent to generate a profit through his gambling. This court does not have jurisdiction to hear plaintiff's new legal theory, that he should be taxed as a recreational gambler on a per-session basis pursuant to I.R.C. § 871(a), instead of on a per-bet basis, because plaintiff did not raise this theory at the IRS before bringing suit in this court. Therefore, the Clerk of the Court shall enter
(emphasis in original).
