Decisions will be entered under
For 2005-09, P, a professional gambler who bet on horse races, deducted his net wagering losses (either incurred during the year or carried over from prior years) in contravention of
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142 T.C. 151">*152 HALPERN,
| 2005 | $22,571 | $4,514 |
| 2006 | 18,462 | 3,692 |
| 2007 | 9,918 | 1,984 |
| 2008 | 7,401 | 1,480 |
| 2009 | 5,965 | 1,193 |
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts have been rounded to the nearest dollar.
142 T.C. 151">*153 After concessions, the issues for decision are whether petitioner, a professional gambler, is, for the years at issue, (1) entitled to a deduction for his losses from wagering transactions in excess of his gains from such transactions (whether those net losses were incurred during the taxable year or used by means of a net operating loss carryover) and (2) liable for the
Some facts are stipulated and are so found. The stipulation of facts, with accompanying exhibits, is incorporated herein by this reference.
At the time the petition was filed, petitioner resided in Woodland Hills, California.
For each of the years at issue, petitioner, a certified public accountant, maintained an accounting practice, which included the preparation of tax returns for clients. He reported the income and expenses from his accounting practice on a Form 1040, U.S. Individual Income Tax Return, Schedule C, Profit or Loss From Business. During those years, petitioner was also a professional gambler whose gambling activities were limited to parimutuel wagering on horse races. To that end, petitioner placed bets on races occurring2014 U.S. Tax Ct. LEXIS 7">*9 both at California racetracks and at racetracks in other States. He reported the results from his wagering on a separate Schedule C (gambling Schedule C) for each of the years at issue. On each of the gambling Schedules C, petitioner reported the gross amount he received on (winning) bets as "Gross receipts or sales", and he reported the amounts he had bet as "Cost of goods sold", subtracting the latter from the former, to determine his gross income or his loss from 142 T.C. 151">*154 gambling. He also reported and deducted miscellaneous other expenses associated with his gambling activities42014 U.S. Tax Ct. LEXIS 7">*10 and reported the sum of his gambling winnings, losses, and miscellaneous other expenses as his income or loss (net wagering income or loss, respectively) from gambling for the year. He then combined his net wagering income or loss with his accounting practice income for the year and reported the sum of the two on page 1, line 12 of his Form 1040 as his total net "Business income or (loss)" for the year.
For each of 2005, 2006, 2008, and 2009 (gambling loss years), petitioner's net wagering loss exceeded his accounting practice income, so that line 12 of each Form 1040 reported a business loss. For 2007, in which he reported a net wagering gain, and for 2009, petitioner claimed net operating loss carryover deductions all or a portion of which, presumably, arose out of unused net wagering losses incurred in prior years. Among respondent's adjustments for each of the gambling loss years is the disallowance of petitioner's deduction for his net wagering losses on the basis of
Petitioner bases his argument that he is entitled to deduct his wagering losses in excess2014 U.S. Tax Ct. LEXIS 7">*11 of his wagering gains under
Before addressing petitioner's arguments, we will describe the concepts of parimutuel wagering and takeout.62014 U.S. Tax Ct. LEXIS 7">*12
In parimutuel wagering, applicable to, among other events of chance, betting on horse races, the entire amount wagered is referred to as the betting pool or "handle". The pool can be managed to ensure that the event manager (in horse racing, the track) receives a share of the betting pool regardless of who wins a particular event or race. That share is referred to as the takeout, and the percentage, set by State law, varies from State to State, generally ranging from 15% to 25% and often depending upon the type of bet, e.g., "straight" or "conventional" win, place, or show wagers or "exotic" (multiple horse or multiple race) wagers, the latter 142 T.C. 151">*156 usually resulting in higher takeout percentages.7 The takeout is used to defray the track's expenses, including purse money for the horse owners, taxes, license fees, and other State-mandated amounts. What remains from the takeout after those liabilities are provided for constitutes the track's profits. The takeout may also be used to cover any shortfall in the amount available in the parimutuel pool, after reduction for takeout, to pay off the winning bettors. That circumstance, generally referred to as the2014 U.S. Tax Ct. LEXIS 7">*13 creation of a "minus pool", arises by virtue of the requirement, in many States, that the track provide a minimum profit to winning ticket holders. See, e.g.,
Petitioner argues that, in extracting takeout from the betting pools, "[t]he tracks are acting in the capacity of a fiduciary, i.e., collection of taxes and fees which they are remitting to the different state and local tax authorities." He likens the process to that of an "employer collecting payroll taxes from the employees and remitting them to the IRS and the state agencies." He argues that his pro rata share of the 142 T.C. 151">*157 takeout constitutes the business expense of a professional gambler and, as such, is not a loss from wagering transactions subject to disallowance under
At trial, petitioner argued that he is entitled to deductions or losses under
Petitioner argues that Professional gamblers should be allowed the same protection as any other profession when the activity is legal and conducted as a profession. In a lawful and democratic society, Congress enacted this law many decades ago, only because at that time, "gambling was taboo". Now gambling is legal in most States in the Union and this law is unjust, not interpreted correctly. In my opinion the intention of Congress, even then, was not to penalize any profession but to prevent abuse when it was conducted as a recreation. The moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many years ago. Not only has tournament poker become a nationally televised event, but casinos or lotteries can be found in many States. Further, the ability for the Internal Revenue Service to accurately track money being lost and won has improved, and some of the substantiation concerns, particularly for professionals, no longer exist. That said, the Tax Court is not free to rewrite the Internal Revenue Code and regulations. We are bound by the law as it currently exists, and we are without the ability to speculate on what it should be. * * *
Lastly, petitioner relies on
With respect to petitioner's alleged right to a deduction for his pro rata share of the takeout, respondent argues (1) because takeout is paid from the pool remaining from losing bets,10 it "is inseparable from the wagering transaction and constitutes wagering losses" subject to the
With respect to petitioner's equal protection argument, respondent points out that, in
Petitioner makes no argument that a parimutuel betting pool is either a cost-sharing arrangement or a business entity (such as a partnership) in whose profits and losses he is entitled to share. His only argument is that, on his behalf, the track was paying his expenses, of a type, such as taxes and license fees, that he could deduct as, for instance,
The term "association" is defined in
142 T.C. 151">*161 Petitioner's attempt to analogize the track's retention and disbursement of takeout to an employee's payroll tax obligations with respect to his employees is misguided. First and foremost, none of the payments the track makes from the handle discharge any obligation of any bettor. And while reduction of the parimutuel pool by the amount of the takeout reduces the amount in the pool available to pay winning wagers (i.e., it reduces the bettor's odds should he win12), none of the takeout can be said to come from a winning bettor's wager, which in all events must be returned to him in full and with at least a small profit.13 Nor can the takeout be said to add to the loss of a losing bettor, who loses the same $2 whether the takeout is 15% of the handle, 20% of the handle, or none of it on2014 U.S. Tax Ct. LEXIS 7">*23 account of a minus pool so deep as to deprive the track of any take after paying all winning wagers.142014 U.S. Tax Ct. LEXIS 7">*24 Moreover, not being an obligation or expense of the bettor, takeout cannot qualify as the bettor's deductible 142 T.C. 151">*162 nonwagering business expense under
On the basis of the foregoing, we hold that petitioner is not entitled to a passthrough deduction, under
We agree with respondent that the reasoning in our Opinion in
Lastly, we note that petitioner's reliance on our decisions in
Petitioner is not entitled to deduct all or any portion of his net gambling losses.
A substantial understatement of income tax exists for an individual if the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000.
The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances. * * * Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of * * * law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer. * * *
Under
On brief, petitioner argues that he "should not be liable for the
Moreover, petitioner, a certified public accountant with an active tax preparation practice, and admittedly aware of
Petitioner is liable for the
1. Petitioner filed a petition with respect to 2005 and 2006 (docket No. 21212-10) in the name of Shiraz Noormohamed Lakhani and a petition with respect to 2007-09 (docket No. 24563-11) in the name of Shiraz Lakhani. The cases were consolidated by order of this Court dated August 17, 2012.↩
2. There are also certain computational adjustments that follow from the adjustments at issue, but they are not in controversy, and we need not discuss them.
3. Petitioner in his answering brief has not made reference by number to those findings of fact proposed by respondent to which he objects, as required by
4. Although the miscellaneous other expenses petitioner deducted for 2005 and 2006 are treated as nondeductible in the notice covering those years, respondent now concedes their deductibility on the grounds that they constitute deductible nonwagering business expenses of a professional gambler.
5. Petitioner's disallowed net wagering losses for the gambling loss years were as follows:
| 2005 | $81,793 |
| 2006 | 110,196 |
| 2008 | 60,454 |
| 2009 | 36,240 |
6. It is interesting to note that the nature of parimutuel betting came before our predecessor, the Board of Tax Appeals, in its first year. See The question before us resolves itself to this: What was the actual gain resulting to the taxpayer from his handbook operations? In the pari mutuel system of wagering on horse racing the odds are fixed after the race is won. All the money bet forms a pool out of which payments of a fixed percentage are made to the State and to the licensed commission under whose auspices the races are run, the residue being apportioned to the bettors. Thus the track odds determined. * * *
7. The various types of straight or conventional wagers (i.e., bets to win, place, or show) and exotic wagers (e.g., exacta, quinella, and trifecta bets) each form separate and distinct parimutuel betting pools.
8. The deductibility of petitioner's 2007 wagering losses is not in dispute because they did not exceed his 2007 wagering gains. Therefore, they are fully deductible against those gains under
9. It is unclear whether petitioner is arguing that he should be able to deduct those amounts in full or only that presumably lesser portion of each amount corresponding to the taxes and license fees paid by the track. On brief, he asks that we uphold his deducting the amounts that "he paid to the race tracks for taxes and licenses which in turn paid the same to the state and local [government]". The distinction is of no matter since we reject his argument that he is entitled to any deduction on account of takeout.
10. As noted
11. Petitioner's testimony at the trial, in which he agreed with respondent's counsel that "all my bets are not on California horse tracks only", indicates that a substantial portion of his bets, probably a majority, were placed at tracks in California, his State of residence. Thus, California law applicable to takeout is particularly relevant to petitioner. Moreover, the various descriptions of parimutuel betting, in general, and takeout, in particular, available on the Internet indicate that California's treatment of takeout is typical of the other States where horse racing and parimutuel betting are permitted.
12. For example, assume 20% of a $100 parimutuel bet-to-win pool (i.e., $20) is wagered on a particular horse, and that horse wins. If the track's takeout with respect to that pool is 20%, so that only $80 is available to pay the winners, the odds on that horse to win will have been 3:1; i.e., the $20 bet on the horse will return to the bettors $80 (the original $20 bet plus a $60 (
13. And since the amount paid out from the pool is net of takeout, no winner needs a deduction to make the amount distributed to him correspond to the sum of (1) his wager and (2) his taxable gain.↩
14. Petitioner virtually concedes that point on brief when he emphasizes the function of the takeout, noting that "racetracks do not operate for free,
15. The problem of unreported gambling gains has been mitigated, but not eliminated, by the payor's obligation to report and, in some cases, withhold Federal and State taxes from large winnings.
16. Although petitioner did not incur (and, therefore, did not report) a net wagering loss for 2007, there was, nonetheless, a substantial understatement of income tax for that year attributable to petitioner's carryover of net wagering losses from prior years.
