Is a full time gambler in the trade or business of gambling? If the answer is yes, two results follow (one result which is good and one result which is not so good): (1) the gambler is able to deduct under Section 162 of the Code all of the ordinary, necessary and reasonable expenses incurred in carrying on the business; and (2) the net income of the gambler, if any, is subject to self-employment tax under Section 1401 of the Code.
In 1987, the United States Supreme Court was presented with the issue of whether a full time gambler was engaged in the trade or business of gambling. Commissioner v. Groetzinger, 480 US 23 (1987). Justice Blackmun issued the court’s opinion. The Supreme Court thoroughly reviewed the history of the phrase “trade or business” in the context of the Internal Revenue Code. The court stated: “[T]o be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer’s primary purpose for engaging in the activity must be for income profit. A sporadic activity, a hobby, or an amusement diversion does not qualify.” Whether a taxpayer is engaged in a trade or business is a question of facts and circumstances.
In Groetzinger, evidence revealed the taxpayer spent substantial amounts of time preparing for and actually gambling. He had been gambling for a long period of time; the activity was not sporadic. It was continuous. Mr. Groetzinger had no other “profession or type of employment.” He engaged in gambling with the intent to make a profit. The court ultimately concluded, gambling may constitute a trade or business, and based upon the facts presented, Mr. Groetzinger was engaged in the trade or business of gambling.
Mr. Groetzinger won the battle in that his victory allowed him to deduct is ordinary, necessary and reasonable expenses associated with his gambling activities. He lost the war in part because his net income (if any) would now be subjected to self employment taxes. The result was likely unsuspected by the taxpayer.
Within a few hours after my January 17, 2014 blog post, as we suspected, President Barack Obama signed the Consolidated Appropriations Act, 2014 (“2014 Act”) into law. Now, at least until September 30, 2014, our federal government may operate without interruption.
Each year, our government must pass bills that appropriate funds for all discretionary spending. In most years, a bill is passed by each of the twelve subcommittees in the House Committee on Appropriations and each of the twelve subcommittees in the Senate Committee on Appropriations.
When Congress cannot pass separate bills, it rolls the bills into one omnibus bill like the 2014 Act. This has become the norm rather than the exception over the past several years. You may be asking yourself why would Congress roll the bills into one single act rather than pass several smaller bills which will be easier for our lawmakers to review and debate. There may be many reasons, including:
- Too much party disagreement to pass individual specific bills;
- Too many issues pending before lawmakers to deal with several pieces of legislation;
- Time constraints that may prevent dealing with appropriations in a piece meal fashion; and/or
- The desire to bury in a single massive act some controversial spending provisions.
On January 15, 2014, the House, by a vote of 359-67, passed an appropriations bill to fund our federal government through September 30, 2014. The next day, January 16, 2014, the Senate passed the bill by a vote of 72-26. The bill will now make its way to President Obama for signature.
Once signed by President Obama, the bill, commonly known as the “Consolidated Appropriations Act, 2014,” will become law (the “Act”). The Act spans 1,524 pages and contains some interesting provisions. Title I of Division E of the Act focuses on the Department of Treasury.
The Act provides the IRS with a 2014 budget of $11.3 billion. This represents a budget decrease of $526 million or 4.4% from its 2013 budget.
The $11.3 billion budget is primarily allocated among four areas:
On December 17, 2013, the US Tax Court issued its opinion in Chaganti v. Commissioner, TC Memo 2013-285. The interesting issue before the court was whether the taxpayer, an attorney, was allowed under Section 162 of the Code to deduct amounts he was personally ordered to pay a trial court and opposing counsel in a case in which he was representing a client.
Mr. Chaganti was initially ordered to pay a “fine” of $262, representing the charges of opposing counsel and his court reporter, for his role in his client’s failure to appear for a deposition. When he did not pay the fine, the court held Mr. Chaganti in contempt and ordered immediate payment (with a daily penalty for late-payment). About a month later, Mr. Chaganti finally paid the fine (without the late payment penalty). Throughout the case, he engaged in behavior the judge labeled as “unnecessarily protracting and contentious.” The court eventually ruled against Mr. Chaganti’s client in the case. The other attorney asked the court for sanctions against Mr. Chaganti (not Mr. Chaganti’s client) as a result of his “bad faith, unreasonable, and vexatious multiplication of the proceedings.” The judge ultimately ordered Mr. Chaganti to pay opposing counsel around $18,000 (to compensate for the additional attorney fees incurred due to his actions) and to pay the court around $2,300 for paying the original penalty late.
On December 10, 2013, the US District Court for the District of New Jersey ended a long and drawn out saga between the IRS, and John and Francis Purciello. The court’s decision (assuming the government does not appeal) should provide the Purciellos with much needed finality and a sense of vindication to end 2013.
The Purciellos filed their joint 2000 tax return, showing a refund due of about $42,000. Although they contacted the IRS on several occasions, in writing and by telephone, inquiring about the refund, the Service failed to provide any response. In late 2002, out of the blue, the IRS notifies the Purciellos that the refund was being applied to civil penalties assessed against Mr. Purciello for tax year 1998. What civil penalties cried the Purciellos?
Apparently, on April 3, 2002, the Service assessed Mr. Purciello with trust fund penalties for two quarters of 1998 relating to a company he had worked for in a strictly sales capacity. The penalties, in the aggregate, amounted to more than $168,000.
Over the next two years, the Purciellos went back and forth with the IRS attempting to resolve the matter. While they eventually received a small refund, the bulk of their claim appeared to be unsuccessful. Consequently, the Purciellos were forced to file a claim for refund in the US District Court for the District of New Jersey.
Larry J. Brant
Larry J. Brant is a Shareholder in Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Portland Tax ForumVirtual Event, 9.24.20
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Oregon Association of Tax ConsultantsBeaverton, OR, To be rescheduled
- To be rescheduled