A CPA likes to gamble, and shows his gambling activity as a second business (his other business activity is his accounting practice). The IRS challenges this, claiming that he’s really an amateur gambler. The Tax Court has to decide who is right.
Ali Mohammadpour is a CPA who also likes to gamble. On his 2003 tax return, he shows his accounting practice on Schedule C. He also shows his gambling on another Schedule C. He won $84,730 while gambling. However, the petitioner lost at least as much as that, and reported a net gambling income of $0.
There’s nothing wrong with an individual having multiple businesses. Indeed, many accountants have two (or more) businesses so that during their off season they can also earn an income.
Unfortunately for the petitioner in this case, there were several questions as to whether he really was a professional. To be a professional gambler, one must, “[engage] in the gambling activity with continuity and regularity and with the primary purpose of making a profit.” This means gambling full-time, for your livelihood.
In contrast, the petitioner in this case “…dedicated approximately 900 hours to his gambling activity in 2003 (or approximately 17 hours per week on average), which appear to have been distributed over 136 days.” That’s definitely not full-time. The Court also noted that the petitioner did not show positive net gambling income in the two years prior to 2003 or in the year after (or, for that matter, the year in question).
More damaging to the petitioner’s case was his lack of recordkeeping. The IRS expects a professional to keep records, no matter what the profession. Gamblers, whether professionals or amateurs, must keep a gambling log.
“Also in contrast to the taxpayer in Commissioner v. Groetzinger, supra, petitioners did not keep reliable records of Mr. Mohammadpour’s gambling activity. This was due in part to error, and also to the fact that Mr. Mohammadpour intentionally ignored, for record-keeping purposes, bets on which he won less than $600 and which therefore were not reported to the IRS by means of Form W-2G. These winning bets of less than $600 made up approximately 10 percent of all Mr. Mohammadpour’s bets. In other words, petitioners adopted record-keeping practices which would merely approximate Mr. Mohammadpour’s gambling performance. Such is inconsistent with a conclusion that Mr. Mohammadpour engaged in his gambling activity with the primary purpose of making a profit.” [footnote omitted]
Mr. Mohammadpour was determined by the Tax Court to be an amateur. If you want to be considered a professional, you need to treat your business as a profession. Not only must you try to earn an income (a livelihood), but you need to keep complete and accurate records. In this case the petitioner was a CPA and should have known this.