Gambling losses are exempt from itemized deduction 3%-cutback. Gambling losses are not an adjustment (add-back) in calculating Alternative Minimum Tax (AMT). The AGI Problem. Gambling winnings increase Adjusted Gross Income (AGI) but gambling losses do not decrease AGI (except for a Professional Gambler). Even if an equal amount of gambling. Gambling losses. Gambling losses were simultaneously spared, strengthened, and neutered under the TCJA. Gambling winnings historically have been reportable on page 1 of an individual taxpayer’s Form 1040, and this has not changed. Gambling losses historically have been reportable on Sch. A, as an itemized deduction, and that too has not changed. Gambling Losses You may deduct gambling losses only if you itemize your deductions on Schedule A (Form 1040 or 1040-SR) (PDF) and kept a record of your winnings and losses. The amount of losses you deduct can't be more than the amount of gambling income you reported on your return. May 26, 2016  The deduction for gambling losses is taken as a miscellaneous itemized deduction. The 2%-of-adjusted-gross-income floor that applies to most miscellaneous itemized deductions does not apply to gambling losses. (Professional gamblers may treat losses as a deductible business expense.) Taxpayers who are subject to the alternative minimum tax (AMT. Treatment of Amateur Gambler's Losses. Any excess losses cannot be carried forward; they simply go up in smoke. On the plus side, the deduction for gambling losses is not subject to the dreaded 2%-of-adjusted-gross-income floor that applies to most miscellaneous itemized deductions and the deduction is fully allowed under the alternative minimum tax (AMT) rules.

• Are Gambling Losses Deductible For Amt Taxes
• Deductible Gambling Losses
• Itemized Deduction Gambling Losses
• Are Gambling Losses Deductible For Amt 2016
• Are Gambling Losses Deductible For Agi

STATE OF MINNESOTA

IN SUPREME COURT

A05-656

Tax Court

Anderson, Paul H., J.

Estelle Busch,

Relator,

vs.

Filed: May 11, 2006

Officeof Appellate Courts

Commissioner of Revenue,

Respondent.

S YL L A B U S

When the taxpayer inthis case claimed her gambling losses as Schedule C business losses on herfederal income tax return and this claim was not rejected by the InternalRevenue Service after an audit of the taxpayer’s tax return, the Commissioner ofRevenue retained the right to make an independent assessment of the taxpayer’s taxliability to the state of Minnesota.

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A taxpayer’sexpectation of profit from a given activity need not always be reasonable forthe activity to qualify as a trade or business.

Under thecircumstances of this case, a taxpayer’s slot machine gambling constitutes atrade or business because the taxpayer considered playing slot machines to be herjob, spent from 40 to 60 hours per week at a casino for over a two-year period,intended to make a profit via her gambling, conducted research into slotmachine strategy, and attempted to apply skill to her gambling activity.

Reversed.

Considered and decidedby the court en banc without oral argument.

O PI N I O N

ANDERSON, Paul H., Justice.

Relator EstelleBusch’s Minnesota individual income tax returns for 1999, 2000, and 2001 wereaudited by the Commissioner of Revenue and as a result Busch was assessed$102,245 in additional taxes, plus interest, under the Minnesota AlternativeMinimum Tax. The additional assessment was based on Busch’s gamblingactivity. Busch played slot machines extensively, winning substantial amountsof money, but losing more money than she won. Under the Minnesota AlternativeMinimum Tax, a taxpayer cannot deduct gambling losses unless they are incurredas part of the taxpayer’s trade or business. Minn. Stat. § 290.091, subd. 2(2004). The commissioner concluded that Busch was not engaged in the trade orbusiness of gambling and therefore disallowed her gambling loss deductions. Busch appealed, and the Minnesota Tax Court affirmed the commissioner’sdetermination that Busch’s gambling did not constitute a trade or business, andthat the commissioner’s review was not barred by a possible IRS determination. Busch, who represented herself in these legal proceedings, appealed the tax court’sjudgment. We reverse.

The parties agreedat the tax court hearing that the facts of this case are essentially undisputed. Busch held several jobs before 1998, including administrative assistant,teacher, police dispatcher, landlord, and building renovator. She did notgamble until 1998. Upon reaching 65 years of age in 1999 and quitting herprevious occupations,[1]Busch began to spend a considerable amount of time playing the slot machines atMystic Lake Casino. By the year 2001 she was spending between 40 to 60 hoursevery week playing the slot machines. Busch testified that she had readseveral articles “on the computer” regarding slot machine play and talked to Mystic Lake employees and customers about which slot machines were “rolling” favorably tothe gamblers.[2] Additionally, Busch kept detailed records of her gambling winnings and losses. However, Busch admitted she was not an expert on how slot machines worked and thatshe chose slot machines as a method of gambling because “it didn’t take a greatdeal of knowledge to play a slot machine.” Busch told the tax court that, forher, gambling was not entertainment, but “just plain hard work.”

It is undisputedthat Busch sought to gain a profit at the slot machines and that she believedshe was good at telling whether a slot machine was rolling favorably to theplayer. Her winnings each year were substantial—$79,482 in 1999, $430,280 in2000, and $972,980 in 2001, but she asserted and the tax court found that herlosses always at least equaled her gains—she claimed $79,482 in losses in 1999,$430,280 in 2000, and $1,161,824 in 2001. Busch initially deducted her 1999and 2000 gambling losses as Schedule A itemized deductions on her federal taxreturns. In 2001, Busch claimed her gambling losses as a deduction on ScheduleC, which is the form used for trade or business deductions.[3] She then amended her 2000 return to claim her gambling losses on Schedule C.

On August 14,2002, the Minnesota Department of Revenue notified Busch that the departmenthad audited her 1999 tax return and had assessed an additional tax under Minnesota’s Alternative Minimum Tax (AMT). The additional tax was assessed becausegambling losses may not be deducted from gambling winnings under the MinnesotaAMT unless the losses are incurred in the course of a trade or business. Minn.Stat. § 290.091, subd. 2. The result of the audit was that Minnesota taxed Busch on her 1999 gambling winnings without any deduction for gambling losses,despite the fact that she had lost more money than she had won. In December2002, the revenue department notified Busch that it also had audited her 2000and 2001 returns, and was similarly assessing additional Minnesota AMT taxes onBusch’s gambling winnings for those years. Altogether, Busch was assessed$102,245 in additional taxes, plus interest. Busch appealed the tax assessmentsto the Commissioner of Revenue (the commissioner).

Meanwhile, inAugust 2004, the Internal Revenue Service (IRS) conducted an audit of Busch’s 2001federal income tax return wherein one of the IRS’s specific enumeratedquestions for Busch was: “It appears you are treating your gambling activity asa business. If so, what are your reasons for treating this as a business?” Asa result of this audit, the IRS made minor adjustments to Busch’s 2001 taxreturn, but did not move Busch’s gambling losses from Schedule C to Schedule Aor otherwise comment on the losses.

In response toBusch’s administrative appeal of the department’s audit, the commissionerexamined Busch’s returns, reviewed her arguments, and concluded that Busch’sgambling did not constitute a trade or business. Busch then appealed thecommissioner’s decision to the Minnesota Tax Court. Following a hearing, thetax court concluded that Busch had not overcome the presumptive validity of thecommissioner’s determination and affirmed the commissioner’s audit assessment. Busch v. Comm’r of Revenue, No. 7590-R (Minn. T.C. March 2, 2005) (slipop. at 9). The court noted that Busch’s slot machine play involved no skill orresearch and was entirely dependent on chance. Id. The court alsonoted that Busch admitted she was not a slot machine expert and that her “personalsituation” suggested that she was not trying to earn a living from gambling. Id. As such, the court concluded that Busch’s gambling activity was more of a hobbythan a trade or business. Id. at 8. The court further stated that “theexpectation of making a profit must be a realistic one” for the activity toqualify as a trade or business. Id. at 9. Busch petitioned our courtfor review, and we issued a writ of certiorari.

I.

Busch first claimsthat the IRS has already ruled that it was acceptable for her to deduct hergambling losses as trade or business deductions and that the commissioner maynot contradict the IRS’s ruling. Busch points out that during the IRS’s auditof her 2001 federal income tax return, the IRS asked if she was treating hergambling activity as a business, and if so, to identify her reasons for suchtreatment. Busch argues that this inquiry indicates that the IRS specificallyexamined Busch’s claim that gambling was her trade or business, and that theIRS’s failure to contest that claim or move her gambling loss deductions fromSchedule C to Schedule A means that the IRS concluded that she was in fact engagedin the trade or business of gambling.[4] While Busch does not specifically identify it as such, Busch’s argumentappears to be a collateral estoppel argument.

When parties have agreedto the underlying facts, we need consider only whether the law was appliedproperly. See Mayo Collaborative Services, Inc. v. Comm’r of Revenue,698 N.W.2d 408, 412 (Minn. 2005). Here, the parties disagreed whether Buschwas engaged in a trade or business, but agreed as to the essential underlyingfacts; thus, our review is de novo. We have held that collateral estoppelapplies when the particular tax matter has been previously adjudicated by afederal court. Tarutis v. Comm’r of Revenue, 393 N.W.2d 667, 669 (Minn. 1986). For collateral estoppel to apply, the following four factors must befulfilled: (1) the issue must be identical to one in a prior adjudication; (2) inthe prior adjudication, there must have been a final judgment on the merits; (3)the estopped party must have been a party or in privity with a party to theprior adjudication; and (4) the estopped party must have been given a full andfair opportunity to be heard on the adjudicated issue. Id.

We have said thatwhen the IRS has failed to adjust or correct a taxpayer’s federal return,collateral estoppel does not apply because there was no prior adjudication andthe commissioner was neither a party nor privy and therefore has no opportunityto be heard. Id. Moreover, in Weed v. Comm’r of Revenue, westated that even if the IRS had made a determination of a taxpayer’s federaltaxable income, the commissioner was not foreclosed from adjusting thetaxpayer’s state taxable income. 550 N.W.2d 285, 289 (Minn. 1996). Even when Minnesota tax law incorporates the federal law, the commissioner is not necessarily boundby the IRS’s determinations. See id.; see also Specktor v. Comm’r ofRevenue, 308 N.W.2d 806, 809 (Minn. 1981). In Specktor, we notedthat in Minnesota the commissioner has the authority to examine tax returns andorder adjustments of individual taxes, which authority would have no meaning ifthe IRS’s action or lack thereof were always to govern the outcome.[5]Id.

Busch seeks tosupport her position by citing several Minnesota Tax Court cases that holdthat, when a taxpayer has, after an audit, come to a settlement with the IRSregarding the amount of the taxpayer’s gross income for the audited year, thetaxpayer cannot contest that gross income figure when it is used to compute thetaxpayer’s Minnesota liability. DeBoer v. Comm’r of Revenue, No. 6712,1997 WL 675466, at *3 (Minn. T.C. Oct. 27, 1997); Yocum v. Comm’r of Revenue,No. 5697, 1992 WL 15465, at *2 (Minn. T.C. Jan. 22, 1992). Though decisions ofthe tax court may be persuasive, they are not binding on our court. A&HVending Co. v. Comm’r of Revenue, 608 N.W.2d 544, 546 (Minn. 2000). Moreover,the cases cited by Busch deal with a different circumstance. For example, in DeBoerand Yocum, the taxpayers were audited by the IRS and consented inwriting to a higher gross income than they originally claimed. DeBoer,1997 WL 675466, at *3; Yocum, 1992 WL 15465, at *2. Then thecommissioner used these federal gross incomes to determine the taxpayers’ stateincome tax liability. Id. In such cases, collateral estoppel is moreapplicable because the commissioner is trying to hold the taxpayer to anagreement to which the taxpayer was a party. Here, Busch is attempting to holdthe commissioner to a determination to which the commissioner was not a party.[6] Because the line of cases cited by Buschdeals with a circumstance wherein the income that the commissioner calculatedfor Minnesota tax purposes was the same as the taxable income the taxpayer hadalready expressly agreed to for federal income tax purposes, we conclude thatthe cases are inapplicable.

We also concludethat when the issue of Busch’s Minnesota tax liability came before the taxcourt, there had been no final adjudication of whether Busch’s gamblingactivity constituted a trade or business. The arguable IRS determination thatBusch’s gambling constituted a trade or business was not the result of fairlycontested litigation in court or any inquiry where the commissioner wasincluded as a party. Therefore, collateral estoppel does not apply. We holdthat under the facts of this case and our prior case law, the commissioner hasthe right to make an independent assessment of Busch’s state tax liability regardlessof any IRS determination as to the status of Busch’s gambling activities as atrade or business.

II.

We must now determinewhether Busch is correct in her claim that her gambling activity constituted atrade or business and therefore she should be allowed to deduct her gamblinglosses to the extent of her winnings for purposes of calculating her MinnesotaAMT. But before doing so, we must determine the correct standard of review forthe tax court’s decision under the AMT. As mentioned above, when parties agreeto certain underlying facts, we need consider only whether the law was appliedproperly, and therefore our review is de novo. See Mayo Collaborative Servs.,Inc.,698 N.W.2d at 412. Here, the parties agreed at trial that thefacts were undisputed and the only question before the court was the applicationof the law to the facts. There is no fact question here as to the nature andpurpose of Busch’s gambling activities. Therefore, the question before us iswhat the law is and how it is to be applied to the undisputed facts. Accordingly,we review the tax court’s decision de novo.

The Minnesota AMT,like the federal AMT, was created to reduce the ability of certain wealthy individualsto avoid payment of individual income tax by using the numerous tax deductionsor exemptions available under the regular tax formula. Minnesota House ofRepresentatives Research, The Minnesota Individual Alternative Minimum Tax(July 2005). Minnesota Statutes § 290.091 (1978) contains the rules forthe Minnesota AMT. The AMT is an alternative tax formula, which limitsdeductions and exemptions. See Minn. Stat. § 290.091 (2004). AMinnesota taxpayer is required to compute the amount of his or her Minnesota incometax each year under both the regular Minnesota formula and the AMT formula, paythe tax due under the regular formula, then pay an additional tax in the amountof the tax calculated under the AMT minus the regular tax. See Minn.Stat. § 290.091, subd. 1.

Under both the Minnesota and federal regular tax formulas, taxpayers may claim an itemized deduction forgambling losses to the extent of their winnings. See Minn. Stat. § 290.01,subd. 19; 26 U.S.C. § 165(d) (2000). For the purpose of computing federal alternativeminimum taxable income, the taxpayer may still take this deduction. 26 U.S.C.§§ 55(b), 56, 67(b), 165(d) (2000). But under Minnesota law, except in limitedcircumstances, a taxpayer may not deduct gambling losses when computing his orher Minnesota AMT. See Minn. Stat. § 290.091, subd. 2.[7] Therefore, in calculating the Minnesota AMT, a taxpayer’s gambling winnings areincluded in taxable income, but the taxpayer cannot deduct gambling losses.

The exception tothe rule that a taxpayer may not deduct gambling losses under the Minnesota AMTis the trade or business deduction. See Minn. Stat. § 290.091, subd. 2(beginning the calculation of Minnesota alternative minimum taxable income withthe taxpayer’s federal alternative minimum taxable income); 26 U.S.C. § 62.[8] The Minnesota AMT, while disallowing certain itemized deductions allowed by thefederal AMT, still allows trade or business expenses to be deducted fromtaxable income. Seeid. Therefore, if a person is engaged inthe trade or business of gambling, he or she would be able to deduct his or hergambling losses from adjusted gross income as trade or business expenses forthe purposes of both the federal and Minnesota AMT.[9]

There are two waysto view Busch’s gambling activities for taxation purposes. Under one theory,Busch was a serious gambler who believed she would make a profit and sought todo so, and therefore she should receive a trade or business deduction as doesanyone else who is engaged in a trade or business. Under the second theory,Busch worked until retirement, then began gambling, which she enjoyed as entertainment. Under this second theory, Busch did not “lose” money; rather, she won aconsiderable sum and then spent it on entertainment. This type of loss isknown as a “hobby loss.” See Michelle B. O’Connor, The PrimaryProfit Objective Test: An Unworkable Standard?, 27 Loy.U.Chi.L.J. 491,498-99 (Spring 1996). Hobby losses often arise from activities that appear onsome level to be a “trade or business,” but are actually a sporadic activity,hobby, or entertainment that does not qualify as a trade or business for taxpurposes. See, e.g., Brook,Inc. v.Comm’r, 799 F.2d 833, 839 (2nd Cir. 1986) (holdingthat club’s deduction of losses it suffered in providing food to nonmembers wasnot authorized as the sales were not engaged in for a profit); Ruben v.Comm’r, No. 87-7079, 1988 WL 79313, at *1 (9th Cir., April 4, 1998) (concludingthat appellant’s horse ranching operations were not a trade or business). Thequestion before us is whether Busch’s losses from her gambling activity shouldbe treated as trade or business losses or as “hobby losses.”

Busch claims that sheis entitled to take her gambling losses as a trade or business deduction,asserting that she considered playing the slot machines to be her “work.” Shepoints to the up to 40 to 60 hours per week that she spent at a casino over athree-year period. While conceding that her expectation of earning a profit mighthave been unreasonable, Busch claims she had such an expectation and that thisexpectation, in addition to the regularity of her slot machine play and herresearch into slot machine strategy, shows that she was engaged in gambling asa trade or business.

The commissioner contendsthat some forms of gambling can constitute a trade or business, but Busch’sgambling did not because it involved no skill and making any money via gamblingon the slot machines is entirely a matter of chance.^[10] The commissioner’s audit orderstated that:

A Professional Gambler is one who hasattained a certain level of skill in a gaming activity whereby he or she makestheir living off of the net winnings in the business. Professional gamblersexist only in activities where skill is a factor in winning, not only the luckof the game. Such activities include black jack, poker (where legal), and thoroughbredhorse racing. On the other hand, games such as bingo, pull-tabs, scratch-offsand slot machines are simply games of chance with no skill factor to providehigher odds of winning.

The commissioner concluded thatBusch’s “entire gambling winnings and losses were incurred by playing the slotmachines, therefore the activity would not qualify as a business.” The commissionerdid go on to comment on other factors, however, such as that Busch spent threeyears gambling without making a profit, and that she spent her savings andretirement funds on gambling. On appeal, the commissioner also notedthat Busch could not remember any specific written materials she had studied onslot machine play and that she admitted to having no particular expertiseregarding slot machines. Additionally, the commissioner noted that Busch neversupported herself on her winnings. The commissioner asserts that these factorsindicate that for Busch, gambling was a “form of entertainment” that sheenjoyed and began to engage in only after she had retired.

As yet, we havenot squarely addressed the question of whether gambling may constitute a tradeor business under Minnesota tax laws. But the United States Supreme Court, inthe case of Commissioner of Internal Revenue v. Groetzinger, addressedthe question of whether and when gambling may constitute a trade or businessunder federal tax law. 480 U.S. 23 (1986). Additionally, in its regulations,the IRS has set forth a number of nonexclusive factors to be considered whenmaking a determination whether a taxpayer’s activity is a trade or business. SeeTreas. Reg. § 1.183-2(b) (1972).

In our analysis, wewill first consider the relevancy of the Supreme Court’s holding in Groetzingerand the IRS factors in determining whether Busch’s gambling activityconstitutes a trade or business. We will then consider the commissioner’s andthe tax court’s conclusions that a taxpayer must have a reasonable expectationof profit from a given activity in order for the activity to qualify as a tradeor business.

A. Commissionerv. Groetzinger

In Groetzinger,the Supreme Court was asked to determine whether Groetzinger’s gamblingactivity constituted a trade or business under the federal tax code. Groetzinger,480 U.S. at 24. Because Groetzinger applies to the federal tax code andthis case concerns the Minnesota tax code, Groetzinger does not controlour decision. But Groetzinger is still persuasive authority, particularlybecause the Minnesota tax code incorporates sections of the federal tax code,including the trade or business sections. Minn. Stat. § 290.01, subd.19 (2004) (defining Minnesota net income as the federal taxable income, withspecified exceptions); 26 U.S.C. § 62, 162 (providing that trade orbusiness expenses are allowed as a deduction to federal adjusted gross income);see Wilson v. Comm’r of Revenue, 656 N.W.2d 547, 552 (Minn. 2003) (“Whenwe interpret a clause of our state constitution that is identical to a clauseof the federal constitution, a decision of the United States Supreme Court isof inherently persuasive, but not necessarily compelling, force.”). Therefore,we will consider the Court’s reasoning in Groetzinger.

In Groetzinger,the taxpayer, Groetzinger, after losing his job, had begun betting on greyhounddog races full time. 480 U.S. at 24. Groetzinger went to the racetrack sixdays a week, spending approximately 60-80 hours per week at the racetrack. Id. He had no other employment, regularly studied racing forms, programs, and othermaterials, and kept a detailed accounting of his wins and losses. Id. at 24-25. But despite all this effort, Groetzinger lost more than he won. Id.at 25. Under the law at that time, Groetzinger was subject to thefederal AMT and his losses were not deductible unless they were incurred aspart of a trade or business. Id. The United States Tax Court held thatGroetzinger’s gambling activity qualified as a trade or business, and theSeventh Circuit Court of Appeals affirmed the Tax Court’s decision. Id. at 26.

On appeal, the SupremeCourt affirmed, holding that gambling can constitute a trade or business, evenif the gambler/taxpayer does not make a profit. See id. at 33. TheCourt stated that if a person “devotes his full-time activity to gambling, andit is his intended livelihood source, it would seem that basic concepts offairness * * * demand that his activity be regarded as a trade or business.” Id. The Court then went on to say that resolution of the issue of whether thetaxpayer is gambling as a trade or business “requires an examination of thefacts in each case.” Id. at 36 (quoting Higgins v. Comm’r,312 U.S. 212, 217 (1941)). The Court stated that “to be engaged in a trade orbusiness, the taxpayer must be involved in the activity with continuity and regularityand that the taxpayer’s primary purpose for engaging in the activity must befor income or profit. A sporadic activity, a hobby, or an amusement diversiondoes not qualify.” Id. at 35. Finally, the Court concluded thatGroetzinger had met the trade or business standard. The Court said:

[I]f one’s gambling activity is pursuedfull time, in good faith, and with regularity, to the production of income fora livelihood, and is not a mere hobby, it is a trade or business within themeaning of the statutes with which we are here concerned. Respondent Groetzingersatisfied that test in 1978. Constant and large-scale effort on his part wasmade. Skill was required and was applied. He did what he did for alivelihood, though with a less-than-successful result. This was not a hobby ora passing fancy or an occasional bet for amusement.

Id. at 35-36.

The main factorsconsidered by the Supreme Court in Groetzinger were the regularity ofGroetzinger’s gambling, the effort he exerted, the skill that he applied, andhis intent to produce a livelihood via gambling. See id. While Busch’sslot machine gambling involved no provable skill, she did gamble 40-60 hoursper week, which is with as much or more regularity than traditional employment requires. She also kept scrupulous records and read articles “on the computer” regarding theuse of slot machines. Finally, her intent to make a profit via her gamblingactivity was acknowledged by the commissioner at the tax court hearing. In Groetzinger,the Court gave much weight to the time and effort distinction; the Courtappears to have considered a hobby as something one is involved in part time oras a side activity. Under the Groetzinger factors, Busch’s gamblingappears to qualify as a trade or business as she gambled full time, madeattempts to improve her “skill” at using slot machines and to apply that skill,kept detailed, businesslike records of her winnings and losses, and engaged inthe gambling activity intending to gain a profit and possibly a livelihood.

B. The IRS“activity engaged in for profit” factors

As mentionedabove, the IRS has set forth a number of nonexclusive factors to be consideredwhen determining whether a taxpayer’s activity constitutes a trade or businessfor tax purposes. See Treas. Reg. § 1.183-2(b). These factors include:(1) the manner in which the taxpayer carries onthe activity (e.g., keeping records in a businesslike way); (2) the expertiseof the taxpayer or his advisors; (3) the time and effort expended by thetaxpayer in carrying on the activity; (4) the expectation that assets used in theactivity may appreciate in value; (5) the success of the taxpayer in carryingon other similar or dissimilar activities; (6) the taxpayer’s history of incomeor losses with respect to the activity; (7) the amount of occasional profits,if any, which are earned; (8) the financial status of the taxpayer; and (9)elements of personal pleasure or recreation. Id. The IRSstresses that these factors are nonexclusive and that the ultimate determinationof whether an activity qualifies as a trade or business for taxation purposesdepends on the specific facts of the situation.[11]Id.Like the criteria articulated in Groetzinger, theIRS factors are not binding on our court because they apply to the federal tax code,but they are still instructive because, as previously noted, the Minnesota tax code incorporates aspects of the federal tax code. See Minn. Stat. §§290.01, subd. 19, 290.091, subd. 2.

When applying the IRSfactors, we are left with the clear impression that Busch’s case presents aclose call; nevertheless, we believe that overall, the most relevant factorsweigh in Busch’s favor. Some factors admittedly do not favor Busch. Forexample, the second factor—the expertise of thetaxpayer or her advisors—weighs against Busch in that she openly admits thatshe is not an expert on how slot machines work. The fourth factor is theexpectation that assets used in the activity may appreciate in value; this factoris not relevant because Busch did not acquire any assets in her gamblingpursuits. The fifth factor is the success of the taxpayer in carrying on othersimilar or dissimilar activities. Busch had no reported success in any othergambling activities and acknowledged that she had not undertaken any. Underthe sixth factor, the IRS also considers the taxpayer’s history of income orlosses with respect to the activity. This factor weighs against Busch, as shenot only did not make money, she lost considerable sums consistently for threeyears.[12]

But at least four ofthe IRS factors favor Busch’s position, and we believe that these factors arethe most applicable and meaningful to her case. For example, the first factorthe IRS considers is the manner in which thetaxpayer carries on the activity. Busch has scrupulously kept records andreported income, which suggests that her gambling was a trade or business. Thethird IRS factor is the time and effort expended by the taxpayer in carrying onthe activity. Busch expended a significant amount of time on gambling, up to60 hours per week. The seventh IRS factor is the amount of occasional profits,if any, which are earned. Busch did win several jackpots, which may have providedher with short-term profits. Under the eighth factor, the IRS considers the financialstatus of the taxpayer—whether the taxpayer has another job or substantialincome from another source. Busch’s income came entirely from other sources,specifically her savings and retirement funds, but she had no occupation otherthan her claimed gambling occupation during the relevant tax years. Thissuggests that Busch intended to devote herself to gambling as a possible meansof earning a living and was simply unsuccessful in making any money.

We conclude thatoverall, both the Groetzinger factors and the IRS factors narrowly supportBusch’s contention that she engaged in gambling as a trade or business. While,as mentioned above, neither the Groetzinger factors nor the IRS factorsare binding on our court, they help to inform our decision here and support aconclusion that Busch’s gambling did constitute a trade or business for thepurpose of computing her Minnesota tax liability.

C. Reasonableexpectation of profit

The commissionerand the Minnesota Tax Court both appear to have based their conclusions thatBusch’s gambling did not constitute a trade or business in large part on theirdetermination that her expectation of profit was not reasonable. Slot machinesare programmed for the gambler to lose. Over time and despite Busch’sassertion that she could tell which machines would pay out, she never made aprofit. Indeed, she lost money steadily for three years. Under thesecircumstances, it is fair for the commissioner to assert that Busch’s beliefthat she could make a profit was unreasonable.

Are Gambling Losses Deductible For Amt Taxes

On this point wefind the IRS regulations informative and helpful. In its regulations regarding “Activities not engaged in for profit,” whereinguidance on determining whether an activity qualifies as a trade or business isgiven, the IRS states: “Although a of is not required, thefacts and circumstances must indicate that the taxpayer entered into theactivity, or continued the activity, with the objective of making a profit.” Treas. Reg. § 1.183-2(a) (1972). Several federal circuit courts ofappeals that have addressed this issue are in agreement with the IRS that whileit is absolutely necessary for the person engaging in the claimed trade orbusiness to have engaged in the activity with the intent to earn a profit, thatexpectation of earning a profit need not be reasonable.[13]

The Minnesota TaxCourt reached a different conclusion when it held that Busch must have had areasonable expectation of profit from her gambling activity for the activity toqualify as a trade or business. When interpreting Minnesota tax law, we are notbound by the federal courts’ determination of federal tax law. But we disagreewith the tax court’s conclusion that a reasonable expectation of profit isrequired for a given activity to qualify as a trade or business. We conclude thatit is often too difficult and uncertain for courts to decide, from the safeposition of hindsight, which business activities had a reasonable expectationof profit and which did not. Furthermore, if trade or business tax incentiveshinged upon a court’s determination of whether an activity had a “realistic”expectation of profit, valuable innovation in our entrepreneurial society couldbe chilled. We conclude that the taxpayer’s expectation of profit from a givenactivity need not always be reasonable for the activity to qualify as a tradeor business.[14]

As the abovediscussion shows, the determination of whether an activity constitutes a tradeor business is a case-by-case, fact-based inquiry and requires consideration ofmany factors. While the determination may be difficult, we believe that inthis case, the commissioner’s conclusion was not consistent with the purpose ofthe Minnesota AMT law. Having considered the Groetzinger factors, theIRS factors, our discussion of the reasonableness of Busch’s expectation ofprofit, and the specific facts of this case, we conclude that Busch’s gamblingdid constitute a trade or business for the purposes of computing her Minnesota tax liability. Accordingly, we reverse the decision of the tax court.

Reversed.

One of the greatest changes brought about by the Tax Cuts and Jobs Act (TCJA) is the elimination of many personal itemized deductions. Starting in 2018 and continuing through 2025, taxpayers will not be able to deduct expenses such as union dues, investment fees, or hobby expenses. However, gambling losses remain deductible.

Personal Expenses that Are No Longer Deductible

Specifically, the TCJA suspended for 2018 through 2025 a large group of deductions lumped together in a category called “miscellaneous itemized deductions” that were deductible to the extent they exceeded 2% of a taxpayer’s adjusted gross income. These include the following deductions:

Unreimbursed job expenses. These are work-related expenses an employee pays out of his or her own pocket. They include:

• work-related travel, transportation, and meal expenses
• union dues
• business liability insurance premiums
• depreciation on a computer or cellular telephone your employer requires you to use in your work
• dues to professional societies
• education (work-related)
• home office expenses for part of your home used regularly and exclusively in your work
• expenses of looking for a new job in your present occupation
• legal fees related to your job
• subscriptions to professional journals and trade magazines related to your work
• tools and supplies used in your work, and
• work clothes and uniforms (if required and not suitable for everyday use).

None of these expenses are deductible during 2018 through 2025. Thus, you should seek to have your employer reimburse you for them. This reimbursement is tax-free as long as you properly document your expenses. Alternatively, you could seek a pay raise to help pay for these expenses, but such a raise would be taxable.

Deductible Gambling Losses

Investment Expenses. Expenses you pay for personal investing are also not deductible as a personal itemized deduction during 2018 through 2025. This includes:

• investment advisory and management fees
• fees for legal and tax advice related to your investments
• trustee fees to manage IRAs and other investment accounts, and
• rental fees for a safe deposit box.

Tax preparation fees. Tax preparation fees are likewise not deductible for 2018 through 2025. This includes costs for hiring a tax pro or buying tax preparation software or tax publications. It also includes any fee you pay for electronic filing of your return. If you have a tax pro prepare both your personal and business taxes, ask for a separate bill for your business return. Reason: The fees to prepare your business return remain a fully deductible business expense—they are not a personal itemized deduction.

Fees to fight the IRS. During 2018 through 2025, you may not deduct as an itemized deduction attorney fees, accounting fees, and other fees you incur to determine, contest, pay, or claim a refund of any tax.

Hobby expenses. A hobby is an activity you engage in primarily for a reason other than to earn a profit—for example, to have fun. Before 2018, hobbyists were permitted to deduct their hobby-related expenses up to the amount of hobby income they earned each year (but only expenses over 2% of AGI were deductible). The TCJA eliminates the itemized deduction for hobby expenses for 2018 through 2025. This means that you will not be able to deduct any expenses you earn from hobbies during these years. However, you still have to report and pay tax on any income you earn from a hobby! However, if your hobby involves selling goods to customers, you may deduct your costs of goods sold when calculating your hobby income. For example, if your hobby is making and selling pottery, you can deduct the cost of making each pot you sell from your hobby income.

Personal Expenses that Remain Deductible

Itemized Deduction Gambling Losses

A few miscellaneous itemized expenses remain deductible during 2018 though 2025 for taxpayers who itemize.

Are Gambling Losses Deductible For Amt 2016

Gambling losses. The deduction for gambling losses has not been affected by the TCJA. These remain deductible up to the amount of your gambling winnings for the year. You cannot simply reduce your gambling winnings by your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. These losses are not subject to the 2% limit on miscellaneous itemized deductions.

Are Gambling Losses Deductible For Agi

Investment interest. If you borrow money to purchase an investment, the interest you pay on the loan is called investment interest. Investment interest remains deductible for taxpayers who itemize. However, the deduction is limited to the amount of taxable investment income you earn each year, such as dividends, royalties, or interest. Any disallowed investment interest is carried over to deduct in future years. Ordinarily, investment income does not include any capital gains or qualifying dividends that enjoy favorable tax treatment. However, you can make an election to include long term capital gain and qualifying dividends in your investment income. This can allow you to deduct a larger amount of investment interest. When you do this, however, your long-term capital gain and qualifying dividends must be taxed at your ordinary income tax rates, not the usually lower capital gains rates.