Anthony & Donna Leite v. Commissioner of Revenue (November 10, 2006)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


ANTHONY & DONNA LEITE        v.	 COMMISSIONER OF REVENUE


Docket No. C268746				 Promulgated:
							 November 10, 2006


	This is an appeal under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the appellee Commissioner of Revenue ("Commissioner" or "appellee") to abate income taxes assessed against the appellants Anthony and Donna Leite ("appellants") under G.L. c. 62 § 4, for the tax year 1999.
	Commissioner Gorton heard this appeal and was joined in the decision for the appellee by Chairman Hammond and Commissioners Scharaffa and Egan.
	These findings of fact and report are promulgated at the request of the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

	R. Arlen Johnson, Esq. for the appellants.
	Kevin M. Daly, Esq. for the appellee.

FINDINGS OF FACT AND REPORT

	Appellants were residents of Milford, Massachusetts during 1999.	During 2000, Mr. Leite timely filed an application for abatement of 1999 income taxes through an amended return Form 33X, claiming for himself the status of a professional gambler and seeking to deduct his losses from the amount of his winnings. On April 6, 2003, the Commissioner denied appellants' application for abatement. Appellants initiated the instant appeal by filing a Petition Under Formal Procedure with the Appellate Tax Board on June 5, 2003. Based on the foregoing facts, the Board found that it had jurisdiction over this appeal.
	Mr. Leite operated a bread delivery business during the 1999 tax year. He delivered Nissens and Wonder bread products to restaurant businesses using his own truck. Beginning in 1993 he was an avid gambler, mostly at the Foxwoods Casino in Connecticut. During the year at issue, he gambled exclusively on slot machines. According to his testimony, he devoted considerable time to reading relevant books, talking to other gamblers, and watching TV programs about Las Vegas. However, he did not elaborate on the time he devoted to studying and researching his gaming pursuits. 
Mr. Leite testified that, upon completion of his daily bread run at approximately 3:30 PM, he often would drive the relatively short distance from his last stop to the Foxwoods Casino, provided he had enough cash to play the "high-limit" slot machines, which he testified was at minimum $2000.00. He testified that he would sometimes stay into the early morning hours, playing the slot machines continuously, usually reinvesting his winnings into more gaming. He was not specific about the time he devoted to gaming on any given occasion.
Mr. Leite's gaming activities during 1999 were tracked and reported on a Foxwoods document entitled "Patron Data Log". This document reflects that Mr. Leite engaged in gaming at Foxwoods on a total of 54 days during 1999. He did not commence his gaming activities, according to the Patron Data Log, until the beginning of May that year. He devoted 9 days to gaming at Foxwoods in May; 7 days in June; 2 days in July; 4 days in August; 5 days in September; and 9 days each in October, November, and December of 1999. 
When the daily pay-out from the slot machines he played exceeded the threshold of $1200.00, Foxwoods issued a Form W-2G to the appellant. He elected not to have federal income tax withheld from his winnings. He reported putting $319,996.00 into the slot machines in the course of his gaming in 1999; he reported getting pay-outs totaling $328,996.00, for a net profit of $8,954.00 during the calendar year.
Appellant testified that the "Patron Data Log" reflected his gaming activities for only those occasions he used his "comp card" while playing the slot machines. He got 1 point, which could be redeemed for goods and services at the Foxwoods complex, for every $80.00 he put into the slot machines. He said there were additional occasions when he gambled without using his "comp card", so that the "Patron Data Log" would not record the activity. However, he provided no specific details about gaming activities above and beyond what is shown on the "Patron Data Log". Nor is there any corroboration of the cursory testimony to substantiate that Mr. Leite engaged in gambling activities for more than the 54 days in 1999 the records reflect. 
It is clear that Mr. Leite had additional winnings beyond those reported on the Forms W-2G, in amounts beneath the threshold of $1200.00. He testified that he simply "reinvested" smaller winnings so that he could spend additional time playing the slot machines. Nevertheless all of his winnings regardless of the amount constitute gross income. Accordingly, Mr. Leite admittedly won more than the $328,996.00 documented on the Forms W-2G, but did not report these additional winnings as income. The evidence suggests that he altogether failed to keep track of pay-outs under the $1200.00 threshold.
Mr. Leite did not maintain separate books or profit and loss statements for his alleged trade or business of gambling. By contrast, records were maintained for the bread delivery business. The only self-generated record he offered into evidence consisted of a few hand-written pages of entries on ledger paper. The record reflects winnings, losses, cash advances, fees, and food expenses and appears to have been created after-the-fact to support his claimed deductions.  
Mr. Leite did not deem himself to be a professional gambler until after the 1999 tax year had passed. In 2000 he filed an amended return asserting the right to deduct his outlays from his winnings, after a conversation with a fellow gambler made him aware of the tax benefits of being in the trade or business of gambling. Mr. Leite charged his expenses in traveling to and from casinos to his bread delivery business. He typically used his "comp points" to cover incidentals including purchases of meals and merchandise. Thus the deductions at issue represent mostly, if not exclusively, the money he put into the slot machines in the course of his gaming pursuits.
On the basis of the foregoing, the Board concluded that Mr. Leite gambled for a total of 54 days, for indeterminate periods of time each day, during 1999. He did not engage in gambling activities until the fifth month of 1999. At the time he was engaged in gambling during 1999 Mr. Leite did not consider himself a professional gambler, and did not maintain books and records of his gaming activities in a manner consistent with the conduct of a trade or business. By contrast, he worked at his bread delivery business on a continuous and regular basis throughout 1999, and maintained books and records reflecting the conduct of a trade or business.
The Board deemed that Mr. Leite's gambling in 1999 was too sporadic and discontinuous a pursuit to be considered the active conduct of a trade or business. His gaming activities were found to be in the nature of a hobby he pursued when he had the time and money left over from his regular work as a bread delivery person. Accordingly, Mr. Leite is not entitled to deduct his losses incurred while gambling from the amount of his winnings. The Board decided this appeal for the appellee.
      OPINION
At issue is whether the appellant is entitled to offset his winnings from playing slot machines with the amount of money he put into the machines in order to play. In order to deduct his losses from his winnings for purposes of the Massachusetts income tax, Mr. Leite was required to demonstrate that he was engaged in the trade or business of gambling. See DiCarlo v. Commissioner of Revenue, 11 Mass. App. Tax Bd. Rep. 69, 72 (1989).
The United States Supreme Court settled in Commissioner v. Groetzinger, 480 U.S. 23 (1987) that a taxpayer's gambling activities can rise to the level of the conduct of a trade or business. In order to qualify "the taxpayer must be involved in the activity with continuity and regularity and … the taxpayer's primary purpose for engaging in the activity must be for income or profit." 480 U.S. at 35. The Court stated that "[a] sporadic activity, a hobby, or an amusement diversion does not qualify." Id.
The taxpayer in Groetzinger engaged in pari-mutuel betting on dog races on a full-time basis during the taxable year and had no other employment after being laid off from his job in February. 480 U.S. at 24. "He went to the track 6 days a week for 48 weeks in 1978." Id. He spent 60-80 hours a week on "gambling-related endeavors." Id. He also "kept a detailed accounting of his wagers and every day noted his winnings and losses in a record book." 480 U.S. at 25.  
In the DiCarlo case and in Menard v. Commissioner of Revenue, 12 Mass. App. Tax Bd. Rep. 174, 183 (1990), the Board found that taxpayers were engaged in the trade or business of gambling. The Board held that a taxpayer may be engaged in two trades or businesses, and that gambling need not be a taxpayer's "principal trade or business". Menard, 12 Mass. App. Tax Bd. Rep. at 183. In Menard, the taxpayer also worked as a high school principal. Id. at 176. In DiCarlo, the taxpayer had a part-time job doing maintenance work at a restaurant. Even so, the taxpayer in Menard "pursued his gambling activities at the track of his choice to the fullest extent possible each day, in good faith, and with regularity over a four-year period." Id. at 183. Moreover, the taxpayer "consulted with the I.R.S. regarding record-keeping requirements prior to commencing his gambling venture [and] maintained extensive, detailed, business-like records." Id. 
In DiCarlo, the taxpayer typically spent seven or eight hours a day at the dog race tracks on six days of the week. On Sundays, he attended the races during the reduced hours the track was open. "Total time spent on racing, at and away from the track, averaged from eight to ten hours a day." 11 Mass. App. Tax Bd. Rep. at 70. It was significant that the taxpayer's part-time work at a restaurant coincided with the times that the race tracks were closed.
In Cerpovicz v. Commissioner of Revenue, 8 Mass. App. Tax Bd. Rep. 88 (1987), a taxpayer was held not to be engaged in a trade or business of gambling. "While he spent more time gambling than teaching, the latter was not only far more remunerative but had occupied over twenty-one years of his life compared to nine months of gambling." Id. at 94. Distinguishing the Cerpovicz case, the Board in Menard observed that "that taxpayer had gambled for a mere nine months; did not maintain extensive records; and apparently did not view or treat his gambling as a trade or business until he was assessed by the Commissioner." 12 Mass. App. Tax Bd. Rep. at 183.
In the instant case, it is clear that Mr. Leite's income was derived largely from his bread delivery business; he gambled when he had enough spare cash. Moreover, his bread delivery work was pursued on a consistent and regular basis. While extensive records were kept for the bread delivery business, Mr. Leite's record-keeping with respect to his gaming was sparse, incomplete, and apparently begun after-the-fact.
The Board found the most decisive factor to be the discontinuity in Mr. Leite's pursuit of his gambling activities. For the first four months of 1999, he did not gamble at all according to the records in evidence. He was able to document only 54 days spent at Foxwoods in 1999. While he testified that he spent additional time gambling without using his "comp card", and gambled late into the night, this testimony was lacking in particulars and uncorroborated. His claim that he devoted time to the study and research of slot machine gaming was non-specific and unelaborated. This testimony thus lacked both credibility and probative value. 
Finally, Mr. Leite never considered himself to be engaged in gambling as a trade or business until after the year in question. He learned from another gambler that there were tax advantages associated with professional gambler status, and only at that point did he raise his claim to be engaged in the trade or business. 
Mr. Leite's gaming activities were pursued with energy, but without the regularity and continuity demonstrated in cases in which taxpayers were deemed to be engaged in a trade or business. Mr. Leite's time playing the slot machines at Foxwoods was more plausibly a hobby given the irregularity of his schedule and the shoddiness of his record-keeping. Accordingly, the Board decided this case for the appellee.

 					APPELLATE TAX BOARD



  By:____________________________________
  Thomas W. Hammond, Jr., Chairman






A true copy,


Attest:______________________________
  	      Assistant Clerk of the Board 

 While the Petition was received on June 6, 2003, which was one day later than the time allowed, it was postmarked by the United States Postal Service on June 5, 2003. Accordingly, the filing was timely under the rule of G.L. c. 62C, § 33A (¶ 3).
 The Internal Revenue Code, by contrast, permits deduction of losses up to the amount of winnings without regard to whether the taxpayer is engaged in the trade or business of gambling. See I.R.C. § 165(d).

ATB 2006-842