Issue: What factors does the Commissioner consider in determining when the gambling activities of a taxpayer constitute a trade or business for purposes of G.L. c. 62?

Directive: In determining when the gambling activities of a taxpayer constitute a trade or business for purposes of G.L. c. 62, the Commissioner will consider a set of factors, as set forth below.

 

Discussion of Law:

 

Massachusetts gross income is federal gross income, with certain modifications not relevant here. G.L. c. 62, § 2(a). Federal gross income is all income from whatever source derived, including gains from gambling. I.R.C. § 61. [1] Thus, gambling winnings are included in Massachusetts gross income. See also TIR 79-6, DOR Directive 86-24.

 

Massachusetts law adopts the deductions permitted under section 62 of the Internal Revenue Code ("Code"), with certain modifications. G.L. c. 62, § 2(d). The deductions allowed under section 62 of the Code include those deductions that are attributable to a trade or business. I.R.C. § 62(a)(1). In particular, section 165 of the Code allows a deduction for losses from wagering transactions to the extent of wagering gains. I.R.C. § 165(d). Thus, a Massachusetts taxpayer may deduct wagering losses to the extent of winnings, but only if the wagering activities of the taxpayer constitute a trade or business. [2]

 

In the context of professional gambling, in Commissioner v. Groetzinger, 480 U.S. 23 (1987), the Supreme Court held that determining whether a taxpayer is engaged in a trade or business "requires an examination of the facts in each case." The Court further held that "if one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business within the meaning of the statutes…." Id. at 35. In Massachusetts, the Appellate Tax Board has relied on Groetzinger and its fact and circumstances test in determining when a taxpayer's gambling activities constituted a trade or business. Cerpovicz v. Commissioner of Revenue, A.T.B. Docket No. 128164 (1987); DiCarlo v. Commissioner of Revenue, A.T.B. Docket No. 139866 (1989); Menard v. Commissioner of Revenue, A.T.B. Docket Nos. 139277, 144198-99, 151689 (1990) (a taxpayer may be in two trades or businesses).

 

The determination of whether a taxpayer is engaged in a trade or business remains one of facts and circumstances. However, in determining when the gambling activities of a taxpayer constitute a trade or business for purposes of G.L. c. 62, the Commissioner will consider a set of factors. These factors are not exclusive, and are meant to provide illustrative guidance to taxpayers. The burden of proof rests with the taxpayer claiming to be a professional gambler. See William Rodman & Sons, Inc. v. State Tax Commission, 373 Mass. 606 (1977); Uniacke v. Commissioner of Revenue, A.T.B. Docket No. F210466 (1995); Olson v. Commissioner of Revenue, A.T.B. Docket No. C256266 (2001).

 

The following factors will be considered:

 

  • gambling activities are entered into and carried on in good faith for the purpose of making a profit;

  • gambling activities are carried on with regularity;

  • gambling activities are pursued on a full-time basis, or to the fullest extent possible if taxpayer is engaged in another trade or business or has employment elsewhere;

  • gambling activities are solely for the taxpayer's own account and taxpayer does not function as a bookmaker;

  • taxpayer maintains adequate records, including accounting of daily wagers, winnings and losses ( see I.R.S. Rev. Proc. 77-29);

  • the extent and nature of taxpayer's activities which further the development of a gambling enterprise; and

  • taxpayer claims deductions associated with the conduct of a trade or business for gambling-related expenses.

This Directive modifies DOR Directive 86-24 to the extent that the position taken therein is inconsistent with the decision in Groetzinger and the decisions made by the Appellate Tax Board in reliance thereon.

 

/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

 

AL:DMS:rmh

 

April 4, 2003

 

DD 03-3



[1] For federal tax purposes, gambling losses may be deducted from adjusted gross income to the extent of gambling winnings, if the taxpayer itemizes his or her deductions. I.R.C. §§ 63(d), 165(d). Massachusetts does not adopt this federal deduction.

[2] Gambling winnings, except winnings from horse and dog racing, are generally subject to withholding under G.L. c. 62B, § 2, regardless of whether the wagering activities of the taxpayer constitute a trade or business.