T.C. Summary Opinion 2006-24

UNITED STATES TAX COURT

JAMES CASTAGNETTA, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22132-03S. Filed February 13, 2006.

James Castagnetta, pro se.

Frank J. Jackson, for respondent.

CARLUZZO, Special Trial Judge: This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year in issue. Rule references

are to the Tax Court Rules of Practice and Procedure. The
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1 The amount in the notice of deficiency was incorrectly

computed to be $683. The parties stipulate that the correct

calculation of the proposed deficiency is $863.

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.

Respondent determined a deficiency of $863 in petitioner’s 

2001 Federal income tax.1 The issue for decision is whether

petitioner’s gambling activity constituted a trade or business

during the taxable year in issue.

Background

Some of the facts have been stipulated and are so found.

Petitioner was not married and had no children during, or as of

the close of, the year in issue. At the time the petition was

filed in this case, petitioner resided in Mt. Kisco, New York. 

Petitioner is a college graduate with a bachelor’s degree in

economics. He lives with a roommate in a rented condominium and 

describes his lifestyle as “modest”.

During 2001, petitioner was employed, part time, as a truck

driver delivering produce to area restaurants. Typically, he

worked on Monday, Tuesday, and Friday, 5 a.m. to noon. He was

not paid for holidays or vacations and his 2001 wages from his

part-time employment totaled $17,785.

Petitioner became interested in horseracing at an early age. 

One of his relatives introduced him to handicapping horseraces. 

He has been handicapping horseraces in some capacity for more
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2 “Speed figures” can also be purchased from a third party.

than 25 years. Petitioner has been “seriously” handicapping

horseraces for approximately 11 years. 

Petitioner bets on horseraces via a closed circuit simulcast

at Yonkers Raceway (Yonkers). From Wednesday through Sunday,

Yonkers simulcasts horseraces from several alternating race

tracks. Typically, petitioner spends approximately 40 hours per

week handicapping and betting on horseraces. During 2001,

petitioner spent more than 250 days handicapping races and

betting at Yonkers. 

Petitioner keeps a detailed account of his daily gambling

transactions. This includes his daily wagers and winnings, as

well as a cumulative total of his yearly winnings and losses.

He also spends a considerable amount of time handicapping races

and studying racing programs and other materials. As part of

handicapping horseraces, petitioner prepares his own “speed

figures”.2 Using a number of criteria, including track length,

track conditions, and weather conditions, as well as his

observations during the races, petitioner determines a final

“speed figure” for the winning horse in each race and compares

the “speed figure” to other horses. Petitioner maintains a

detailed chronological record of his “speed figures” for the

winner of each horserace. 
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Prior to 2001, petitioner maintained handwritten tables for

the “speed figures” he prepared. During 2001, petitioner began

using a commercially available computer spreadsheet program to

maintain and prepare the tables for his “speed figures”. 

Generally, petitioner makes hand-recorded notes during the race

and then later enters the information into the spreadsheet

program. In addition to maintaining detailed “speed figures”,

petitioner keeps copies of racing forms, racing programs, and

betting tickets as part of his record keeping. He does not

maintain a separate checking account with respect to his gambling

activity. 

Petitioner does not advertise that he handicaps horseraces,

nor does he sell the “speed figures” he prepares. He does,

however, offer advice to, and solicit advice from, other regular

gamblers. Petitioner also watches videotapes of the races so he

can “closely” review each race.

Petitioner does not use any wages from his job as a truck

driver to finance his gambling activity. Instead, his wagers are

a fixed percentage of his “bankroll”. Petitioner’s “bankroll”

consists solely of his cumulative winnings at the race track. 

Generally, petitioner bets 2.5 percent of his “bankroll” on each

race. During 2001, petitioner earned a 4-percent return on each

dollar bet he placed; i.e., petitioner won on average of $1.04
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3 Respondent does not contest that petitioner incurred

these gambling-related expenses.

for each dollar bet he placed. According to petitioner, Yonkers

typically pays back about 83 cents for each dollar bet placed. 

Petitioner’s 2001 Federal income tax return was timely

filed. The taxable income and income tax liability shown on that

return take into account the standard deduction applicable to

petitioner’s filing status. Included with that return is a

Schedule C, Profit or Loss From Business, which lists his

principal business activity as “Parimutuel Wagering”. 

On the Schedule C, petitioner reported the following

amounts:

Gross receipts

 from wagers $52,501

Total wagered 50,725

Gross Income 1,776

Total expenses (1,542)

Net Profit 234

Petitioner’s total expenses consisted of supplies of $162 and

forms and programs of $1,380.3

In the notice of deficiency respondent determined that

petitioner’s gambling activity did not constitute a trade or

business during 2001. The gambling income reported on the

Schedule C was recharacterized as “other income”, and the

wagering losses were allowed as a miscellaneous itemized

deduction in lieu of the standard deduction. 
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4 In general, sec. 165(a) allows a taxpayer to deduct “any

loss sustained during the taxable year and not compensated for by

insurance or otherwise.” Losses from wagering transactions,

however, are “allowed only to the extent of the gains from such

transactions.” Sec. 165(d); sec. 1.165-10, Income Tax Regs. We

construed the phrase “losses from wagering transactions” to

include not only losing wagers but also for other expenses

incurred in connection with gambling transactions. See Estate of

Todisco v. Commissioner, 757 F.2d 1 (1st Cir. 1985), affg. T.C.

Memo. 1983-247; Offutt v. Commissioner, 16 T.C. 1214 (1951); see

also Praytor v. Commissioner, T.C. Memo. 2000-282 (citing

Kochevar v. Commissioner, T.C. Memo. 1995-607 (holding that slotmachine players, even if construed to be in the trade or business

of gambling, could deduct gambling losses and expenses, including

automatic teller charges, office supplies, travel mileage, and

meals, only to the extent of the their winnings)); Valenti v.

Commissioner, T.C. Memo. 1994-483 (holding that a deduction for

losses incurred in wagering transactions is subject to sec.

165(d) regardless of the fact that the taxpayer was in the trade

or business of gambling); Kozma v. Commissioner, T.C. Memo. 1986-

177 (construing the phrase “losses from wagering transactions” as

used in sec. 165(d) to include expenses incurred by a

professional gambler for transportation, meals, lodging,

admission fees, and office supplies). 

Discussion

The issue in this case is whether petitioner’s gambling

activity constituted a trade or business for purposes of section

162 during 2001. If petitioner were engaged in a trade or

business of gambling, wagering losses, to the extent deductible

under section 165(d),4 would be deducted in computing adjusted

gross income. See sec. 62. On the other hand, if petitioner

were not in a trade or business of gambling, wagering losses, to

the extent deductible under section 165(d), would be deductible

as an itemized deduction in the computation of taxable income. 
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See Gajewski v. Commissioner, 84 T.C. 980, 982 (1985); Johnston

v. Commissioner, 25 T.C. 106, 108 (1955).

Consistent with the manner in which petitioner reported the

income and expenses attributable to his gambling activity on his

Federal income tax return for the year in issue, petitioner

claims that his gambling activity constitutes a trade or

business. Respondent argues, in part, that petitioner’s gambling

activity does not constitute a trade or business because he did

not engage in that activity with the requisite intent to profit. 

In general, section 162(a) allows a deduction for all

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on a trade or business. The term “trade

or business” is not precisely defined in the Internal Revenue

Code or the regulations promulgated thereunder; however, it is

well established that in order for an activity to be considered a

taxpayer’s trade or business for purposes of section 162, the

activity must be conducted “with continuity and regularity” and

“the taxpayer’s primary purpose for engaging in the activity must

be for income or profit.” Commissioner v. Groetzinger, 480 U.S.

23, 35 (1987). It is clear that in a single taxable year, a

taxpayer may be in engaged in more than one trade or business. 

Curphey v. Commissioner, 73 T.C. 766 (1980); Barrish v.

Commissioner, T.C. Memo. 1984-602. 
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We are satisfied that petitioner’s gambling activity was

conducted with the requisite continuity and regularity during the

taxable year to allow for treatment as a trade or business within

the meaning of section 162(a). Nevertheless, in order for an

activity to be considered a trade or business within the meaning

of that section, a taxpayer’s primary purpose fo engaging in the

activity must be for income or profit. See Commissioner v.

Groetzinger, supra; Miller v. Commissioner, T.C. Memo. 1998-463,

affd. 208 F.3d 214 (6th Cir. 2000). Furthermore, as was the

situation in Groetzinger, the activity in question must be the

taxpayer’s “intended livelihood source”. Commissioner v.

Groetzinger, supra at 33.

The test of whether a taxpayer conducted an activity for

profit is whether he or she entered into, or continued, the

activity with an actual or honest objective of making a profit. 

Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer v.

Commissioner, 78 T.C. 642, 644-645 (1982), affd. without opinion

702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs. 

Although a reasonable expectation of profit on a taxpayer’s part

is not required, the profit objective must be bona fide, as

determined from a consideration of the surrounding facts and

circumstances. Keanini v. Commissioner, supra; Dreicer v.

Commissioner, supra at 645; Golanty v. Commissioner, 72 T.C. 411,

425-426 (1979), affd. without published opinion 647 F.2d 170 (9th
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Cir. 1981); Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965),

affd. 379 F.2d 252 (2d Cir. 1967).

Whether petitioner engaged in his gambling activity with an

actual and honest objective of realizing a profit must be

redetermined year-to-year, taking into account all of the

relevant facts and circumstances. Golanty v. Commissioner,

supra at 426; sec. 1.183-2(a) and (b), Income Tax Regs. More

weight is given to objective facts than to petitioner’s statement

of his intent. Engdahl v. Commissioner, 72 T.C. 659, 666 (1979);

sec. 1.183-2(a), Income Tax Regs.

The following factors, which are nonexclusive, should be

considered in the determination of whether an activity is engaged

in for profit: (1) The manner in which the taxpayer carried on

the activity; (2) the expertise of the taxpayer or his or her

advisers; (3) the time and effort expended by the taxpayer in

carrying on the activity; (4) the expectation that assets used in

the activity may appreciate in value; (5) the success of the

taxpayer in carrying on other similar or dissimilar activities;

(6) the taxpayer’s history of income or 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. Sec. 1.183-

2(b), Income Tax Regs.
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No one factor is determinative in and of itself, and our

conclusion with respect to petitioner’s profit objective does not

depend upon merely counting up those factors that suggest the

presence of a profit motive and comparing the number to those

factors that indicate the opposite. Sec. 1.183-2(b), Income Tax

Regs. These factors are nonexclusive, and not every factor is

relevant in every case. Vandeyacht v. Commissioner, T.C. Memo.

1994-148; Borsody v. Commissioner, T.C. Memo. 1993-534, affd. per

curiam 92 F.3d 1176 (4th Cir. 1996); sec. 1.183-2(b), Income Tax

Regs.

Turning to the relevant factors enumerated in section 1.183-

2(b), Income Tax Regs., we find that petitioner’s gambling

activity was operated in a businesslike manner. Petitioner

regularly attended the horseraces at Yonkers. In addition to

keeping copies of betting slips and racing forms and programs,

petitioner kept detailed records with respect to his gambling

activity. Petitioner kept a detailed account of his daily

wagers, as well as a cumulative total of his yearly winnings and

losses. Petitioner also maintained numerous statistics for each

horserace in the form of “speed figures” and used this

information for handicapping horseraces. Petitioner reviewed

videotapes of the horseraces for further study. During the

taxable year in issue, petitioner also began to use a computer to

maintain a significant amount of his records with respect to his
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gambling activity. Although petitioner maintained only a single

bank account, his gambling winnings and losses were accounted for

separately. Accordingly, this factor favors petitioner.

A profit objective might be indicated where the taxpayer

carries on an activity in accordance with practices learned from

extensive study of accepted business and economic practices, or

consultation with experts involved therein. Sec. 1.183-2(b)(3),

Income Tax Regs. Petitioner has been gambling on horseraces for

more than 25 years. Petitioner has been “seriously” handicapping 

horseraces for 11 years. This includes preparing detailed “speed

figures” for the winner of each race. Petitioner sought advice

from, as well as provided advice to, other individuals who

gambled on a regular basis. Finally, through the years

petitioner has read numerous books published on gambling and

handicapping horseraces. This factor favors petitioner.

A profit objective might be indicated where the taxpayer

uses much of his personal time and effort to carry on the

activity. Sec. 1.183-2(b)(4), Income Tax Regs. Petitioner

spends about 40 hours pursuing his gambling activity. During

2001, he spent approximately 250 days gambling and handicapping

horseraces. Petitioner’s detailed records, including the selfprepared “speed figures”, are evidence of the time and effort

expended by petitioner away from the race track. We are

convinced that petitioner spent a significant amount of time 
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and effort in pursuit of this activity. This factor favors

petitioner.

 A profit objective is strongly indicated where the taxpayer

has experienced a series of profitable years. Sec. 1.183-

2(b)(6), Income Tax Regs. Detailed financial information about

petitioner’s other taxable years is not available on this record. 

An opportunity to earn a substantial ultimate profit in a highly

speculative venture is ordinarily sufficient to indicate that the

activity is engaged in for profit even though losses or only

occasional small profits are actually generated. Sec. 1.183-

2(b)(7), Income Tax Regs. Although it was modest in amount,

petitioner enjoyed a profit from gambling during the year in

issue. This factor is neutral or slightly favors petitioner.

The next factor significant in our inquiry is the financial

status of the taxpayer. A profit objective might be indicated

where the taxpayer does not have substantial income from sources

other than the activity. Sec. 1.183-2(b)(8), Income Tax Regs. 

Petitioner held no substantial investments during 2001, and his

part-time employment as a delivery truck driver was his only

other source of income. Under the circumstances, the amount of

his wages gives little insight into his profit objective. On

balance, we consider this factor to be neutral.

A lack of profit objective might be indicated where there

are personal motives for carrying on the activity, especially
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where the motive is personal pleasure or recreation. Sec. 1.183-

2(b)(9), Income Tax Regs. Profit need not be the only objective,

however, and personal motives may coexist with an actual and

honest intent to derive a profit. A taxpayer’s enjoyment of an

activity does not necessarily indicate that the taxpayer lacks a

profit objective if the activity is conducted for profit as shown

by other factors. See Jackson v. Commissioner, 59 T.C. 312, 317

(1972); sec. 1.183-2(b)(9), Income Tax Regs. The fact that

petitioner may have also enjoyed betting on horseraces does not

mean that he did not engage in the activity for profit. This

factor is neutral.

Taking into account the above factors and considering the

facts and circumstances relating to petitioner’s gambling

activity, we conclude that petitioner engaged in his gambling

activity with the bona fide intent of making a profit. Having

found that petitioner conducted his gambling activity with

continuity and regularity, we conclude that petitioner was in the

trade or business of gambling during the taxable year in issue. 

Accordingly, petitioner’s gambling expenses are deductible under

section 162(a), to the extent limited by section 165(d). 

The parties are cautioned, however, that our holding in this

case does no more than resolve the year here in issue. See sec.

1.183-2(a) and (b), Income Tax Regs. Petitioner’s betting

strategy (2.5 percent of his “bankroll”) raises some question
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whether his gambling activity was his “intended livelihood

source”, Commissioner v. Groetzinger, 480 U.S. at 33, as his

bankroll was described as “cumulative winnings” with no mention

about withdrawals for “livelihood” expenditures. Maintaining a

“bankroll” used exclusively for gambling purposes strongly

suggests that his gambling activity does not constitute a trade

or business. To the extent that petitioner’s betting strategy

remains consistent over the years, a different result might well

be reached.

 Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

for petitioner.