Opinion ID: 1748568
Heading Depth: 3
Heading Rank: 3

Heading: Reasonable expectation of profit

Text: The commissioner and the Minnesota Tax Court both appear to have based their conclusions that Busch's gambling did not constitute a trade or business in large part on their determination that her expectation of profit was not reasonable. Slot machines are programmed for the gambler to lose. Over time and despite Busch's assertion that she could tell which machines would pay out, she never made a profit. Indeed, she lost money steadily for three years. Under these circumstances, it is fair for the commissioner to assert that Busch's belief that she could make a profit was unreasonable. On this point we find the IRS regulations informative and helpful. In its regulations regarding Activities not engaged in for profit, wherein guidance on determining whether an activity qualifies as a trade or business is given, the IRS states: Although a reasonable expectation of profit is not required, the facts and circumstances must indicate that the taxpayer entered into the activity, or continued the activity, with the objective of making a profit. Treas. Reg. § 1.183-2(a) (1972). Several federal circuit courts of appeals that have addressed this issue are in agreement with the IRS that while it is absolutely necessary for the person engaging in the claimed trade or business to have engaged in the activity with the intent to earn a profit, that expectation of earning a profit need not be reasonable. [13] The Minnesota Tax Court reached a different conclusion when it held that Busch must have had a reasonable expectation of profit from her gambling activity for the activity to qualify as a trade or business. When interpreting Minnesota tax law, we are not bound by the federal courts' determination of federal tax law. But we disagree with the tax court's conclusion that a reasonable expectation of profit is required for a given activity to qualify as a trade or business. We conclude that it is often too difficult and uncertain for courts to decide, from the safe position of hindsight, which business activities had a reasonable expectation of profit and which did not. Furthermore, if trade or business tax incentives hinged upon a court's determination of whether an activity had a realistic expectation of profit, valuable innovation in our entrepreneurial society could be chilled. We conclude that the taxpayer's expectation of profit from a given activity need not always be reasonable for the activity to qualify as a trade or business. [14] As the above discussion shows, the determination of whether an activity constitutes a trade or business is a case-by-case, fact-based inquiry and requires consideration of many factors. While the determination may be difficult, we believe that in this case, the commissioner's conclusion was not consistent with the purpose of the Minnesota AMT law. Having considered the Groetzinger factors, the IRS factors, our discussion of the reasonableness of Busch's expectation of profit, and the specific facts of this case, we conclude that Busch's gambling did constitute a trade or business for the purposes of computing her Minnesota tax liability. Accordingly, we reverse the decision of the tax court. Reversed.