Opinion ID: 1748568
Heading Depth: 3
Heading Rank: 2

Heading: The IRS activity engaged in for profit factors

Text: As mentioned above, the IRS has set forth a number of nonexclusive factors to be considered when determining whether a taxpayer's activity constitutes a trade or business for tax purposes. See Treas. Reg. § 1.183-2(b). These factors include: (1) the manner in which the taxpayer carries on the activity (e.g., keeping records in a businesslike way); (2) the expertise of the taxpayer or his advisors; (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. Id. The IRS stresses that these factors are nonexclusive and that the ultimate determination of whether an activity qualifies as a trade or business for taxation purposes depends on the specific facts of the situation. [11] Id. Like the criteria articulated in Groetzinger, the IRS 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 IRS factors, we are left with the clear impression that Busch's case presents a close call; nevertheless, we believe that overall, the most relevant factors weigh in Busch's favor. Some factors admittedly do not favor Busch. For example, the second factorthe expertise of the taxpayer or her advisorsweighs against Busch in that she openly admits that she is not an expert on how slot machines work. The fourth factor is the expectation that assets used in the activity may appreciate in value; this factor is not relevant because Busch did not acquire any assets in her gambling pursuits. The fifth factor is the success of the taxpayer in carrying on other similar or dissimilar activities. Busch had no reported success in any other gambling activities and acknowledged that she had not undertaken any. Under the sixth factor, the IRS also considers the taxpayer's history of income or losses with respect to the activity. This factor weighs against Busch, as she not only did not make money, she lost considerable sums consistently for three years. [12] But at least four of the IRS factors favor Busch's position, and we believe that these factors are the most applicable and meaningful to her case. For example, the first factor the IRS considers is the manner in which the taxpayer carries on the activity. Busch has scrupulously kept records and reported income, which suggests that her gambling was a trade or business. The third IRS factor is the time and effort expended by the taxpayer in carrying on the activity. Busch expended a significant amount of time on gambling, up to 60 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 provided her with short-term profits. Under the eighth factor, the IRS considers the financial status of the taxpayerwhether the taxpayer has another job or substantial income from another source. Busch's income came entirely from other sources, specifically her savings and retirement funds, but she had no occupation other than her claimed gambling occupation during the relevant tax years. This suggests that Busch intended to devote herself to gambling as a possible means of earning a living and was simply unsuccessful in making any money. We conclude that overall, both the Groetzinger factors and the IRS factors narrowly support Busch's contention that she engaged in gambling as a trade or business. While, as mentioned above, neither the Groetzinger factors nor the IRS factors are binding on our court, they help to inform our decision here and support a conclusion that Busch's gambling did constitute a trade or business for the purpose of computing her Minnesota tax liability.