This was originally published on PAOO on August 4th, 2010.
Tax court summary opinions lack value as precedent. They frequently make up for it in their entertainment value. They also give a better glimpse of the gritty reality of audits. They often seem to concern issues of substantiation. Since you have already had two bites at the substantiation apple by the time you get there, the cases can sometimes sound a little silly. Taxpayers do sometimes win though and I was particularly pleased that Trieu M. Le was successful (TC Summary Opinion 2010-94). I always say that fairness and making sense don't have anything to do with whatever the right answer is, but that doesn't mean I'm not rooting that way.
Trieu M. Le had lost over 200,000 playing slot machines in 2006. He claimed that he was a professional gambler, although he did not take the net loss against other income, The Service took the position that he was not a professional gambler. They increased his gross income and reduced the losses as itemized deductions subject to the 2% floor. This produced a deficiency of just under $10,000. During 2006 Mr. Le and his wife had spent every weekend playing slot machines sleeping only a few hours. For this dedication the Tax Court awarded them an A for effort noting that it added up to as much time as they spent on their regular jobs.
Having disposed of the issue that they were not full time gamblers, the court moved onto the Service's contention that their "business plan" was irrational :
Before petitioner's decision to become a professional gambler, petitioners had been casual gamblers but they did not wager large amounts. Sometime during 2005 petitioners began to invest heavily in gambling (mainly playing slot machines). Petitioners were born in Vietnam, and their religious and cultural beliefs were derived from their Vietnamese background. They believed in Feng Shui. Because of this belief and other religious and cultural beliefs, they expected that certain days were “lucky days” or days on which their chances of successful gambling increased. They were cognizant that slot machine odds favored the casinos but expected to overcome those odds by attempting to gamble on their “lucky days”. In addition, petitioners would watch other slot machine players; and if they had excessive losses, petitioners believed that taking over machines of losing players provided more opportunity. That was their plan for making a profit.
Petitioner is from a culture different from that generally extant in the United States, and he drew upon that culture to formulate his business plan. His plan was to use Feng Shui to determine which days were his or his wife's “lucky days” and have that person bet heavily on those days. He also used a technique of watching other players; and if they left a slot machine after heavy losses, petitioner believed that the machine was due for a payoff.
The standard, however, requires only that the profit objective be actual and honest. It would be difficult to find on the record before the Court that petitioner's approach to making a profit was irrational. For example, if someone's investment in a stock or a business were based on Feng Shui or some other cultural judgment, that would not per se be “irrational”. Petitioners used their best judgment and successfully tested their business approach. Ultimately, the fact that their approach was unsuccessful does not make it irrational.