Gambling Activity Did Not Rise To Trade or Business Level.

The plaintiff was a Mexican citizen and nonresident of the U.S. that brought a tax refund action exceeding $16 million.  He claimed that he was engaged in the trade or business of slot machine gambling in Las Vegas and, as a result, his taxes should be based on his net income in accordance with I.R.C. Sec. 871(b) (nonresident alien is taxed on taxable income connected with trade or business conducted in the U.S.).  The plaintiff had retired from a Mexican potato farming business in 2001 and began his "betting business" at that time, making numerous trips to Las Vegas annually.  For the years at issue, the plaintiff reported a net loss in some years and profit in other years.  On audit, IRS disallowed wagering costs due to lack of trade or business and issued deficiency notice and assessed tax at 30 percent rate pursuant to I.R.C. Sec. 871(a)(1).  Court determined that test set forth in Comr. v. Groetzinger, 480 U.S. 23 (1987) was to be utilized in determining the existence of a trade or business, and that the test was not satisfied because the plaintiff did not engage in gambling activities on a basis that were continuous and regular.  The court turned to the factors set forth in Treas. Reg. Sec. 1.183-2 to determine whether the plaintiff had the requisite profit intent to be deemed to be in the conduct of a trade or business and determined that: (1) he did not pursue his gambling activity for the purpose of making a profit; (2) he couldn't rely on advisors or gain expertise because playing slots is controlled by a random number generator with the outcome based on pure luck; (3) his time spent on the activity was sporadic and did not consume much of his personal time; (4) he had no expectation that the assets used in the activity would increase in value (because there were none); (5) he didn't participate in any other activities that would enhance his success in playing slot machines; (6) the history of income or loss from the activity was a neutral factor; (7) the amount of occasional profits slightly favored the plaintiff; (8) the taxpayer was very wealthy and didn't need income from slots to support himself, and; (9) there were substantial elements of personal pleasure.  Thus, the plaintiff did not engage in playing slots with the required profit intent.  The court upheld the IRS position.  Free-Pacheco v. United States, No. 12-121T, 2014 U.S. Claims LEXIS 666 (Fed. Cl. Jun. 25, 2014).