A professional poker player who was also a civil and geotechnical engineer and a laundromat owner lost in Tax Court on Monday (Hom, T.C. Memo. 2013-163). The court held that John Hom received unreported wages from his wholly owned C corporation, could not deduct unsubstantiated gambling losses or travel expenses, and failed to establish he was entitled to additional losses from his laundromat business.
Hom, who for the years at issue did not file returns for himself or his corporation until after the IRS prepared substitutes for returns for him, had made large withdrawals from his corporation’s bank account for each year at issue (2005–2008). The IRS used these withdrawals to recreate his wage income for those years. Hom, however, argued that the withdrawals were repayments on a loan he made to the corporation, rather than wages for engineering services he performed as an officer and employee of the corporation. The Tax Court, however, noted that there was no evidence of a loan and that there was evidence that the payments were for services rendered to the corporation.
Hom was no luckier when it came to the additional gambling losses he tried to claim to offset his significant amounts of income from playing poker online and in casinos. The parties stipulated that Hom was in the trade or business of gambling during the years at issue, which permitted him to deduct his gambling losses to the extent of his gambling gains.
Thus the Tax Court allowed Hom a deduction for gambling losses for 2005 that he was able to substantiate, but did not allow him a deduction for additional gambling losses he claimed for other years because, for 2006, he had no gambling gains to offset the losses and, for 2007 and 2008, he did not present evidence sufficient for the court to estimate his losses.
The court also rejected his attempt to deduct his travel and lodging expenses for trips to casinos because he did not meet the heightened substantiation requirements to deduct these expenses under Sec. 274(d). However, it did permit him to deduct $595, $20, $160, and $40 of tournament entry fees for 2005 through 2008.
As for the laundromat, the IRS permitted deductions for a smaller amount of expenses than that claimed by Hom on his returns for 2007 and 2008. On this issue as well, the Tax Court upheld the IRS’s determination because the evidence Hom presented was not sufficient to support the increased deduction.
He also argued he was not liable for the negligence penalty imposed by the IRS, but the court upheld it, pointing to Hom’s failure to maintain records, having unreported income, and having unsubstantiated loss and expense deductions.