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Popovich v. Indiana Department of State Revenue

Tax Court of Indiana

December 29, 2017

NICK POPOVICH, Petitioner,
v.
INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

         ON APPEAL FROM A FINAL DETERMINATION OF THE INDIANA DEPARTMENT OF STATE REVENUE

          ATTORNEYS FOR PETITIONER: JAMES K. GILDAY GILDAY & ASSOCIATES, P.C. Indianapolis, IN

          JAIME L. TURLEY PERZ ATTORNEY AT LAW Valparaiso, IN

          ATTORNEYS FOR RESPONDENT: CURTIS T. HILL, JR. ATTORNEY GENERAL OF INDIANA WINSTON LIN DEPUTY ATTORNEY GENERAL Indianapolis, IN

          WENTWORTH, J.

         Nick Popovich appeals the Indiana Department of State Revenue's Proposed Assessments of adjusted gross income tax (AGIT) for the 2003 and 2004 tax years. The Court, having previously determined that the Department's 2003 Proposed Assessment was void, see Popovich v. Indiana Dep't of State Revenue (Popovich VII), 52 N.E.3d 73, 77-78 (Ind. Tax Ct. 2016), now addresses the final issue in this case: whether Popovich was a professional gambler eligible for certain gambling-related deductions from his Indiana adjusted gross income for the 2004 tax year. The Court finds that Popovich was not eligible for those deductions because he was not a professional gambler in 2004.

         FACTS[1] AND PROCEDURAL HISTORY

         Popovich, a resident of Indiana, started playing blackjack at the age of 19. (See Trial Tr. at 10, 93-94.) Over the years, he continued to gamble with family and friends recreationally and on special occasions. (See Trial Tr. at 28-29, 93-94; Stipulated Facts & Exhibits ("Stip."), Confd'l Ex. 22 at 42-45.) Popovich married Patricia Sage-Popovich in the late 1980s; the couple subsequently moved into a home in Valparaiso, Indiana.[2](See Stip., Confd'l Ex. 22 at 14; Trial Tr. at 10-11.)

         In 1994, Patricia began to operate Sage-Popovich, Inc. ("SPI"), a corporation that provided a variety of aviation-related services, including airplane detailing, liquidations, and repossessions, from the couple's Valparaiso residence. (See Stip., Confd'l Ex. 22 at 15-30, Ex. 28; Trial Tr. at 12-13, 26-27.) In contrast, Popovich was engaged in a "transactional business" both before and after that period, which typically involved short-term independent contractor work or other abbreviated entrepreneurial endeavors. (See Trial Tr. at 13-25.) (See also Trial Tr. at 26 (stating "from 1987 to 2006 I never had a W-2, I was always one deal to another").) For example, Popovich once worked as a commercial pilot for about 6 months, he repossessed airplanes intermittently, he started a company that moved a steel mill to Australia during a 1½-year period, he was affiliated with a company that manufactured automatic weapons, and he established a charter boat business that "never quite got afloat." (See Trial Tr. at 15-25; Stip., Confd'l Ex. 22 at 33.) In fact, Popovich spent a week in a Haitian prison during the 1986 coup of Jean-Claude "Baby Doc" Duvalier after his attempt to repossess a plane on behalf of Huntington National Bank failed. (See Trial Tr. at 21-22.)

         While watching the poker tour on television in late 2001, Popovich began to think about "trying his hand" at a new profession, namely becoming a professional blackjack player. (See Trial Tr. at 29.) After discussing the requirements for becoming a professional gambler with various casino employees, an attorney, and the IRS, Popovich determined that he needed to maintain detailed records of his gambling activities. (See Trial Tr. at 29-30, 84.) In addition, Popovich "mapped out" a business plan "in his head, " purchased computer software to practice blackjack at home, and learned new gambling techniques, such as card counting and certain progressive betting strategies, by reading blackjack-specific books and blogs. (See Trial Tr. at 30-31; Pet'r Trial Ex. 1.)

         By January of 2002, Popovich was ready to put his business plan into action. (See Trial Tr. at 34-37; Resp't Trial Ex. 1.) Because Popovich did not have a personal checking account of his own, Patricia used her personal checking account to establish a line of credit[3] for Popovich at the Horseshoe Hammond casino. (See Trial Tr. at 52-53; Stip., Confd'l Ex. 22 at 46-47, 92.) Popovich then put most of his newly learned gambling techniques into practice at Horseshoe Hammond on 40 separate occasions in 2002. (See Resp't Trial Ex. 1; Trial Tr. at 34-38 (explaining that he did not use the technique of card counting because he believed it was disfavored in Indiana and illegal in other states).) Popovich kept track of his gambling activities on excel spreadsheets, recording the specific casinos, the dates, the playing times, the "buy in" amounts, [4] and his wins and losses. (See Resp't Trial Ex. 1.)

         After losing just over $200, 000 during his trial run in 2002, Popovich reevaluated his gambling strategies and determined that he must, among other things, leave the table when the cards turned against him, take bigger breaks between losses to review his gameplay, and make fewer hunch bets (i.e., bets based entirely on feelings rather than on empirical data or "tried and true" methods). (See Resp't Trial Ex. 1; Trial Tr. at 35, 39, 103-06, 117, 129-30.) Popovich implemented the new strategies in 2003 and continued to track his gambling activities on excel spreadsheets for a total of 69 days at casinos in both Indiana and Nevada, but his losses soared to over $450, 000. (See Stip., Ex. 11 at 1103-04, 1107.)

         In 2004, however, Popovich's luck changed; his net winnings totaled $44, 200 from gambling primarily at the Indiana Horseshoe Hammond casino over a 10½ month period. (See, e.g., Trial Tr. at 44; Stip., Ex. 12 at 1109.) During that year, Popovich also gambled at Harrah's East Chicago and Harrah's New Albany; in Louisiana at Harrah's New Orleans; and in Nevada at Caesars Palace, Caesars Tahoe, and Harrah's Tahoe. (See Stip., Ex. 12.) Popovich continued using excel spreadsheets to track his gambling activities albeit in a slightly different manner. (Compare Stip., Ex. 11 (2003 gambling records) with Ex. 12 (2004 gambling records).) Specifically, Popovich prepared a "Gaming Record" that documented his daily gambling activities by indicating the name of the casino at which he gambled, the date, the total time he was in the casino, the combined value of the markers, [5] and the games and tables at which he played. (See Trial Tr. at 72-73, 84, 121-23; Stip., Ex. 12 at 1105-06.) Popovich also prepared a "Win/Loss Record" that summarized the daily amounts of his winnings and losses by documenting the name of the casino at which he gambled, the date, the actual time spent gambling, and the combined value of markers.[6] (See Trial Tr. at 73-74, 121-23, 126-27; Stip., Ex. 12 at 1109.) (See also Trial Tr. at 82-85 (providing that Popovich did not make an entry on the Win/Loss Record when he broke even).)

         In addition, Popovich retained certain casino-generated records, such as the casino Markers and Redemption Vouchers, to substantiate his self-prepared records. (See Trial Tr. at 70-72, 75-76, 99-102; Stip., Confd'l Ex. 14.) The Markers included the casino name, the time, the date, the distinct "check number, " the precise games ("BJ" or "FW"), [7] and the tables where Popovich had gambled. (See, e.g., Stip., Confd'l Ex. 14 at 623, 917.) The Redemption Vouchers indicated when and how Popovich redeemed the Markers by providing the redemption date, referencing the Markers' distinct check numbers, and indicating whether Popovich redeemed a Marker by chip, cash, check, or wire transfer. (See Trial Tr. at 69; Stip., Confd'l Ex. 14 at 582, 606, 640, 769.) Popovich also obtained Trip History Reports from Horseshoe Hammond and Harrah's East Chicago at year's end that provided, among other things, estimates of the Markers' daily value, the time expended gambling, and the amounts won or lost. (See Trial Tr. at 62-66; see also, e.g., Stip., Ex. 9[8] at 135.) Popovich, however, stated that he did not use the Trip History Reports in preparing the Gaming Record or the Win/Loss Record because he thought they were unreliable given their use of estimates. (See, e.g., Trial Tr. at 62-66.)

         In May of 2004, Popovich established his own personal checking account that he used to conduct his gambling activities. (See Trial Tr. at 56-57; Stip., Confd'l Ex. 15 at 996-1023.) Up to that point, he had used Patricia's checking account to conduct his gambling activities. (See Trial Tr. at 53-54; Stip., Confd'l Ex. 22 at 57-59, Confd'l Ex. 16.) In September of 2004, Popovich and Patricia established a joint checking account for Popovich's gambling activities. (See Trial Tr. at 57-58; Stip., Confd'l Ex. 22 at 59, Confd'l Ex. 15 at 1024-1093.) Popovich also made several loans to Patricia, payable on demand, for both her personal and professional use in 2003 and 2004. (See Stip., Confd'l Ex. 22 at 75-77; Trial Tr. at 56, 85.) While the loans were not memorialized by promissory notes, the couple did keep a "sloppy record" of them by handwriting the check numbers, the amounts loaned and repaid, and the relevant dates on a sheet of paper that they kept in Patricia's safety deposit box.[9] (See Stip., Confd'l Ex. 22 at 71-79; Trial Tr. at 56, 85, 87-89, 115-16.) The couple also included a line item named the "Popovich Gaming Account" on SPI's general ledger to document the amount of the demand loans and any repayments. (See Trial Tr. at 138, 176-77.) In mid-October 2004, Popovich's line of credit at the Horseshoe Hammond casino was suspended, and shortly thereafter, he stopped gambling entirely and moved onto another "deal." (See Trial Tr. at 59-60, 90-91.)

         In August of 2005, Popovich filed his 2004 federal and state income tax returns separately from Patricia. (See Stip. ¶ 1, Confd'l Exs. 25-26.) Popovich attached a Schedule C, Profit or Loss From Business, to his federal return, stating that he was a professional gambler. (Stip., Confd'l Ex. 25 at 966.) After deducting his gambling losses of $6, 442, 000 from his gambling winnings of $6, 846, 200 on the Schedule C, Popovich reported a gambling profit of $44, 200 for the 2004 tax year. (Stip., Confd'l Ex. 25 at 966.) Popovich, however, carried forward a net operating loss from his 2003 gambling activities that reduced his 2004 federal adjusted gross income to a negative $411, 031. (Stip., Confd'l Ex. 25 at 964.) Popovich then used his federal adjusted gross income as the starting point for calculating his 2004 Indiana AGIT liability as required by Indiana Code § 6-3-1-3.5(a), ultimately reporting his 2004 Indiana AGIT liability as zero. (Compare Stip., Confd'l Ex. 25 at 964 with Confd'l Ex. 26 at 989-90.) See also Ind. Code § 6-3-1- 3.5(a) (2004) (amended 2005) (defining adjusted gross income under IRC § 62 as the starting place for calculating an individual's Indiana adjusted gross income).

         Approximately two years later, the Department audited Popovich and determined that he was not a professional gambler during the 2004 tax year. (See Stip. ¶ 2, Confd'l Ex. 20.) Accordingly, the Department disallowed his deduction of gambling losses from gambling winnings, recalculated his Indiana adjusted gross income, and determined that he owed additional AGIT for the 2004 tax year. (See, e.g., Stip., Confd'l Ex. 1 at 1218.) Consequently, on January 28, 2008, the Department issued its 2004 Proposed Assessment that imposed nearly $300, 000 in AGIT, interest, and penalties. (See Stip. ¶ 3, Confd'l Ex. 3.) On March 12, 2008, Popovich protested the Department's 2004 Proposed Assessment, but he conceded that the 2003 net operating loss should not have been used to offset his 2004 gambling income. (Stip. ¶¶ 4, 8, Confd'l Ex. 5.) On August 3, 2010, the Department issued a Letter of Findings denying the remainder of Popovich's protest. (Stip. ¶ 5, Ex. 6.)

         On October 4, 2010, Popovich initiated this original tax appeal. After resolving several interim matters, [10] Popovich's appeal proceeded to trial on December 7, 2016. The Court heard oral argument on March 23, 2017. Additional facts will be supplied as necessary.

         STANDARD OF REVIEW

         The Court reviews the final determinations of the Department de novo. Ind. Code § 6-8.1-5-1(i) (2017). Accordingly, the Court is not bound by the evidence or the issues presented at the administrative level. Horseshoe Hammond, LLC v. Indiana Dep't of State Revenue, 865 N.E.2d 725, 727 (Ind. Tax Ct. 2007), review denied.

         LAW

         As mentioned, Indiana Code § 6-3-1-3.5(a) defines adjusted gross income under IRC § 62 as the starting place for calculating an individual's Indiana adjusted gross income. I.C. § 6-3-1-3.5(a). IRC § 62 states that for individuals, the term "adjusted gross income" means gross income minus, among other things, the type of expense deductions at issue here: above-the-line deductions related to a taxpayer's trade or business. See I.R.C. §§ 62, 162, 183 (2004).

         While the question whether a taxpayer is engaged in the trade or business of professional gambling is one of first impression in Indiana, other jurisdictions have analyzed similar issues by applying the specific facts in those cases to the two-part test set forth in Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23 (1987) and certain Treasury Regulation factors. See, e.g., Moore v. C.I.R., 102 T.C.M. (CCH) 74, 2011 WL 2929168, at *2-3 (T.C. 2011); McKeever v. C.I.R., 80 T.C.M. (CCH) 358, 2000 WL 1297710, at *8-19 (T.C. 2000); Free-Pacheco v. U.S., 117 Fed.Cl. 228, 262-91 (Fed. Cl. 2014); Treas. Reg. § 1.183-2(a)-(b) (2004). The Court finds these federal authorities instructive and their reasoning applicable to this matter because they interpret the Internal Revenue Code provisions that Article 3 of Indiana's tax code incorporates by reference. See I.C. § 6-3-1-3.5(a); see also F.A. Wilhelm Constr. Co. v. Indiana Dep't of State Revenue, 586 N.E.2d 953, 955 (Ind. Tax Ct. 1992) (providing that the legislature's reference to specific provisions of the Internal Revenue Code indicates its intent that Indiana's AGIT laws be interpreted in harmony with them). Accordingly, the Court will apply the U.S. Supreme Court's two-part test that requires a taxpayer claiming to be engaged in the business of professional gambling to demonstrate that he is "involved in the activity with continuity and regularity and that [his] primary purpose for engaging in the activity . . . [is] for income or profit." C.I.R. v. Groetzinger, 480 U.S. 23, 35 (1987) (emphasis added). Also, the Court finds instructive the federal Treasury Regulations that set forth a non-exhaustive list of nine factors to assist in determining whether a taxpayer is engaged in an activity for income or profit:

(1) the manner in which the taxpayer carries on the activity; (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) the elements of personal pleasure or recreation.

See Treas. Reg. § 1.183-2(a)-(b).

         ANALYSIS

         I. CONTINUITY AND REGULARITY

         To determine whether a taxpayer's gambling activity exhibits the requisite continuity and regularity, a reviewing court must examine the specific facts in the case. Groetzinger, 480 U.S. at 36. See also, e.g., Free-Pacheco, 117 Fed.Cl. at 263 (providing that "Groetzinger does not define what constitutes continuous and regular activity, other than to indicate that a 'sporadic activity, a hobby, or an amusement diversion does not qualify'" (citation omitted)). Courts generally have found, however, that a taxpayer's gambling activity is continuous and regular when the taxpayer gambles on a full-time basis[11] and has no other source of employment or livelihood. See, e.g., Groetzinger, 480 U.S. at 35; Bathalter v. C.I.R., 54 T.C.M. (CCH) 902, 1987 WL 48826 (T.C. 1987).

         Gambling Time

         Groetzinger instructs that a taxpayer's gambling activity is continuous and regular when the taxpayer gambles on a full-time basis. See Groetzinger, 480 U.S. at 35. Popovich contends that his gambling was continuous and regular because even though he did not gamble for 40 hours a week, a typical full-time work schedule, he spent sufficient time to be considered a full-time gambler. (See Pet'r Post-Trial Br. ("Pet'r Br.") at 28-31; Pet'r Post-Trial Reply Br. ("Pet'r Reply Br.") at 21-23.) Popovich presented evidence that shows: 1) he gambled a total of 60 days in 2004 (more than 1½ days per week annualized); 2) his gambling sessions lasted 5-6 hours each (totaling about 1, 000 hours annualized); and 3) he spent about 10 hours a week studying blackjack. (See Pet'r Br. at 4, 11-12, 28-31 and Pet'r Reply Br. at 21-23 (citing, e.g., Stip., Ex. 12 at 1105-06, Confd'l Ex. 22 at 71-72, 94-95; Trial Tr. at 27, 33, 85-86, 177-78).) And, Popovich supports his position by referring to three federal cases interpreting the continuity and regularity requirement. (See Pet'r Br. at 29-31 (citing Libutti v. C.I.R., 71 T.C.M. (CCH) 2343, 1996 WL 98762 (T.C. 1996); Storey v. C.I.R., 103 T.C.M. (CCH) 1631, 2012 WL 1409273 (T.C. 2012); Miller v. C.I.R., 76 T.C.M. 1174, 1998 WL 906689 (T.C. 1998), aff'd 208 F.3d 214 (6th Cir. 2000)).)

         During trial, Popovich presented his Gaming Record and his Win/Loss Record to show that he gambled for a total of 60 days in 2004 and that each of his gambling sessions lasted about 5-6 hours. Popovich stated that he prepared these records on the very day, or the day after, he gambled at a casino. (See Trial Tr. at 70-72.) Popovich claimed that these self-prepared records were complete and accurate not just because they were contemporaneous, but also ...


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