Ali and Arlene Mohammadpour - Page 6

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               For a taxpayer engaged in the trade or business of gambling,           
          gambling losses are deductible from gross income in arriving at             
          adjusted gross income.  See sec. 62.  However, for a taxpayer not           
          in the trade or business of gambling, gambling losses are not               
          taken into account in computing adjusted gross income but rather            
          are deductible as an itemized deduction in arriving at taxable              
          income.  See sec. 63(a).5                                                   
               Petitioners do not dispute that if they are required to                
          report Mr. Mohammadpour’s gambling losses as an itemized                    
          deduction, they are not entitled to the child tax credit and                
          their itemized deductions are as determined by respondent.                  
          However, they contest respondent’s categorization of Mr.                    
          Mohammadpour’s losses from gambling as an itemized deduction,               
          claiming that his gambling activity was a trade or business.                
               The Supreme Court, in Commissioner v. Groetzinger, 480 U.S.            
          23 (1987), held that a taxpayer may be in the trade or business             
          of gambling where he or she engages in the gambling activity with           
          continuity and regularity and with the primary purpose of making            
          a profit.  A sporadic activity, hobby, or amusement diversion               

               5Regardless of whether a taxpayer’s gambling activity                  
          constitutes a trade or business, sec. 165(d) provides:  “Losses             
          from wagering transactions shall be allowed only to the extent of           
          the gains from such transactions.”  See also sec. 1.165-10,                 
          Income Tax Regs.  Petitioners do not dispute that sec. 165(d)               
          limits their gambling loss deduction to the amount of their                 
          winnings.  Nor do they seek to offset gambling losses against               
          income from other sources or to carry over gambling losses to               
          other tax years.                                                            

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Last modified: November 10, 2007