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Busch v. Commissioner of Revenue

May 11, 2006



When the taxpayer in this case claimed her gambling losses as Schedule C business losses on her federal income tax return and this claim was not rejected by the Internal Revenue Service after an audit of the taxpayer's tax return, the Commissioner of Revenue retained the right to make an independent assessment of the taxpayer's tax liability to the state of Minnesota.

A taxpayer's expectation of profit from a given activity need not always be reasonable for the activity to qualify as a trade or business.

Under the circumstances of this case, a taxpayer's slot machine gambling constitutes a trade or business because the taxpayer considered playing slot machines to be her job, spent from 40 to 60 hours per week at a casino for over a two-year period, intended to make a profit via her gambling, conducted research into slot machine strategy, and attempted to apply skill to her gambling activity.

The opinion of the court was delivered by: Anderson, Paul H. Justice


Considered and decided by the court en banc without oral argument.


Relator Estelle Busch's Minnesota individual income tax returns for 1999, 2000, and 2001 were audited by the Commissioner of Revenue and as a result Busch was assessed $102,245 in additional taxes, plus interest, under the Minnesota Alternative Minimum Tax. The additional assessment was based on Busch's gambling activity. Busch played slot machines extensively, winning substantial amounts of money, but losing more money than she won. Under the Minnesota Alternative Minimum Tax, a taxpayer cannot deduct gambling losses unless they are incurred as part of the taxpayer's trade or business. Minn. Stat. § 290.091, subd. 2 (2004). The commissioner concluded that Busch was not engaged in the trade or business of gambling and therefore disallowed her gambling loss deductions. Busch appealed, and the Minnesota Tax Court affirmed the commissioner's determination that Busch's gambling did not constitute a trade or business, and that the commissioner's review was not barred by a possible IRS determination. Busch, who represented herself in these legal proceedings, appealed the tax court's judgment. We reverse.

The parties agreed at the tax court hearing that the facts of this case are essentially undisputed. Busch held several jobs before 1998, including administrative assistant, teacher, police dispatcher, landlord, and building renovator. She did not gamble until 1998. Upon reaching 65 years of age in 1999 and quitting her previous occupations,*fn1 Busch began to spend a considerable amount of time playing the slot machines at Mystic Lake Casino. By the year 2001 she was spending between 40 to 60 hours every week playing the slot machines. Busch testified that she had read several articles "on the computer" regarding slot machine play and talked to Mystic Lake employees and customers about which slot machines were "rolling" favorably to the gamblers.*fn2 Additionally, Busch kept detailed records of her gambling winnings and losses. However, Busch admitted she was not an expert on how slot machines worked and that she chose slot machines as a method of gambling because "it didn't take a great deal of knowledge to play a slot machine." Busch told the tax court that, for her, gambling was not entertainment, but "just plain hard work."

It is undisputed that Busch sought to gain a profit at the slot machines and that she believed she was good at telling whether a slot machine was rolling favorably to the player. Her winnings each year were substantial--$79,482 in 1999, $430,280 in 2000, and $972,980 in 2001, but she asserted and the tax court found that her losses always at least equaled her gains--she claimed $79,482 in losses in 1999, $430,280 in 2000, and $1,161,824 in 2001. Busch initially deducted her 1999 and 2000 gambling losses as Schedule A itemized deductions on her federal tax returns. In 2001, Busch claimed her gambling losses as a deduction on Schedule C, which is the form used for trade or business deductions.*fn3 She then amended her 2000 return to claim her gambling losses on Schedule C.

On August 14, 2002, the Minnesota Department of Revenue notified Busch that the department had audited her 1999 tax return and had assessed an additional tax under Minnesota's Alternative Minimum Tax (AMT). The additional tax was assessed because gambling losses may not be deducted from gambling winnings under the Minnesota AMT unless the losses are incurred in the course of a trade or business. Minn. Stat. § 290.091, subd. 2. The result of the audit was that Minnesota taxed Busch on her 1999 gambling winnings without any deduction for gambling losses, despite the fact that she had lost more money than she had won. In December 2002, the revenue department notified Busch that it also had audited her 2000 and 2001 returns, and was similarly assessing additional Minnesota AMT taxes on Busch's gambling winnings for those years. Altogether, Busch was assessed $102,245 in additional taxes, plus interest. Busch appealed the tax assessments to the Commissioner of Revenue (the commissioner).

Meanwhile, in August 2004, the Internal Revenue Service (IRS) conducted an audit of Busch's 2001 federal income tax return wherein one of the IRS's specific enumerated questions for Busch was: "It appears you are treating your gambling activity as a business. If so, what are your reasons for treating this as a business?" As a result of this audit, the IRS made minor adjustments to Busch's 2001 tax return, but did not move Busch's gambling losses from Schedule C to Schedule A or otherwise comment on the losses.

In response to Busch's administrative appeal of the department's audit, the commissioner examined Busch's returns, reviewed her arguments, and concluded that Busch's gambling did not constitute a trade or business. Busch then appealed the commissioner's decision to the Minnesota Tax Court. Following a hearing, the tax court concluded that Busch had not overcome the presumptive validity of the commissioner's determination and affirmed the commissioner's audit assessment. Busch v. Comm'r of Revenue, No. 7590-R (Minn. T.C. March 2, 2005) (slip op. at 9). The court noted that Busch's slot machine play involved no skill or research and was entirely dependent on chance. Id. The court also noted that Busch admitted she was not a slot machine expert and that her "personal situation" suggested that she was not trying to earn a living from gambling. Id. As such, the court concluded that Busch's gambling activity was more of a hobby than a trade or ...

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