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February 13, 2006

James Castegnetta is serious about the ponies - serious enough to defeat the IRS in Tax Court. His facts are a model of recordkeeping, if not of a profitable use of time.

Petitioner keeps a detailed account of his daily gambling transactions. This includes his daily wagers and winnings, as well as a cumulative total of his yearly winnings and losses. He also spends a considerable amount of time handicapping races and studying racing programs and other materials. As part of handicapping horseraces, petitioner prepares his own “speed figures”. Using a number of criteria, including track length, track conditions, and weather conditions, as well as his observations during the races, petitioner determines a final “speed figure” for the winning horse in each race and compares the “speed figure” to other horses. Petitioner maintains a detailed chronological record of his “speed figures” for the winner of each horserace.

What did all of this work do for Mr. Castagnetta financially? This:


$234 and an IRS exam, to be exact. But he convinced the Tax Court that his gambling rose to the level of a trade or business, so his gambling losses are "above the line," rather than on his schedule A. This saved Mr. Castagnetta $863 in taxes.

Considering the time Mr. Castagnetta spent on the ponies to earn $234, and his ability to win in Tax Court, I think it's time for him to dump the ponies and go to law school.

As far as the lessons for other taxpayers, I will leave it to Russ Fox to have the final word, given his expertise in the area. (Update: Russ has already risen to the occasion with a good post).

Link: James Castagnetta, T.C. Summary Opinion 2006-24.

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