You meet Mr. Gene Cage, who lives and works in Reno, Nevada. The IRS has challenged his Schedule C deductions which produced a net business loss for the 2017 tax year. Mr. Cage is wondering about whether he should challenge the IRS's determination. He would like to know about his chances of prevailing at a trial if he did challenge the IRS in court.

Mr. Cage has a parttime job as a customer account representative in a corporate office. In 2014, his fulltime hours were reduced, and he works during the week from 8 a.m. to 12 noon (20 hours per week). After lunch, he devotes his time to learning about and playing casino slot machines. (Slot machines are mechanical or computer devices which for a wager typically spin a set of wheels, paying out on the wager based on the outcome of the spin.) In early 2015, Mr. Cage attended a seminar held by Dr. Stanley Clark called "Beating the Slots: How to Win Against the House". Using Dr. Clark's methods, Mr. Cage went to a casino and won a considerable amount of money. Since then, he has continued to play slots, primarily in casinos but also sometimes online or in special slots game parlors. After failing to replicate his immediate successes, he has done research on the game (reading books and attending other seminars) and has altered Dr. Clark's original method to better meet what he calls his "unique playing style".

Mr. Cage has reported his gambling as a trade or business activity on a Schedule C of his tax returns consistently. After showing a net profit from his gambling activities in 2015, he has taken net business losses for each year 2016 through 2019. In 2017, he had a net gambling profit (that is, his slot machine winnings exceeded his slot machine wagers), but he had other business expenses related to travel and research which exceeded his net gambling profit. He utilized those deductions to eliminate his wagering income for 2017, resulting in a loss which he then used to offset his parttime wage income*.

Mr. Cage estimates that he spends 20 hours each week playing slots - about 2 hours each weekday and an additional 10 hours over an average weekend. Additionally, he spends about 510 hours per week learning about slots and perfecting his strategy and speaking with others (mostly in online chat groups) about slots. Mr. Cage does not keep a log of the time he spends, but he does keep records of his gambling winnings and losses for each day in a handwritten journal, making occasional notes about when a good wager was the result of a specific strategy he employed. While he certainly has winning wagers every day, he only has a net winning playing session 1 or 2 times per week. He does not maintain a separate bank account for his gambling activity. He pays for his travel and research costs out of his personal bank account. He has receipts for all of his business costs.

He knows many other slots gamblers now and feels that he is a rising star in their small community. He frequently meets up with his gaming friends during his business travel. He loves to play slots. When he travels to play slots, he spends several days playing slots for 810 hours with little downtime to do anything else other than have a few meals with his gaming friends. Sometimes he attends slots tournaments, but mostly he plays on his own. He would like to teach his methods to others someday, but he has not taken any concrete steps to conduct seminars or write on his own.

*Note that this offset of wage income would not be permitted from 20182025 pursuant to 165(d). You can assume for purposes of this assignment that this limitation is irrelevant.

1. Find the IRS regulation that provides a list of factors for determining whether an activity is a trade or business. Give the citation for the regulation and list the factors.
2. Based on these factors, will a court determine that Mr. Cage's gambling activities were a business or a hobby? Why?