John Allen and Glenna A. Lyle  6/7/1999

Joseph F. and Dorothy M. German  3/31/1999

John David Zielonka 2/18/1997

Timothy C. Sadlier 1/27/1997

Edward B. Rood 5/29/1996

James K. Roberts 5/16/1996

Robert Libutti  3/7/1996

John J. Burke and Vivian Burke  12/26/1995

Philip H. and Anna Friedman 12/4/1995

Gregory Alberico  11/16/1995

Stanley B. and Rose M. Whitten  10/25/1995

Connecticut Cases:
http://www.jud.ct.gov/external/super/Tax/recent.htm



 

T.C. Summary Opinion 2007-194
UNITED STATES TAX COURT
LINDA M. MYERS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 23664-05S. Filed November 19, 2007. Kathryn J. Sedo and Christine Rittberg, for petitioner.
Lisa R. Woods, for respondent.

KROUPA, Judge: This case was heard pursuant to the provisions of section 7463⁽¹⁾ of the Internal Revenue Code in effect at the time the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.

Respondent concedes that petitioner is not liable for the accuracy-related penalty under sec. 6662(a). Respondent determined a $5,266 deficiency in petitioner’s Federal income tax for 2003 and determined that petitioner was liable for a $1,055 accuracy-related penalty under section 6662(a). After concessions,⁽²⁾ the sole issue for decision is whether petitioner was in the trade or business of gambling in 2003. We hold that she was.

Background

Some of the facts have been stipulated and are so found. The stipulation of facts and the accompanying exhibits are incorporated by this reference. Petitioner resided in South Saint Paul, Minnesota, at the time she filed the petition.

Petitioner’s Activities

Petitioner spent nearly all of her time during 2003 pursuing two activities, a trucking business that she owned and operated, and her gambling activity. She spent 25 to 35 hours per week working at the trucking business and about 40 hours per week on the gambling activity.

Petitioner oversaw the management and operations functions of her trucking business, which employed eleven drivers for eight trucks in 2003. She worked diligently to maintain the documentation required to run a successful trucking business, such as licenses, maintenance logs, and insurance matters. Petitioner retained an accountant to assist her with financial recordkeeping. Petitioner received a $28,000 salary and $36,000 nonemployee compensation from the trucking business in 2003. Petitioner’s gambling activity consumed the rest of her time. In fact, a typical day for petitioner involved working at the trucking business until 1 or 2 p.m., followed by a trip to the casino that typically lasted until 2 a.m. to 6 a.m. Petitioner would then return home and sleep for a little while before arising the next day to follow the same routine. Petitioner’s children, who had lost their father in an automobile accident, were extremely worried about petitioner’s early morning drives home from the casino, particularly in the wintertime. Nevertheless, petitioner gambled and made these late night trips home nearly every day.

Petitioner originally began gambling in 1992 after her husband’s death, focusing on the $1 slot machines. When she first began gambling, petitioner would occasionally talk with other gamblers. Petitioner became increasingly serious about her gambling pursuits as time progressed and as she became accustomed to the casinos and learned more about their operations. She considered herself a professional gambler by 2000. Petitioner viewed herself as a gambling expert but found no pleasure in gambling. Instead, she considered gambling stressful, tiring, and time consuming. She did not go to the casino with friends or companions and was focused on doing everything she could to win while she was there.

Petitioner developed certain strategies she felt would maximize her odds of winning. Petitioner’s primary strategy was essentially to locate and play those slot machines that were due to make a payout. Petitioner strategized that the more money put into a machine without a payout increased the odds of a payout. Petitioner would speak with the casino attendants upon arriving at the casino to determine which slot machines to play. The attendants would describe what had happened so far that day, which slot machines were played most heavily but had made no payouts, and which slot machines had made payouts. The attendants knew this information because they made the payouts by hand to gamblers who won over a certain amount. Petitioner also sometimes watched other gamblers playing slot machines to learn the slot machines’ patterns. After learning this information, petitioner identified those slot machines petitioner considered “ripe” for a payout and played them.

Petitioner gambled about $500 in each of five slot machines that she felt were good candidates to make payouts on a typical day at the casino. Petitioner would carefully watch the results of each machine once she began using it. If the slot machine began giving her free plays, doubles, or triples, she viewed that as a very good sign and an indication that the slot machine was about to make a large payout. These results validated petitioner’s choice of slot machine and convinced petitioner to continue playing that machine. Petitioner also strategized from her experience that a slot machine would stay “hot” for a few weeks once it started paying.

Documentation of the Gambling Activity

The casinos gave petitioner Forms W-2G, Certain Gambling Winnings, when she won $1,200 or more on the slot machines. The casinos also provided petitioner a player card that she could insert into the slot machines to track her activities. The player card, when inserted into the machine, would record the amounts petitioner gambled and the amounts she won. Each year, the casinos would process the player card information to generate an annual profit and loss statement for petitioner. While petitioner used her player card most of the time, she did not use it every single time. The profit and loss statements were thus not a complete reflection of petitioner’s gambling activities because they lacked any gambling petitioner did without the player card.

Petitioner was not interested in the non-recordkeeping benefits the player card offered, such as free lodging and meals. She only wanted it to track her profits. In fact, petitioner was disappointed when the casino offered her a free trip to Las Vegas because she thought she must have been losing too much money at her gambling activity for the casino to offer her such a trip and an opportunity to lose more.

Petitioner did not find it necessary to keep her own written set of separate gambling records. She knew in her head how much she had won or lost each day. In addition, the casinos documented her activities through the player card system. Petitioner did retain bank statements, canceled checks, credit card statements, the Forms W-2G, and the profit and loss statement, which documented the gambling activities. Petitioner did not make a budget for the gambling activity but generally knew how much she entered the casino with each time.

Success of Petitioner’s Gambling Activity

Petitioner did not report an overall profit from her gambling activities in the 3 years before and the year after the year at issue. She has won large jackpots several times, however, including $50,000 twice. She won jackpots of $1,200 or more over 300 times during 2003. Petitioner also has taken home as much as $45,000 profit from 1 day’s gambling. Despite the occasional large jackpots, petitioner was concerned that she continued to lose money. She changed her strategy accordingly. Petitioner tried to focus on winning a little bit at a time rather than try to earn back large losses in one night. For example, if petitioner won money early in the afternoon, petitioner would go home rather than stay at the casino and play more to try to recoup old losses.

Petitioner’s Returns

Petitioner has treated herself as a professional gambler on her income tax returns since at least 2000. Petitioner used the same accountant that helped with the trucking business to assist her with matters related to the gambling activity and to prepare her individual returns.

While sec. 165(a) generally permits the deduction of losses from gross income, there is a special rule limiting the deduction of gambling losses. Losses from wagering transactions may only be deducted to the extent of gains from wagering transactions. Sec. 165(d).

Petitioner filed her return for 2003 reporting that she was in the trade or business of gambling. She deducted her gambling losses as an expense to the extent of her gambling winnings, totaling $1,408,740 in 2003. Respondent examined petitioner’s return for 2003 and issued a deficiency notice. Petitioner timely filed a petition.

Discussion

The sole issue for decision is whether petitioner was in the trade or business of gambling in 2003. If petitioner was in the trade or business of gambling, she may deduct her wagering losses to the extent allowable in computing adjusted gross income.⁽³⁾ See sec. 62. If petitioner was not in the trade or business of gambling, on the other hand, she may only deduct the wagering losses to the extent allowable as an itemized deduction to compute taxable income. See Calvao v. Commissioner, T.C. Memo. 2007-57.

All ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business are generally deductible. Sec. 162(a). An activity must be conducted with continuity, regularity, and the primary purpose of earning a profit to be considered a trade or business under section 162. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987). Whether the taxpayer is carrying on a trade or business depends on the facts and circumstances.⁽⁴⁾ Id. at 36.

Respondent has conceded that petitioner’s gambling activity was conducted with the required continuity and regularity during 2003. The parties dispute, however, whether petitioner’s primary purpose for engaging in the activity was to earn a profit. See id.; Miller v. Commissioner, T.C. Memo. 1998-463, affd. without published opinion 208 F.3d 214 (6th Cir. 2000). We examine whether the taxpayer engaged in the activity with the actual and honest objective of making a profit. See Evans v. Commissioner, 908 F.2d 369, 373 (8th Cir. 1990), revg. T.C. Memo. 1988-468; Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs. While a taxpayer’s expectation of profit need not be reasonable, there must be a good faith objective of making a profit. Allen v. Commissioner, 72 T.C. 28, 33 (1979); sec. 1.183-2(a), Income Tax Regs. We give greater weight to objective facts than to a taxpayer’s statements of intent. Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a), Income Tax Regs.

We structure our analysis around nine nonexclusive factors. Sec. 1.183-2(b), Income Tax Regs. The nine factors are:

1. The manner in which the taxpayer carried on the activity;
2. the expertise of the taxpayer or his or her advisers;
3. the time and effort expended by the taxpayer in carrying on the activity;
4. the expectation that the 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 loss 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. whether elements of personal pleasure or recreation are involved. Id.

No factor or set of factors is controlling, nor is the existence of a majority of factors favoring or disfavoring a profit objective necessarily controlling. Hendricks v. Commissioner, 32 F.3d 94, 98 (4th Cir. 1994), affg. T.C. Memo.

1993-396; Brannen v. Commissioner, 722 F.2d 695, 704 (11th Cir. 1984), affg. 78 T.C. 471 (1982); sec. 1.183-2(b), Income Tax Regs. The individual facts and circumstances of each case are the primary test. Keanini v. Commissioner, supra at 46; Allen v. Commissioner, supra at 34; sec. 1.183-2(b), Income Tax Regs.

We now examine each of the nine nonexclusive factors. Manner in Which the Taxpayer Carried On the Activity We begin by examining the manner in which petitioner carried on her gambling activity. The fact that a taxpayer carries on the activity in a businesslike manner may indicate a profit objective. Sec. 1.183-2(b)(1), Income Tax Regs. In determining whether a taxpayer conducted an activity in a businesslike manner, we consider whether the taxpayer maintained complete and accurate books and records, whether the taxpayer conducted the activity in a manner substantially similar to those of comparable businesses that are profitable, and whether the taxpayer attempted changes in an effort to earn a profit. Engdahl v. Commissioner, 72 T.C. 659, 666-667 (1979); sec. 1.183-2(b)(1), Income Tax Regs.

The casinos maintained profit and loss tallies for petitioner through the player card system. Petitioner thus did not find it necessary to keep separate books and records to track this information. She used her player card most of the time to enable the casino to perform this tracking function. Petitioner also did not keep a separate bank account for her gambling activities but kept a tally of the amount she had with her when she went to the casino. See Canale v. Commissioner, T.C. Memo. 1989-619; cf. Calvao v. Commissioner, T.C. Memo. 2007-57 (taxpayer claimed he kept daily records of gambling activity but failed to offer any records into evidence). Petitioner also had no written budget or business plan, although she had a strategy she felt would enable her to win. She explained her strategy in detail to the Court. Petitioner’s strategy was to identify and play slot machines that were due for a payout. She implemented the strategy by carefully gathering information about the playing history of the slot machines in the casino and studying their patterns to determine which slot machines were likely to pay out. Moreover, petitioner testified that after some initial losses she changed her strategy to help her win. She decided to try to win just a little at a time rather than to try to recoup old losses all at once. See Engdahl v. Commissioner, supra at 669. If petitioner won some money early in the day, she would take the winnings and return home, rather than continue to gamble with the money she had just won and risk losing it. We find that this factor favors petitioner. Expertise of Taxpayer or His or Her Advisers We next consider petitioner’s expertise (or the expertise of her advisers) in the gambling activity. Preparing for the activity by extensive study of its accepted business, economic, and scientific practices, and consulting with experts in these matters may indicate that a taxpayer has a profit objective when the taxpayer follows that advice. Sec. 1.183-2(b)(2), Income Tax Regs.

Petitioner considers herself a gambling expert and has gambled for over 10 years. The continuity and regularity of her gambling activity strongly suggest that she is an expert at slot machines. Petitioner also consulted regularly with casino employees to further her gambling strategy and watched other gamblers to understand what she believed to be slot machine payout patterns. We find that this factor favors petitioner.

Time and Effort Expended by the Taxpayer in Carrying On the Activity We next consider the time and effort petitioner expended in carrying on the gambling activity. A taxpayer’s devotion of much time and effort to conducting an activity, particularly if the activity does not have substantial personal or recreational aspects, may indicate an intention to derive a profit. Sec. 1.183-2(b)(3), Income Tax Regs.

Petitioner spent at least 40 hours per week gambling at the casinos. Petitioner would often gamble for 12 to 15 hours at a time, often as late as 2 a.m. to 6 a.m. We acknowledge that gambling activities are often viewed as recreational, enjoyable pursuits upon which many people enjoy spending significant time. See, e.g., Calvao v. Commissioner, T.C. Memo. 2007-57. Petitioner testified credibly, however, that she did not view gambling as a mere recreational pursuit. She credibly testified that she found no pleasure in gambling. Moreover, petitioner did not go to the casino with others and while there, was focused on winning as much money as possible. We find that this factor favors petitioner.

Expectation That the Assets Used in the Activity May Appreciate in Value Another factor to be considered is the expectation that the assets used in the activity may appreciate in value. Sec. 1.183-2(b)(4), Income Tax Regs. The parties agree that this factor does not apply.

Success of the Taxpayer in Carrying On Other Similar or Dissimilar Activities We next examine petitioner’s success in carrying on other similar or dissimilar activities. If a taxpayer has previously engaged in similar activities and made them profitable, this success may show that the taxpayer has a profit objective, even though the current activity is presently unprofitable. Sec. 1.183-2(b)(5), Income Tax Regs. A taxpayer’s success in other, unrelated activities also may indicate a profit objective. Daugherty v. Commissioner, T.C. Memo. 1983-188. A taxpayer’s success in a different business enterprise may be evidence of a profit objective where the taxpayer relied on diligence, initiative, foresight, and other qualities that generally lead to success in business activities. Id.

Petitioner has shown that she was capable of running a successful business through her ownership and operation of the trucking business. Petitioner’s success with the trucking business indicates that she had the skills to operate a business successfully. She relied on the same accountant for her gambling activities and relied on her player card to track her winnings. We find this factor favors petitioner.

Taxpayer’s History of Income or Loss With Respect to the Activity We next examine petitioner’s history of income or loss with respect to the gambling activity. A history of substantial losses may indicate that the taxpayer did not conduct the activity for profit. Golanty v. Commissioner, 72 T.C. 411, 427 (1979), affd. without published opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(b)(6), Income Tax Regs. Losses during the initial or startup stage of an activity do not necessarily indicate, however, that the taxpayer did not conduct the activity for profit, but losses that continue to be sustained beyond the period that is customarily necessary to bring the operation to profitable status may indicate the taxpayer did not engage in the activity for profit. Engdahl v. Commissioner, 72 T.C. at 668; sec. 1.183-2(b)(6), Income Tax Regs. Abandoning an activity after indications that the activity will be unprofitable signifies that the taxpayer engaged in the activity for profit. Canale v. Commissioner, T.C. Memo. 1989-619. Petitioner has not shown a profit from her gambling activity for the 3 years before and the year after the year at issue. Petitioner persisted in the activity despite the ongoing pattern of losses, although she did change her strategy to some extent. This factor favors respondent.

Amount of Occasional Profits, If Any, Which Are Earned We next consider the amounts of occasional profits, if any, that petitioner earned. Occasional profits the taxpayer earned from the activity, in relation to the amount of losses incurred, the amount of the taxpayer’s investment, and the value of the assets used in the activity provide useful criteria in determining the taxpayer’s intent. Sec. 1.183-2(b)(7), Income Tax Regs. A practical possibility that a taxpayer could earn enough money in a year to exceed expenses also can indicate a profit objective. Bolt v. Commissioner, 50 T.C. 1007, 1014-1015 (1968).

Petitioner has occasionally won jackpots as large as $50,000 from her gambling activity. Petitioner won sums of $1,200 or more over 300 times in 2003. Her frequent wins and occasional big wins indicate the possibility that petitioner could have earned enough to cover her expenses in a year. This factor favors petitioner.

Financial Status of the Taxpayer

We next examine petitioner’s financial status. If a taxpayer does not have substantial income or capital from sources other than the activity in question, it may indicate that the taxpayer engages in the activity for profit. Sec. 1.183-2(b)(8), Income Tax Regs. Conversely, substantial income from sources other than the activity, especially if the losses generate large tax benefits, may indicate that the taxpayer is not conducting the activity for profit. Id. Those with substantial income from other sources have a much greater tax incentive to incur large expenditures in a hobby type of business. Jackson v. Commissioner, 59 T.C. 312, 317 (1972). Petitioner earned $64,000 from the trucking business in 2003. Merely because petitioner had another source of income in 2003 is not dispositive, however. See Calvao v. Commissioner, supra. None of petitioner’s income from the trucking business could be offset by gambling losses due to the limitation on deducting gambling losses only to the extent of winnings. See sec. 165(d). Petitioner thus had no tax incentive to engage in the gambling activity to shield income from other endeavors. We conclude that this factor is neutral.

Whether Elements of Personal Pleasure or Recreation Are Involved We next examine whether elements of personal pleasure or recreation were involved in the gambling activity. The presence of recreational or pleasurable motives in conducting an activity may indicate that the taxpayer is not conducting the activity for profit. Sec. 1.183-2(b)(9), Income Tax Regs.; see Calvao v. Commissioner, T.C. Memo. 2007-57 (taxpayer’s gambling strategy and desire to win found consistent with gambling for entertainment or recreational purposes). That the taxpayer derives personal pleasure from engaging in the activity is insufficient to cause the activity to be classified as not engaged in for profit if other factors show that the activity is conducted for profit. Jackson v. Commissioner, supra; sec. 1.183-2(b)(9), Income Tax Regs.

We acknowledge that gambling at a casino is an activity commonly understood to be a pleasant amusement. Petitioner testified credibly, however, that she found no pleasure in gambling. It was work. Petitioner testified that she found gambling to be stressful, tiring, and time consuming. She further testified that she always went to the casino alone and that no friends or family members accompanied her to add any entertainment element to her activities. We find her testimony thoughtful and credible. On balance, we find this factor favors petitioner.

Conclusion

Taking into account the above factors and considering the facts and circumstances relating to petitioner’s gambling activity, we conclude that petitioner engaged in the gambling activity with the actual and honest objective of making a profit in 2003. As the parties have agreed that petitioner conducted the gambling activity with continuity and regularity, we conclude that petitioner was in the trade or business of gambling during 2003. Accordingly, petitioner may deduct her gambling expenses under section 162(a) to the extent allowable under section 165(d).

To reflect the foregoing, Decision will be entered for petitioner.


Footnotes:

(1) All section references are to the Internal Revenue Code in effect for the year at issue, unless otherwise indicated.

(2) Respondent concedes that petitioner is not liable for the accuracy-related penalty under sec. 6662(a)

(3) While sec. 165(a) generally permits the deduction of losses from gross income, there is a special rule limiting the deduction of gambling losses. Losses from wagering transactions may only be deducted to the extent of gains from wagering transactions. Sec. 165(d).


(4) At trial, we denied petitioner’s motion to shift the burden of proof under sec. 7491 because the outcome of this case is determined on the preponderance of the evidence, making it unnecessary to determine who has the burden of proof. See Topping v. Commissioner, T.C. Memo. 2007-92. The Court invited the parties to address this issue on brief. We have carefully reviewed the parties’ arguments on brief and stand by our ruling denying petitioner’s motion to shift the burden of proof to respondent. Instead, we shall determine the outcome of this case on the preponderance of the evidence. See id.

 

T.C. Memo. 2007-57
UNITED STATES TAX COURT
JOSE CALVAO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7287-05. Filed March 8, 2007.
Timothy J. Burke, for petitioner.
Luanne S. Di Mauro, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HAINES, Judge: Respondent determined a deficiency in petitioner’s 2002 Federal income tax of $17,096 and an accuracy related penalty under section 6662(a) of $3,419.⁽¹⁾ The issues for decision are whether petitioner was in the trade or business of gambling during 2002, and whether petitioner is liable for an accuracy-related penalty under section 6662(a).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time he filed his petition, petitioner resided in Tiverton, Rhode Island.

Prior to 1993, petitioner was an operations manager for a textile firm called Prim/Dritz Corporation. In 1993, petitioner started Caltex Corporation (Caltex), an S corporation. Caltex is a textile firm which sells embroidered T-shirts, caps, and other similar products. Sometime before 1999, Caltex hired petitioner’s brother with the goal that, once petitioner’s brother learned about the textile business, petitioner could reduce his involvement in Caltex. In 1999, petitioner’s brother took over the day-to-day operations of Caltex. During 2002, petitioner was the president and 100-percent owner of Caltex and worked at Caltex 20 to 25 hours per week providing “consulting services”. In 2002, petitioner received a salary of $42,000 and a distribution of income of $99,790 from Caltex.

During 2002, petitioner played the slot machines at several casinos throughout the United States.⁽²⁾ Petitioner spent most of his time at Foxwoods Resort and Casino in Connecticut, which was approximately 100 miles from his home. The casinos issued petitioner Forms W-2G, Certain Gambling Winnings, for 2002, reflecting gross winnings of $132,800. Prior to filing his 2002 Federal income tax return, petitioner prepared a summary of his gambling activity (the gambling summary). The gambling summary reflected that petitioner gambled on 24 separate occasions, won a total of $132,800, and lost a total of $180,300. Petitioner timely filed his 2002 Federal income tax return.⁽³⁾ Petitioner reported the following sources of income: (1) Wage income from Caltex of $42,000; (2) taxable interest of $7,676; (3) ordinary dividends of $3,176; (4) taxable State income tax refund of $3,224; and (5) income from rental real estate, S corporations, and trusts of $109,403.⁽⁴⁾ On an attached Schedule C, Profit or Loss From Business, petitioner reported that his principal business or profession was professional gambling. Petitioner reported gross receipts of $132,800, cost of goods sold of $180,300, and deducted $3,150 in travel expenses, for a net Schedule C loss of $50,650. After deducting the Schedule C loss and a net operating loss carryover of $1,106, petitioner reported total income of $113,723. Petitioner claimed itemized deductions of $14,077 and a personal exemption of $3,000, resulting in taxable income of $96,646 and total tax of $23,303. On March 21, 2005, respondent issued petitioner a notice of deficiency. Respondent determined petitioner was not engaged in the trade or business of gambling during 2002 and therefore could not deduct his gambling losses on Schedule C. Instead, respondent determined petitioner could deduct the gambling losses as an itemized deduction, but only to the extent of his gambling winnings.⁽⁵⁾ Based on the above, respondent determined the amount of tax required to be shown on petitioner’s 2002 return was $40,399, resulting in a deficiency of $17,096. Respondent also determined petitioner was liable for an accuracy-related penalty under section 6662(a) of $3,419.

In response to the notice of deficiency, petitioner filed his petition with this Court on April 18, 2005.

OPINION

I. Petitioner’s Gambling Activity

Respondent determined petitioner was not in the trade or business of gambling during 2002 and thus could not claim his gambling losses as a Schedule C deduction. Petitioner argues he was in the trade or business of gambling because he pursued the activity full time, in good faith, with regularity, and for the production of income.⁽⁶⁾ Section 162(a) allows deductions for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. If a taxpayer were engaged in the trade or business of gambling, losses would be deductible from gross income in arriving at the adjusted gross income. See sec. 62. However, if the taxpayer were not in the trade or business of gambling, his losses would be deductible as an itemized deduction in arriving at taxable income. See sec. 63(a). Regardless of whether the gambling activity constituted a trade or business, section 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. Although petitioner deducted gambling losses exceeding his gambling winnings by $50,650, petitioner does not dispute that section 165(d) limits his gambling loss deduction to the amount of his gambling winnings.

To be engaged in a trade or business within the meaning of section 162(a), an individual taxpayer must be involved in the activity with continuity, regularity, and with the primary purpose of deriving income and profit. Commissioner v.Groetzinger, 480 U.S. 23, 35 (1987). Whether the taxpayer is carrying on a trade or business requires an examination of all the facts in each case. Id. at 36; Higgins v. Commissioner, 312 U.S. 212, 217 (1941).

In Groetzinger, the Supreme Court addressed the issue of whether a taxpayer’s gambling activity was a trade or business within the meaning of section 162(a). The taxpayer devoted 60 to 80 hours each week for 48 weeks to parimutuel wagering, primarily on greyhound races. Commissioner v. Groetzinger, supra at 24. The taxpayer gambled at racetracks 6 days a week and spent a substantial amount of time studying racing forms, programs, and other materials. Id. While the taxpayer received $6,498 in income from other sources during the year, the taxpayer had no other profession or type of employment during the 48 weeks he devoted to gambling. Id. at 24-25. The Supreme Court stated:

to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and * * * the taxpayer’s primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify. * * *

 * * * * * * *

we conclude that if one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business within the meaning of the statutes with which we are here concerned. * * *

Id. at 35-36. The Supreme Court affirmed the judgment of the Court of Appeals for the Seventh Circuit, finding the taxpayer was engaged in the trade or business of gambling. Id. at 36.

Petitioner argues the facts of Groetzinger are similar to the facts of this case, and, like the Supreme Court in Groetzinger, we should find petitioner was engaged in the trade or business of gambling. After carefully considering the facts in this case, we disagree.

Petitioner argues, like the taxpayer in Groetzinger, he spent a substantial amount of time preparing for his trips to the casino and developed a strategy for his gambling:

In 2002, the petitioner went to the casino with a plan.The petitioner would first talk to the casino hosts to find out which areas of the casino were heavily played and what slot machines were/were not hitting. Based upon the information, the petitioner then determined what slot machines he was going to play and how much money he would need.

In 2002, the petitioner set a limit for his losses each day that he went to the casino. The petitioner also set a limit on his games/winnings such that he left the casino once he made a twenty (20%) percent return on his money.

Petitioner also argues that he bought a slot machine, spent a significant amount of time studying how the “chips” and cycles of slot machines worked, subscribed to a gambling magazine, and read “probably about 20” books on playing the slot machines. Petitioner’s efforts and strategy are consistent with the desire to win money playing the slot machines. However, we find petitioner’s desire to win money and his strategy for doing so is also consistent with gambling purely for its entertainment or recreational aspects. The time petitioner spent and the strategy he developed, by themselves, do not establish petitioner was engaged in the trade or business of gambling. Petitioner testified he maintained daily records of his gambling activity and argues on brief his record keeping is indicative of a trade or business. Petitioner did not provide respondent with these records, nor did he introduce the records into evidence. Given the lack of evidence, we do not find that petitioner maintained daily records of his gambling activity.

Petitioner argues that he spent “approximately 2,206.5 hours” gambling at various casinos, “where he focused primarily on slot machines such as the ‘Double Diamond’”, and that the amount of time devoted to his gambling activity is indicative of a trade or business. Petitioner relies on a schedule of gambling wins and losses to establish the hours spent gambling. The schedule of gambling wins and losses reflects petitioner’s attempt to reconstruct the dates he gambled, the amount of money won or lost, and the amount of time spent gambling each day. However, the schedule was not provided to respondent until January 4, 2006, and there is no evidence in the record indicating when the schedule was prepared. This evidence was not contemporaneously maintained, and it is inaccurate and unreliable.⁽⁷⁾ Petitioner did not provide his purported daily records, nor did he provide other evidence corroborating the amount of time he devoted to gambling during 2002. Given the lack of reliable evidence, we cannot determine how much time petitioner devoted to gambling during 2002. Unlike the taxpayer in Groetzinger, petitioner spent approximately 20 to 25 hours per week working for Caltex.

Additionally, petitioner’s livelihood did not depend on playing the slot machines. His primary income came from his salary of $42,000 and the passthrough of income of $99,790 from Caltex, of which he was president and 100-percent owner during 2002. By themselves, these facts do not preclude petitioner from being engaged in the trade or business of gambling. However, such factors were considered by the Supreme Court in Groetzinger and are relevant to our determination. See Commissioner v. Groetzinger, 480 U.S. at 24-25, 35-36. We find that these facts weigh against petitioner’s being engaged in the trade or business of gambling. See Jones v. Commissioner, T.C. Memo. 1988-393. Taking into consideration all of the above, we find petitioner was not engaged in the trade or business of gambling in 2002. Therefore, petitioner is not entitled to report his gambling activity on Schedule C. Instead, petitioner must claim his gambling losses as an itemized deduction on Schedule A, as determined by respondent. We sustain respondent’s determination that the amount of tax required to be shown on petitioner’s 2002 Federal income tax return was $40,399, resulting in a deficiency of $17,096.

II. Accuracy-Related Penalty Under Section 6662(a)

Respondent determined petitioner is liable for an accuracy related penalty under section 6662(a) for 2002 of $3,419. Petitioner argues he is not liable for an accuracy-related penalty because he reasonably relied upon the advice of his accountant. Section 6662(a) imposes a penalty in the amount of 20 percent of the portion of the underpayment to which section 6662 applies. As relevant to this case, the penalty applies to any portion of the underpayment that is attributable to any substantial understatement of income tax. Sec. 6662(b)(2).

There is a “substantial understatement of income tax” if the amount of the understatement exceeds the greater of 10 percent of the tax required to be shown on the return or $5,000. Sec.6662(d)(1).

The Commissioner bears the burden of production with respect to penalties. Sec. 7491©; Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once the burden of production is met, the taxpayer must come forward with evidence sufficient to show that the penalty does not apply. Higbee v. Commissioner, supra at 447.

The tax required to be shown on petitioner’s tax return was $40,399. Ten percent of that amount is less than $5,000. Thus, petitioner’s understatement is substantial if it exceeds $5,000. Petitioner reported an income tax liability of $23,303, resulting in an understatement of $17,096. Respondent has satisfied his burden of production by showing that petitioner’s understatement of tax was substantial.

The accuracy-related penalty is not imposed, however, with respect to any portion of the understatement if the taxpayer can establish he acted with reasonable cause and in good faith. Sec. 6664(c)(1). Reliance upon the advice of a professional may demonstrate a taxpayer acted with reasonable cause and in good faith. Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 98-99 (2000), affd. 299 F.2d 221 (3d Cir. 2002); Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991); see sec. 1.6664-4©(1), Income Tax Regs. However, a taxpayer’s reliance upon the advice of a professional does not automatically constitute reasonable cause. Neonatology Associates v. Commissioner, supra at 98-99; see sec. 1.6664-4©(1), Income Tax Regs. For a taxpayer to reasonably rely on the advice of a professional, the taxpayer must show: (1) The adviser was a competent professional who had sufficient expertise to justify reliance; (2) the taxpayer provided necessary and accurate information to the adviser; and (3) the taxpayer actually relied in good faith on the adviser’s judgment. Neonatology Associates v. Commissioner, supra at 98-99.

Petitioner testified he relied on his accountant, Mr. Beauregard, to prepare his return, and Mr. Beauregard had prepared his returns since 1993 without incident. However, petitioner did not call Mr. Beauregard as a witness, nor did he introduce evidence which would establish that Mr. Beauregard possessed the requisite expertise.⁽⁸⁾ Because petitioner has not established that Mr. Beauregard was a competent professional who had sufficient expertise to justify reliance, petitioner has not shown that he acted with reasonable cause and in good faith. See sec. 6664(c)(1); Neonatology Associates v. Commissioner, supra at 98-99. Therefore, we find petitioner is liable for an accuracy related penalty under section 6662(a) of $3,419.

III. Conclusion

Petitioner was not engaged in the trade or business of gambling in 2002. For all of the foregoing reasons, we hold petitioner is liable for a deficiency in his 2002 Federal income tax of $17,096 and an accuracy-related penalty under section 6662(a) of $3,419.

In reaching our holdings, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.

To reflect the foregoing, Decision will be entered for respondent.

Footnotes:

(1) Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended. All amounts are rounded to the nearest dollar.

(2) Petitioner occasionally played Carribean stud poker, but the slot machine was his preferred game.

(3) Petitioner’s return was prepared by Norman R. Beauregard (Mr. Beauregard), who identified himself on the return as a certified public accountant. There is nothing else in the record regarding Mr. Beauregard’s experience or qualifications.

(4) The income from rental real estate, S corporations, and trusts included a total rental real estate loss of $6,047, a passthrough of income from Caltex of $99,790, and trust income of $15,660.

(5) Respondent also disallowed the claimed personal exemption deduction because petitioner’s adjusted gross income exceeded the allowable amount for such a deduction. Petitioner does not dispute this determination.

(6) The resolution of this issue does not impact the amount of the allowable gambling loss deduction. See sec. 165(d). However, the resolution of this issue does impact the amount of the deficiency. If the gambling loss deduction were shifted from Schedule C to Schedule A, Itemized Deductions, it would increase petitioner’s adjusted gross income, thus limiting under sec. 68 the extent to which itemized deductions other than the gambling loss are allowable.

(7) For example, the schedule of gambling wins and losses indicates petitioner spent 18 days gambling during March 2002, during which he won $9,700 and lost $27,900. However, the gambling summary prepared by petitioner for use in filing his 2002 return indicates petitioner gambled on only 2 days during March 2002, during which time he won $9,700 but lost $31,300. Additionally, the Forms W-2G issued to petitioner for payouts made during March 2002 indicate petitioner won only $8,100. Similar discrepancies appear in other months.

(8) Petitioner did not begin his gambling activity until 2002, and his underpayment of tax arose from claimed deductions for that activity. Mr. Beauregard’s preparation of petitioner’s returns for 1993-2001 does not establish that Mr. Beauregard had sufficient expertise regarding the tax treatment of petitioner’s gambling activity. In fact, despite the clear requirement of sec. 165(d) that gambling losses may be claimed only to the extent of gambling winnings, petitioner claimed gambling losses that exceeded his gambling winnings by $50,650. In addition, the gambling losses were claimed as costs of goods sold. At the least, this calls into question Mr. Beauregard’s expertise.

 

T.C. Memo. 2007-38 UNITED STATES TAX COURT
GEORGE E. AND GLORIA TSCHETSCHOT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9498-03. Filed February 20, 2007.

R disallowed losses in excess of Ps’ winnings from gambling and determined both a deficiency and a penalty for substantial understatement for 2000. After conceding that H’s net gambling losses were not properly deductible, Ps argued that, as a professional tournament poker player, W’s net losses should be treated the same as those of any other professional sport participants. Held: W’s net gambling losses are not exempt from the limitations of sec. 165(d), I.R.C. Held, further: We leave for the parties to determine as part of their computations under Rule 155,Tax Court Rules of Practice and Procedure, whether there was a substantial understatement for the taxable year in issue; if so, Ps are liable for the accuracy-related penalty.

Gloria Tschetschot, pro se. J. Anthony Hoefer, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

ARMEN, Special Trial Judge: Respondent determined a deficiency in petitioners’ Federal income tax for the taxable year 2000 of $10,071, as well as an accuracy-related penalty for a substantial understatement of income tax of $2,014. The grounds for the deficiency were the limitations of section 165(d)as applied to Gloria Tschetschot’s (Mrs. Tschetschot) professional tournament poker playing and George E. Tschetschot’s (Mr. Tschetschot) status as a nonprofessional gambler.⁽¹⁾  At trial, petitioners conceded that Mr. Tschetschot was not a professional gambler but argued that Mrs. Tschetschot’s professional tournament poker playing is not gambling and thus not subject to the limitations of section 165(d) on losses from gambling. Respondent conceded that Mrs. Tschetschot’s business expenses related to her professional gambling activity were deductible [ed. note: against other current-year income only⁽⁷⁾]. Thus, the two issues for decision are: (1) Whether Mrs. Tschetschot’s tournament poker losses are limited by section165(d) to the amount of her tournament poker winnings, and (2) whether a penalty under section 6662(a) for a substantial understatement of income tax is appropriate.


FINDINGS OF FACT At the time the petition was filed, petitioners resided in Cedar Rapids, Iowa.

Mrs. Tschetschot is a database project engineer. She was also a professional tournament poker player in 2000. ⁽²⁾ Mr.Tschetschot is not a professional gambler but occasionally plays slot machines and blackjack while accompanying his wife on her poker tournament trips.

Tournament poker is somewhat different from “live-action”poker. A poker tournament consists of a series of individual events hosted by a casino, and it can last anywhere from several days to 2 weeks. Unlike live-action poker, tournament participants cannot exit the game by cashing out partway through the tournament; tournaments are played until there is one player left with all of the chips.

All tournaments have a “buy-in”, or entrance fee, that is paid by the tournament participants to the tournament organizer. A portion of this amount is an administrative fee kept by the casino hosting the event, and the remainder goes directly into the prize fund “pot” that will ultimately be paid out to the .tournament’s winners. No portion of the administration fee is included in the prize fund, and the entire prize fund is dispersed to winning participants. The buy-in may or may not correlate dollar-for-dollar with the amount of chips received at the start of the tournament, and the chips themselves have no intrinsic monetary value. Although “re-buys” are sometimes allowed, tournament play contemplates that each player has only a fixed number of chips and that each player begins the tournament with the same number of chips. When a player runs out of chips, he or she is out of the game. Cash prizes are awarded to a predetermined number of finishing places in the tournament. Because of the buy-in system, the only monetary loss a tournament participant may incur will be the amount of the buy-ins and any re-buys the participant might make; no participant will be able to bet--or subsequently lose--any greater amount. Similar to live-action poker, however, a player’s tournament success depends on a combination of both luck and skill. ⁽³⁾ A player might have a decent hand, but as Kenny Rogers tells us in “The Gambler”, he or she would still have to “know when to hold ‘em, know when to fold‘em, know when to walk away and know when to run” to actually be a success.

For 2000, the taxable year in issue, Mrs. Tschetschot earned approximately $49,000 in wages. She also participated in nine poker tournament series, winning in excess of $11,000. ⁽⁴⁾

Mrs. Tschetschot claimed a net loss of $29,933 from her "professional gambler” activity in 2000 on her Schedule C, Profit or Loss From Business. Mr. Tschetschot claimed a net loss of $9,000 from his “professional gambler” activity in 2000 on his Schedule C.

Respondent determined a deficiency of $10,071 based on the view that the deductions claimed by petitioners related to their gambling activities were not appropriately Schedule C deductions, but rather deductions allowable on Schedule A, Itemized Deductions, but only to the extent of petitioners’ winnings. Respondent also determined an accuracy-related penalty under section 6662(a) of $2,014.

At trial, petitioners conceded the issue as to Mr.Tschetschot but disputed the determination as to Mrs.Tschetschot. Respondent conceded Mrs. Tschetschot’s status as a professional, as well as the corresponding treatment of certain expenses related to her professional gambling activity.

Respondent maintains that section 165(d) limits Mrs. Tschetschot’s losses and that petitioners remain liable for an accuracy-related penalty. Petitioners contend that Mrs. Tschetschot’s professional tournament poker playing activity is more properly classified as “entertainment and professional sports” than professional gambling and should bear the resulting tax treatment; i.e., that her net loss should not be limited by section 165(d) restricting losses from wagering activities. Petitioners also contend that they do not meet the threshold amount for the imposition of an accuracy-related penalty based on a substantial understatement of income tax.

OPINION.

Tournament Poker ⁽⁵⁾

Central to petitioners’ contention is the thesis that tournament poker, unlike other types of poker, is not a wagering activity.

The term “wagering” has different meanings depending on the context in which the term is used. More often than not, and as it is used in the Internal Revenue Code, the term is synonymous with “gambling”. ⁽⁶⁾

Congress has made a policy decision such that, while section165 generally allows losses to be deducted from gross income, “[l]osses from wagering transactions shall be allowed only to the extent of the gains from such transactions.” ⁽⁷⁾ Sec. 165(d); see also sec. 165(a). However, neither the Internal Revenue Code nor the regulations define what constitutes a wagering activity.

When a term is not defined, we must apply the term’s “plain,obvious, and rational meaning.” Liddle v. Commissioner, 103 T.C.285, 293 n.4 (1994), affd. 65 F.3d 329 (3d Cir. 1995); see also Boyd v. United States, 762 F.2d 1369, 1373 (9th Cir. 1985). According to the dictionary, a “wager” is defined as “something risked or staked on an uncertain event” or “a bet”. Random House College Dictionary (1968). Similarly, “to wager” is defined as: (1) Something risked or staked on an uncertain event; bet; (2) the act of betting. Random House College Dictionary (1973). Courts have often had to differentiate between wagering and related activities on the one hand and those activities not falling into that category on the other. See, e.g., Allen v. U.S. Govt. Dept. of Treas., 976 F.2d 975 (5th Cir.1992) (“tokes” paid as tips to casino dealers are not gains from wagering transactions); Offutt v. Commissioner, 16 T.C. 1214(1951) (betting on horse races is wagering); Libutti v. Commissioner, T.C. Memo. 1996-108 (gambler’s receipt of complimentary goods from a casino was sufficiently tied to gambling participation that they were gains from wagering transactions); Whitten v. Commissioner, T.C. Memo. 1995-508(expenses incurred to be a contestant on Wheel of Fortune were not wagering expenses); Heide v. Commissioner, 2 B.T.A. 451(1925) (playing bridge for stakes is wagering). However, courts have routinely held that poker is a wagering activity. See, e.g., Boyd v. United States, supra. But here, petitioners ask us to treat tournament poker differently than other kinds of poker.

After a careful review of the record, it is clear that while there are differences between tournament poker and other types of poker, ⁽⁸⁾ none rise to the level of meaningful, substantive differences that would warrant different tax treatment under the current Internal Revenue Code.

A. Tournament Poker as a Sporting Event

Petitioners argue that tournament poker is conducted in much the same way as other professional sporting tournaments. Participants pay an entry fee and compete to win prizes through their good fortune and superior skill. But simply because a sport or activity is played or conducted in a tournament setting does not transform the underlying activity into something different. ⁽⁹⁾

Tournament poker play, much like live-action poker, necessitates the use of the word “bet” or “wager” even to describe how the game is played. Petitioners argue that the usage of the word “bet” in this context is insignificant. The Court sees it differently.

Betting is so intrinsic to poker that it is nearly impossible to avoid using a word that implies gambling in any way when discussing the topic. Bets are placed on each hand, and each round of betting has consequences. Whether or not the chips being used to make these bets have immediate and tangible monetary value does not change the fact that the players are still placing bets, hoping to win. This is true even in a tournament setting.

Petitioners agree that the first poker tournaments held were, in fact, “wagering events”. For example, in those early games, “Each participant put up $10,000 and received $10,000 in chips.” The fact that the chips being used to place bets in tournament poker today only bear some fractional relationship to the dollar values of the prizes and/or entry fees does not change the basic nature of the game as a wagering activity.

B. Professional Tournament Poker as a Business

Petitioners also raise an equal protection argument and argue that there is no valid reason to treat tournament poker differently, for tax purposes, from tournament golf or tennis. Petitioners argue that the benefits of being able to offset "exaggerated income” from very successful years by losses sustained in less successful years should be available to professional tournament poker players as much as they are to other professions.

Congress made a policy decision to treat businesses based on wagering activities differently. In the absence of Congressional action, we are not free to correct any perceived unfairness stemming from a rationally based policy choice. In Valenti v. Commissioner, T.C. Memo. 1994-483, the Court noted that treating businesses based on wagering and gambling differently from other businesses is a rational differentiation and not one that rises to the level of being violative of due process or equal protection. See also Steward Mach. Co. v. Davis, 301 U.S. 548,584 (1937) (holding that Congress, like the states, has the freedom to tax businesses differently). Thus, it has been held:

[A] classification that differentiates the business of gambling from other business has “a rational basis, and when subjected to judicial scrutiny, it must be presumed to rest on that basis if there is any conceivable state of facts which would support it.” * * *

Valenti v. Commissioner, supra (quoting Carmichael v. Southern Coal Co., 301 U.S. 495 (1937)).

II. Substantial Understatement of Tax

With respect to a taxpayer’s liability for any penalty, section 7491(c) places on the Commissioner the burden of production, thereby requiring the Commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438,446-447 (2001). Once the Commissioner meets his burden of production, the taxpayer must come forward with persuasive evidence that the Commissioner’s determination is incorrect. See id. at 447; see also Rule 142(a); Welch v. Helvering, 290 U.S.111, 115 (1933).

Section 6662(a) imposes a penalty equal to 20 percent of the amount of any underpayment attributable to a substantial understatement of income tax. Sec. 6662(b)(2). An understatement is the amount by which the correct tax exceeds the tax reported on the return. Sec. 6662(d). The understatement is substantial if it exceeds the greater of $5,000 or 10 percent of the tax required to be shown on the return. Sec.6662(d)(1)(A)(i) and (ii).

Section 6664(c)(1) provides that no penalty shall be imposed if the taxpayer demonstrates that there was reasonable cause for the underpayment and the taxpayer acted in good faith. The determination of whether a taxpayer acted with reasonable cause and in good faith depends on the facts and circumstances of the situation and includes an “honest misunderstanding of fact or law”. Sec. 1.6664-4(b)(1)(c), Income Tax Regs. Insofar as Mr.Tschetschot is concerned, petitioners have not demonstrated either good faith or that there was reasonable cause for their position. As to Mrs. Tschetschot, petitioners were clearly aware of the mandate of section 165(d); their wish that it be inapplicable to tournament poker does not constitute the type of misunderstanding contemplated by the statutes or the regulations.

An understatement is reduced by the portion of the understatement that is attributable to the tax treatment of an item for which there is substantial authority or with respect to which there is adequate disclosure and a reasonable basis. See sec. 6662(d)(2)(B); sec. 1.6662-4(a), Income Tax Regs. However, no substantial authority exists to support petitioners’ position as to either the inapplicability of section 165(d) to tournament poker or Mr. Tschetschot’s status as a professional gambler. Substantial “authority [exists] for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.” Sec. 1.6662-4(d)(3)(i), Income Tax Regs. Types of authority on which a taxpayer may rely include the Internal Revenue Code and regulations, revenue rulings and procedures, technical advice memoranda, and private letter rulings. See sec. 1.6662-4(d)(3)(iii), Income Tax Regs. Additionally, whether or not there was adequate disclosure, there is no reasonable basis to support petitioners’ position on tournament poker given the clear mandate of section 165(d) and the existing case law interpreting it. Accordingly, we are not permitted to make a reduction in the understatement attributable to respondent’s determination on that issue.

In view of respondent’s concession that Mrs. Tschetschot’s expenses are deductible, it is unclear whether there exists a substantial understatement of income tax. We therefore leave for the parties to determine as part of the Rule 155 computation whether there was, in fact, a substantial understatement for the taxable year in issue. If a substantial understatement exists for the year in issue, petitioners are liable for the accuracy-related penalty.

III. Conclusion

The moral climate surrounding gambling has changed since the tax provisions concerning wagering were enacted many years ago. Not only has tournament poker become a nationally televised event, but casinos or lotteries can be found in many States. Further, the ability for the Internal Revenue Service to accurately track money being lost and won has improved, and some of the substantiation concerns, particularly for professionals, no longer exist. That said, the Tax Court is not free to rewrite the Internal Revenue Code and regulations. We are bound by the law as it currently exists, and we are without the ability to speculate on what it should be. Accordingly, we hold that tournament poker is a wagering activity subject to the limitations of section 165(d).

To reflect the foregoing, Decision will be entered under Rule 155.


Footnotes:

(1) Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.

(2) Respondent stipulated this fact for purposes of this case only. There are no substantiation issues in this case.

(3) A court in England recently had the opportunity to decide whether Texas Hold ‘Em was a game of chance or a game of skill, and the jury decided on the former. See http://news.bbc.co.uk/1/hi/england/london/6267603.stm

(4) The amount of Mrs. Tschetschot’s stipulated winnings totals $13,269, whereas she reported only $11,708. Respondent discusses this discrepancy in his post trial brief by saying that "Respondent did not adjust this discrepancy because the unreported winnings would have been offset by allowance of losses that were disallowed.”

(5) The issue related to tournament poker is essentially legal in nature; accordingly, we decide it without regard to the burden of proof.

(6) The legislative history of sec. 23(g) of the Revenue Act of 1934, ch. 277, tit. I, 48 Stat. 680, 689 re-designated sec. 23(h) by the Revenue Act of 1938, ch. 289, 52Stat. 461 and then continued as such in the 1939 Code until enacted as sec. 165(d) in the 1954 Code) uses the terms "wagering” and “gambling” interchangeably.

(7) Sec. 165(d) applies to both professional and recreational gamblers. See, e.g., Boyd v. United States, 762 F.2d 1369 (9thCir. 1985); Offutt v. Commissioner, 16 T.C. 1214 (1951); Heidelberg v. Commissioner, T.C. Memo. 1977-133. One of the consequences to professional gamblers is that the loss carryover provisions of sec. 172 are unavailable for amounts attributable to wagering activity. That is not an issue in this case as Mrs.Tschetschot had other income to absorb her expenses properly deductible as a professional. One of the consequences to nonprofessionals is that they may only deduct gambling losses if they itemize deductions on their tax returns. Sec. 62(a); see also Heidelberg v. Commissioner, supra.

(8) The most significant difference is that unlike playing in a live-action poker game, when one buys into a tournament game, each player receives the same fixed amount of chips. The game is played, and when a player runs out of chips, the player is out of the tournament. The playing continues until one player has all of the chips. It may take a different skill set to play tournament poker because no endless stream of funds is available, and endurance is a crucial factor to a participant’s success.

(9) Similarly, a casino’s decision to issue a Form W2-G,Certain Gambling Winnings, or a Form 1099-Misc., Miscellaneous Income, does not affect the nature of the winnings for tax purposes.

 

NO. CV 04 4001070S : PETER B. STONE : v. CONNECTICUT COMMISSIONER OF REVENUE SERVICES
FEBRUARY 7, 2007

MEMORANDUM OF DECISION

The plaintiff, Peter B. Stone (Stone), brings this appeal contesting the decision of the commissioner of revenue services (commissioner) disallowing the plaintiff’s deduction of gambling losses against gambling winnings and the imposition of additional income tax assessments against the plaintiff for the calendar years 1998 and 1999 (hereinafter the taxable years).

During the taxable years, the plaintiff resided in New Milford, Connecticut and was a full-time salaried employee of Xerox Corporation until his retirement in October 1999. The plaintiff also was a sole proprietor of Peter Stone Canvas, a part-time seasonal business which manufactured, repaired and installed canvas products. The plaintiff further owned and managed commercial income-producing real estate.

The plaintiff claims to be a professional gambler, a person who is in the trade or business of gambling, and indicated so when he filed Schedule C1⁽¹⁾ of his 1998 and 1999 federal income tax return forms 1040. See Plaintiff’s Exhibits 1 and 3.

During the taxable year 1998, the plaintiff played slot machines at various casinos for a total of 43 days and was issued forms W-2G⁽²⁾ by casinos reporting slot machine winnings. On Schedule C of his 1998 federal return, the plaintiff reported gambling gross receipts of $44,464 and expenses of $44,464 resulting in $0 net profit. See Plaintiff’s Exhibit 1.

During the taxable year 1999, the plaintiff played slot machines at various casinos for a total of 22 days and was issued forms W-2G.⁽³⁾ On Schedule C for his 1999 federal return, the plaintiff reported gambling gross receipts of $120,170 and expenses of $120,170 resulting in $0 net profit. See Plaintiff’s Exhibit 3.

On his Connecticut state income tax return, form CT-1040, Stone reported both his federal adjusted gross income and Connecticut adjusted gross income for 1998 as $83,748.⁽⁴⁾ See Plaintiff’s Exhibit 2. For 1999, Stone reported his federal adjusted gross income and Connecticut adjusted gross income as $27,888 on form CT-1040. See Plaintiff’s Exhibit 4.

The plaintiff testified that he gambled regularly on slot machines at various New Jersey and Connecticut casinos where he typically placed five to ten bets per minute on $5 slot machines. The plaintiff’s friend Kathryn Ruzek (Ruzek) accompanied Stone on all of his gambling trips and kept detailed records of his gambling activities on post-it notes. Ruzek recorded the dates and hours of Stone’s attendance at the various casinos and the specific slot machines he played, the amount of money he spent, including all checks and ATM withdrawals made, and the amount of jackpots. Following each gambling trip, Ruzak placed the post-it notes in a manila envelope. During the tax filing season, Ruzak entered the information written on the post-it notes⁽⁵⁾, forms W-2G, credit card records and checks into a computer spreadsheet. The plaintiff’s accountant then used the spreadsheet to prepare the plaintiff’s federal and state income tax return forms.

The plaintiff testified that he read gambling instructional materials and periodicals to study slot machines, especially the payouts from different types of slot machines. During the taxable years, the plaintiff was rated in the top 1-2% of gambling patrons by New Jersey and Connecticut casinos. According to the plaintiff, the casinos rate players based upon the total amount of money gambled and treat rated players with “respect” by providing them with privileges such as access to lounge areas, food and parking. In 4 addition, the plaintiff was invited to play in slot machine casino tournaments during the taxable years.

“Income derived from wagering transactions is includible in gross income under the provisions of section 61 of the Internal Revenue Code.” Rev. Proc. 77-29, 1977-2 CB 538. Section 165 (d) of the Internal Revenue Code provides that “[l]osses from wagering transactions shall be allowed only to the extent of the gains from such transactions.” 26 U.S.C. 165 (d).

On the federal level, gambling winnings and losses are reported on form 1040 in one of two ways. If the taxpayer is engaged in the business of gambling, the taxpayer files Schedule C to form 1040 and reports the business income or loss from gambling on line 12 of form 1040. If the taxpayer is not a professional gambler, the taxpayer reports gambling winnings on line 21 of form 1040 and files Schedule A to form 1040 in order to itemize deductions attributable to gambling losses to the extent of gambling winnings.

It is the commissioner’s position that the plaintiff (1) was not a professional gambler during the taxable years, (2) was not eligible to file Schedule C to form 1040 and to report zero income on line 12 of form 1040 and (3) owes additional income tax on the plaintiff’s gambling winnings.

As an example, the plaintiff reported on his 1998 federal form 1040 that he was a professional gambler and that his adjusted gross income was $83,748. See Plaintiff’s Exhibit 1. If the plaintiff was not a professional gambler during the taxable year 1998 and therefore, not eligible to file Schedule C, he would have reported his gambling winnings in the amount of $44,464 on line 21 of his 1998 federal form 1040 and increase his adjusted gross income to $128, 212.

In contrast to the federal level, non-professional gamblers filing their Connecticut state income tax returns must report all winnings as gross income. Connecticut income tax liability starts with a taxpayer’s “properly reported” federal adjusted gross income. General Statutes § 12-701 (a) (19) provides, in relevant part, as follows: “‘Adjusted gross income’ means the adjusted gross income of a natural person with respect to any taxable year, as determined for federal income tax purposes and as properly reported on such person’s federal income tax return.” (Emphasis added.)

Taking the federal adjusted gross income, §12-701 (a) (20) allows taxpayers to modify their Connecticut adjusted gross income with a list of additions and subtractions. Unless taxpayers filing Connecticut income tax returns have a trade or business from which to deduct business expenses, ordinary gambling losses cannot be deducted from a taxpayer’s Connecticut adjusted gross income, unless specifically allowed by statute. This is so “[b]ecause deductions and exemptions from otherwise taxable income are matters of legislative grace . . . .” D. A. Pincus & Co. v. Meehan, 235 Conn. 865, 873, 670 A.2d 1278 (1996).

Having outlined the factual background and statutory context, the issue in this case is whether the plaintiff’s gambling activities during the taxable years constituted a trade or business that would have permitted the plaintiff to file a Schedule C to his federal return and deduct his gambling losses to the extent of his gambling winnings. The resolution of this issue is fact-oriented. See Commissioner v. Groetzinger, 480 U.S. 23, 35-36, 107 S. Ct. 980, 94 L. Ed. 2d 25 (1987) (60-80 hours per week, 48 weeks per year devoted to parimutuel wagering on dog races constitutes professional gambling). See also Pacific Indemnity Ins. Co. v. Aetna Casualty & Surety Co., 240 Conn. 26, 31, 688 A.2d 319 (1997) (“business pursuits means a continued or regular activity that is conducted for the purpose of profit, such as a trade, profession or occupation”).

In Groetzinger, the court determined that the term “trade or business” was difficult to define under the Internal Revenue Code. The court further stated that “the difficulty rests in the Code’s wide utilization in various contexts of the term ‘trade or business,’ in the absence of an all-purpose definition by statute or regulation, and in our concern that an attempt judicially to formulate and impose a test for all situations would be counter productive, unhelpful, and even somewhat precarious for the overall integrity of the Code.” Groetzinger, 480 U.S. 36. Recognizing that cases of this nature should be decided on the facts, the Groetzinger court considered the following factors in its analysis of whether the taxpayer’s gambling activities rose to the level of a trade or business: “if one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business within the meaning of the statutes with which we are here concerned.” Id., 35. The commissioner has adopted the Groetzinger factors for the purpose of determining whether a person is a professional gambler.

The facts in the present case are not as clear as those in Groetzinger because the plaintiff Stone was employed full-time by Xerox Corporation until October 1, 1999, conducted a part-time seasonal canvas products business, owned income-producing real estate and spent 43 days in 1998 and 22 days in 1999 casino slot machines gambling.

The commissioner argues that the plaintiff must be engaged in gambling full-time and pursue gambling to produce income for a livelihood in order for the plaintiff to be engaged in gambling as a trade or business. However, in Connecticut, it is not necessary that a business activity be the principal occupation rather than a part-time or supplemental activity. See Pacific Indemnity Ins. Co. v. Aetna Casualty & Surety Co., 240 Conn. 32.

The court is mindful that the Groetzinger court recognized that the term “trade or business” is difficult to define. The lesson learned from Groetzinger is that no formulae or test can be developed that can be applied universally to all cases. In fact, the Groetzinger court stated that “the Code has never contained a definition of the words ‘trade or business’ for general application, and no regulation has been issued expounding its meaning for all purposes. Neither has a broadly applicable authoritative judicial definition emerged. . . .” Groetzinger, 480 U.S. 27.

The Treasury Regulations (regulations), in effect pursuant to §183 of the Internal Revenue Code, provide that “[t]he determination whether an activity is engaged in for profit is to be made by reference to objective standards, taking into account all of the facts and circumstances of each case. Although a reasonable expectation of profit is not required, the facts and circumstances must indicate that the taxpayer entered into the activity, or continued the activity, with the objective of making a profit. . . . In determining whether an activity is engaged in for profit, greater weight is given to objective facts than to the taxpayer’s mere statement of his intent.” Treas. Reg. § 1.183-2 (a).⁽⁶⁾

The facts and circumstances in the present case indicate that the taxpayer was engaged in gambling activity with the objective of making a profit. The plaintiff testified that he believed he was pursuing an income goal for a livelihood and kept track of his wagering for this purpose.

With regard to what factors contribute to whether a taxpayer engages in an activity for profit, the regulations under § 183 provide nine factors to consider: “

• (1) the extent to which the taxpayer carries out the activity in a businesslike manner;

• (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 other similar or dissimilar activities;

• (6) the taxpayer’s history of income or losses attributable to the activity;

• (7) the amount of occasional profits, if any, which are earned;

• (8) the taxpayer’s financial status; and

• (9) any elements of personal pleasure or recreation in the activity. Treas. Reg. § 1.183-2 (b) (1)-(9). ”Westbrook v. Commissioner, 68 F.3d 868, 876 (1995).

In consideration of the second factor listed in the regulations, the plaintiff argues that skill is involved in order to successfully play casino slot machines. The commissioner produced as an expert witness, Professor Robert Hannum (Professor Hannum), a full professor of statistics at the University of Denver with a special interest in the mathematics of gambling. Professor Hannum testified that the playing of slot machines requires no skill since skill requires an exercise of judgment that affects the outcome of the play. As discussed above, the plaintiff studied gambling techniques and slot machines; however, playing slot machines is squarely a game of chance without the player affecting his success each time the slot machine is engaged.

Professor Hannum discussed how there is a house advantage in playing casino slot machines and that there is a mathematical advantage programmed into the slot machines by the casino operators. According to Professor Hannum, a 92% payback to the player is average; therefore, a slot machine player can expect to lose approximately $8 out of every $100 played. Professor Hannum also noted that a player can be a winner at slot machines over a shot period of time, but in the long-term, a player will lose. In Professor Hannum’s opinion, a slot machine player cannot be a professional gambler because he or she would not have the expectation of making a profit. Under Professor Hannum’s theory, a slot machine player can never have a profit motive.

The plaintiff contends that he had a profit motive because he exhibited an expectation of winning at slot machines in the taxable years 1998 and 1999. In those years, the plaintiff reported slot machine winnings of $44,464 and $120,174, respectively. However, Professor Hannum’s opinion, that a slot machine player cannot win over the long-term, is supported by the plaintiff’s tax returns for 1998 and 1999. In those taxable years, the plaintiff had gambling losses equal to or greater than his gambling winnings.

During the taxable year 1998, the plaintiff had $83,748 listed as federal adjusted gross income on his federal and Connecticut income tax return forms consisting of $46,902 in wages, $373 in taxable interest, a business loss of $3,193 from the canvas operation and a taxable portion for pensions and annuities of $39,666. See Plaintiff’s Exhibits 1 and 2. For the taxable year 1999, the plaintiff had $27,888 listed as federal adjusted gross income on his federal and Connecticut income tax returns consisting of $45,821 in wages, $61 in taxable interest, a business loss of $5,494 from the canvas operation and a loss of $12,500 from the real estate rental.

The court accepts Professor Hannum’s opinion as credible that, regardless of a player’s study of slot machine payouts and instructional materials, a gambler cannot exercise such skill as to affect the payout of slot machines because the machines are programmed to cause the player to lose in the long run. Furthermore, the key test here for determining whether a taxpayer is engaged in the trade or business of gambling is not skill when playing slot machines, but the expectation of winning or having “profit motive”.

Although the plaintiff believes he will be successful playing slot machines and this belief is unrealistic from a statistical basis, it is difficult for the court to find that a slot machine gambler has no subjective expectation of winning. See, e.g., Busch v. Commissioner of Revenue, 713 N.W.2d 337, 349 (Minn. 2006), where the Minnesota Supreme Court reversed the decision of the Minnesota Tax Court and held that “the taxpayer’s expectation of profit from a given activity need not always be reasonable for the activity to qualify as a trade or business.”⁽⁷⁾

In addressing the first profit motive indicator listed in the regulations, the plaintiff did conduct his gambling activities in a businesslike manner by keeping detailed records of the days he gambled, the types and numbers of machines played and his winnings and losses.

The third indicator, time and effort expended, does not support a finding that the plaintiff’s gambling activities were conducted in such depth and with adequate continuity and regularity because the plaintiff gambled only 43 days in 1998 and 22 days in 1999. The court concurs with the commissioner that the plaintiff’s visits to the casinos were irregular and infrequent during the taxable years and that the plaintiff’s time was limited by his full-time work for Xerox and the approximately 350 hours devoted to his canvas business.⁽⁸⁾

As to the fourth indicator, there was no evidence offered to show that the plaintiff had an expectation that assets used for his gambling would appreciate in value. As to the fifth and sixth indicators, there is nothing to support the plaintiff’s contention that he has a successful history of winning while playing slot machines during the taxable years. Although the plaintiff reported substantial jackpots in the years 2000 through 2003, the present issue is whether the plaintiff was engaged in a trade or business as a gambler in the taxable years 1998 and 1999. The plaintiff’s financial status during the taxable years, as represented by his pension income, wages, canvas business earnings, and rental income, was sufficient to maintain a gambling lifestyle. It was not the winnings from gambling at the slot machines that sustained the plaintiff’s lifestyle, but his other income which was unrelated to gambling.

For the seventh and eighth indicators, the plaintiff did not make a profit and his financial status does not appear to have changed. As to the final indicator, there is no evidence to support a finding that the plaintiff considered his gambling activities during the taxable year to be a hobby or purely for pleasure. While the plaintiff’s gambling activities did not rise to the level of being engaged in a trade or business, his subjective intent appears to be more like a compulsion to gamble rather than just a hobby.

Upon review of all the indicators and the court’s analysis of each, it is necessary to consider the standard of proof needed by the plaintiff to be successful in this appeal. In Leonard v. Commissioner of Revenue Services, 264 Conn. 302, the Supreme Court has recognized that, in a taxpayer’s challenge of the commissioner’s imposition of a deficiency assessment in tax matters, it is the taxpayer’s burden to prove that a deficiency assessment is in error by presenting clear and convincing evidence. See also Gavigan v. Commissioner of Revenue Services, 89 Conn. App. 111, 114, 871 A.2d 1101 (2005), citing Leonard.

Under the court’s analysis of the facts, the plaintiff has met two of the nine indicators listed above in the regulations, namely, profit motive and conducting gambling activities in a businesslike manner. Under these circumstances and with the high standard of proof required of the plaintiff to show the commissioner’s error, the court concludes that the plaintiff has not sustained his burden.⁽⁹⁾ The plaintiff has failed to prove that he was a professional gambler operating in the trade or business of gambling sufficient to claim his gambling losses against his gambling winnings during the taxable years.

The plaintiff raises a constitutional issue that the plaintiff’s equal protection rights have been violated under the Fourteenth Amendment of the United States constitution and article first, §20, of the Connecticut constitution. As a result of the commissioner classifying the plaintiff as a non-professional gambler, it is the plaintiff’s contention that the commissioner gives unequal treatment to the gambling winnings of professional and non-professional gamblers. The plaintiff argues that there is no rational basis for the commissioner to discriminate against non-professional gamblers by taxing them on gross gambling winnings, while professional gamblers are taxed on net winnings, and cites Stewart Dry Goods Co. v. Lewis, 294 U.S. 550, 566, 55 S. Ct. 525, 79 L. Ed. 1054 (1935) (Kentucky tax law unconstitutional by imposing higher tax rate on retailers with large gross sales and lower tax rate on retailers with lower gross sales).

The constitutional issue here is not the disparity in taxing one taxpayer from another based on the size of gambling winnings. Instead, there is a rational basis for the legislature to impose a tax on professional gamblers that is different from how nonprofessional gamblers are treated. Professional gamblers and non-professional gamblers are simply not in the same class. See the distinction discussed above, on the federal level, of a professional gambler filing Schedule C to form 1040 to report gambling winnings and losses versus a non-professional gambler filing Schedule A to form 1040.

Accordingly, judgment may enter in favor of the defendant denying the plaintiff’s appeal for the taxable years, without costs to either party.

Arnold W. Aronson
Judge Trial Referee


From curriculum vitae of State's expert witness:
• Peter B. Stone v. Commissioner of Revenue Services, State of Connecticut (July 2006) – Whether or not: (1) the plaintiff is a professional gambler in the trade or business of gambling under the Internal Revenue Code, 26 D.S.C. §162(a); (2) the Department of Revenue Services' income tax is discriminatory as applied to Plaintiff and other individuals categorized by the Commissioner as non professional gamblers; (3) the State impermissibly discriminates against individuals based upon the type of gambling activity engaged in; and (4) the State selectively enforces income reporting requirements against those winning larger sums of money in gambling activities.

Footnotes:
(1) IRS Profit or Loss from Business form.

(2) IRS Certain Gambling Winnings form. Operators of slot machines are required to furnish forms W-2G to those winners who receive a winning payout of $1,200 or more. See, e.g., Plaintiff’s Exhibit 13.

(3) See, e.g., Plaintiff’s Exhibit 14.

(4) Taxpayers are required to list any additions and subtractions to the federal adjusted gross income on lines 30-37 and lines 38-47, respectively, of Schedule 1 to form CT-1040.

(5) Ruzek testified that she discarded the post-it notes once the information written upon them was entered into the spreadsheet.

(6) Although there is no general incorporation of federal tax concepts into our state tax laws, incorporation of federal tax principles makes sense where applicable to the issue at hand. See Bell Atlantic NYNEX Mobile, Inc. v. Commissioner of Revenue Services, 273 Conn. 240, 261-62, 869 A.2d 611 (2005).

(7) The court notes that the Busch decision resolved in the taxpayer’s favor by placing the burden of proof on the commissioner rather than the taxpayer. However, Connecticut follows the rule that the burden of proving an error in a deficiency assessment is on the taxpayer. See Leonard v. Commissioner of Revenue Services, 264 Conn. 286, 302, 823 A.2d 1184 (2003).

(8) “[T]he Plaintiff’s visits to the casinos during the Taxable years were irregular and infrequent. To this end, during the Taxable year 1998, the Plaintiff visited casinos only two days each in May and June, three days in September, one day in October and zero days in November. During the Taxable year 1999, the Plaintiff visited casinos only one day each in March, May and September, and zero days in January, April and October.” (Defendant’s post-trial brief, p. 16.) See also Leite v. Commissioner of Revenue, Appellate Tax Board (Mass.), Docket No. C268746 (November 10, 2006) (54 days of slot machine gambling does not constitute the trade or business of gambling); Erbs v. Commissioner, T.C. Summary Opinion 2001-85 (semi-retired taxpayer’s 89 sporadic visits to casino throughout taxable year not trade or business of gambling). In addition, the evidence was not clear on how many days in 1998 and 1999 Stone spent gambling in New Jersey casinos versus Connecticut casinos.

(9) The parties filed briefs discussing the clear and convincing evidence standard. Even assuming that a less demanding standard of proof is considered, namely, the preponderance of the evidence standard, the court is not persuaded that the plaintiff would narrow the evidentiary gap to be successful in this appeal. See also Gavigan v. Commissioner of Revenue Services, 99 Conn. App. 903 (2007) (affirmed per curiam trial court’s use of clear and convincing evidence standard).

 

T.C. Summary Opinion 2005-109
UNITED STATES TAX COURT
JIMMIE L. CLEMONS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 20040-03S. Filed August 1, 2005.  Jimmie L. Clemons, pro se.

Jeanne Gramling and Blake W. Ferguson, for respondent.  GOLDBERG, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time the petition was filed. The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Respondent determined a deficiency in petitioner’s Federal income tax of $1,601 for the taxable year 2001.(1) After concessions,(2) the issue for decision is whether petitioner must include in his gross income gambling winnings of $44,833 for taxable year 2001.(3) The amount of petitioner’s Social Security benefits received during taxable year 2001 that must be included in his 2001 gross income is a computational matter and will be resolved by our decision on the unreported gambling income issue.

(1) At trial, respondent conceded that the amount of the deficiency for taxable year 2001 set forth in the notice of deficiency was not correct. Instead, respondent claims that the correct deficiency is $1,046.

(2) At trial, respondent conceded that petitioner was entitled to Schedule A deductions for taxable year 2001 of $44,833 and $500 for gambling losses and charitable contributions, respectively.

(3) If the $44,833 gambling winnings are included in petitioner’s gross income, he must also include Social Security benefits received of $8,690 in his gross income for taxable year 2001 pursuant to sec. 86.

Background

Some of the facts have been stipulated and are so found.  The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner resided in Flat Rock, North Carolina, on the date the petition was filed in this case.

Petitioner timely filed his Federal income tax return for the 2001 taxable year. On Form 1040, U.S. Individual Income Tax Return, for taxable year 2001, petitioner reported capital gain income of $1,663.13. Petitioner did not report any other income.  Petitioner also claimed a personal exemption and the standard deduction. Petitioner did not attach a Schedule A, Itemized Deductions, to his Form 1040.

During taxable year 2001, petitioner was retired.  Petitioner gambled at Harrah’s Cherokee Smokey Mountain Casino (Cherokee Casino), and during taxable year 2001, petitioner received gambling winnings of $44,833 from Cherokee Casino.  Both petitioner and respondent received seven Forms W-2G, Certain Gambling Winnings, for taxable year 2001, all seven of which were from Cherokee Casino in the amounts of $16,000, $2,500, $4,000, $4,000, $4,500, $12,583, and $1,250, for a total of $44,833. Petitioner attached these Forms W-2G to his 2001 Form 1040, but, as previously stated, he did not report the amounts as gross income. From these Forms W-2G, respondent determined that petitioner had unreported gambling income of $44,833 for taxable year 2001.

Accordingly, in the notice of deficiency for taxable year 2001, dated November 3, 2003, respondent determined that petitioner must include gambling winnings in the amount of $44,833 in his gross income. Respondent also determined that - 4 - petitioner was entitled to Schedule A itemized miscellaneous deductions in the amount of $44,523, rather than the standard deduction, and respondent further determined that petitioner must include taxable Social Security benefits of $8,690 in his gross income for taxable year 2001. The taxable Social Security income was computed at 85 percent of the total amount of $10,244, which petitioner received as Social Security benefits during taxable year 2001.

After the issuance of the notice of deficiency, but before trial, respondent conceded that he failed to allow petitioner a personal exemption and understated the allowable itemized miscellaneous deductions in his computation of the deficiency reflected in the notice of deficiency.

As previously noted, at trial, respondent conceded that petitioner was entitled to Schedule A itemized miscellaneous deductions of $45,333, consisting of $44,833 for gambling losses incurred by petitioner during taxable year 2001 and $500 for charitable contributions made by petitioner during taxable year 2001. Respondent also conceded, at trial, that the correct amount of the deficiency for taxable year 2001 was $1,046.

Discussion

As a general rule, the determinations of the Commissioner in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving the Commissioner’s determinations to - 5 - be in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). As one exception to this rule, section 7491(a) places upon the Commissioner the burden of proof with respect to any factual issue relating to liability for tax if the taxpayer maintained adequate records, satisfied the substantiation requirements, cooperated with the Commissioner, and introduced during the Court proceeding credible evidence with respect to the factual issue. We decide the issue in this case without regard to the burden of proof. Accordingly, we need not decide whether the general rule of section 7491(a)(1) is applicable in this case. See Higbee v. Commissioner, 116 T.C. 438 (2001). 

Petitioner contends that his $44,833 gambling winnings need not be included in his gross income because he had gambling losses to offset these winnings. Respondent, however, contends that petitioner must include his gambling winnings in his gross income and is then entitled to a Schedule A miscellaneous itemized deduction for his gambling losses. 

The present problem seems to be that petitioner steadfastly rejects or ignores certain basic principles of the Federal income tax laws. Petitioner wishes to net his winnings and losses and, on his tax return, report in gross income only the amount of any net gambling winnings. Petitioner considers as “actual income” only his capital gain proceeds and any net gambling winnings.  Petitioner is in error.

Section 61(a) defines gross income as “all income from whatever source derived,” including gambling, unless otherwise provided. McClanahan v. United States, 292 F.2d 630, 631-632 (5^th Cir. 1961). The Supreme Court has consistently given this definition of gross income a liberal construction “in recognition of the intention of Congress to tax all gains except those specifically exempted.” Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955); see also Roemer v. Commissioner, 716 F.2d 693, 696 (9^th Cir. 1983) (all realized accessions to wealth are presumed taxable income, unless the taxpayer can demonstrate that an acquisition is specifically exempted from taxation), revg. 79 T.C. 398 (1982).

Section 62 defines adjusted gross income and allows expenses of a trade or business and certain employee business expenses to be deducted from gross income. These deductions are sometimes referred to as deductions “above the line,” meaning simply that they are deducted from gross income to arrive at “adjusted gross income.” Gamblers who are engaged in a trade or business of gambling may be able to deduct their gambling losses above the line; indeed, courts have based their decisions in some cases on the proposition that such a professional gambler may net losses against winnings for purposes of determining what is includable in gross income. See Winkler v. United States, 230 F.2d 766 (1^st - 7 - Cir. 1956); Green v. Commissioner, 66 T.C. 538 (1976). This is not the present case.

In the case of a taxpayer not engaged in the trade or business of gambling, gambling losses are allowable as a miscellaneous itemized deduction, but only to the extent of gains from such transactions. See sec. 165(d); McClanahan v. United States, supra; Winkler v. United States, supra; Gajewski v.  Commissioner, 84 T.C. 980 (1985); Lutz v. Commissioner, T.C.  Memo. 2002-89; see also Stein v. Commissioner, T.C. Memo. 1984-403; Umstead v. Commissioner, T.C. Memo. 1982-573. 

The parties agree that, during taxable year 2001, petitioner received gambling winnings of $44,833 at the Cherokee Casino.  The parties further agree that petitioner incurred gambling losses, during taxable year 2001, in excess of $44,833.  Petitioner did not report the aforesaid gambling winnings as gross income on his 2001 Federal income tax return. Instead, petitioner merely offset his gambling income with his sustained gambling losses and did not report either of these amounts on his 2001 Federal income tax return.

Petitioner presented no evidence to show that he was a professional gambler, nor did he contend that he was a professional gambler. On the basis of the evidence in the record, we conclude that petitioner was a recreational gambler and not a professional gambler. Therefore, the gambling losses incurred by petitioner during taxable year 2001 are allowable only as an miscellaneous itemized deduction on Schedule A, to the extent of gains from gambling. See sec. 165(d); sec. 1.165-10, Income Tax Regs. Thus, petitioner must include his gambling winnings in his adjusted gross income and is entitled only then to a Schedule A miscellaneous itemized deduction, to the extent of his gains from gambling, for his gambling losses. See sec.  165(d); sec. 1.165-10, Income Tax Regs. 

Reviewed and adopted as the report of the Small Tax Case Division.
To reflect respondent’s concessions and our resolution of the disputed matters, Decision will be entered under Rule 155.
 

T.C. Summary Opinion 2005-3
UNITED STATES TAX COURT
PANSY V. PANAGES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16154-03S. Filed January 4, 2005.
Pansy V. Panages, pro se.
Paul K. Voelker, for respondent.

COUVILLION, Special Trial Judge: This case was heard pursuant to section 7463 in effect when the petition was filed.(1) The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority.

(1) Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Respondent determined a deficiency of $6,161 in petitioner’s Federal income tax for 2001, and a section 6662(a) penalty of $1,232.

The issues for decision are: (1) Whether petitioner’s gambling activity amounted to a trade or business un