T.C. Memo. 2013-163
UNITED STATES TAX COURT
JOHN C. HOM, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9399-11. Filed July 8, 2013.
John C. Hom, pro se.
Tyler N. Orlowski, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined the following deficiencies,
additions to tax, and penalties with respect to petitioner’s Federal income tax:
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[*2] Additions to tax Penalty
Sec. Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6651(a)(2) 6654 6662(a)
2005 $67,263 $16,815.75 -0- -0- $13,452.60
2006 53,181 13,285.75 -0- -0- 10,636.20
2007 96,240 21,654.00 $15,879.60 $3,244.36 -0-
2008 38,938 8,761.05 4,088.49 1,251.32 -0-
After concessions, the issues for decision are: (1) whether the notice of deficiency
is invalid for failing to include the address and telephone number of the local
office of the National Taxpayer Advocate as directed by section 6212(a); (2)
whether the notice of deficiency is invalid with respect to 2007; (3) whether
petitioner received unreported wages of $114,323.73, $103,513.97, $68,578.04,
and $88,581.76 in 2005, 2006, 2007, and 2008, respectively, from his wholly
owned subchapter C corporation, John C. Hom & Associates (JCHA); (4) whether
petitioner was an employee of JCHA pursuant to section 3121(d)(1) or (2); (5)
whether petitioner is entitled to deduct additional gambling losses for 2006, 2007,
and 2008, and if so, in what amounts; (6) whether petitioner is entitled to deduct
additional gambling expenses under section 162(a) for 2005, 2006, 2007, and
2008; (7) whether petitioner is entitled to deduct other expenses listed on the
Schedules C, Profit or Loss From Business, for his laundromat business in
amounts greater than respondent conceded; and (8) whether petitioner is liable for
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[*3] accuracy-related penalties under section 6662(a) for 2005 and 2006. The
parties agree that petitioner was required to use the married filing separate status
during the years in issue. Unless otherwise indicated, all section references are to
the Internal Revenue Code as in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated facts are
incorporated in our findings by this reference. Petitioner resided in California
when he filed his petition.
I. Background
Petitioner received a bachelor of science degree from the University of
California at Berkeley. Petitioner has been licensed by and registered with
California as a civil engineer and a geotechnical engineer since 1978.
II. Petitioner’s Businesses
A. JCHA
On April 2, 1986, petitioner registered JCHA, his wholly owned subchapter
C corporation, as a California corporation. Petitioner is the president and chief
executive officer of JCHA, and no other person has served as an officer of JCHA.
On March 1, 2004, the State of California Franchise Tax Board suspended JCHA’s
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[*4] corporate powers, rights, and privileges for failure to pay State income taxes.
Nevertheless, JCHA continued its business operations during the years in issue.
Petitioner managed the day-to-day operations of JCHA, and he alone
provided licensed engineering services for JCHA during the years in issue.
Petitioner did not perform engineering services for any other engineering firm
during the years in issue, and he maintained health insurance through JCHA
during the years in issue.
According to time records JCHA maintained, petitioner worked the
following hours:
Start date End date Hours
Apr. 1, 2005 Mar. 31, 2006 2,103.60
Jan. 1, 2006 Dec. 31, 2006 1,679.10
Jan. 1, 2007 Dec. 31, 2007 631.25
Jan. 1, 2008 Dec. 31, 2008 358.50
JCHA maintained a Wells Fargo bank account with an account number
ending in 6759 (JCHA’s account). Petitioner had sole access to JCHA’s account.
After petitioner ignored information document requests from the Internal Revenue
Service (IRS), Revenue Agent Kevan Mullins summoned bank statements for the
years in issue for JCHA’s account and performed a bank deposits analysis on the
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[*5] account. The bank deposits analysis, after a correction, shows that petitioner
made the following withdrawals, electronic deposits, paper deposits, and net
withdrawals from JCHA’s account:
2005 2006 2007 2008
Withdrawals $138,860.91 $113,812.93 $94,953.75 $126,561.11
Electronic deposits 24,537.18 10,298.96 26,375.71 26,309.95
Paper deposits -0- -0- -0- 11,669.40
Net withdrawals 114,323.73 103,513.97 68,578.04 88,581.76
On April 5, 2010, petitioner submitted to the IRS Forms 1120, U.S.
Corporation Income Tax Return (corporate income tax returns), for JCHA’s
taxable years ending March 31, 2004, 2005, 2006, 2007, and 2008. On its
corporate income tax returns JCHA reported paying officer’s compensation of
$9,350, $66,476, $55,689, $19,794, and $78,011 for its taxable years ending
March 31, 2005, 2006, 2007, 2008, and 2009, respectively.
B. Petitioner’s Gambling Business
Petitioner has played poker regularly since 1995, and during the years in
issue he was in the trade or business of gambling. In 2002 petitioner won an event
at the World Series of Poker, and he feels that he can compete against the world’s
top players.
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[*6] During the years in issue petitioner played online poker and casino poker.
Petitioner played online poker at Pokerstars.com and Partypoker.com. Petitioner
played casino poker in Las Vegas, Nevada.
Petitioner had the following gross receipts from his gambling business:
2005 2006 2007 2008
Pokerstars.com $147,353.95 $149,139.15 $95,219.91 $55,363.83
Partypoker.com 7,065.00 -0- -0- -0-
Casino 3,965.00 -0- 149,687.00 2,769.00
Gross receipts 158,383.95 149,139.15 244,906.91 58,132.83
Petitioner’s gross receipts from playing casino poker in 2007 include $4,740
from RIO All-Suite Hotel & Casino (Rio Casino); $3,987 from Rio Casino;
$136,695 from Grand Sierra Resort & Casino on February 27, 2007; and $4,265
from Bellagio.
Petitioner had the following losses from his gambling business:
2005 2006 2007 2008
Pokerstars.com $163,241.09 $135,332.50 $100,364.90 $72,464.82
Partypoker.com 9,200.00 Unknown -0- -0-
Casino 9,035.00 Unknown Unknown Unknown
Losses 181,476.09 Unknown Unknown Unknown
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[*7] Petitioner had the following expenses from his gambling business in 2006:
Flights $1,149
Hotels 2,756
Car rentals 1,298
Parking -0-
Total expenses 5,203
C. Petitioner’s Laundromat Business
On October 31, 2001, petitioner purchased a laundromat in San Francisco,
California. Petitioner employed one individual at the laundromat. Petitioner kept
handwritten logs for the laundromat during the years in issue. In February 2008
petitioner closed the laundromat.
The laundromat had gross sales or receipts of $36,312, $32,704.25,
$38,096.75, and $3,355.25 for 2005, 2006, 2007, and 2008, respectively.
III. Petitioner’s Tax Reporting
On February 29, 2008, petitioner filed his 2005 Form 1040, U.S. Individual
Income Tax Return (income tax return). On December 8, 2008, petitioner filed his
2006 income tax return. Petitioner failed to file timely his 2007 or 2008 income
tax return. On November 9, 2009, the IRS prepared substitutes for returns
pursuant to section 6020(b) for 2007 and 2008. On March 7, 2010, petitioner
submitted to the IRS a 2007 income tax return. On January 18, 2011, the IRS
prepared updated substitutes for returns for 2007 and 2008, which were used in
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[*8] preparation of the notice of deficiency. In February 2012 petitioner submitted
to the IRS a 2008 income tax return.
Petitioner’s submitted income tax returns reported total income of -$5,889,
$2,779, $31,985, and -$887 for 2005, 2006, 2007, and 2008, respectively.
Petitioner did not report the receipt of any wage income during the years in
issue. Petitioner attached Schedules C to his 2005-08 income tax returns that
showed net profit or loss from the following businesses: (1) a soil engineering
consultant business; (2) a gambling business; and (3) a laundromat business.
A. Soil Engineering Consultant Schedules C
On Schedules C attached to his income tax returns for the years in issue
petitioner reported his soil engineering consultant business’ gross income, total
expenses, and net profit as follows:
2005 2006 2007 2008
Gross income $50,954 $59,314 $8,075 $84,234
Total expenses -0- -0- -0- -0-
Net profit 50,954 59,314 8,075 84,234
B. Gambling Schedules C
On Schedules C attached to his income tax returns for the years in issue
petitioner reported the gambling business’s gross income, total expenses, and net
loss as follows:
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[*9] 2005 2006 2007 2008
Gross income $9,700 $19,762 -0- -0-
Total expenses 49,561 51,867 $15,413 $45,376
Net loss (39,861) (32,105) (15,413) (45,376)
C. Laundromat Schedules C
On Schedules C attached to his income tax returns for the years in issue
petitioner reported the laundromat business’s gross income, total expenses, and net
loss as follows:
2005 2006 2007 2008
Gross income $30,201 $25,841 $35,578 $3,330
Total expenses 47,183 50,271 66,301 42,151
Net loss (16,982) (24,430) (30,723) (38,821)
IV. Notice of Deficiency
The notice of deficiency included the following:
The contact person can access your tax information and help
you get answers. You also have the right to contact the office of the
Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute
for established IRS procedures such as the formal appeals process.
The Taxpayer Advocate is not able to reverse legally correct tax
determinations, nor extend the time fixed by law that you have to file
a petition in the U.S. Tax Court. The Taxpayer Advocate can,
however, see that a tax matter that may not have been resolved
through normal channels gets prompt and proper handling. If you
want Taxpayer Advocate assistance, please contact the Taxpayer
Advocate for the IRS office that issued this notice of deficiency.
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[*10] Please visit our website at
www.irs.gov/advocate/content/0,,id=150972,00.html for the Taxpayer
Advocate telephone numbers and addresses for this location.
OPINION
I. Preliminary Matters
Five months before trial the Court’s standing pretrial order was served along
with the notice setting case for trial. The standing pretrial order includes the
following:
2. Trial Exhibits. It is ORDERED that any documents or
materials which a party expects to use (except solely for
impeachment) if the case is tried, but which are not stipulated, shall
be identified in writing and exchanged by the parties at least 14 days
before the first day of the trial session. The Court may refuse to
receive in evidence any document or material that is not so stipulated
or exchanged, unless the parties have agreed otherwise or the Court
so allows for good cause shown.
More than four months after trial, and more than one month after the parties filed
their opening briefs, petitioner filed a motion to reopen the record. Respondent
objected to reopening the record and also to the admission of additional
documentary evidence without an evidentiary hearing. Petitioner’s motion was
denied for the following reasons.
Reopening the record for the submission of additional evidence lies within
the discretion of the Court. Butler v. Commissioner, 114 T.C. 276, 286-287
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[*11] (2000) (citing Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321,
331 (1971)). The policy of the Court is to try all of the issues raised in a case in
one proceeding to avoid piecemeal and protracted litigation. Markwardt v.
Commissioner, 64 T.C. 989, 998 (1975). Petitioner was given ample opportunity
to provide evidence both before and at trial, and he failed to introduce the
additional evidence that he now wishes to introduce. Moreover, petitioner failed
to abide by the Court’s standing pretrial order that requires all documents that a
party expects to use at trial be provided to the other party at least 14 days in
advance of the trial calendar. Under such circumstances, we declined to bifurcate
the trial to receive additional evidence.
Petitioner did not cooperate with respondent’s examination or with the
Appeals Office. Petitioner refused to turn over requested records; he ignored
information document requests, and the IRS had to resort to a court order to gain
access to petitioner’s Pokerstars.com records. Petitioner’s failure to cooperate
with respondent in producing requested documents before trial is an additional
ground for denying petitioner’s motion. See Tinnerman v. Commissioner, T.C.
Memo. 2006-250. Reopening the record after the opening briefs were filed would
necessitate a further hearing and would prejudice respondent and would
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[*12] unreasonably protract the proceedings. Such unusual relief is not justified in
this case.
II. Validity of the Notice of Deficiency
A. Missing Taxpayer Advocate Information
Petitioner contends that the notice of deficiency is invalid because the
inclusion of a Web site address where the address and telephone number of the
local office of the taxpayer advocate may be found does not comply with the
applicable statute. See sec. 6212(a). We addressed this contention in a related
case petitioner brought on behalf of JCHA and held that the failure of a notice of
deficiency to include the address and telephone number of the local office of the
taxpayer advocate does not invalidate the notice where the taxpayer has not shown
that the taxpayer was prejudiced by that failure. See John C. Hom & Assocs., Inc.
v. Commissioner, 140 T.C. __, __-__ (slip op. at 5-8) (May 7, 2013); see also
Elings v. Commissioner, 324 F.3d 1110, 1112-1113 (9th Cir. 2003)
(nonprejudicial, minor and technical errors do not invalidate a notice of
deficiency). As in John C. Hom & Assocs., Inc. v. Commissioner, 140 T.C. at __
(slip op. at 5-8), and for the same reasons, petitioner has not shown that he was
prejudiced by the failure of the notice of deficiency to include the address and
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[*13] telephone number of the local office of the taxpayer advocate. We therefore
conclude that the notice of deficiency was valid.
B. Respondent’s Alleged Failure To Examine Petitioner’s 2007 Return
Petitioner contends that the notice of deficiency is invalid with respect to
2007 because respondent failed to examine the 2007 income tax return that he
claims he filed on March 7, 2010. Petitioner cites Scar v. Commissioner, 814 F.2d
1363, 1368 (9th Cir. 1987) (holding that a notice of deficiency was invalid where
the Commissioner did not examine the taxpayer’s return and the notice of
deficiency referred to a transaction that was unrelated to the taxpayer), rev’g 81
T.C. 855 (1983), but there is no similarity between Scar and this case. To support
his contention petitioner argues that the IRS did not accept his 2007 income tax
return but instead filed a substitute for return on January 18, 2011. However,
petitioner’s account transcripts show that petitioner’s 2007 income tax return was
not filed because the IRS had already prepared a substitute for return for 2007 on
November 9, 2009, before petitioner submitted a return. The notice of deficiency
was sent after the IRS examined the initial substitute for return and considered any
records that petitioner provided. We therefore conclude that the notice of
deficiency is valid with respect to 2007.
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[*14] III. Burden of Proof
Generally, the taxpayer bears the burden of proof. See Rule 142(a); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Section 7491(a) shifts to
the Commissioner the burden of proof with respect to any factual issue if the
taxpayer introduces credible evidence and has complied with substantiation
requirements, has maintained required records, and has cooperated with
reasonable requests for witnesses, information, and documents. See sec.
7491(a)(1) and (2). Petitioner has not satisfied the requirements of section
7491(a)(1) and (2).
Petitioner failed to maintain required records or to provide them to
respondent. See sec. 6001. Respondent was therefore authorized to reconstruct
petitioner’s income by any method that clearly reflects income. See sec. 446(b);
Petzoldt v. Commissioner, 92 T.C. 661, 693 (1989); sec. 1.446-1(b)(1), Income
Tax Regs. The bank deposits method is a permissible method of reconstructing
income. See Clayton v. Commissioner, 102 T.C. 632, 645 (1994). Respondent’s
bank deposits analysis shows that petitioner withdrew for personal use significant
amounts from JCHA’s account that he did not report as wages. The withdrawals
from JCHA’s account are prima facie evidence of income, and petitioner has the
burden of showing the nontaxable nature of established receipts. See Tokarski v.
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[*15] Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64
T.C. 651, 656-657 (1975), aff’d, 566 F.2d 2 (6th Cir. 1977). Petitioner bears the
burden of establishing that the unreported income adjustments were arbitrary or
erroneous. See Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999),
aff’g T.C. Memo. 1997-97; Clayton v. Commissioner, 102 T.C. at 645.
Citing Cohen v. Commissioner, 266 F.2d 5, 11 (9th Cir. 1959), remanding
T.C. Memo. 1957-172, petitioner contends that respondent’s disallowance of
petitioner’s claimed gambling losses in their entirety rendered the deficiency
determination “arbitrary or erroneous”, thereby shifting the burden of proof to
respondent. However, respondent disallowed petitioner’s claimed gambling losses
because petitioner’s gambling records did not clearly show petitioner’s gambling
losses and petitioner was uncooperative. Respondent accurately determined
petitioner’s gambling income but disallowed petitioner’s claimed losses because
petitioner failed to substantiate them. By contrast, in Cohen v. Commissioner, 266
F.2d at 9-11, the court held that the Commissioner failed to determine accurately
the taxpayer’s income in the first instance because the Commissioner included in
the taxpayer’s income amounts that the taxpayer held for third parties.
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[*16] IV. Unreported Wage Income From JCHA
Petitioner made net withdrawals from JCHA’s account of $114,323.73,
$103,513.97, $68,578.04, and $88,581.76 in 2005, 2006, 2007, and 2008,
respectively. Respondent determined that these amounts were constructive wages
to petitioner and allowed JCHA to deduct the difference between these amounts
and the amounts that it reported on its returns. Petitioner introduced no credible
evidence showing that any of the withdrawals he made from JCHA’s account were
for JCHA’s expenses. Instead, petitioner contends that these net withdrawals were
repayments of loans he made to JCHA in 2000 and 2001.
“In the context of taxation, courts have defined a loan as ‘an agreement,
either express or implied, whereby one person advances money to the other and
the other agrees to repay it upon such terms as to time and rate of interest, or
without interest, as the parties may agree.’” Calloway v. Commissioner, 135 T.C.
26, 36-37 (2010) (quoting Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir.
2000), aff’g T.C. Memo. 1998-121), aff’d, 691 F.3d 1315 (11th Cir. 2012). For a
transaction to be a bona fide loan the parties must have actually intended to
establish a debtor-creditor relationship at the time the funds were advanced.
Fisher v. Commissioner, 54 T.C. 905, 909-910 (1970). “Whether a bona fide
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[*17] debtor-creditor relationship exists is a question of fact to be determined
upon a consideration of all the pertinent facts in the case.” Id. at 909.
Petitioner contends that he lent money to JCHA in 2000 and 2001 and that
the amounts he withdrew from JCHA during the years in issue were repayments of
those loans. However, petitioner introduced records from JCHA that purport to
show that, from May 2002 until December 2005, petitioner borrowed $234,151.92
from, and repaid $164,066.92 to JCHA. These records do not reflect any of the
amounts that petitioner claims he lent to JCHA in 2000 and 2001. Moreover,
petitioner admitted at trial that (1) he did not execute a note to memorialize the
purported loan, (2) JCHA did not pay interest on the purported loan, and (3) there
was no repayment schedule on the purported loan. We are not persuaded that a
bona fide debtor-creditor relationship existed between petitioner and JCHA. We
conclude that any amounts that petitioner transferred to JCHA in 2000 and 2001
were capital contributions and not loans.
Whether personal use of corporate property constitutes constructive
dividends, wages (i.e., compensation for services), or something else is a question
of fact. Loftin & Woodard, Inc. v. United States, 577 F.2d 1206, 1242 (5th Cir.
1978); Goldstein v. Commissioner, 298 F.2d 562, 566 (9th Cir. 1962), aff’g T.C.
Memo. 1960-276. Petitioner failed to introduce credible evidence showing that
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[*18] respondent’s characterization of the amounts that he withdrew from JCHA’s
account as wages was erroneous. The evidence of petitioner’s services to JCHA,
discussed further below, suggests strongly that the amounts withdrawn were
compensation for his services as an engineer and as an officer of the corporation.
We sustain respondent’s determination on this issue.
V. Whether Petitioner Was an Employee of JCHA
Respondent determined that petitioner was an employee of JCHA during the
years in issue. Under section 3121(d)(2), the term “employee” includes any
individual who has the status of an employee under the common law. Paragraphs
(1), (3), and (4) of section 3121(d) describe other individuals who are considered
employees regardless of their status under the common law. Individuals described
within those paragraphs are commonly referred to as “statutory” employees. See
Joseph M. Grey Pub. Accountant, P.C. v. Commissioner, 119 T.C. 121, 126
(2002), aff’d, 93 Fed. Appx. 473 (3d Cir. 2004).
One category of statutory employee is defined as “any officer of a
corporation”. Sec. 3121(d)(1). Section 31.3121(d)-1(b), Employment Tax Regs.,
clarifies the scope of section 3121(d) in determining the employee status of
corporate officers as follows: “Generally, an officer of a corporation is an
employee of the corporation. However, an officer of a corporation who as such
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[*19] does not perform any services or performs only minor services and who
neither receives nor is entitled to receive, directly or indirectly, any remuneration
is considered not to be an employee of the corporation.” Consequently, if an
officer performs substantial services for a corporation and receives remuneration
for those services, that officer is an employee. See Veterinary Surgical
Consultants, P.C. v. Commissioner, 117 T.C. 141, 145 (2001), aff’d sub nom.
Yeagle Drywall Co. v. Commissioner, 54 Fed. Appx. 100 (3d Cir. 2002).
Petitioner contends that he was not an officer of JCHA because its corporate
powers were suspended on March 1, 2004, for failure to pay State income taxes,
see Cal. Rev. & Tax. Code sec. 23302 (West 2004), and that it therefore lacked the
power to appoint officers under California law. However, petitioner has not cited
any authoritative California law to support his contention that he could not be an
officer of JCHA while its powers, rights, and privileges were suspended. During
the years in issue, he and JCHA continued to conduct business in the same manner
as before.
The parties stipulated that petitioner is the president and chief executive
officer of JCHA, and petitioner testified that no other person has served as an
officer of JCHA. Moreover, on April 5, 2010, petitioner signed JCHA’s corporate
income tax returns for its taxable years ending March 31, 2004, 2005, 2006, 2007,
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[*20] and 2008, even though its corporate powers, rights, and privileges were then
suspended. See sec. 6062 (providing that corporate returns must be signed by an
officer of the corporation). We conclude, therefore, that petitioner was an officer
of JCHA during the years in issue.
Petitioner performed substantial services as an officer of JCHA. In
particular, petitioner admits that he managed the day-to-day operations of JCHA.
Accordingly, petitioner was a “statutory” employee pursuant to section 3121(d)(1)
because he was an officer of JCHA who provided substantial managerial services
as an officer of the corporation. See Van Camp & Bennion v. United States, 251
F.3d 862, 865-866 (9th Cir. 2001).
VI. Gambling Losses and Expenses
A. Section 165(d)
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.
However, section 165(d) applies to preclude deduction of wagering losses against
other income, even if the taxpayer is engaged in the trade or business of gambling.
See Boyd v. United States, 762 F.2d 1369, 1372-1373 (9th Cir. 1985); Mayo v.
Commissioner, 136 T.C. 81, 85 (2011). As we explained in Mayo v.
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[*21] Commissioner, 136 T.C. at 85-90, this result is consistent with the holding
of Commissioner v. Groetzinger, 480 U.S. 23 (1987).
The parties stipulated that petitioner was in the trade or business of
gambling during the years in issue. Accordingly, petitioner is entitled to deduct
his gambling losses to the extent of his gambling gains. See secs. 162(a), 165(d);
Mayo v. Commissioner, 136 T.C. at 85.
Petitioner contends that United States v. Hughes Props., Inc., 476 U.S. 593
(1986), treated wagering losses by a casino engaged in the trade or business of
gambling as ordinary and necessary expenses under section 162(a) and not as
wagering losses under section 165(d). But Hughes Props., 476 U.S. at 601,
did not discuss whether wagering losses are subject to section 165(d) but, rather,
whether the taxpayer had incurred the wagering loss during the year for which it
was claimed. Accordingly, petitioner’s contention is misplaced.
B. Additional Gambling Losses
Petitioner failed to introduce evidence substantiating additional gambling
losses during the years in issue. Petitioner contends, however, that we should
estimate and allow additional gambling losses.
Where a taxpayer establishes that he or she incurred a deductible expense
but is unable to substantiate the precise amount, we may, bearing heavily against
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[*22] the taxpayer who has failed to maintain records, approximate the amount of
the expense. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).
However, we must have sufficient evidence upon which to make a reasonable
estimate to apply the Cohan rule. See Vanicek v. Commissioner, 85 T.C. 731,
742-743 (1985).
Respondent conceded on brief that petitioner received no gross receipts
from online poker on Partypoker.com and from casino poker in 2006. Thus there
are no gains from online poker on Partypoker.com to be offset by losses from that
activity in 2006, and additional losses from gambling will not be allowed for 2006.
Petitioner had gross receipts from casino poker of $149,687 and $2,769 in
2007 and 2008, respectively. Petitioner introduced no evidence showing how
often he played casino poker in 2007 and 2008. However, petitioner’s 2007 gross
receipts from casino poker were won on four dates in 2007, including $136,695 at
Grand Sierra Casino on February 27, 2007. This suggests that petitioner’s casino
poker earnings were won in relatively few events. Petitioner was a skillful and
seemingly successful poker player. Unlike cases involving slot machine players
with continuous play but occasional jackpots, petitioner did not necessarily suffer
any losses from playing casino poker in 2007 or 2008. Cf. Briseno v.
Commissioner, T.C. Memo. 2009-67. We therefore have no basis upon which to
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[*23] estimate petitioner’s gambling losses for those years. See Vanicek v.
Commissioner, 85 T.C. at 742-743. Accordingly, petitioner is not entitled to
deduct any additional gambling losses for 2007 and 2008.
C. Additional Gambling Expenses
1. Transportation and Lodging
Petitioner introduced three summary exhibits to substantiate his gambling
business’s transportation and lodging expenses for 2005, 2007, and 2008.
However, petitioner failed to introduce credible evidence substantiating any of the
purported transportation and lodging expenses for 2005, 2007, or 2008.
Petitioner’s summary exhibits are not corroborated or reliable. Section 274(d)
establishes a heightened substantiation requirement for certain types of expenses,
and we may not estimate the transportation and lodging expenses for 2005, 2007,
and 2008. See Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff’d, 412
F.2d 201 (2d Cir. 1969). Accordingly, petitioner is not entitled to deduct any of
his gambling business’s purported transportation and lodging expenses for 2005,
2007, and 2008.
2. Rake and Tournament Entry Fees
Petitioner contends that he is entitled to deduct rake and tournament entry
fees as gambling expenses. Respondent concedes that section 165(d) does not
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[*24] apply to rake and tournament entry fees but contends that petitioner has not
proven that he incurred any such fees.
Petitioner testified that he incurred rake fees of $2 to $4 per hand to play
poker at Pokerstars.com. However, petitioner failed to introduce credible
evidence corroborating his testimony. Petitioner’s testimony standing alone is not
reliable, and we have no basis upon which to estimate petitioner’s rake fee
expenses for the years in issue. See Vanicek v. Commissioner, 85 T.C. at
742-743. Accordingly, petitioner is not entitled to deduct any rake fees.
The record contains copies of receipts issued to petitioner by various
casinos. The receipts show that petitioner paid tournament entry fees totaling
$595 and $20 in 2005 and 2006, respectively. However, petitioner has not shown
that the tournament entry fees for 2005 were not included in the stipulated
gambling losses for that year. Petitioner introduced no receipts for tournament
entry fees for 2007 and 2008. However, the record shows that petitioner played
casino poker in at least four tournaments in 2007 and in at least one tournament in
2008. Using the tournament entry fees that petitioner paid in 2005 and 2006, we
estimate that petitioner paid tournament entry fees of $160 and $40 in 2007 and
2008, respectively. We have no basis to estimate any additional tournament fees
for the years in issue. See id. We conclude, therefore, that (1) $595 of the
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[*25] stipulated gambling loss for 2005 is not subject to the section 165(d)
limitation; and (2) and petitioner is entitled to deduct $20, $160, and $40 in
tournament entry fees for 2006, 2007, and 2008, respectively.
VII. Laundromat Expenses and Depreciation
In the notice of deficiency respondent allowed the reported expenses for
petitioner’s laundromat business for 2005 and 2006 and allowed the following
expenses for 2007 and 2008:
Expense 2007 2008
Other $31,580 $5,458.00
Depreciation and sec. 179 10,457 871.42
Petitioner failed to address in his opening brief the issue of whether he was
entitled to deduct additional expenses for 2007 and 2008 with respect to his
laundromat business. We, therefore, deem these issues to be conceded or
abandoned. See Rules 123(a) and (b), 151(e)(5); Lunsford v. Commissioner, 117
T.C. 183, 187 n.6 (2001).
In any event, petitioner failed to satisfy his burden of proof on these issues.
Petitioner offered only a summary exhibit that purports to show expenses totaling
$57,010.31 for his laundromat business in 2007. Petitioner also introduced
various invoices and canceled checks to substantiate his laundromat expenses for
2007 and 2008. However, the invoices and canceled checks do not corroborate
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[*26] petitioner’s summary exhibit, and the summary exhibit without
corroboration is unreliable. The invoices and canceled checks do not otherwise
show that petitioner is entitled to deduct any of the laundromat business’s
expenses for 2007 and 2008 in amounts greater than respondent allowed. He did
not introduce any evidence showing that he is entitled to deduct depreciation or
section 179 expenses for 2007 or 2008 with respect to his laundromat business in
amounts greater than respondent allowed. Accordingly, petitioner is not entitled
to deduct additional laundromat business expenses, depreciation, or section 179
expenses for 2007 and 2008.
VIII. Section 6662(a) Penalty
Respondent determined that petitioner is liable for an accuracy-related
penalty under section 6662(a) for 2005 and 2006. Section 6662(a) and (b)(1) and
(2) provides for a penalty of 20% on the portion of an underpayment of tax (1) due
to negligence or disregard of rules or regulations or (2) attributable to a substantial
understatement of income tax. Section 6662(c) defines “negligence” as any failure
to make a reasonable attempt to comply with the provisions of the Internal
Revenue Code, and “disregard” means any careless, reckless, or intentional
disregard. The evidence of failure to maintain records, unreported income, and
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[*27] unsubstantiated loss and expense deductions claimed by petitioner is
sufficient to prove negligence and satisfies respondent’s burden of production.
Whether applied because of negligence or disregard of rules or regulations
or a substantial understatement of income tax, the accuracy-related penalty is not
imposed with respect to any portion of the underpayment as to which the taxpayer
acted with reasonable cause and in good faith. See sec. 6664(c)(1). Whether the
taxpayer acted with reasonable cause and in good faith depends upon all the
pertinent facts and circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioner has the burden of proving reasonable cause and good faith. See Higbee
v. Commissioner, 116 T.C. 438, 449 (2001). He has not done so here.
We have considered the other arguments of the parties. They are irrelevant,
lack merit, or are unnecessary to the result reached. To reflect respondent’s
concessions and the foregoing,
Decision will be entered
under Rule 155.