T.C. Memo. 1995-542
UNITED STATES TAX COURT
GREGORY ALBERICO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21293-93. Filed November 16, 1995.
James W. Faber, for petitioner.
William R. Davis, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FAY, Judge: By notice of deficiency dated June 30, 1993,
respondent determined deficiencies in petitioner's income tax for
the taxable years 1990 and 1991, in the amounts of $21,478 and
$8,926, respectively, and accuracy-related penalties for the
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taxable years 1990 and 1991 under section 6662(a)1. The issues
for decision are:
1. Whether petitioner is entitled to deductions for gambling
losses during the tax year 1990. We hold that he is not.
2. Whether petitioner failed to report gambling winnings for
the tax year 1991. We hold that he did.
3. Whether a penalty should be imposed against petitioner
under section 6662. We hold that it should.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are incorpo-
rated herein by this reference. At the time the petition was
filed, petitioner resided in Broomfield, Colorado.
Petitioner is a professional gambler. In 1972, after
serving three tours of duty in Vietnam, petitioner was stationed
as the Post Adjutant of Rocky Mountain Arsenal in Denver,
Colorado. It was at this time that petitioner's gambling
activity started. By 1977, petitioner had developed a gambling
addiction. Petitioner was discharged from the military in 1978
after being convicted of stealing Government property to support
his gambling addiction.2 Petitioner was incarcerated twice for
1
All section references are to the Internal Revenue Code in
effect for the years in issue, unless otherwise indicated.
2
Petitioner testified that he declared the money he received
from the sale of the stolen Government property on his 1977
Federal income tax return.
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theft of Government property, once from 1980 to 1984 and again
from 1986 to 1989.
During 1990 and 1991, the years in issue, petitioner
frequented Colorado dog racing tracks and played the slot
machines in Las Vegas. For 1990 and 1991, petitioner reported
his gambling winnings as $87,619 and $203,567, respectively, and
his gambling losses as $78,864 and $187,000, respectively. The
winnings reported on petitioner's Federal income tax returns for
1990 and 1991 are in excess of the amounts stated as reported
income for gambling winnings3 on petitioner's Forms W-2G.4
3
For 1990 and 1991, petitioner reported $87,619 and $203,567
respectively as gambling winnings. However, petitioner's Form W-
2G income statements only showed petitioner winning $21,800.70
and $92,625.70, respectively.
4
The payer of proceeds from a wager must report gambling
winnings on Form W-2G if a taxpayer receives:
(1) $600 or more in gambling winnings from:
(a) Horse racing, dog racing, jai alai, state
lotteries, and other wagering transactions
* * * [in which] the winnings are at least
300 times the amount of the wager; or
(b) Lotteries, raffles, sweepstakes, wager-
ing pools, or drawings, such as those
held by churches or civic organizations;
(2) $1,200 or more of gambling winnings from
bingo or slot machines; or
(3) $1,500 or more of * * * [winnings] from keno.
Instructions to Recipient for IRS Form W-2G, Statement for Recip-
ients of Certain Gambling Winnings.
Under the general rule of sec. 3402(q) certain gambling
winnings are subject to withholding:
Sec. 3402(q) Extension of Withholding to Certain
Gambling Winnings.--
(continued...)
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Petitioner testified that he reported income in excess of the
Form W-2G for both years in issue based upon his personal records
4
(...continued)
(1) General rule.--Every person, including the
Government of the United States, a State, or a
political subdivision thereof, or any instrumentalities
of the foregoing, making any payment of winnings which
are subject to withholding shall deduct and withhold
from such payment a tax in an amount equal to 20
percent of such payment.
* * * * * * *
(3) Winnings which are subject to withholding.-
For purposes of this subsection, the term "winnings
which are subject to withholding" means proceeds from a
wager determined in accordance with the following:
(A) In general.--Except as provided in
subparagraphs (B) and (C), proceeds of more than
$1,000 from a wagering transaction, if the amount
of such proceeds is at least 300 times as large as
the amount wagered.
(B) State-conducted lotteries.--Proceeds of
more than $5,000 from a wager placed in a lottery
conducted by an agency of a State acting under
authority of State law, but only if such wager is
placed with the State agency conducting such
lottery, or with its authorized employees or
agents.
(C) Sweepstakes, wagering pools, certain
parimutuel pools, jai alai, and lotteries.--
Proceeds of more than $1,000 from--
(i) a wager placed in a sweepstakes,
wagering pool, or lottery (other than a wager
described in subparagraph (B)), or
(ii) a wagering transaction in a
parimutuel pool with respect to horse races,
dog races, or jai alai if the amount of such
proceeds is at least 300 times as large as
the amount wagered.
* * * * * * *
(5) Exemption for bingo, keno, and slot machines.--
The tax imposed under paragraph (1) shall not apply to
winnings from a slot machine, keno, and bingo.
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of his gambling activities. However, petitioner produced no
records showing his gambling results for 1990, except for his
1990 Federal income tax return. For 1991, petitioner presented
dog racing programs covering part of the period during which he
gambled at the dog tracks.
Petitioner testified that he had recorded in a notebook how
much he bet on each race in 1990, but, after his divorce, his ex-
wife or her new husband threw away all of the gambling records
that petitioner had stored in their house. Petitioner offered no
evidence at trial to support this story.
For 1991, petitioner stated that he maintained two sets of
records. Petitioner's main set of records consisted of his daily
race programs in which he would record how much money he had to
bet that day, how much money he bet on each race, and how much he
won or lost. The second set of records was a ledger in which
petitioner recorded his losses. At trial, petitioner stated that
his 1991 ledger was inaccurate and was prepared solely for the
audit with respondent.
In late 1992, the Internal Revenue Service, after examining
petitioner's race programs for January to June of 1991, requested
to examine petitioner's race programs for the second half of
1991. Petitioner testified that he and his daughter delivered
the race programs to a gentleman handing out tax forms in the
lobby of the Internal Revenue Service office building and asked
the man to give the programs to Mr. Thomas Ellison, the auditor
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handling his case. Petitioner did not ask for nor receive a
receipt for these documents. Several weeks later, petitioner
received a phone call from his accountant informing him that
Mr. Ellison could not locate the programs that petitioner claims
to have delivered to the Internal Revenue Service. Petitioner
contends that the Internal Revenue Service lost his records when
they remodeled and moved the tax auditor's office to a different
part of the IRS building. Neither party introduced evidence that
petitioner's programs were ever found.
While petitioner claims that he and an adult daughter gave a
complete set of records to respondent, nothing in the record
corroborates it. Additionally, petitioner's daughter never
testified, nor did the gentleman handing out the tax forms in the
lobby of the Internal Revenue Service office building.
Based on the programs for January to June of 1991 that
respondent had received, respondent extrapolated the amount of
payouts of less than $1,000 ("small" winnings) for the period
without programs (July to December 1991) by applying the ratio of
"small" winnings to Form W-2G winnings from the period with pro-
grams, to the Form W-2G winnings. Respondent then added this
amount, plus the winnings reported on the Form W-2G, the "small"
winnings reported in petitioner's programs, and petitioner's slot
machine winnings to determine petitioner's total gambling
winnings.
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Likewise, based on the ratio of losses-to-winnings reflected
in petitioner's dog racing programs for January to June of 1991,
respondent determined that, for the additional gambling winnings
determined by extrapolation, petitioner was entitled to addi-
tional gambling losses, and respondent made such an adjustment in
the notice of deficiency.
OPINION
1990 Taxable Year
Petitioner claimed $87,619 in gambling winnings and $78,864
in gambling losses on his 1990 return. After audit, respondent
disallowed his claimed gambling losses in the notice of defi-
ciency. Petitioner bases his challenge to the 1990 deficiency on
his claim for the Court to estimate his losses, citing Cohan v.
Commissioner, 39 F.2d 540 (2d Cir. 1930).
Taxpayers have the burden of showing that they are entitled
to a gambling loss deduction. Norgaard v. Commissioner, 939 F.2d
874, 878 (9th Cir. 1991), affg. in part, revg. in part T.C. Memo.
1989-390. Section 6001 requires taxpayers to keep adequate
records to substantiate their income and deductions. See also
sec. 1.6001-1(a), Income Tax Regs. Absent production of adequate
records sustaining a taxpayer's claimed losses, taxpayers are not
entitled to any gambling deduction. Norgaard v. Commissioner,
939 F.2d at 878; Conley v. Commissioner, T.C. Memo. 1992-215.
However, under the rule of Cohan v. Commissioner, supra at 543,
when a taxpayer fails to keep records, but a court is convinced
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that deductible expenditures were made, it "should make as close
an approximation as it can, bearing heavily if it chooses upon
the taxpayer whose inexactitude is of his own making."
Here, the parties do not dispute that petitioner failed to
produce any documents to support his claimed gambling losses for
1990. Rather, petitioner testified that, at one time, he had
records, but either his ex-wife or her new husband had thrown
them away. Thus, petitioner tries to fit within the framework of
the rule of Cohan by laying the blame at the feet of his ex-wife.
However, petitioner failed to call his ex-wife to testify. Thus,
the Court did not have the opportunity to corroborate petition-
er's story.
Unless the court has some proof that the taxpayer is
entitled to some deduction, the taxpayer should not be granted
relief. Williams v. United States, 245 F.2d 559, 560 (5th Cir.
1957). Additionally, where "'there are no reliable figures from
which to calculate or extrapolate a reasonable estimate of * * *
[a taxpayer's] losses'", no such adjustment is warranted. Metas
v. Commissioner, T.C. Memo. 1982-36 (quoting Plisco v. United
States, 306 F.2d 784, 787 (D.C. Cir. 1962)). Here, the only
evidence presented to support petitioner's losses reported on his
1990 Federal income tax return was petitioner's own testimony.
Thus, although it logically follows that petitioner must have
sustained some losses considering his substantial gambling
activity, the complete absence of any documentation or other
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credible corroborating evidence concerning his gambling activ-
ities affords the Court no opportunity to estimate petitioner's
alleged sustained losses under the rule of Cohan v. Commissioner,
supra. Accordingly, we hold that petitioner has failed to carry
his burden of proof with respect to the gambling loss substantia-
tion issue and that his gross gambling winnings are taxable as
determined by the Commissioner for the year in question.
1991 Taxable Year
On his 1991 return, petitioner reported $203,567 in gambling
winnings and $187,000 in losses. Attached to the return were
Forms W-2G reflecting $92,6265 in dog track winnings won by
petitioner and reported to respondent by the tracks. After
audit, respondent determined that petitioner had failed to report
$137,946 in gambling winnings. Respondent also made a correla-
tive adjustment, increasing petitioner's gambling losses by
$104,478. Petitioner challenges the 1991 deficiency on the
grounds that respondent had no basis to suspect that petitioner
earned more income than reported, respondent inappropriately and
incorrectly applied extrapolation, and respondent is unable to
establish, using a net worth method or any other method, that
petitioner made or lost more than he reported on his 1991 Federal
income tax return.
5
The parties both stated that petitioner's Forms W-2G
attached to his 1991 Federal income tax return totaled $95,707 in
dog track winnings. However, the Forms W-2G attached to
petitioner's 1991 Federal income tax return received into
evidence totaled $92,625.70.
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Petitioner claims that for the 1991 tax year, he provided
respondent a complete set of original dog racing programs to
substantiate the income reported on his Federal income tax return
but that some of the programs were lost by respondent.6 However,
at trial, both of respondent's tax auditors who were working on
petitioner's audit, testified that they never received the pro-
grams for the second half of 1991. Petitioner failed to present
any evidence to support his claim that he delivered these pro-
grams to respondent. He presented no receipt for the programs
and offered no testimony or other evidence to corroborate his
story. Thus, petitioner presented an incomplete picture of his
1991 gambling activities.
When a taxpayer fails to maintain adequate books and
records, the Commissioner is authorized to reconstruct income by
any reasonable means which will clearly reflect income. Holland
v. United States, 348 U.S. 121, 130-132 (1954); Conforte v. Com-
missioner, 74 T.C. 1160, 1181 (1980), affd. in part and revd. in
part 692 F.2d 587 (9th Cir. 1982). Extrapolation is a permissi-
ble method of proving the volume of unreported wagers. Gordon v.
Commissioner, 572 F.2d 193, 195 (9th Cir. 1977); Carson v. United
States, 560 F.2d 693 (5th Cir. 1977).
6
Petitioner also provided respondent with a ledger showing
petitioner's net winnings or losses for each day that he gambled,
and the cumulative running total of petitioner's net winnings or
losses for the year. However, petitioner admitted both at the
audit and at trial that the ledger was inaccurate.
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Here, petitioner failed to maintain adequate records to
determine his correct tax liability for the 1991 taxable year. In
order to determine petitioner's correct tax liability, respondent
reasonably used petitioner's dog racing programs for the first
half of 1991 to reconstruct, through extrapolation, petitioner's
gambling winnings and losses for 1991. Accordingly, we hold that
petitioner has failed to substantiate the accuracy of his 1991
Federal income tax return and that his net gambling winnings are
taxable as determined by the Commissioner for the year in
question.
Negligence Penalty
Respondent determined that petitioner was negligent under
section 6662(a) in claiming a deduction for gambling losses for
the tax year 1990 and in failing to properly report his gambling
income for the tax year 1991. For purposes of section 6662(a),
the term "negligence" includes any failure to make a reasonable
attempt to comply with the provisions of the Internal Revenue
Code, and "disregard" includes any careless, reckless or
intentional disregard. Sec. 6662(c). Negligence frequently
takes the form of failure to report income or overstatement of
deductions. Marcello v. Commissioner, 380 F.2d 509 (5th Cir.
1967); Estate of Mason v. Commissioner, 64 T.C. 651 (1975), affd.
566 F.2d 2 (6th Cir. 1977); Beus v. Commissioner, 261 F.2d 176
(9th Cir. 1958). Understatement of income or overstatement of
deductions often reflects the inadequacy of the taxpayer's
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records, which is in itself a basis for imposing the penalty. A
taxpayer is required to maintain records sufficient to establish
information provided on a tax return. Sec. 1.6001-1(a), Income
Tax Regs. Therefore, failure to keep adequate records is
evidence not only of negligence, but of intentional disregard of
the regulations. Marcello v. Commissioner, supra, Magnon v.
Commissioner, 73 T.C. 980 (1980). Here, the taxpayer failed to
maintain records sufficient to establish the amount of gambling
winnings and losses on both his 1990 and 1991 Federal income tax
returns. Accordingly, we hold for respondent.
Decision will be entered
under Rule 155.