T.C. Memo. 1995-607
UNITED STATES TAX COURT
BERNARD F. KOCHEVAR, SR. AND MARLENE C. KOCHEVAR,
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27054-93. Filed December 26, 1995.
Bernard F. Kochevar, Sr. and Marlene C. Kochevar, pro sese.
Paul Dixon, for respondent.
MEMORANDUM OPINION
GOLDBERG, Special Trial Judge: This case was heard pursuant
to section 7443A(b)(3) and Rules 180, 181, and 182.1 Respondent
determined a deficiency in petitioners' Federal income tax for
the taxable year 1990 in the amount of $6,625, and an addition to
tax under section 6651(a)(1) in the amount of $494.
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year in issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
2
After concessions,2 the issues for decision are: (1) Whether
petitioners are engaged in the business of being professional
slot machine players, and, if so, whether they are entitled to
claim certain gambling related expenses as ordinary and necessary
business expenses under section 162; (2) whether petitioners are
entitled to deduct the portion of their gambling losses that
exceeds their gambling winnings; and (3) whether petitioners are
liable for an addition to tax under section 6651(a)(1).
Some of the facts have been stipulated and are so found.
The stipulation of facts and attached exhibits are incorporated
herein by this reference. Petitioners resided in Reno, Nevada,
at the time their petition was filed.
Petitioner Bernard F. Kochevar, Sr. (Mr. Kochevar) has been
employed by Welsh Engineering, Inc. as an engineer and surveyor
since 1988, and, according to his testimony, works an average of
50 to 70 hours each week. Petitioner Marlene C. Kochevar (Mrs.
Kochevar) is a paralegal, and, during 1990, worked for several
employers. For several months during the year, Mrs. Kochevar
maintained a full-time position with the Airport Authority in
Nevada, as well as a part-time position with Welsh Engineering,
Inc. as an evening contract typist. At all times during 1990,
Mrs. Kochevar maintained full-time employment.
2
Petitioners concede that they failed to report interest income of $45
and nonemployee compensation of $1,253.
3
Petitioners began playing progressive slot machines on a
frequent basis in 1989. Petitioners testified that they traveled
to local casinos in the evenings after work and on weekends,
spending 20 to 40 hours each week studying and playing slot
machines. They spent the majority of their time at the Sparks
Nugget and Western Village casinos in Sparks, Nevada, and the
Peppermill Casino in Reno.
On or about April 15, 1991, petitioners filed a Form 4868
requesting an automatic 4-month extension of time to file their
1990 joint Federal income tax return and paying their estimated
1990 net tax liability of $1,813. Petitioners' request was
granted, and, on August 15, 1991, the final day of the extension,
they postmarked their 1990 return, wherein they requested a
refund of $6,461. This amount was calculated as follows: total
tax due of $7,199, less Federal income tax withheld of $11,847
and $1,813 paid with Form 4868. Petitioners received their
refund of $6,461 in a check dated September 20, 1991, issued by
the U.S. Treasury.
On the Schedule C attached to their 1990 Federal income tax
return, petitioners stated that they were engaged in the business
of being professional slot machine players. They reported income
and expenses from gambling activities in the respective amounts
of $24,777 and $47,853, resulting in a net loss of $23,076. The
expenses claimed in connection with their gambling were as
follows: (1) Automatic teller machine (ATM) charges and tips in
4
the amount of $740; (2) office expenses and supplies totaling
$37; (3) mileage allotment for travel to the casinos in the
amount of $340; (4) meals at the casinos in the amount of $144;
and (5) losses in the amount of $46,592. Petitioners also
attached a Form 8275 to their return, wherein they disclosed the
nature and extent of their gambling activities in great detail.
On September 2, 1992, after their 1990 Federal income tax
return was selected for examination, petitioners met with Mr.
Lynn Peterson, an Appeals Officer of the Internal Revenue Service
(IRS), to discuss their case. In a letter dated June 17, 1993,
Mr. Peterson stated in pertinent part:
You and I discussed you and your wife's approach to slot
machine playing and I told you that I accepted that you were
in a trade or business. I still accept that you are in a
trade or business. * * *
* * * Absent any other provision of the Internal Revenue
Code, section 162 of the Code would allow you to take the
net loss from your trade or business of slot machine player
and offset income from other sources.
* * * * * *
[However,] [t]he problem is Internal Revenue Code section
165(d). This section reads as follows:
(d) Wagering Losses.--Losses from wagering transactions
shall be allowed only to the extent of the gains from
such transactions. * * *
* * * If you wish a report to accept the adjustments, please
call or write by 7/15/93. If I do not hear from you at all,
then I will have to send you the report, called a statutory
notice of deficiency, that will allow you to take the issues
to the Tax Court.
In the notice of deficiency dated September 24, 1993,
respondent determined that petitioners were not entitled to
5
deduct expenses connected with wagering in excess of gross
receipts from the wagering activities under section 165(d).
Respondent also determined that petitioners were liable for an
addition to tax under section 6651(a)(1) for failure to file
their return within the time prescribed by law.
Section 165(d) provides that "Losses from wagering
transactions shall be allowed only to the extent of the gains
from such transactions." In Boyd v. United States, 762 F.2d
1369, 1372-1373 (9th Cir. 1985), the Ninth Circuit Court of
Appeals stated:
To resolve the conflict between section 162(a) and 165(d),
we looked to the rule that a specific statute controls a
general statute. * * * Section 162(a) deals with all
business expenses, whereas 165(d) specifically addresses
gambling losses. Section 165(d) therefore controls, and a
gambling loss, although it may be a business expense, is
deductible only to the extent of gambling gains. [Citations
omitted.]
See also Valenti v. Commissioner, T.C. Memo. 1994-483. As such,
petitioners are not entitled to claim wagering losses in excess
of their winnings even assuming they were engaged in the business
of being professional slot machine players. See Kozma v.
Commissioner, T.C. Memo. 1986-177 (related expenses included in
wagering losses subject to section 165(d) limitations).
Respondent is sustained on this issue.
In an attempt to overcome the limitation of section 165(d),
petitioners pose several arguments: (1) Respondent is estopped
from disputing their return as filed because the petitioners were
6
issued a refund for the full amount requested on the return by
the IRS; (2) they should not be held liable for the deficiency
because they gave full disclosure of their position on the Form
8275 attached to their return; and (3) the application of section
165(d) violates their right to equal protection in that it treats
professional gamblers differently than taxpayers in other trades
or businesses.
In response to petitioners' first argument, the fact that
petitioners received a tax refund does not preclude respondent
from later determining a deficiency in petitioners' taxes for the
same taxable year. Gordon v. United States, 757 F.2d 1157, 1160
(11th Cir. 1985); Warner v. Commissioner, 526 F.2d 1 (9th Cir.
1975), affg. T.C. Memo. 1974-243; Hacker v. Commissioner, T.C.
Memo. 1993-285, affd. without published opinion 29 F.3d 632 (9th
Cir. 1994). In the same vein, the disclosure of a position by a
taxpayer does not prevent respondent from later determining that
the position is in error. The purpose of Form 8275 is to shield
taxpayers from an addition to tax for negligence or substantial
understatement of income tax. See secs. 6653, 6661(b). In
response to petitioners' final argument, we quote our decision in
Valenti v. Commissioner, supra: "The argument that section
165(d) violates equal protection as applied to those engaged in
the trade or business of gambling borders on the frivolous. We
reject it without further discussion."
7
Respondent determined that petitioners are liable for an
addition to tax for filing their 1990 Federal income tax return
after the due date. Section 6651(a)(1) provides for an addition
to tax in the amount of 5 percent of the amount of the tax if the
failure to file is for not more than 1 month, with an additional
5 percent for each month in which the failure to file continues,
not exceeding 25 percent of the tax in the aggregate. The
addition to tax is applicable unless it is shown that the failure
to file is due to reasonable cause and not willful neglect.
Respondent contends that petitioners' 1990 tax return was
due on April 15, 1991, and that the return was not filed until
August 19, 1991. Petitioners maintain that they had an automatic
extension of time to file their tax return. While it is true
that petitioner filed an application for an automatic extension
of time, respondent contends that the application is invalid
because petitioners failed to estimate properly their tax for
1990 when they filed their Form 4868. Sec. 1.6081-4(a)(4),
Income Tax Regs.
On their application for extension, petitioners estimated
their 1990 tax liability, without taking into consideration their
gambling losses, to be $13,660. After deducting taxes withheld
of $11,847, petitioner remitted a check to the IRS in the amount
of $1,813. In the notice of deficiency, respondent determined
that petitioners' 1990 tax liability was $13,824. The deficiency
8
resulted from the refund issued to petitioners after they filed
their return on August 19, 1991.
Exactitude is not required in making an estimation of one's
tax liability for purposes of an automatic extension. Crocker v.
Commissioner, 92 T.C. 899, 907 (1989). A taxpayer must make a
bona fide and reasonable estimate of the tax liability based on
the information available when a request for extension is made.
Id. at 908; see Berlin v. Commissioner, 59 F.2d 996 (2d Cir.
1932), affg. a Memorandum Opinion of this Court. Therefore, we
find that petitioners properly estimated their tax liability,
and, as such, the time in which petitioners were permitted to
file was extended 3 months. Because the envelope containing
their 1990 return was postmarked on August 15, 1991, we conclude
that petitioners are not liable for an addition to tax under
section 6651(a)(1).
To reflect the foregoing,
Decision will be entered
for respondent, except as to
the addition to tax under
sec. 6651(a)(1).