T.C. Memo. 1998-212
UNITED STATES TAX COURT
JOHN D. SMITH AND HAZEL B. SMITH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26101-96. Filed June 16, 1998.
Daniel J. Winfree, for petitioners.
Timothy F. Salel, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182. Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year 1994. Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioners' 1994
Federal income tax in the amount of $2,783. The issues for
- 2 -
decision are: (1) Whether petitioners are entitled to a gambling
loss deduction not claimed on their 1994 Federal income tax
return; and (2) whether petitioners may exclude from their 1994
income certain amounts received during that year pursuant to
long-term disability insurance coverage.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioners are husband and wife. They filed a timely joint
Federal income tax return for the year 1994. At the time the
petition was filed, petitioners resided in El Cajon, California.
Prior to the year in issue, Hazel B. Smith was employed by
Sears, Roebuck and Co. (Sears). She retired from Sears either
shortly before, or early in, 1994. As a result of an accident
that occurred prior to 1994, she was confined to a wheelchair for
most, or all, of that year.
John D. Smith was employed as a counter person by
Consolidated Electrical Distributors, Inc. (Consolidated) from
1987 until he injured his back in an employment-related accident
in 1992. Consolidated provided long-term disability benefits to
its employees through a group plan underwritten by ITT Hartford
(Hartford). As a result of his back injury, he applied for and
received long-term disability benefits under the group plan.
Long-term disability benefits were approved in September 1993 to
continue during the period of his disability, but not beyond
- 3 -
December 1994. The benefits took the form of monthly payments,
the amounts of which took into account his wages at the time of
the accident, worker's compensation payments and other disability
benefits received. During 1994 he received monthly payments
(long-term disability benefits) from Hartford totaling $3,637.
The monthly payments were made by check; the check stubs indicate
that the "taxable pct" of each payment is "100". The payments
were reported as wages on a Form W-2 issued to him by
Consolidated for the year 1994.
Neither petitioner was employed during 1994. Because they
had so much free time and their activities were somewhat limited
by their respective disabilities, they developed an interest in
playing bingo. Many of their friends also played bingo and
petitioners viewed the experience as a social activity as much as
a gambling activity.
During 1994 petitioners attended numerous bingo sessions
conducted at two Indian reservations located within 20 miles of
their residence. Typically, they would attend one or two bingo
sessions per day, 4 to 5 days per week. Mrs. Smith spent between
$27 and $32 per session on various types of games that were
played during the bingo sessions. Mr. Smith spent somewhat less.
Sometimes they won, sometimes they lost, and sometimes they broke
even. Petitioners did not consider breaking even to equate to
winning. Petitioners did not maintain any records that reflect
- 4 -
the amounts spent or won playing bingo during 1994. They saved
some admission receipts and cards, but these documents were
discarded prior to the time that they were notified that their
1994 year was under examination.
During a 6- or 7-week period in 1994 Mrs. Smith was
particularly lucky. She enjoyed $12,600 in bingo winnings, which
were reported to her and respondent on Forms W-2G.
Petitioners included $5,950 in bingo winnings in the income
reported on their 1994 Federal income tax return. The manner in
which that amount was calculated was not explained on the return.
They did not include any portion of the disability benefits
received by Mr. Smith in their reported income.
In the notice of deficiency respondent increased
petitioners' income by the excess of the amount of bingo winnings
reported on the Forms W-2G over the amount reported on their
return. Respondent also increased petitioners' income by the
amount of disability benefits received by Mr. Smith. Other
adjustments were made in the notice of deficiency but are not in
dispute in this case.
OPINION
Bingo Winnings and Losses
Although raised in the context of unreported gambling
income, in essence the controversy between the parties focuses
upon the allowance of a gambling loss deduction. In general,
- 5 -
section 165(d) allows a taxpayer to deduct losses from gambling
transactions only to the extent of gains from such transactions.
Petitioners agree that all of their bingo winnings should
have been reported, but claim entitlement to a gambling loss
deduction not listed on their 1994 return. At trial petitioners
explained that the amount of bingo winnings reported on their
1994 return was a net amount. Mrs. Smith estimated that she
spent more than $100 per week to play bingo during 1994. She
calculated her total bingo losses to be $6,900 for that year.
She computed her winnings to include the $12,600 reported on
Forms W-2G, plus $250 in other winnings received in $50 or $100
increments. The amount of bingo winnings reported on
petitioners' 1994 return was calculated by subtracting estimated
losses from estimated winnings.
Respondent argues that petitioners are not entitled to any
deduction for gambling losses because they failed to maintain
adequate books and records from which the extent of their bingo
winnings and losses during 1994 can be established.
Section 6001 and the corresponding regulations require
taxpayers to keep adequate records to substantiate their income
and deductions. See also Rev. Proc. 77-29, 1977-2 C.B. 538.
When a taxpayer fails to keep records, but a court is convinced
that deductible expenditures were incurred, the court "should
make as close an approximation as it can, bearing heavily if it
- 6 -
chooses upon the taxpayer whose inexactitude is of his own
making." Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930).
In cases involving gambling loss deductions, this Court has
invoked the rule of Cohan only when satisfied that the taxpayer
incurred some gambling losses, see Drews v. Commissioner, 25 T.C.
1354 (1956); Doffin v. Commissioner, T.C. Memo. 1991-114; Forman
v. Commissioner, T.C. Memo. 1988-64; Kalisch v. Commissioner,
T.C. Memo. 1986-541, affd. without published opinion 838 F.2d 461
(3d Cir. 1987), and there is some basis upon which an estimate of
such losses can be made. Vanicek v. Commissioner, 85 T.C. 731,
743 (1985). However, before we allow a gambling loss deduction
based upon estimates, we must be convinced that the taxpayer's
gambling losses exceeded unreported gains from gambling
transactions. Donovan v. Commissioner, 359 F.2d 64 (1st Cir.
1966), affg. per curiam T.C. Memo. 1965-247; Schooler v.
Commissioner, 68 T.C. 867 (1977); Scoccimarro v. Commissioner,
T.C. Memo. 1979-455.
Obviously, petitioners sustained gambling losses during
1994; equally as obvious, however, is the fact that they enjoyed
unreported bingo winnings. In this case, because petitioners
received unreported bingo winnings, they must establish that
their annual bingo losses exceeded their annual unreported bingo
winnings in order to be entitled to a deduction for bingo losses.
- 7 -
Because petitioners did not consider small amounts won to be
consequential, and they did not consider breaking even to equate
to winning, we have no basis to calculate, or estimate,
petitioners' unreported bingo winnings. Without some basis for
estimating petitioners' 1994 unreported bingo winnings it is
impossible to determine whether petitioners' bingo losses
exceeded those winnings. Accordingly, they are not entitled to
any deduction for bingo losses. It follows, and we hold, that
respondent's adjustment increasing their 1994 income by the
excess of the bingo winnings reported on Forms W-2G over reported
gambling winnings is sustained.
Long-Term Disability Benefits
Petitioners did not report any portion of the long-term
disability benefits Mr. Smith received from Hartford in 1994.
The parties appear to agree that the group plan subscribed to by
Consolidated constitutes an accident or health plan within the
meaning of sections 104(a)(3) and 105(a), and we proceed as
though it does. Simply stated, the statutory scheme framed
by these sections allows a taxpayer to exclude from income
amounts received through accident or health insurance plans if:
(1) The taxpayer paid for the insurance; or (2) the amounts were
attributable to contributions by the taxpayer's employer that
were includable in the taxpayer's gross income. Sec. 104(a)(3).
On the other hand, amounts received by an employee through
- 8 -
accident or health insurance for personal injuries must be
included in gross income to the extent such amounts are
attributable to contributions by the employer that were not
includable in the gross income of the employee. Sec. 105(a).
In this case there is nothing in the record that suggests
that the amounts contributed by Consolidated on behalf of Mr.
Smith for the long-term disability insurance that generated the
payments here under consideration were includable in his gross
income. Although he testified that he believed that he might
have contributed a de minimis amount towards the insurance, we do
not find his testimony on the point to be sufficient to support a
finding that he did so. Consequently, we find that section
105(a) rather than 104(a)(3) controls. It follows that
petitioners must include in their 1994 income the amount of long-
term disability payments received by Mr. Smith during that year,
and respondent's determination in this regard is sustained.
To reflect the foregoing and the agreed adjustments,
Decision will be entered
under Rule 155.