T.C. Memo. 2002-89
UNITED STATES TAX COURT
RONALD J. LUTZ, JR. AND PAULA M. LUTZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10211-99. Filed April 4, 2002.
Michele M. Echols, for petitioners.1
Emile L. Hebert III and Susan S. Canavello, for
respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Respondent determined a $37,164 deficiency
in petitioners’ 1996 joint Federal income tax and a $7,349
1
At trial, petitioners were represented by Robert L.
Henderson, Jr., who subsequently withdrew.
- 2 -
accuracy-related penalty under section 6662(a).2 The issues for
decision are: (1) Whether petitioners in 1996 had unreported
wagering gains in excess of wagering losses, and if so, the
amount of the excess gains; and (2) whether petitioners are
liable for a penalty under section 6662(a) for substantially
understating their 1996 income tax.
FINDINGS OF FACT
The parties have stipulated some facts, which we incorporate
herein by this reference. When they petitioned the Court,
petitioners, husband and wife, resided in Slidell, Louisiana.
During 1996, petitioner husband (Ronald) was president and
part owner of Mega International, Inc. (Mega), an S corporation
which operated an offshore oil field business.3 During 1996,
Ronald earned $80,000 in wages from Mega. During 1996,
petitioner wife (Paula) did not work outside the home. Although
Paula was not employed by Mega and otherwise provided no services
to Mega, during 1996 she also received $24,000 from Mega, which
reported the payments to her on a 1996 Form W-2, Wage and Tax
Statement, as wages, tips, or other compensation.
2
Unless otherwise indicated, all 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.
3
Unaudited financial statements admitted into evidence
indicate that petitioners owned 49 percent of Mega International,
Inc. (Mega). The record otherwise contains no information about
the ownership of Mega.
- 3 -
In 1996, Ronald’s employment with Mega required him to work
60 to 80 hours per week. In June 1996, Paula gave birth to
petitioners’ third child. Despite the demands of their
respective obligations, however, petitioners found time in 1996
for a great deal of recreational gambling. Two or three times a
week, they went to casinos together. Once or twice a week, Paula
went to casinos without Ronald.
Petitioners gambled primarily at the following four casinos:
Casino Magic in Biloxi, Mississippi (Biloxi Casino Magic); Casino
Magic in Bay St. Louis, Mississippi (Bay St. Louis Casino Magic);
Bayou Caddy’s Jubilation Casino in Lakeshore, Mississippi
(Jubilation Casino); and Boomtown Casino in Harvey, Louisiana
(Boomtown Casino).
When petitioners visited a casino together, they usually
gambled in separate areas, until one of them ran out of money and
went and found the other. Ronald favored table games; Paula
played both table games and slot machines. Sometimes Paula would
gamble all day, into the wee hours. During their gambling trips,
the casinos furnished petitioners, free of charge, meals, hotel
rooms, and such.
When petitioners went to the casinos, they sometimes brought
substantial amounts of cash for gambling. Sometimes they
obtained cash at the casinos, either through a line of credit
with the casinos, or by cashing a check, using a credit card, or
- 4 -
making automatic teller machine withdrawals. Sometimes they
would take cash home from the casinos; sometimes they would not.
Except for the $40,000 proceeds of one jackpot that Paula won in
February 1996, petitioners deposited into their checking or
savings accounts none of the cash that they brought home from the
casinos.
During 1996, petitioners kept no records of their gambling
activities. Biloxi Casino Magic and Bay St. Louis Casino Magic
(collectively, the Casinos Magic), however, maintained some
records of petitioners’ gambling activities. With regard to
petitioners’ table games play, these records consist primarily of
computer-generated “Trip History Reports” (THRs), wherein the
casinos’ table games supervisors would estimate and record
petitioners’ “observed” wins and losses on particular dates.
The THRs indicate that during 1996 petitioners had estimated
total winnings and losses at table games in the following
amounts:
Winnings Losses
Paula:
Bay St. Louis Casino Magic –- $32,729
Biloxi Casino Magic $1,250 --
Ronald:
Bay St. Louis Casino Magic 10,850 7,500
Biloxi Casino Magic -– 350
Employees of the Casinos Magic typically do not “observe”
patrons’ slot machine play, as they do table games play. The
casinos do, however, make available to their patrons so-called
- 5 -
Player’s Club cards--magnetic-strip cards that when inserted into
the casinos’ slot machines electronically track the player’s wins
and losses. During 1996, Paula had several Player’s Club cards,
but she did not use them because she thought they were a “jinx”.
As far as the record reveals, Ronald also used no Player’s Club
card when he gambled at slot machines. Consequently, the only
Casinos Magic records of petitioners’ slot machine play are those
that relate to the casinos’ reporting, on Form W-2G, Certain
Gambling Winnings, of slot machine winnings over $1,200.4
In 1996, the Bay St. Louis Casino Magic issued 24 Forms W-2G
to Paula and one Form W-2G to Ronald, reporting aggregate slot
machine winnings in 1996 of $99,500 ($98,250 for Paula and $1,250
for Ronald) on total bets placed of $4,975–-reflecting a 20-to-1
payoff on each individual jackpot. In 1996, the Biloxi Casino
Magic issued 10 Forms W-2G to Paula and one Form W-2G to Ronald,
showing aggregate winnings of $39,400 ($37,800 for Paula and
$1,600 for Ronald).5
During 1996, petitioners also had these other gambling
winnings and losses:
4
Forms W-2G, Certain Gambling Winnings, are required to be
issued for table game winnings of $600 or more and for slot
machine winnings of $1,200 or more. Sec. 6041(a); sec. 7.6041-1,
Temporary Income Tax Regs., 42 Fed. Reg. 33286 (June 30, 1977).
5
The record does not indicate the amounts of bets placed
with respect to these Biloxi Casino Magic winnings.
- 6 -
Winnings Losses
Boomtown Casino $2,645 $1,690
Jubilation Casino 3,100 1,550
On their 1996 joint Federal income tax return, petitioners
reported no income or losses from their gambling activities.
They reported $104,000 wage income from Mega.
Respondent commenced an examination of petitioners’ 1996
joint Federal income tax return in December 1998. In the notice
of deficiency, issued in March 1999, respondent determined that
petitioners had $91,000 unreported gambling income. Respondent’s
determination was based on gambling winnings reported on 18 Forms
W-2G–-two from Jubilation Casino (showing $3,100 total gross
winnings), eight from the Bay St. Louis Casino Magic (showing
$61,000 total gross winnings), seven from the Biloxi Casino Magic
(showing $24,900 total gross winnings), and one from Boomtown
Casino (showing $2,000 total gross winnings).
OPINION
Petitioners contend that their 1996 gambling losses more
than offset their gambling winnings and that respondent’s
determination is therefore in error. Respondent concedes that
petitioners had $43,818.75 of gambling losses in 1996, based
largely on the THRs generated by the Casinos Magic with respect
to petitioners’ table games play. Respondent contends, however,
that petitioners had at least $144,645 of unreported gambling
winnings in 1996, and that the notice of deficiency reflects only
- 7 -
$91,000 of these unreported gambling winnings, thus omitting (for
unexplained reasons) at least $53,645 of these unreported
gambling winnings. Respondent contends that since the $43,818.75
conceded gambling losses are less than the unreported gross
gambling winnings that were omitted from the notice of
deficiency, petitioners are entitled to no deduction for gambling
losses.6
Gross income includes all income from whatever source
derived, including gambling. Sec. 61; McClanahan v. United
States, 292 F.2d 630, 631-632 (5th Cir. 1961). In the case of a
taxpayer not engaged in the trade or business of gambling,
gambling losses are allowable as an 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, 230
F.2d 766 (1st Cir. 1956); Gajewski v. Commissioner, 84 T.C. 980
(1985).
Absent a statutory exception, petitioners generally bear the
burden of proving their entitlement to claimed deductions. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). When
respondent raises a new matter, however, the burden of proof is
on him. Rule 142(a). Accordingly, respondent bears the burden
of establishing the amount of petitioners’ additional unreported
6
Respondent does not seek any increased deficiency based on
gambling winnings omitted from the notice of deficiency.
- 8 -
gross gambling income that is not reflected in the notice of
deficiency. See Kalisch v. Commissioner, T.C. Memo. 1986-541,
affd. without published opinion 838 F.2d 461 (3d Cir. 1987).
In certain circumstances, section 7491 places the burden of
proof on respondent with regard to certain factual issues.
Section 7491 is effective with respect to court proceedings
arising in connection with examinations commencing after July 22,
1998. Internal Revenue Service Restructuring & Reform Act of
1998, Pub. L. 105-206, sec. 3001(c)(2), 112 Stat. 727. The
examination in the instant case began in December 1998.
Therefore we evaluate whether respondent bears the burden of
proof pursuant to section 7491.
Section 7491(a)(1) provides that if, in any court
proceeding, the taxpayer introduces credible evidence with
respect to factual issues relevant to ascertaining the taxpayer’s
liability for a tax (under subtitle A or B), the burden of proof
with respect to such factual issues will be placed on the
Commissioner, provided that various conditions are met. One of
the conditions is that the taxpayer must comply with the
substantiation and record-keeping requirements of the Internal
Revenue Code. See sec. 7491(a)(2)(A) and (B).7 Under the
7
For the burden to be placed on the Commissioner, the
taxpayer must also cooperate with reasonable requests by the
Commissioner for “witnesses, information, documents, meetings,
and interviews”. Sec. 7491(a)(2)(B). Respondent argues that
(continued...)
- 9 -
Internal Revenue Code, the taxpayer is required to maintain
records that are sufficient to enable the Commissioner to
determine the correct tax liability. See sec. 6001; sec. 1.6001-
1(a), Income Tax Regs.; see also Rev. Proc. 77-29, 1977-2 C.B.
538 (providing guidance as to acceptable evidence for
substantiating wagering wins and losses). Here, petitioners do
not dispute that they failed to maintain records of their
gambling activities. Accordingly, the burden of proof as to
petitioners’ gambling losses is not placed on respondent, and
petitioners bear the burden of substantiating the amount of any
claimed gambling loss deduction. See Hradesky v. Commissioner,
65 T.C. 87, 90 (1975), affd. 540 F.2d 821 (5th Cir. 1976).
Moreover, as discussed in greater detail below, although
petitioners have introduced evidence substantiating some losses–-
and respondent has conceded some losses--petitioners have failed
to introduce credible evidence, as required by section 7491(a),
7
(...continued)
petitioners fail this requirement, having failed to produce any
documents to substantiate their gambling winnings and losses
after receiving from respondent a December 1998 letter regarding
the examination of their 1996 Federal tax liabilities. Because
we conclude that petitioners have failed the substantiation and
record-keeping requirements of sec. 7491(a)(2)(A) and (B), we
need not decide whether petitioners also fail the cooperation
test.
The benefits of sec. 7491 are also unavailable if the
taxpayer fails certain net-worth limitations. See sec.
7491(a)(2)(C). Respondent does not argue that petitioners fail
the net-worth limitations.
- 10 -
to show that their gambling losses equal or exceed their gambling
winnings.8
In contending that petitioners had at least $144,645 of
unreported gambling winnings, respondent relies on stipulations
and undisputed evidence which show that petitioners had
unreported gambling winnings from the following sources:
Boomtown Casino $2,645
Jubilation Casino 3,100
Bay St. Louis Casino Magic 99,500
Biloxi Casino Magic 39,400
Total 144,645
While we agree (and petitioners do not dispute) that
petitioners had unreported gambling winnings of $144,645,
respondent has not shown that the entire $144,645 represents
gross income to petitioners. The evidence shows, and we have
found, that the $99,500 gambling winnings from the Bay St. Louis
Casino Magic, as reported on Forms W-2G, were all from slot
machine play and that to win this $99,500, petitioners placed
bets of $4,975. Therefore, $4,975 of the $99,500 slot machine
winnings is in the nature of a recovery of capital and should be
excluded from petitioners’ gross gambling winnings to arrive at
8
Sec. 7491 does not define what constitutes credible
evidence. The pertinent legislative history states: “Credible
evidence is the quality of evidence which, after critical
analysis, the court would find sufficient upon which to base a
decision on the issue if no contrary evidence were submitted
(without regard to the judicial presumption of IRS correctness).”
H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-
995; see Higbee v. Commissioner, 116 T.C. 438, 442 (2001).
- 11 -
gross income under section 61 and adjusted gross income under
section 62. See Hochman v. Commissioner, T.C. Memo. 1986-24.
Similarly, the $39,400 gambling winnings from the Biloxi
Casino Magic is the amount reported as gambling winnings on Forms
W-2G. The record does not expressly indicate whether these gross
winnings are from slot machine or table games play. On the basis
of all the evidence in the record, however, we infer that the
$39,400 winnings are all from petitioners’ slot machine play at
the Biloxi Casino Magic.9 Although the evidence does not
expressly indicate the amounts of bets that petitioners placed to
win these jackpots, we believe that it is a fair inference that
the slot machine payoffs for the Bay St. Louis Casino Magic and
the Biloxi Casino Magic were the same; i.e., 20 to 1.
Accordingly, we infer that petitioners placed aggregate bets of
$1,970 to win the $39,400 at the Biloxi Casino Magic.10
9
This inference is based on several considerations:
According to the Biloxi Casino Magic Trip History Reports (THRs)
that are in evidence, petitioners had only $1,250 table games
winnings at the Biloxi Casino Magic. The smallest amount of
winnings shown on the Biloxi Casino Magic Forms W-2G, however, is
$1,600. All of petitioners’ winnings as reported on the Forms W-
2G from the Biloxi Casino Magic are in amounts greater than
$1,200–-the slot machine threshold amount–-and are in round
numbers, in amounts similar to those reflected on the Bay
St. Louis Casino Magic Forms W-2G. Since the latter Forms W-2G
clearly relate solely to slot machine play, we infer that the
Biloxi Casino Magic Forms W-2G also relate solely to slot machine
play.
10
By contrast, with respect to petitioners’ winnings of
$2,645 and $3,100 from Boomtown Casino in Harvey, La., and
(continued...)
- 12 -
Consequently, petitioners’ cost of winning the $138,900 total
slot machine winnings was $6,945 ($4,975 plus $1,970).
Subtracting this amount from petitioners’ $144,645 gross gambling
winnings (which includes the $138,900 slot machine winnings), we
conclude that the facts relied upon by respondent show that
petitioners had total unreported gross income from gambling of
$137,700.11
As previously discussed, respondent determined in the notice
of deficiency that petitioners had unreported gambling winnings
of $91,000, of which amount $85,900 represent slot machine
winnings reported on Forms W-2G from the Casinos Magic.
Consistent with our conclusion that these slot machine winnings
reflect payoffs of 20 times the bets placed, it appears that
petitioners’ cost of winning the $85,900 total jackpots was
$4,295. Excluding this capital-recovery cost from the gross
gambling winnings reflected in the notice of deficiency, we
10
(...continued)
Jubilation Casino in Lakeshore, Miss., respectively, the record
contains no basis for inferring either the type of games played
or the bets placed.
11
This figure does not include table games winnings
reflected on the Casinos Magic THRs, in amounts of $10,850 for
Ronald and $1,250 for Paula. Nor does this figure otherwise
include any of petitioners’ gross gambling winnings that might
have been under the casinos’ reporting thresholds. Respondent
has not expressly argued that any such additional unreported
winnings should be taken into account. Accordingly, we give them
no further consideration in assessing petitioners’ allowable
gambling losses.
- 13 -
conclude that the unreported gross income indicated by the notice
of deficiency is $86,705 ($91,000 less $4,295).
To recap, we conclude that the facts relied upon by
respondent show that petitioners had unreported gambling gross
income of $137,700. This amount is $50,995 greater than the
$86,705 unreported gambling gross income indicated by the
unreported gross gambling winnings reflected in the notice of
deficiency. To establish their entitlement to deduct gambling
losses from the gross gambling income indicated by the notice of
deficiency, petitioners must establish that their gambling losses
are greater than the $50,995 of unreported gross gambling income
that is not reflected in the notice of deficiency. See Schooler
v. Commissioner, 68 T.C. 867 (1977). Respondent has conceded
that petitioners have gambling losses of $43,818.75, based
largely on the THRs generated by the Casinos Magic with respect
to petitioners’ table games play. Accordingly, petitioners must
establish additional gambling losses of at least $7,176.25
($50,995 less $43,818.75) to show entitlement to any gambling
loss deduction.12
12
As discussed in more detail in the text, the $43,818.75
gambling losses that respondent has conceded represent primarily
losses reflected in THRs, relating to table games play at the
Casinos Magic. These conceded losses do not include petitioners’
costs of placing slot machine bets and hence do not duplicate the
amounts that we have concluded should be allowed as an offset in
determining petitioners’ gross income from slot machine winnings.
- 14 -
As previously discussed, the notice of deficiency is based
on respondent’s determination that petitioners had unreported
slot machine winnings from the Casinos Magic and a lesser amount
of winnings from the Boomtown Casino and the Jubilation Casino.
The parties have stipulated the amount of gambling losses that
petitioners sustained at Boomtown Casino and Jubilation casino.
Respondent has conceded the Casinos Magic table games losses as
reflected on the THRs. Accordingly, the essence of the dispute
between the parties is whether petitioners have substantiated
gambling losses with respect to their slot machine play at the
Casinos Magic.
Having kept no records of losses on their slot machine play
at the Casinos Magic, petitioners rely on two undated letters, on
Bay St. Louis Casino Magic letterhead and signed by Tina
Frederiksen in her capacity as “Casino Magic VIP Representative”.
These letters state that for 1996 Paula had a net loss of $20,910
and Ronald had a net win of $3,350 “in Table Games, Slots, or
combined play”. The letters contain a number of caveats,
however, including that the casino’s tracking system “is designed
for marketing purposes only”, that the “information should only
be used to support your personal records”, that the casino
“cannot be certain that you used your * * * Player’s Club Card
every time you visited us, or used it correctly”, and that “Table
Game play is not an exact account of actual play; it is strictly
- 15 -
an estimate.” Although Ms. Frederiksen (using her married name
of Cantrell) testified at trial, she offered no testimony
regarding the source or nature of the information contained in
the two letters.
From the face of the letters, we infer that estimates
therein of petitioners’ net winnings and losses are based on the
casinos’ tracking system. The evidence shows that the casinos
generally did not track slot machine wins and losses unless the
patron used a Players’ Club card. Paula testified that she did
not use her Players’ Club cards when she played slot machines
because she thought they were a “jinx.” Similarly, there is no
evidence that Ronald ever used a Players’ Club Card when he
played slot machines. Accordingly, we conclude that the letters
are unreliable indicators of petitioners’ gambling winnings and
losses, failing in particular to reflect either slot machine
winnings or losses. Cf. Mayer v. Commissioner, T.C. Memo. 2000-
295 (similar unsigned letter from Caesar’s Palace, purporting to
estimate the taxpayer’s gambling winnings and losses, was deemed
to be unreliable evidence and given no weight), affd. 2002 U.S.
App. LEXIS 2838 (2d Cir. 2002).
Petitioners contend that their bank statements and other
documentary evidence show that during 1996 they made cash
withdrawals or debit or credit card charges at the casinos
totaling some $39,329. Assuming that petitioners made such
- 16 -
transactions at the casinos, the mere fact of these transactions
does not substantiate actual losses of those funds on gambling.
See Schooler v. Commissioner, 68 T.C. at 870; Klabacka v.
Commissioner, T.C. Memo. 1987-77.
Petitioners presented testimony of casino employees,
indicating that the odds of beating the casinos over the long
haul are not good. We do not doubt it. Such generalizations,
however, do not tend to substantiate petitioners’ actual gambling
losses or provide us any basis for estimating them.
Petitioners rely upon Doffin v. Commissioner, T.C. Memo.
1991-114, to establish that they are entitled to deduct gambling
losses. In Doffin, the taxpayer had $46,240 lottery winnings in
one year and $32,571 in another. The taxpayer kept no records of
gambling losses. The Commissioner allowed the taxpayer a
deduction for gambling losses limited to the costs of the winning
lottery tickets ($494) in one of the years at issue. The
Commissioner allowed the taxpayer no gambling losses for the
other year. The evidence in Doffin showed that the taxpayer, who
lived in a mobile home and had few assets and little income, had
sold assets and borrowed money during the years at issue to
support his gambling habit. The taxpayer’s lifestyle and
financial position indicated no accessions to wealth commensurate
with the amount of net gambling winnings determined by
respondent. Finding it highly improbable that the taxpayer would
- 17 -
have purchased only winning tickets, the Court applied the rule
of Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), to estimate
the amount of the taxpayer’s gambling losses.
Unlike Doffin v. Commissioner, supra, this is not a case
where the taxpayers had few assets, no income apart from
gambling, and no significant accessions to wealth during the year
at issue. Petitioners have admitted to an increase in their net
worth for 1996 that corresponds roughly to the amount of
unreported gambling income that respondent has determined.
Petitioners introduced into evidence unaudited statements of
financial position, purporting to show the change in their net
worth during 1996. These documents indicate that during 1996
petitioners’ net worth increased by $89,503 (from $542,275 to
$631,778). These documents indicate that during 1996 petitioners
purchased, among other things, a new Chevrolet Suburban and a
motorcycle, and that the value of their interest in Mega
increased by some $70,000 during 1996.13 In short, we are unable
to conclude on the basis of the evidence in the record that
petitioners’ significant accessions to wealth in 1996 were not
13
Although petitioners testified that they did not put any
gambling winnings into Mega, we note that in 1996 Mega paid Laura
$24,000, even though she performed no services for Mega. In this
regard, Paula testified that Mega “paid my husband and I, since
we owned the company * * * they wrote us a check. But I didn’t
do anything.” These peculiar circumstances raise the suggestion,
if not the likelihood, that Mega’s assets and petitioners’
separate assets were to some degree fungible.
- 18 -
attributable in whole or part to their unreported gambling
winnings.
Petitioners’ testimony on this score was less than
compelling. On direct examination, Paula was asked the leading
question whether “you feel like your [1996] losses exceeded your
winnings”. In response, Paula testified, “I think so. I don’t
have–-we didn’t have any money. * * * I mean, it just–-I mean,
nothing really changed. We had money in and out, in and out of–-
it was like we had gambling money all year. It would go through
our fingers.” Surely every taxpayer can attest that income has a
way of slipping through the fingers and leaving one feeling none
the richer for it. This dolorous fact of life, however, affords
no basis for tax relief in the ordinary situation, much less in
the situation here involving unreported gambling winnings.
In sum, we are unconvinced that petitioners’ gambling losses
exceeded the unreported gross gambling income not reflected in
the notice of deficiency. The record provides no satisfactory
basis for estimating petitioners’ gambling losses in excess of
the amount we have allowed as a downward adjustment and the
amount conceded by respondent. Consequently, we do not apply the
rule of Cohan v. Commissioner, supra, to estimate the amount of
losses. See Donovan v. Commissioner, 359 F.2d 64 (1st Cir.
1966), affg. T.C. Memo. 1965-247; Stein v. Commissioner, 322 F.2d
78, 83 (5th Cir. 1963), affg. T.C. Memo. 1962-19; Schooler v.
- 19 -
Commissioner, supra; Mayer v. Commissioner, supra (disallowing
unsubstantiated slot machine losses). Petitioners could have
avoided this result by keeping records of their gambling
activities or perhaps by simply using their Players’ Club cards
to track their slot machine play at the Casinos Magic. Instead,
they spun the wheel with the tax laws and therein made a losing
wager.
Accordingly, we allow petitioners no gambling losses for
1996, although, as previously discussed, we adjust downward (from
$91,000 to $86,705) respondent’s determination of petitioners’
unreported gross income from gambling, to account for
petitioners’ cost of making the winning slot machine bets at the
Casinos Magic.
Accuracy-Related Penalty
Respondent determined that petitioners are liable for an
accuracy-related penalty under section 6662(a) for a substantial
understatement of tax. Section 6662(a) imposes an accuracy-
related penalty equal to 20 percent of any underpayment that is
attributable to a substantial understatement of income tax.
Section 6662(d)(1) defines a “substantial understatement” of
income tax as one which exceeds the greater of 10 percent of the
tax required to be shown on the return or $5,000. The accuracy-
related penalty does not apply with respect to any portion of the
- 20 -
underpayment if it is shown that the taxpayer had reasonable
cause and acted in good faith. Sec. 6664(c).
Because this court proceeding arises in connection with an
examination commenced after July 22, 1998, respondent bears the
burden of producing sufficient evidence to support imposition of
the accuracy-related penalty; however, the burden remains on
petitioners to show that the reasonable cause exception applies.
See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447
(2001); Penn v. Commissioner, T.C. Memo. 2001-267.
As previously discussed, the undisputed evidence shows that
petitioners had at least $86,705 in unreported gross income from
gambling, as determined by reference to the $91,000 of gambling
winnings as understated in the notice of deficiency. Petitioners
have failed to substantiate gambling losses in excess of
unreported gambling gross income omitted from the notice of
deficiency. The net result is a substantial understatement of
tax as defined in section 6662(d)(1)(A).
In determining whether a taxpayer acted with reasonable
cause and in good faith, the most important factor is the extent
of the taxpayer's effort to assess the proper tax liability.
Sec. 1.6664-4(b)(1), Income Tax Regs. With respect to
petitioners’ 1996 gambling activities, four casinos issued
petitioners some 39 Forms W-2G, reporting aggregate gambling
winnings over $144,000–-an amount greater than petitioners’
- 21 -
substantial wage income. Yet petitioners reported neither
gambling winnings nor gambling losses on their Federal income tax
return, nor did they disclose this omission on their return.
On brief, petitioners argue that they are not liable for the
accuracy-related penalty because they believed their gambling
losses exceeded their gambling winnings and “in good faith with
reasonable cause under a wrong assumption did not report the
gambling winnings.” It is well settled that taxpayers have a
duty to report as gross income gambling winnings such as those
involved here; gambling losses must be claimed as itemized
deductions, subject to statutory limitations. See McClanahan v.
United States, 292 F.2d at 631-632; Gajewski v. Commissioner, 84
T.C. at 982; Johnston v. Commissioner, 25 T.C. 106, 108 (1955).
Taxpayers are required to take reasonable steps to determine the
law and comply with it. Niedringhaus v. Commissioner, 99 T.C.
202, 222 (1992). The record does not indicate that petitioners
took any such steps or that any portion of their underpayment was
due to reasonable cause.
Accordingly, we conclude that petitioners are liable for an
accuracy-related penalty under section 6662(a).
To reflect the foregoing,
Decision will be entered
under Rule 155.