LAVIGNE v. COMMISSIONER

T.C. Summary Opinion 2002-81

UNITED STATES TAX COURT

MICHAEL G. AND KATE M. LAVIGNE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6435-01S. Filed July 2, 2002.

Michael G. and Kate M. Lavigne, pro se.

Douglas S. Polsky, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1 The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority.

1
Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
years at issue. All Rule references are to the Tax Court Rules
of Practice and Procedure.
 - 2 -

Respondent determined deficiencies of $4,097 and $7,658 in

petitioners' Federal income taxes, respectively, for 1998 and

1999 and corresponding penalties under section 6662(a) in the

amounts of $819 and $1,532.

Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference. At the time the petition was filed, petitioners'

legal residence was Albuquerque, New Mexico.

For each of the years in question, petitioners claimed

itemized deductions on a Schedule A, Itemized Deductions, of

their Federal income tax return. For 1998, petitioners claimed

itemized deductions totaling $26,446, of which $15,484 was

disallowed by respondent. For 1999, petitioners deducted

$38,113, of which $27,368 was disallowed by respondent.

Petitioners, nevertheless, were allowed itemized deductions for

both years, since the total of their other claimed and allowed

deductions exceeded the standard deduction under section 63(c).

For the 2 years at issue, the disallowed deductions consisted of

charitable contributions, job expenses, and other miscellaneous

deductions. Additionally, for 1999, respondent disallowed an

itemized deduction for gambling losses of $4,000.

The issues for decision are: (1) Whether petitioners are

entitled to the disallowed itemized deductions for charitable

contributions, job expenses, and other miscellaneous deductions
 - 3 -

for 1998 and 1999 and the disallowed gambling losses for 1999,

and (2) whether petitioners are liable for the penalties under

section 6662(a). In addition, the Court considers the

applicability of section 6673(a) to the facts of this case.

Petitioners were both employed during the 2 years in

question. Mr. Lavigne was employed by a construction company,

and Mrs. Lavigne was employed by Intel Corp. They reported

combined wages of $70,996 and $83,088, respectively, for 1998 and

1999.

For the 2 years in question, petitioners' income tax returns

were prepared by a return preparer, Robin Beltran. The record

does not reflect the circumstances surrounding how petitioners

engaged Mr. Beltran.2 Mr. Beltran advised petitioners that

records were not necessary to substantiate deductions claimed on

their returns, and such records could be disregarded because,

irrespective of records, a taxpayer, under the law, was "allowed"

deductions for such expenses pursuant to a "formula" based on the

income the taxpayer earned.

The deductions disallowed by respondent on petitioners' tax

returns consisted of the following:

2
The Court notes that this case is one of numerous cases
heard by the Court involving tax returns prepared by Mr. Beltran,
which essentially involve the same deductions at issue here.
 - 4 -

1998 1999

Charitable contributions $ 5,299 $ 7,071
Unreimbursed employee expenses and
tax preparation fees (before the
sec. 67(a)limitation) 11,632 18,082

Petitioners acknowledged at trial that their actual

charitable contributions were considerably less than the amounts

claimed on their returns but ventured no estimate as to the

correct amount of their actual contributions. They presented

meager evidence reflecting nominal contributions to

organizations, such as the Fraternal Order of Police and Special

Olympics of New Mexico, as well as a handwritten list of clothing

and other items donated to "Joy Junction" during one of the years

at issue.

The unreimbursed employee expenses claimed represented

expenses incurred by Mr. Lavigne in the use of his personal

vehicle in connection with his employment. No logs or other

records were maintained by him with respect to these expenses.

With respect to the first issue regarding petitioners'

entitlement to deductions for unreimbursed employee business

expenses, petitioners did not maintain logs or other records to

substantiate the amounts claimed for such expenses on their

returns. Such deductions are subject to the strict

substantiation requirements of section 274(d). In the absence of

records that would satisfy section 274(d), the Court holds that
 - 5 -

petitioners are not entitled to deductions for such expenses for

the 2 years in question. Petitioners did incur expenses for

preparation of their tax returns; however, because these expenses

would not exceed 2 percent of petitioners' adjusted gross income

each year, therefore, under section 67(a), petitioners are not

entitled to deductions for tax preparation fees for 1998 and

1999.

With respect to charitable contributions, petitioners

produced only meager documentary evidence to substantiate their

contributions for the 2 years at issue. The Court is satisfied

that petitioners did make some qualifying charitable

contributions during the years at issue, and, therefore, under

the Court's discretionary authority pursuant to Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), allows

petitioners charitable contribution deductions of $300 for each

year at issue.

On their 1999 Federal income tax return, petitioners

reported, as income, gambling winnings of $4,000. On Schedule A

of their return, petitioners claimed an itemized deduction of

$4,000 for gambling losses. Respondent disallowed the claimed

deduction. The $4,000 represented winnings by Mrs. Lavigne from

slot machines at Las Vegas, Nevada. Mrs. Lavigne played slot

machines there every month. She maintained no books and records

of her winnings, nor any records for the amounts spent on
 - 6 -

gambling. The $4,000 reported on the return represented an

amount for which the casino had issued an IRS Form 1099 to Mrs.

Lavigne for a larger than normal payoff from a slot machine.

Mrs. Lavigne admitted she had other winnings during the course of

the year for which no Forms 1099 were issued; however, no records

were maintained by her for such winnings. Mrs. Lavigne was

satisfied that her losses exceeded $4,000 during 1999. The only

records submitted at trial to establish her losses consisted of a

bank statement of Mrs. Lavigne's account reflecting various

withdrawals that she contends substantiated her gambling losses.

Section 165(d) allows taxpayers to deduct losses from

wagering transactions to the extent of the gains from such

transactions. In order to establish entitlement to a deduction

for wagering losses in this Court, the taxpayer must prove the

losses sustained during the taxable year. Mack v. Commissioner,

429 F.2d 182 (6th Cir. 1970), affg. T.C. Memo. 1969-26; Stein v.

Commissioner, 322 F.2d 78 (5th Cir. 1963), affg. T.C. Memo. 1962-

19. The taxpayer must also prove that the amount of such

wagering losses claimed as a deduction does not exceed the amount

of the taxpayer's gains from wagering transactions. Sec. 165(d).

Implicitly, this requires the taxpayer to prove both the amount

of losses and the amount of winnings. Schooler v. Commissioner,

68 T.C. 867, 869 (1977); Donovan v. Commissioner, T.C. Memo.

1965-247, affd. per curiam 359 F.2d 64 (1st Cir. 1966).
 - 7 -

Otherwise, there would be no way of knowing whether the sum of

the losses deducted on the return is greater or less than the

taxpayer's winnings. Schooler v. Commissioner, supra at 869.

For example, if the taxpayer, in addition to the winnings

reported on a return, had other winnings that were not reported,

then the taxpayer must prove that the losses claimed as a

deduction on the return exceeded the unreported winnings in order

to be entitled to deduct any such losses. Donovan v.

Commissioner, supra. The amount deductible in such situation is

the amount of the claimed losses which exceeds the unreported

winnings, as long as such amount does not exceed the winnings

reported on the taxpayer's return. Sec. 165(d); Schooler v.

Commissioner, supra; Donovan v. Commissioner, supra. Here,

petitioners did not prove the amount of their gambling winnings,

both reported and unreported, and, thus, they failed to prove

that the amount of the wagering losses deducted on the 1999

return is greater than the unreported gains from gambling.

Rodriguez v. Commissioner, T.C. Memo. 2001-36. Respondent,

therefore, is sustained in the disallowance of petitioners'

$4,000 gambling loss deduction for 1999.

The second issue is whether petitioners are liable for the

section 6662(a) penalties. Petitioners contend they should be

absolved of liability for such penalties because they relied on

the representations of their return preparer, Mr. Beltran.
 - 8 -

Section 6662(a) provides for an accuracy-related penalty

equal to 20 percent of any portion of an underpayment of tax

required to be shown on the return that is attributable to the

taxpayer's negligence or disregard of rules or regulations. Sec.

6662(a) and (b)(1). Negligence consists of any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code, and disregard consists of any careless, reckless,

or intentional disregard. Sec. 6662(c). The courts have refined

the Code definition of negligence as a lack of due care or

failure to do what a reasonable and prudent person would do under

similar circumstances. Allen v. Commissioner, 925 F.2d 348, 353

(9th Cir. 1991), affg. 92 T.C. 1 (1989). Section 1.6662-3(b)(1),

Income Tax Regs., provides that "Negligence is strongly indicated

where * * * a taxpayer fails to make a reasonable attempt to

ascertain the correctness of a deduction * * * on a return which

would seem to a reasonable and prudent person to be 'too good to

be true' under the circumstances". An exception applies when the

taxpayer demonstrates (1) there was reasonable cause for the

underpayment, and (2) the taxpayer acted in good faith with

respect to the underpayment. Sec. 6664(c). Whether the taxpayer

acted with reasonable cause and in good faith is determined by

the relevant facts and circumstances. The most important factor

is the extent of the taxpayer's effort to assess the proper tax

liability. Stubblefield v. Commissioner, T.C. Memo. 1996-537;
 - 9 -

sec. 1.6664-4(b)(1), Income Tax Regs. Under section 1.6664-

4(b)(1), Income Tax Regs., "Circumstances that may indicate

reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

all of the facts and circumstances, including the experience,

knowledge and education of the taxpayer." Moreover, a taxpayer

is generally charged with knowledge of the law. Niedringhaus v.

Commissioner, 99 T.C. 202, 222 (1992). Although a taxpayer is

not subject to the addition to tax for negligence where the

taxpayer makes honest mistakes in complex matters, the taxpayer

must take reasonable steps to determine the law and to comply

with it. Id.

Under certain circumstances, a taxpayer may avoid the

accuracy-related penalty for negligence where the taxpayer

reasonably relied on the advice of a competent professional.

Sec. 6664(c); Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991);

sec. 1.6664-4(b)(1), Income Tax Regs. Reliance on a professional

adviser, standing alone, is not an absolute defense to

negligence; it is only one factor to be considered. In order for

reliance on a professional adviser to relieve a taxpayer from the

negligence penalty, the taxpayer must establish that the

professional adviser on whom he or she relied had the expertise
 - 10 -

and knowledge of the relevant facts to provide informed advice on

the subject matter. Freytag v. Commissioner, supra at 888.

Petitioners made no effort to ascertain the professional

background and qualifications of their return preparer. They

examined the returns he prepared and admitted at trial that they

caused Mr. Beltran to revise the returns to reduce the claimed

expenses because they realized that the amounts claimed were

excessive. Yet, petitioners knew that, with the revisions

ordered by them, the expenses claimed were still excessive and

made no effort to have their returns corrected to reflect the

actual amount of their claimed deductions. The Court notes that

the unreimbursed employee business expenses claimed on the

returns, all related to Mr. Lavigne's employment, amounted to

32.6 percent and 37.4 percent, respectively, of the wages Mr.

Lavigne earned during 1998 and 1999. Mr. Lavigne admitted in his

testimony at trial that he would not accept employment that

required the employee to bear expenses of that proportion without

any reimbursement from the employer or some other source other

than himself. Petitioners did not look beyond the

representations of Mr. Beltran, knowing that the deductions at

issue were grossly inflated. Petitioners knew that they could

claim only deductions that could be substantiated. Petitioners

made no reasonable effort to ascertain their correct tax

liabilities for the years at issue. Stubblefield v.
 - 11 -

Commissioner, supra. On this record, the Court sustains

respondent on the section 6662(a) accuracy-related penalties for

the 2 years at issue.

Section 6673(a) authorizes the Court to require a taxpayer

to pay to the United States a penalty not exceeding $25,000 when,

in the Court's judgment, proceedings have been instituted or

maintained by the taxpayer primarily for delay or where the

taxpayer's position in the proceeding is frivolous or groundless.

The Court considers petitioners' claim that they should not be

liable for the deficiencies and penalties to be frivolous and

groundless. Petitioners knew, or should have known, that a

substantial portion of the itemized deductions at issue was false

and could not be sustained. Other circumstances noted above need

not be repeated here.

The function of this Court is to provide a forum to decide

issues relating to liability for Federal taxes. Any reasonable

and prudent person, under the facts presented to the Court,

should have known that the claimed deductions could not have been

sustained, and the Court is satisfied that petitioners knew that.

We do not and should not countenance the use of this Court as a

vehicle for a disgruntled litigant to proclaim the wrongdoing of

another, his return preparer, as a basis for relief from a

penalty that was determined by respondent on facts that clearly

are not sustainable. Golub v. Commissioner, T.C. Memo. 1999-288.
 - 12 -

Petitioners, therefore, have interfered with the Court's function

to the detriment of other parties having cases with legitimate

issues for the Court to consider. Petitioners have caused

needless expense and wasted resources, not only for the Court,

but for its personnel, respondent, and respondent's counsel.

Under these circumstances, the penalty under section 6673 is

warranted, and petitioners will be ordered to pay a penalty of

$500 to the United States under section 6673(a).

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

under Rule 155.