T.C. Summary Opinion 2005-3
UNITED STATES TAX COURT
PANSY V. PANAGES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16154-03S. Filed January 4, 2005.
Pansy V. Panages, pro se.
Paul K. Voelker, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect when 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
year at issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
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Respondent determined a deficiency of $6,161 in petitioner’s
Federal income tax for 2001, and a section 6662(a) penalty of
$1,232.
The issues for decision are: (1) Whether petitioner’s
gambling activity amounted to a trade or business under section
162, thereby allowing her to deduct gambling losses on Schedule
C, Profit or Loss From Business, of her Federal income tax
return, and (2) whether petitioner is liable for the section
6662(a) penalty.
Some of the facts were stipulated. Those facts, with the
exhibits annexed thereto, are so found and are made part hereof.
Petitioner’s legal residence at the time the petition was filed
was Sparks, Nevada.
Before entering the flower business, petitioner completed
her freshman year of high school and had some floral industry
training. Petitioner then opened a flower shop in Reno, Nevada.
The Flower Bucket Florist (flower shop) was organized as a
corporation with petitioner as the sole stockholder. At the time
of trial, petitioner’s flower shop was open 12 hours a day,
Monday through Saturday, and a few hours on Sunday. The flower
shop paid petitioner a $66,310 salary during 2001.
In addition, petitioner operated as sole stockholder another
business, F.B. Wholesale, Inc. (F.B. Wholesale), which was a
wholesale market that purchased flowers from growers and brokers
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and then resold the flowers to retail florists. The flower shop
is one of F.B. Wholesale’s customers. F.B. Wholesale paid
petitioner a $7,200 salary during 2001. Finally, petitioner
earned $26,160 in rent from two other businesses and $4,848 in
the lease of a portion of her home to an elderly lady.
During the year in issue, petitioner was nearly 70 years of
age and had begun making plans for retirement. As a result, she
began training her two daughters to assume control of the flower
shop; however, petitioner was still actively involved in the
flower shop during 2001. Because petitioner planned to hand over
management of the flower shop to her daughters, when she turned
65, she began looking for other ways to supplement her monthly
Social Security benefits.
Petitioner believed she had a talent for winning at slot
machines and began playing the machines at different locations.
She eventually gambled almost exclusively at one grocery store
(Smith's) that had the type of machines she liked, known as
progressive machines. She began cultivating relationships with
some of the grocery employees and started “tipping” them so they
would alert her to what machines had not “paid out” recently.
Petitioner usually played the machine or machines that had gone
the longest without a winner. On her 2001 tax return, she
deducted as business expenses $6,000 in tips she paid grocery
employees for that information. Petitioner estimated she spent
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20 to 25 hours a week playing the slot machines at Smith’s. All
of her gambling occurred after the flower shop was closed for the
evening. Smith’s was on the route petitioner traveled from the
flower shop to her home.
During 2000, petitioner contacted an Internal Revenue
Service (IRS) agent for information on how to file her income tax
return as a professional gambler. Petitioner never sought
information from other professional gamblers as to what was
required to become a professional gambler for tax purposes. She
was reluctant to publicize her status as a professional gambler
because of a perceived stigma attached to that occupation. She
discussed her tax status as a professional gambler only on one
occasion with an IRS agent. She was advised by the agent to
simply file a Schedule C with her income tax return and was
advised of her responsibility to pay self-employment taxes on any
profit realized. Because petitioner reported a loss on her 2001
return, she did not pay any self-employment taxes.2
On Schedule C of her 2001 return, petitioner listed
“Professional Gambler” as her principal business and reported
negative income of $5,050 and $8,129 in expenses for a total loss
of $13,179. Petitioner kept records verifying the exact dates
2
There is no evidence in the record that, in her quest
to qualify as a professional gambler, petitioner inquired or
received any information that a basic and fundamental requisite
of a trade or business, including that of a professional gambler,
is that the activity be engaged in for profit.
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and amounts of her winnings, tips, and ATM charges and attached
those records to her Schedule C. Respondent agreed at trial that
petitioner kept meticulous records. Nevertheless, on her Form
1040, U.S. Individual Income Tax Return, petitioner listed her
occupation as “Floral Manager”.
For gambling to reach the level of a trade or business
activity it must be “pursued full time, in good faith, and with
regularity, to the production of income for a livelihood, and * *
* not a mere hobby”. Commissioner v. Groetzinger, 480 U.S. 23,
35 (1987). The Supreme Court, in Groetzinger, held that a
taxpayer who spent between 60 and 80 hours per week at dog races
qualified as a professional gambler even though the taxpayer
received income during the year from interest, dividends, capital
gains, and salary earned before his job was terminated.
Likewise, a taxpayer who spent 35 hours a week at a horse track
after losing his job as a salesman and who was seeking a new
sales job qualified as a professional gambler for purposes of
section 162. Rusnak v. Commissioner, T.C. Memo. 1987-249.
Unlike the taxpayers in the cited cases, petitioner did not
pursue gambling full time. She gambled regularly but only after
she finished working at her flower shop. She frequently stopped
at Smith’s to play the slot machines on her way home from work.
As she reported on her tax return, her occupation was “floral
manager”. The fact that petitioner earned income from
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investments and rent does not in and of itself bar her from being
a professional gambler. Petitioner, however, does not qualify as
a professional gambler because her situation does not satisfy the
test laid out by the Supreme Court. In Commissioner v.
Groetzinger, supra at 33, the Court stated that, if a taxpayer
“devotes his full-time activity to gambling, and it is his
intended livelihood source, it would seem that basic concepts of
fairness * * * demand that his activity be regarded as a trade or
business”. Petitioner’s livelihood was not her winnings from
slot machines; instead, her primary income came from her flower
shop. Her gambling was not a trade or business under section
162. Consequently, petitioner may not deduct her losses on a
Schedule C but must itemize them.3
Respondent determined a section 6662(a) penalty of $1,232
against petitioner. Section 6662(a) provides for a 20-percent
addition to tax for any underpayment to which the section
applies. Respondent determined that section 6662(b) applies to
3
If petitioner qualified as a professional gambler for
purposes of sec. 162, she still could claim her losses only to
the extent she had gains. Sec. 165(d); Praytor v. Commissioner,
T.C. Memo. 2000-282. Because petitioner does not qualify as a
professional gambler, it is not necessary to address whether
petitioner may deduct ATM charges and tips to grocery store
employees as expenses because her slot machine losses alone
exceeded her winnings; therefore, she may not deduct the charges
or tips. In the notice of deficiency, respondent disallowed all
of petitioner’s claimed deductions for gambling losses and other
expenses in excess of gambling income. That computation is
sustained by the Court.
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petitioner because (1) petitioner was negligent or disregarded
rules or regulations, or (2) petitioner’s deficiency represented
a substantial understatement of income tax.
Negligence is defined as “any failure to make a reasonable
attempt to comply with the provisions of this title”, and
disregard includes “careless, reckless, or intentional
disregard.” Sec. 6662(c). The Court holds that petitioner was
not negligent, nor did she disregard rules or regulations when
she filed as a professional gambler on her 2001 tax return. She
consulted with an IRS agent and inquired as to how to file her
tax returns as a professional gambler. She then followed the
guidelines of the agent, which were simply to include a Schedule
C with her income tax return. The Court finds petitioner’s
testimony credible. Petitioner kept adequate records verifying
her level of gambling activity and attached the records to her
Schedule C. In addition, once petitioner received the notice of
deficiency from respondent, she ceased her gambling activity
while awaiting a decision by this Court. Petitioner’s actions
amount to reasonableness under section 6662(c), and her actions
are not considered by the Court to be “careless, reckless, or
intentional disregard.”
Section 6662(b) also provides an addition to tax in the
amount of 20 percent for any “substantial understatement of
income tax.” A substantial understatement is defined as the
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greater of 10 percent of the tax required to be shown on the
return or $5,000. Sec. 6662(d)(1)(A). Petitioner’s
understatement does amount to more than $5,000; however, she
qualifies for a reduction of the understatement. Sec.
6662(d)(1)(B). Section 6662(d) provides for a reduction of the
understatement if the taxpayer supplied the relevant facts
affecting the tax treatment on the return and if there was a
reasonable basis for the tax treatment. Sec. 6662(d)(2)(B)(ii).
As previously discussed, petitioner attached adequate records to
her 2001 income tax return, and she had a reasonable basis for
believing she qualified as a professional gambler simply by
filing a Schedule C. Therefore, petitioner’s understatement for
purposes of determining whether it amounts to a “substantial
understatement of income tax” is reduced to zero. Sec.
6662(d)(1)(A). Petitioner is not liable for the section 6662(a)
penalty.4
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.
4
At trial, respondent agreed that, if the Court held
that petitioner was not a professional gambler, she could deduct
her gambling expenses as itemized deductions. In addition,
respondent conceded that petitioner was also entitled to itemized
deductions of $200, $458, and $1,376, respectively, for
charitable contributions, taxes, and interest.