T.C. Summary Opinion 2005-138
UNITED STATES TAX COURT
THOMAS L. & C. MARLENE PIAS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10304-04S. Filed September 19, 2005.
Thomas L. and C. Marlene Pias, pro se.
James E. Schacht and Mark J. Miller, for respondent.
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of 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
year in issue.
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Respondent determined a deficiency of $9,934 in petitioners’
2001 Federal income tax. The issues are whether petitioner
Thomas L. Pias (petitioner) was in a trade or business of
gambling and whether the parties had previously settled the case.
Petitioners resided in Racine, Wisconsin, when the petition in
this case was filed.
Background
The facts may be summarized as follows. After 28 years,
petitioner retired as an accountant with a local automobile
distributorship in January 2001. Prior to that time, he had
gambled occasionally at casinos. In August 2000, petitioner
received the following written advice from the local office of
the Internal Revenue Service:
A gambler is engaged in a trade or business [of being a]
“professional gambler” when the gambling activity (1) is
pursued full time, in good faith, and with regularity, to
the production of income for a livelihood, and (2) is not a
mere hobby; resolution of this issue requires an examination
of the facts in each case.
Commissioner of Internal Revenue v. Groetzinger
No. 85-1226
Supreme Court of The United States
Subsequent to his retirement, petitioner began going to
casinos 2 or 3 times a week. This shift in his behavior was
prompted by what petitioner thought was a “lucky streak.” His
gambling consisted of playing video poker machines. Petitioner
returned to work in September 2001.
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Petitioner was issued Forms W-2G, Certain Gambling Winnings,
totaling $38,800 by the casinos that he frequented. On Schedule
C, Profit or Loss From Business, attached to petitioners’ joint
2001 Federal income tax return, petitioner reported this amount
as income and claimed deductions for gambling losses of $68,861,2
tolls of $149, automobile expenses of $421, and other expenses of
$1,157. Petitioner claimed an overall loss of $31,788 from the
trade or business of gambling. In the notice of deficiency,
dated March 15, 2004, respondent allowed a deduction for gambling
losses of $38,800 on Schedule A, Itemized Deductions, and
disallowed the balance of the deductions claimed on Schedule C.
The amount of the deficiency was $9,934. The notice was issued
from the Brookhaven Internal Revenue Service Center (referred to
herein as the Service Center), in Holtsville, New York.
Petitioners mailed their petition to this Court on June 12, 2004.
By letter dated June 1, 2004, the Service Center proposed a
revised deficiency of $5,681. Although the statement disallows
gambling losses in excess of gambling income, the proposed
changes in the income and losses do not relate to either the
figures on petitioner’s Schedule C or the statutory notice. The
letter provides that petitioners must sign and date the “total
agreement statement” and return it. The total agreement
statement provided:
2
Figures are rounded to the nearest dollar.
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I consent to the immediate assessment and collection of any
increase in tax and penalties plus interest shown * * *. I
understand that by signing this waiver, I won’t be able to
contest these changes in the U.S. Tax Court unless
additional tax is determined to be due for 2001.
Petitioners did not execute the “total agreement statement”;
an assessment was made; and collection notices were sent to
petitioners. On September 13, 2004, the assessment was abated in
light of the filing of the petition in this Court.
Subsequently, petitioner contacted the local Appeals officer
handling the case and expressed his agreement to the deficiency
proposed in the June 1, 2004, letter. Petitioner was told that
his acceptance was not timely. Nonetheless, petitioner paid the
revised deficiency of $5,681 which amount was posted to
petitioners’ 2001 account as an “advance payment of determined
deficiency”.
Discussion
Section 61(a) defines gross income to mean all income from
whatever source derived. Gambling winnings, whether reported or
not, are includable in gross income. Paul v. Commissioner, T.C.
Memo. 1992-582. In the case of an individual, section 62(a)
defines adjusted gross income as gross income less certain
deductions, including deductions attributable to a trade or
business carried on by the taxpayer. Sec. 62(a)(1). If
petitioner’s gambling activity constituted a trade or business,
his gambling losses would be deductible from gross income in
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arriving at the adjusted gross income on Schedule C. If
petitioner’s gambling activity did not constitute a trade or
business, his gambling losses would be deductible as an itemized
deduction in arriving at taxable income on Schedule A. Sec.
63(a). But, regardless whether or not the activity constituted a
trade or business, section 165(d) provides that “Losses from
wagering transactions shall be allowed only to the extent of the
gains from such transactions.” See also sec. 1.165-10, Income
Tax Regs. Petitioner does not dispute that section 165(d)
applies here.
Petitioner claims to be in the trade or business of
gambling, and we are, therefore, faced with the question whether
he is entitled to claim deductions on Schedule C. In
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987), the Supreme
Court held that “if one’s gambling activity is pursued full time,
in good faith, and with regularity, to the production of income
for a livelihood, and is not a mere hobby, it is a trade or
business”. We are willing to assume that petitioner did devote
many hours at the casinos playing video poker with some degree of
regularity. We are not satisfied, however, that petitioner
looked to this activity for a production of income for his
livelihood. Petitioner’s explanation for his activity was that
at the end of 2000 he “was in what I thought was a lucky streak.”
This explanation rings more of a pastime or a hobby than of an
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activity for the production of income for a livelihood. To be
sure, the volume of the activity may have gotten out of hand, but
the underlying purpose for the activity did not change.
Petitioner was not in a trade or business of gambling.
Petitioner also contends that he settled this case pursuant
to the June 1, 2004, letter. If we treat the letter as a
prepetition settlement attempt, the requirements of sections 7121
and 7122 (settlement agreements) have not been satisfied. See
Dormer v. Commissioner, T.C. Memo. 2004-167. If we treat the
letter as a postpetition offer of settlement, that offer was
contingent on petitioners executing the total agreement
statement, and there is no evidence that they complied with that
requirement. In this regard, petitioner testified that he did
not know, until October 2004, that section 165(d) disallows
gambling losses that exceed gambling income and that he then told
the Appeals officer in Wisconsin that he “was going to agree to
that assessment and pay the tax and the interest.” There can be
no question that petitioners had not previously accepted any
offer to settle. It seems most likely that petitioner was trying
to play both ends against the middle, and when he learned of
section 165(d) he then attempted to resuscitate the offer that
they had ignored. We do not find that the offer in the June 1,
2004, letter, assuming it constituted a valid offer, was timely
accepted.
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Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.