T.C. Summary Opinion 2005-139
UNITED STATES TAX COURT
TRACI A. TOMKO AND RONALD R. TOMKO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6108-04S. Filed September 27, 2005.
Traci A. Tomko and Ronald R. Tomko, 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, and Rule references are to the Tax Court Rules of
Practice and Procedure.
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Respondent determined a deficiency of $13,170 in
petitioners’ 2001 Federal income tax. The issue is whether
petitioners are entitled to deduct certain gambling losses.
Petitioners resided in Oneida, Wisconsin, when the petition in
this case was filed.
Background
The facts may be summarized as follows. During 2001,
petitioners were recreational gamblers who played slot machines.
Petitioners had winnings of at least $44,464 from these
activities that were reported to the Internal Revenue Service.
See sec. 7.6041-1, Temporary Proced. & Admin. Regs., 42 Fed. Reg.
1471 (Jan. 7, 1977). On their joint 2001 Form 1040, U.S.
Individual Income Tax Return, petitioners reported gambling
income of $21,100 and gambling losses of the same amount on
Schedule A, Itemized Deductions. Respondent determined that
petitioners received gambling income of $44,464 and disallowed
the deduction for gambling losses on the ground that petitioners
failed to substantiate any losses.
Petitioners do not dispute the increase in gambling income.
Petitioners, however, argue that they have substantiated their
losses. They claim that the funds for each trip to the local
casinos is shown by cash withdrawals on credit cards or bank
account debit cards. Their statements from these accounts show
activities at the casinos. In addition, they reconstructed their
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gambling activities allegedly showing cash withdrawals for each
day and the amount of individual gain or loss at the end of the
day. For example, the credit card account statement shows that
on June 14, 2001, they withdrew $600, and the gambling activity
records for that day show that they lost $600.
Discussion
Section 61(a) defines gross income to mean all income from
whatever source derived. Winnings from slot machines and other
gambling winnings are includable in gross income. See Lyszkowski
v. Commissioner, T.C. Memo. 1995-235, affd. without published
opinion 79 F.3d 1138 (3d Cir. 1996). 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 a taxpayer’s gambling activity constituted a trade
or business, his or her gambling losses would be deductible from
gross income in arriving at adjusted gross income on Schedule C,
Profit or Loss From Business. If a taxpayer’s gambling activity
did not constitute a trade or business, his or her gambling
losses would be deductible as an itemized deduction in arriving
at taxable income on Schedule A. Sec. 63(a). Petitioners do not
claim that they were in the trade or business of gambling.
Regardless whether or not the activity constituted a trade
or business, section 165(d) provides that “Losses from wagering
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transactions shall be allowed only to the extent of the gains
from such transactions.” See also sec. 1.165-10, Income Tax
Regs. Petitioners do not dispute that section 165(d) applies
here.
Respondent claims that petitioners’ records are insufficient
to establish that they incurred any losses. To be sure,
petitioners’ records leave something to be desired. Section 6001
and the regulations thereunder require that taxpayers keep
adequate records to substantiate their income and deductions.
When a taxpayer fails to keep adequate records, but a court is
convinced that deductible expenses were made, the Court “should
make as close an approximation as it can, bearing heavily if it
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 losses, this Court has invoked the
Cohan rule when it is satisfied that a taxpayer has incurred some
gambling losses. See Drews v. Commissioner, 25 T.C. 1354 (1956).
The total amount petitioners attribute to their gambling
activity is $46,542--$18,080 (Chase credit card), $19,800 (MBNA
credit card), and $8,662 (bank account debit card). While this
amount may have cycled through the casinos and the financial
institution, we are not convinced that this amount represents
petitioners’ gambling losses. According to their testimony,
their losses were computed by the amount of cash they had at the
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end of their sessions of playing the slot machines, and they
claim they did not not leave a casino with any of the cash they
had originally withdrawn except when they hit a payout of more
than $1,200. We are particularly bothered by this explanation.
Although the odds are in a casino’s favor, it does not
necessarily follow that there are no days when a player comes out
ahead. Given the uncertainty of petitioners’ records, and the
certainty that there must have been some losses, we find that
petitioners did suffer total gambling losses of $40,000 in 2001.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.