T.C. Memo. 2006-205
UNITED STATES TAX COURT
TERRI L. AND AUSTIN W. HARTSOCK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8950-05. Filed September 25, 2006.
Stuart Levine, for petitioners.1
Karen Lynne Baker, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined deficiencies in, and
accuracy-related penalties under section 6662(a)2 on, petition-
1
Petitioners filed their petition with the Court and ap-
peared at trial pro sese. On Feb. 14, 2006, after the trial in
this case, Stuart Levine entered his appearance.
2
All section references are to the Internal Revenue Code
(continued...)
- 2 -
ers’ Federal income tax (tax), as follows:
Accuracy-Related
Year Deficiency Penalty
1999 $87,099 $17,420
2000 104,225 20,845
The issues remaining for decision are:
(1) Are petitioners entitled for each of the years at issue
to deduct gambling losses in excess of the deduction allowed by
respondent for each such year? We hold that they are not.
(2) Are petitioners liable for each of the years at issue
for the accuracy-related penalty under section 6662(a)? We hold
that they are.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioners, Terri L. Hartsock (Ms. Hartsock) and Austin W.
Hartsock (Mr. Hartsock), resided in Frederick, Maryland, at the
time they filed the petition.
Around 1994, Mr. Hartsock incorporated his business known as
The Frederick Painting Company. Since that time, he and Ms.
Hartsock have been employed by that company.
During the years at issue, petitioners did not have a
mortgage loan with respect to their residence and therefore did
not have any mortgage loan expenses. Nor did petitioners have
2
(...continued)
(Code) in effect for the years at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
- 3 -
very many other expenses during those years.
During 1999 and 2000, petitioners made a number of trips to
Atlantic City, New Jersey (Atlantic City), where they, inter
alia, gambled at slot machines at various gambling establish-
ments, including Tropicana, Trump Taj Mahal, Resorts Atlantic
City, and Harrah’s.3 During 1999 and 2000, petitioners did not
maintain the records required by the Code to substantiate any
gambling losses that they incurred during each of those years.
For 1999, Harrah’s issued to Mr. Hartsock at least three
substitute forms in lieu of Forms W-2G, Certain Gambling Winnings
(Harrah’s substitute 1999 Form W-2G),4 with respect to the fol-
lowing respective dates: August 13 and 14 and September 4, 1999.
Harrah’s substitute 1999 Form W-2G issued to Mr. Hartsock
with respect to August 13, 1999, showed, inter alia, the follow-
ing gross winnings of Mr. Hartsock from each of several slot
machines that he played at Harrah’s, the time of such gross
winnings from each such machine, and the minimum amount required
to be wagered in each such machine:
3
During 1999, Ms. Hartsock traveled with her parents, and
without Mr. Hartsock, to Atlantic City, where she gambled at at
least one gambling establishment.
4
The instructions for Form W-2G, Certain Gambling Winnings,
with respect to 1999 stated in pertinent part: “If the [gam-
bling] winnings (not reduced by the wager) from a * * * slot
machine are $1,200 or more, they are reportable gambling win-
nings.”
- 4 -
Minimum Amount
Gross Winnings Time of Gross Winning Required To Be Wagered
$5,000 9:20 p.m. $25
750 9:30 p.m. 25
5,000 10:30 p.m. 25
1,750 9:40 p.m. 25
3,000 12:00 a.m. 100
$15,500
Harrah’s substitute 1999 Form W-2G issued to Mr. Hartsock
with respect to August 14, 1999, showed, inter alia, the follow-
ing gross winnings of Mr. Hartsock from each of several slot
machines that he played at Harrah’s, the time of such gross
winnings from each such machine, and the minimum amount required
to be wagered in each such machine:
Minimum Amount
Gross Winnings Time of Gross Winnings Required To Be Wagered
$3,000 10:22 p.m. $100
5,100 10:51 p.m. 25
2,000 10:55 p.m. 100
2,000 11:15 p.m. 100
2,000 12:20 a.m. 100
18,000 12:30 a.m. 100
2,000 12:50 a.m. 100
1,500 1:15 a.m. 100
$35,600
Harrah’s substitute 1999 Form W-2G issued to Mr. Hartsock
with respect to September 4, 1999, showed, inter alia, the
following gross winnings of Mr. Hartsock from each of several
slot machines that he played at Harrah’s, the time of such gross
winnings from each such machine, and the minimum amount required
to be wagered in each such machine:
- 5 -
Minimum Amount
Gross Winnings Time of Gross Winnings Required To Be Wagered
$5,100 10:07 p.m. $25
2,875 11:30 p.m. 25
1,200 12:22 a.m. 25
4,000 12:55 a.m. 100
10,000 12:56 a.m. 100
10,000 1:25 a.m. 100
2,000 2:00 a.m. 100
4,000 2:45 a.m. 100
2,000 3:00 a.m. 100
2,000 3:20 a.m. 100
8,000 3:40 a.m. 100
$51,175
On August 13, 1999, in exchange for cash, Mr. Hartsock
issued three checks totaling $13,000 payable to Marina Associ-
ates, a company that handled the casino credit for Harrah’s. On
August 14, 1999, in exchange for cash, Mr. Hartsock issued three
checks totaling $12,000 payable to Marina Associates and one
$5,100 check payable to T.T.M.A., a company that handled the
casino credit for Trump Taj Mahal. (We shall sometimes refer
collectively to the respective checks that Mr. Hartsock issued to
Marina Associates on August 13 and 14, 1999, and to T.T.M.A. on
August 14, 1999, as Mr. Hartsock’s checks.) Shortly after Mr.
Hartsock issued Mr. Hartsock’s checks to Marina Associates and
T.T.M.A., those organizations presented such checks to Mr.
Hartsock’s bank, Frederick County National Bank, for payment from
funds in his bank account.
- 6 -
Petitioners timely filed Form 1040, U.S. Individual Income
Tax Return, for each of their taxable years 1999 and 2000 (peti-
tioners’ 1999 return and petitioners’ 2000 return, respectively).
In petitioners’ 1999 return, petitioners reported the
following income:
Income Amount
1
Wages, salaries, tips, etc. $92,461
Taxable interest 2,333
Ordinary dividends 701
Capital gain or (loss) 76,940
Rental real estate, royalties, 9,463
partnerships, S corporations,
trusts, etc.
2
Other income 230,825
Total income $412,723
1
Of the $92,461 of total wages reported in petitioners’ 1999
return, The Frederick Painting Company paid $74,911.40 to Mr.
Hartsock and $17,550 to Ms. Hartsock.
2
The parties agree that the $230,825 of “Other income”
reported in petitioners’ 1999 return consisted solely of peti-
tioners’ gambling winnings.
In petitioners’ 1999 return, petitioners claimed itemized
deductions totaling $245,250. Included in those itemized deduc-
tions was a deduction for $230,825 of claimed gambling losses.
In petitioners’ 2000 return, petitioners reported the
following income:
- 7 -
Income Amount
1
Wages, salaries, tips, etc. $93,582
Taxable interest 152
Ordinary dividends 30
2
Capital gain or (loss) (3,000)
Rental real estate, royalties, 9,736
partnerships, S corporations,
trusts, etc.
3
Other income 293,750
Total income $394,250
1
Of the $93,582 of total wages reported in petitioners’ 2000
return, The Frederick Painting Company paid $75,381.54 to Mr.
Hartsock and $18,200 to Ms. Hartsock.
2
In Schedule D, Capital Gains and Losses, petitioners re-
ported a net short-term capital loss of $283,646 and a net long-
term capital gain of $11.
3
The parties agree that the $293,750 of “Other income”
reported in petitioners’ 2000 return consisted solely of peti-
tioners’ gambling winnings.
In petitioners’ 2000 return, petitioners claimed itemized
deductions totaling $309,580. Included in those itemized deduc-
tions was a deduction for $293,022 of claimed gambling losses.
Respondent issued to petitioners a notice of deficiency
(notice) for their taxable years 1999 and 2000. In that notice,
respondent disallowed the gambling loss deductions of $230,825
and $293,022 that petitioners claimed in petitioners’ 1999 return
and petitioners’ 2000 return, respectively. In the notice,
respondent also determined that petitioners are liable for each
of their taxable years 1999 and 2000 for the accuracy-related
penalty under section 6662(a) because of section 6662(b)(1).
- 8 -
OPINION
Claimed Gambling Losses
At trial, respondent conceded that petitioners incurred
gambling losses of $76,314 and $55,750 during 1999 and 2000,
respectively, and that they are entitled to deduct such losses
for those respective years. We must decide whether petitioners
are entitled for each of the years at issue to deduct gambling
losses in excess of the deduction allowed by respondent for each
such year.
Section 165(d) permits a taxpayer to deduct losses from
wagering transactions to the extent of the winnings from such
transactions. The taxpayer bears the burden of proving entitle-
ment to such a deduction. Schooler v. Commissioner, 68 T.C. 867,
869 (1977). Moreover, deductions are a matter of legislative
grace, and the taxpayer bears the burden of proving entitlement
to any deduction claimed. INDOPCO, Inc. v. Commissioner, 503
U.S. 79, 84 (1992). A taxpayer is required to maintain records
sufficient to establish the amount of any deduction claimed.
Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
It is petitioners’ position that the burden of proof with
respect to the claimed gambling loss deductions at issue has
shifted to respondent under section 7491(a). That is because,
according to petitioners, they “introduced credible evidence that
- 9 -
they suffered extensive gambling losses in 1999”.5 It is respon-
dent’s position that the burden of proof has not shifted to
respondent under section 7491(a).
The burden of proof shifts to the Commissioner of Internal
Revenue (Commissioner) with respect to the Commissioner’s deter-
mination of a deficiency if the taxpayer introduces credible
evidence with respect to any factual issue relevant to ascertain-
ing any such deficiency and complies with the requirements of
section 7491(a)(2), including the requirements, inter alia, that
(1) the taxpayer has complied with the requirements of the Code
to substantiate any item, and (2) the taxpayer has maintained all
records required by the Code. See sec. 7491(a)(1), (2)(A) and
(B).
On the record before us, we find that petitioners have not
introduced credible evidence within the meaning of section
7491(a) with respect to the respective amounts of their claimed
gambling losses for the years at issue and have not complied with
the requirements of section 7491(a)(2)(A) and (B). On that
record, we find that the burden of proof has not shifted to
5
It is not clear whether petitioners are claiming that the
burden of proof has shifted to respondent under sec. 7491(a) with
respect to their claimed gambling loss deductions for both of
their taxable years 1999 and 2000, or only with respect to the
claimed gambling loss deduction for their taxable year 1999. In
any event, as discussed below, we hold that the burden of proof
has not shifted to respondent under sec. 7491(a) with respect to
either year at issue.
- 10 -
respondent under section 7491(a) with respect to the claimed
gambling loss deductions at issue.
We turn now to whether petitioners are entitled for each of
the years at issue to a gambling loss deduction in excess of the
deduction allowed by respondent for each such year.6 To support
their position that they are entitled to such a greater deduction
for each year at issue, petitioners rely on: The testimony of
Mr. Hartsock; the respective Harrah’s substitute 1999 Forms W-2G
with respect to August 13 and 14 and September 4, 1999; Mr.
Hartsock’s checks dated August 13, 1999, totaling $13,000 payable
to Marina Associates; Mr. Hartsock’s checks dated August 14,
1999, totaling $12,000 payable to Marina Associates; Mr.
Hartsock’s $5,100 check dated August 14, 1999, payable to
T.T.M.A., and certain documents (workpapers) that petitioners
prepared and that purport to show how petitioners estimated the
respective amounts of money that they gambled and lost in slot
machines at Harrah’s on each of those dates.
Respondent counters that petitioners have failed to carry
their burden of showing that they are entitled for each of the
years at issue to a gambling loss deduction in excess of the
deduction allowed by respondent for each such year. On the
6
Petitioners acknowledge, as they must, that they are enti-
tled for each of the years at issue to deduct gambling losses
only to the extent of their gambling winnings for each such year.
See sec. 165(d).
- 11 -
record before us, we agree with respondent.
Petitioners’ focus at trial and on brief is on the gambling
losses that they contend they incurred during the years at issue
at Harrah’s.7 Mr. Hartsock testified that petitioners calculated
their claimed gambling losses at Harrah’s by using the minimum
amount required to be wagered in each slot machine that they
played at Harrah’s as shown on the respective Harrah’s substitute
Forms W-2G with respect to August 13 and 14 and September 4,
1999, the respective times of gambling winnings as shown on such
respective forms, and the respective amounts that they estimated
they would have been able to wager within a minute in each such
slot machine that they played at Harrah’s if they had played two
coins at one time.8 In support of Mr. Hartsock’s testimony,
7
According to petitioners, “The gambling losses allowed by
the Respondent for both years in question were those incurred at
all of the casinos that the Petitioners gambled in during those
years, except for Harrah’s.”
8
As we understand the way in which petitioners calculated
their claimed gambling losses at Harrah’s, petitioners multiplied
the number of minutes between gambling winnings at a $100 slot
machine or a $25 slot machine, as reflected on the respective
Harrah’s substitute Forms W-2G with respect to Aug. 13 and 14 and
Sept. 4, 1999, by the amount that they estimated they would have
been able to wager within a minute in such a $100 slot machine or
such a $25 slot machine if they had played two coins at one time.
Mr. Hartsock testified that he would have been able to wager
within a minute $1,200, “give or take $200”, in a $100 slot
machine and $300 in a $25 slot machine. Mr. Hartsock testified
that petitioners reduced the amount so calculated to reflect that
they would not have been constantly wagering in slot machines
that they were playing because they would have stopped wagering
to light up cigarettes, get drinks, or talk with others.
- 12 -
petitioners rely on, inter alia, certain workpapers that they
prepared and that purport to show how they calculated the gam-
bling losses that they contend they incurred at Harrah’s during
1999.
We have serious reservations about the reliability of the
self-serving and uncorroborated workpapers on which petitioners
rely.9 We also have serious reservations about the reliability
9
For example, one of the workpapers that petitioners pre-
pared purports to show their estimate of the gambling losses that
they incurred at Harrah’s on Aug. 13 and 14, 1999. The total
gambling winnings shown on that workpaper for those dates are
different from the total gambling winnings shown (1) on the
respective Harrah’s substitute Forms W-2G with respect to those
dates and (2) on another workpaper that petitioners prepared and
that purports to show the total of petitioners’ gambling winnings
at Harrah’s on Aug. 13 and 14, 1999, as reflected on such respec-
tive forms with respect to Aug. 13 and 14, 1999, as well as other
gambling winnings that petitioners claim they had at Harrah’s on
such dates and that are not reflected on such respective forms.
Moreover, one of the workpapers that petitioners prepared
purports to show their estimate of the gambling losses that they
incurred at Harrah’s on Sept. 4, 1999. The total gambling
winnings shown on that workpaper for that date are different from
the total gambling winnings shown on (1) Harrah’s substitute Form
W-2G with respect to Sept. 4, 1999, and (2) on another workpaper
that petitioners prepared and that purports to show the total of
petitioners’ gambling winnings at Harrah’s on Sept. 4, 1999, as
reflected on Harrah’s substitute Form W-2G with respect to that
date, as well as other gambling winnings that petitioners claim
they had at Harrah’s on such date and that are not reflected on
such form.
Another example of the unreliability of petitioners’
workpapers is that one of those workpapers indicates that peti-
tioners estimated that Mr. Hartsock wagered in a $25 slot ma-
chine, and lost before any reduction for time spent not wagering,
$22,800 during what they computed to be a 19-minute period
between 10:22 p.m. and 10:51 p.m. on Aug. 14, 1999. However, the
(continued...)
- 13 -
of the methodology that petitioners contend they used, as re-
flected on such workpapers, to estimate the gambling losses that
they claim they incurred at Harrah’s on August 13 and 14 and
September 4, 1999.10 We are unwilling to rely on Mr. Hartsock’s
self-serving and uncorroborated testimony and the self-serving
and uncorroborated workpapers that petitioners prepared in order
to establish that they incurred gambling losses at Harrah’s on
certain dates during 1999. Petitioners presented no evidence in
9
(...continued)
time interval between 10:22 p.m. and 10:51 p.m. is 29 minutes,
not 19 minutes. Moreover, Mr. Hartsock testified that he would
have been able to wager within a minute only $300 in a $25 slot
machine, or at most $5,700 in a 19-minute period and at most
$8,700 in a 29-minute period.
An additional example of the unreliability of petitioners’
workpapers is that one of those workpapers indicates that peti-
tioners estimated that Mr. Hartsock wagered in a $100 slot
machine, and lost before any reduction for time spent not wager-
ing, $42,000 during what they computed to be a 35-minute period
between 1:35 a.m. and 2:00 a.m. on Sept. 5, 1999. However, the
time interval between 1:35 a.m. and 2:00 a.m. is 25 minutes, not
35 minutes.
10
For example, petitioners have failed to establish that
they gambled during each time interval between gambling winnings
shown on the respective Harrah’s substitute Forms W-2G with
respect to Aug. 13 and 14 and Sept. 4, 1999, at the same slot
machine from which they received gambling winnings at the end of
each such time interval, as shown on such forms. Nor have
petitioners persuaded us that they would have been able to wager
within a minute the respective amounts that they claim they
wagered in a $100 slot machine (i.e., $1,200) and a $25 slot
machine (i.e., $300). In addition, petitioners did not provide a
specific and acceptable explanation as to how they calculated the
respective amounts of time that they assert they did not spend
playing slot machines to smoke cigarettes, get drinks, and talk
with others, which time they assert they used to reduce their
claimed gambling losses at Harrah’s.
- 14 -
support of their claim that they incurred gambling losses at
Harrah’s during 2000.11
Based upon our examination of the entire record before us,
we find that petitioners have failed to carry their burden of
establishing that they are entitled for each of the years at
issue to a gambling loss deduction in excess of the deduction
allowed by respondent for each such year.
Accuracy-Related Penalty
Respondent determined that petitioners are liable for each
of the years at issue for the accuracy-related penalty under
section 6662(a) because of negligence or disregard of rules or
regulations under section 6662(b)(1).
The term “negligence” in section 6662(b)(1) includes any
failure to make a reasonable attempt to comply with the Code.
Sec. 6662(c). Negligence has also been defined as a failure to
do what a reasonable person would do under the circumstances.
11
Assuming arguendo that petitioners had carried their
burden of proof with respect to their claim that they had gam-
bling losses for each year at issue in excess of the gambling
losses allowed by respondent for each such year, on the record
before us, we find that petitioners have failed to provide
sufficient evidence on which the Court would be able to make an
estimate of the total amount of gambling losses sustained for
each such year. Cf. Cohan v. Commissioner, 39 F.2d 540, 543-544
(2d Cir. 1930). In this connection, we note that we find the
cases on which petitioners rely here and in which the Court
relied on Cohan to estimate the amount of gambling losses sus-
tained in each such case to be materially distinguishable from
the instant case and their reliance on those cases to be mis-
placed.
- 15 -
See Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),
affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C.
686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990). The term
“disregard” includes any careless, reckless, or intentional
disregard. Sec. 6662(c).
The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment if it is shown that there
was reasonable cause for, and that the taxpayer acted in good
faith with respect to, such portion. Sec. 6664(c)(1). The
determination whether the taxpayer acted with reasonable cause
and in good faith depends upon the pertinent facts and circum-
stances, including the taxpayer’s efforts to assess such tax-
payer’s proper tax liability, the knowledge and experience of the
taxpayer, and the reliance on the advice of a professional, such
as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs.
Respondent has the burden of production under section
7491(c) with respect to the accuracy-related penalty under
section 6662. To meet that burden, respondent must come forward
with sufficient evidence indicating that it is appropriate to
impose that penalty. Higbee v. Commissioner, 116 T.C. 438, 446
(2001). Although respondent bears the burden of production with
respect to the accuracy-related penalty that respondent deter-
mined for petitioners’ taxable years 1999 and 2000, respondent
“need not introduce evidence regarding reasonable cause * * * or
- 16 -
similar provisions. * * * the taxpayer bears the burden of proof
with regard to those issues.” Id.
In the instant case, petitioners’ underpayment for each of
the years at issue is attributable solely to their claimed
gambling loss deduction for each such year. Petitioners concede
that they did not keep the records required by the Code to
substantiate each such loss deduction. Failure to keep adequate
records is evidence not only of negligence, but also of inten-
tional disregard of regulations. See sec. 1.6662-3(b)(1) and
(2), Income Tax Regs.; see also Magnon v. Commissioner, 73 T.C.
980, 1008 (1980). On the record before us, we find that respon-
dent has met respondent’s burden of production under section
7491(c). On that record, we further find that petitioners have
failed to carry their burden of showing that they were not
negligent and did not disregard rules or regulations, or other-
wise did what a reasonable person would do, with respect to the
underpayment for each of the years at issue.
On the record before us, we also find that petitioners have
failed to carry their burden of showing that there was reasonable
cause for, and that they acted in good faith with respect to, the
underpayment for each of the years at issue.12 See sec.
12
On the instant record, we also find that petitioners have
failed to carry their burden of showing that the respective
underpayments for the years at issue are attributable to their
reliance on a professional, such as an accountant. See sec.
(continued...)
- 17 -
6664(c)(1).
Based upon our examination of the entire record before us,
we find that petitioners have failed to carry their burden of
establishing that they are not liable for each of the years at
issue for the accuracy-related penalty under section 6662(a).
We have considered all of the contentions and arguments of
the parties that are not discussed herein, and we find them to be
without merit, irrelevant, and/or moot.
To reflect the foregoing and the concessions of respondent,
Decision will be entered under
Rule 155.
12
(...continued)
1.6664-4(b)(1), Income Tax Regs.