T.C. Summary Opinion 2008-17
UNITED STATES TAX COURT
THOMAS PATRICK AND CHRISTINE E. DAWSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20323-06S. Filed February 20, 2008.
Thomas Patrick and Christine E. Dawson, pro sese.
Harry J. Negro, for respondent.
RUWE, Judge: This case was heard pursuant to the provisions
of section 74631 of the Internal Revenue Code in effect when the
petition was filed. Pursuant to section 7463(b), the decision to
be entered is not reviewable by any other court, and this opinion
shall not be treated as precedent for any other case.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year in issue.
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Respondent determined a $4,190 deficiency in petitioners’
Federal income tax for 2004 and an $838 accuracy-related penalty
under section 6662 due to negligence.
The issues for decision are whether petitioners are entitled
to net their gambling losses against their gambling winnings in
computing adjusted gross income and whether they are liable for a
section 6662(a) accuracy-related penalty due to negligence.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated by this reference. Petitioners resided in
Williamstown, New Jersey, at the time they filed their petition.
During 2004, petitioner Thomas Dawson was employed full time
as a building inspector, and petitioner Christine Dawson was
employed full time as a registered nurse.
During 2004, petitioners gambled at casinos in Atlantic
City, New Jersey. Most of petitioners’ gambling consisted of
playing $5- or $10-pull slot machines. Neither petitioner was a
professional gambler. Their combined jackpots received from
Atlantic City casinos in 2004 totaled $208,420; however, their
combined gambling losses for 2004 exceeded the $208,420 jackpots
that they won. In other words, petitioners’ gambling activities
during 2004 resulted in a net loss.
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On their 2004 Federal income tax return, petitioners
reported adjusted gross income of $145,694 which did not include
any of the jackpots. Petitioners did not claim deductions on
their 2004 return for any of their gambling losses. Petitioners
did not report their gambling jackpots and losses because their
gambling activities failed to produce net winnings in 2004.
After examining petitioners’ 2004 return, respondent
determined that petitioners’ casino jackpots were gambling
winnings and increased petitioners’ adjusted gross income by
$208,420. Respondent also determined that petitioners were
entitled to itemized deductions for gambling losses of $208,420.
While respondent allowed itemized deductions for gambling
losses in the same amount that he increased petitioners’ adjusted
gross income, the increase in adjusted gross income triggered
certain limitations on other deductions. As a result, respondent
disallowed a $490 tuition deduction, disallowed job-related and
miscellaneous expenses of $4,178, decreased total itemized
deductions by $6,267, and disallowed a $6,200 deduction for
personal exemptions. These adjustments, based on respondent’s
adjustment to petitioners’ adjusted gross income, are
computational adjustments required by law.
In their petition, petitioners claim that it makes no sense
to increase their adjusted gross income because their gambling
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activities produced a net loss for 2004. Petitioners are
contesting only the propriety of increasing their adjusted gross
income. They have not contested the accuracy of the
computational adjustments that flow from increasing their
adjusted gross income.
Discussion
Gross income includes all income from whatever source
derived, including gambling income. See sec. 61; Jackson v.
Commissioner, T.C. Memo. 2007-373. The jackpots that petitioners
received constitute gambling income. A taxpayer in the trade or
business of gambling may deduct wagering losses to the extent
allowable in computing adjusted gross income. A taxpayer who was
not in the trade or business of gambling may deduct wagering
losses only to the extent allowable as an itemized deduction to
compute taxable income. See Calvao v. Commissioner, T.C. Memo.
2007-57. Petitioners were not professional gamblers and were not
in the trade or business of gambling. Therefore, their gambling
losses were not deductible in arriving at adjusted gross income,
and respondent’s determination to increase petitioners’ adjusted
gross income by the amount of jackpots received in 2004 was
correct. Since that resolves the only issue petitioners raised
regarding the tax deficiency, respondent’s deficiency
determination of $4,190 is sustained.
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With regard to respondent’s determination that petitioners
are liable for the accuracy-related penalty under section 6662(a)
due to negligence, petitioners argue that when they prepared
their 2004 return, they concluded that since their gambling
activity produced a net loss, they had no gambling income to
report. Petitioner Thomas Dawson testified that this was the way
petitioners had filed returns in prior years and that he was not
aware of the previously stated rules that precluded the netting
of gambling winnings and losses in determining adjusted gross
income. He explained that he used simple logic in determining
that petitioners’ gambling activity did not produce income.
Section 6662(c) defines negligence as “any failure to make a
reasonable attempt to comply with the provisions” of the Code.
After hearing the testimony presented, we conclude that
petitioners made an honest attempt to comply with their reporting
requirements. Petitioners do not purport to be tax experts and
when preparing their returns concluded that they did not have to
report gambling income because their nonbusiness gambling
activity resulted in a net loss. While their conclusion was
incorrect, we do not think that their error negates the
reasonableness of their attempt to comply with their reporting
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requirements. We hold that petitioners are not liable for the
section 6662 penalty due to negligence.
Decision will be entered
for respondent as to the
deficiency and for petitioners
as to the accuracy-related
penalty.