T.C. Summary Opinion 2009-144
UNITED STATES TAX COURT
JANELLO S. DUNGCA AND MARIA C. GUTIERREZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17802-08S. Filed September 17, 2009.
Janello S. Dungca and Maria C. Gutierrez, pro sese.
Matthew D. Carlson, for respondent.
GERBER, 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,
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2005, the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
- 2 -
and this opinion shall not be treated as precedent for any other
case.
Respondent determined a $33,091 income tax deficiency and a
$6,618 section 6662(a) accuracy-related penalty for petitioners’
2005 tax year. After concessions,2 the issues presented for our
consideration are: (1) Whether petitioners are entitled to
deduct expenses for meals and entertainment claimed on Schedule
C, Profit or Loss From Business; (2) whether petitioners are
entitled to deduct gambling losses; (3) whether petitioners are
entitled to deduct moving expenses;3 (4) whether petitioners are
entitled to deduct educational expenses; and (5) whether
petitioners are liable for a section 6662(a) accuracy-related
penalty.
Background
Petitioners resided in California at the time their petition
was filed. Petitioners were married during the period under
2
Petitioners conceded $643 in unreported income and that
they are not entitled to deductions claimed for utilities and
business use of their home. Respondent conceded that petitioners
are entitled to gambling losses of $10,497.10. Petitioners
claimed losses of $78,437.
3
Petitioners provided no evidence in support of their
claimed deduction for moving expenses and, accordingly, are
considered to have abandoned this issue. See Petzoldt v.
Commissioner, 92 T.C. 661, 683 (1989). Respondent made numerous
adjustments to petitioners’ 2005 tax return, and only a limited
number were presented to the Court. To the extent that any of
those adjustments have not been conceded or settled, petitioners
failed to adduce evidence in support of those deductions and have
thus abandoned those items.
- 3 -
consideration and filed a joint Federal Income tax return for
their 2005 tax year. During 2005 petitioner Janello S. Dungca
(Mr. Dungca) was employed by a consulting company in Pittsburgh,
Pennsylvania. His consulting assignment from January 1 through
July 30, 2005, was at the Mayo Clinic in Rochester, Minnesota.
During that same period, approximately every other weekend
petitioners visited a gambling establishment named Canterbury
Park that offered wagering on horse racing.
Mr. Dungca was an inveterate gambler, and since 1991 he had
spent a good amount of his nonworking time gambling. His
gambling activity focused upon horse racing, and he made multiple
bets on each race in the form of trifecta and other multiple
wagers where horses had to finish in a particular order. He
gambled whenever he had access to funds. During 2005 Mr. Dungca
gambled every other weekend because his salary was paid on a
biweekly basis. At the betting establishment Mr. Dungca would
place a wager on every available race. Occasionally, when he had
winnings he would entrust them to his wife with instructions not
to return them to him. Nevertheless, Mr. Dungca would approach
his wife and convince her to give him the winnings. Mr. Dungca
would retain betting slips, receipts, and records of cash
withdrawals, and at the end of each day he would record the day’s
bets, winnings, and cash withdrawals (cash in and out) in a
- 4 -
journal. The journal entries reflected the net cashflow for the
day, because there were large numbers of bets made each day.
On the days that he gambled, it was not unusual for Mr.
Dungca to wager total daily amounts ranging from approximately
$500 to over $3,000. His pattern was to withdraw cash from his
bank account (usually through an ATM) and to place wagers. If he
lost, he would withdraw more funds. If he won, he would
“reinvest” the winnings. During 2005 Mr. Dungca received Forms
W-2G, Certain Gambling Winnings, reflecting total gambling
winnings of $78,262. For their 2005 tax year petitioners
reported gambling winnings of $78,437 and corresponding gambling
losses of $78,437, thereby showing no net gambling income for the
year. Only gambling winnings that exceeded $600 were reported on
Forms W-2G, and winnings in amounts less than $600 were not
included in the $78,437 (either on Forms W-2G or reported on
petitioners’ 2005 income tax return).
Mr. Dungca retained betting ticket stubs and maintained
records of his cash withdrawal and gambling activity. He used
that information, which included all winning and losing bets, to
determine that his losses exceeded his winnings during 2005.
Unfortunately, his wife petitioner Maria C. Gutierrez (Ms.
Gutierrez), discarded some of the stubs and records sometime
after the 2005 return had been prepared and filed because she did
not think that they were of any future use.
- 5 -
Mr. Dungca’s journal contained only summary entries. On any
day that he gambled he would record the date, location, types of
wager, the net amount won, and the net amount lost. He would
also record the cash withdrawals from the bank and the amount on
hand at the end of each day. The winnings over $600 can be
verified, but there is no way to verify winnings less than $600
or the bets or losses for each day without reference to the
underlying tickets, which, to some extent, have been discarded.
Mr. Dungca’s recordkeeping was based on cash on hand. He
would account for cash withdrawals from the bank and any net
winnings. He did not, however, segregate his gambling cash on
hand from one day to the next. As an example, on December 30,
2005, he ended the day with $3,000 cash on hand and had only
$2,500 cash on hand on December 31, 2005. The $500 difference
was spent on purchases other than betting. In addition, Mr.
Dungca’s journal entries were occasionally inconsistent or
inaccurate.
When petitioners’ 2005 tax return was audited, Mr. Dungca
presented his journal, in which he had recorded the net
transactions for each day. He also presented 2005 bank records
reflecting cash withdrawals that corresponded to and supported
his log. He did not, however, have some of the betting stubs
and/or receipts because of his wife’s mistake, and he was forced
to reconstruct his betting patterns for 2005. After some days of
- 6 -
gambling, Mr. Dungca had net winnings, but, inevitably, he would
use those winnings to fund future gambling. For purposes of his
audit Mr. Dungca constructed a spreadsheet that is backed by
documentation that was available to respondent’s agents,
reflecting that he bet $92,727.95 during 2005. The contemporary
log, however, reflected losses/bets totaling $98,323.80. The
difference, as Mr. Dungca explained, is represented by tickets
that were discarded by his wife.
Mr. Dungca also used detailed information from 2006 and 2007
to show his betting patterns, and he testified that they were
substantially the same as his 2005 patterns. Essentially, his
betting pattern for part of 2006 was to gamble for about 4 or 5
hours per day and make multiple bets on each race in the
approximate range of $12 to $100. Most of the bets did not
result in winnings. Occasionally, Mr. Dungca would win large
amounts. For example, on October 28, 2006, he bet $68 and won
$6,328.70. He also won smaller amounts ranging approximately
from $16 to $700. For 2005, however, there are no backup records
to show the winnings under $600.
For 2005 Mr. Dungca deducted $4,000 for meals purchased
while he was away from home on business. Mr. Dungca had accepted
a temporary assignment in Santa Clara, which was approximately
184 miles from his home. He was able to stay with relatives in
Santa Clara and accordingly claimed only expenses for meals. Mr.
- 7 -
Dungca produced receipts for meals. The receipts were
occasionally for more than one person, but there was no specific
evidence of the identity of the other person(s) or the business
purpose for the meal.
Ms. Gutierrez was married to Mr. Dungca during 2004. She
moved to the United States from Colombia, South America, where
she was licensed as a physician specializing in anesthesiology.
In order to practice medicine in the United States she had to
become certified. To become certified she had to appear before
three boards and be tested as to her qualifications. Before the
testing, she took courses to prepare herself. The cost of three
preparatory courses during 2005 was $2,560. Petitioners claimed
only $2,000 for education on their 2005 return.
Discussion4
Petitioners’ entitlement to claimed gambling losses
represents a substantial portion of the $33,091 deficiency.
Mr. Dungca was an inveterate gambler, and he wagered substantial
amounts during 2005. He had retained his individual betting
receipts and maintained a journal of the net cashflow for each
day’s betting activity. Although Mr. Dungca has bank records
showing substantial withdrawals of cash that correspond to the
4
Neither party raised the question of the burden of proof or
the application of sec. 7491. Under established principles and
in general, petitioners bear the burden with respect to the
disallowed deduction items, and respondent has the burden of
production with respect to the accuracy-related penalty.
- 8 -
entries in his journal, his wife mistakenly discarded some of his
betting receipts so that he is not able to show that his gambling
losses equaled or exceeded his gambling winnings.
Further complicating his situation, Mr. Dungca received and
maintained only records of winnings that were $600 or more, and
there is no way to verify the winnings that were less than $600
other than the daily summary entries in Mr. Dungca’s journal.
One final complication is that, to some extent, Mr. Dungca’s
journal does not account for all cash withdrawn or won because he
did not account for variances in cash on hand from one day to the
next.
Taxpayers are entitled to deduct5 gambling losses only to
the extent of gambling winnings. Sec. 165(d); sec. 1.165-10,
Income Tax Regs. Taxpayers are required to maintain adequate
records in support of the amounts reported on their tax returns.
Sec. 6001. Mr. Dungca’s journal reflects $98,323.80 in 2005
wagering, based on his summary cashflow analysis. One could
assume that the difference between the total wagers and the
$78,437 reflected on Forms W-2G represented winnings in amounts
less than $600, however, there is no accurate way to support that
5
We note that petitioners’ gambling losses are itemized
deductions subject to the limitations for deductions claimed on
Schedule A, Itemized Deductions, because they are not in the
trade or business of gambling. See Hochman v. Commissioner, T.C.
Memo. 1986-24.
- 9 -
assumption. One could also assume that Mr. Dungca always6
“reinvested” his winnings and that his losses always equaled his
winnings. However, there is no accurate way to support that
assumption.
Mr. Dungca has established his inveterate gambling pattern
and has presented sufficient records to permit the Court to make
a judgment as to the amount of his gambling losses for 2005.
Under the principles expressed in Cohan v. Commissioner, 39 F.2d
540 (2d Cir. 1930), a court is permitted to make such a judgment.
On the basis of all of the information available, we hold that
Mr. Dungca’s gambling losses for 2005 were $65,000, relying upon
his reporting of $78,437 of income or winnings.6 In great part,
our holding is based upon our estimate of Mr. Dungca’s personal
use of winnings for expenditures other than wagering and
inconsistencies in his cashflow analysis.
Ms. Gutierrez was licensed as a physician specializing in
anesthesiology in her native country of Colombia, South America.
In order to practice medicine in the United States, she was
required to become board certified and licensed. To that end,
6
We have not considered any amounts of winnings or losses in
excess of the $78,437 reported and, in effect, assumed that
winnings of less than $600 and wagers (losses) of those amounts
were equal. Our holding is based solely on the evidence before
the Court. Our holding that petitioner is entitled to $65,000 in
gambling losses includes the $10,497.10 respondent conceded.
- 10 -
she took specialized courses. During 2005 her tuition was
$2,560, only $2,000 of which was deducted on petitioners’ 2005
tax return.
Under section 222, taxpayers are allowed a deduction for
tuition and related expenses paid during the taxable year. For
the year 2005 the deduction was limited in amount and depended
upon the taxpayer’s adjusted gross income. On the basis of
petitioners’ combined adjusted gross income, the limitation was
$2,000, the amount they claimed. See sec. 222(b)(2)(B)(ii).
Respondent argues that petitioners did not substantiate the
educational expenditure. On the record before us, we find that
Ms. Gutierrez paid $2,560 for qualified tuition, $2,000 of which
is deductible for 2005 under section 222.
For 2005 Mr. Dungca deducted $4,000 for meals purchased
while he was away from home on business. He had accepted a
temporary assignment in Santa Clara, approximately 184 miles from
his home in California. He paid only meal expenses because he
was able to stay with relatives in Santa Clara. Mr. Dungca
produced receipts for meals. The receipts were occasionally for
meals purchased for more than one person. In instances of
multiple meals there was no evidence of the identity of the other
person(s) or the business purpose for the meal.
In general, taxpayers are allowed a deduction for ordinary
and necessary expenses paid or incurred during the taxable year
- 11 -
in carrying on any trade or business. Sec. 162. Traveling
expenses, including amounts expended for meals while away from
home in the pursuit of a trade or business, may be deductible.
Commissioner v. Flowers, 326 U.S. 465 (1946). In addition, when
a taxpayer is away from home on a temporary basis, his living or
travel expenses may be considered deductible business expenses.
Peurifoy v. Commissioner, 358 U.S. 59, 60 (1958). Employment has
been defined as “temporary” if it is foreseeably terminable or
lasts for a relatively short fixed duration. Boone v. United
States, 482 F.2d 417, 419 (5th Cir. 1973). Mr. Dungca’s work in
Santa Clara was temporary. Accordingly, the remaining question
is one of substantiation of the $4,000 claimed for meals. See
sec. 274(d)(1) (requiring substantiation by adequate records of
traveling expenses, including meals).
The Court reviewed the meal receipts Mr. Dungca provided
for a period beginning July 6 and ending September 23, 2005. For
each receipt that indicated multiple diners, the number of diners
was divided into the total to arrive at the amount deductible for
Mr. Dungca. In addition, a limited number of receipts were for
restaurants that were close to Mr. Dungca’s home in Fairfield and
far from his temporary work location in Santa Clara. Those
receipts were not counted toward the deductible amount allowable.
On the basis of that approach, the Court finds that petitioners
substantiated $875.88 of meals expense for 2005. Because of the
- 12 -
section 274(n) limitation, petitioners are limited to a deduction
of $437.94.
Finally, we consider whether petitioners are liable
for an accuracy-related penalty. Section 6662(a) and (b)(1)
and (2) imposes an accuracy-related penalty of 20 percent on
the portion of an underpayment attributable to negligence,
disregard of rules or regulations, or a substantial
understatement of income tax. Negligence includes any failure
to keep adequate books and records or to substantiate items
properly. Sec. 1.6662-3(b)(1), Income Tax Regs. An
understatement is substantial if it exceeds the greater of: (1)
10 percent of the tax required to be shown on the return for the
taxable year, or (2) $5,000. Sec. 6662(d)(1)(A).
Respondent determined that petitioners were liable for the
section 6662 accuracy-related penalty for negligence because of
their failure to maintain adequate records and their failure to
substantiate claimed deductions. It is patently clear from the
record that petitioners failed to maintain adequate records, and
to the extent that we have specifically disallowed such
deductions, our basis was failure to substantiate the amounts.
In addition, they did not establish reasonable cause and good
faith for their underpayment. See sec. 6664(c)(1); Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Therefore, we hold that
- 13 -
petitioners are liable for an accuracy-related penalty on the
resulting underpayment.
All other adjustments in the notice of deficiency were
either computational or items for which petitioners did not
provide the Court with any evidence or argument and which are
therefore deemed abandoned or conceded. In view of the
foregoing,
Decision will be entered
under Rule 155.