T.C. Summary Opinion 2009-184
UNITED STATES TAX COURT
JOSE DIAZ CARO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24720-08S. Filed December 3, 2009.
George L. Willis and Taylor Jensen (specially recognized),
for petitioner.
Nicole C. Lloyd, for respondent.
KROUPA, Judge: This case was heard pursuant to the
provisions of section 74631 of the Internal Revenue Code in
effect at the time the petition was filed. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
All section references are to the Internal Revenue Code in
effect for the year at issue, unless otherwise indicated.
-2-
other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a $15,041 deficiency in petitioner’s
Federal income tax for 2006 and a $3,008 accuracy-related penalty
under section 6662(a). After concessions, we are left to decide
whether petitioner had gambling losses in excess of those allowed
in the deficiency notice. We find that he did.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts, the supplemental stipulation of facts,
and their accompanying exhibits are incorporated by this
reference. Petitioner resided in California at the time he filed
the petition.
Petitioner was a professional gambler who had been betting
on horses for over 20 years. Petitioner carefully preserved each
day’s losing tickets inside that day’s racing program as well as
W-2Gs. Petitioner then recorded the total amounts of losses and
winnings on the front of the program at the end of the day.
Finally he taped the programs shut, sealing the tickets inside.
Petitioner kept accurate contemporaneous records. Petitioner
learned to keep accurate records after the Internal Revenue
Service (IRS) audited his return for an earlier year and he
received a no-change letter.
-3-
Petitioner gambled every day that the ponies ran. When he
won, he would often “reinvest” those winnings, losing much or all
of what he had won. Petitioner did not own a home or a car in
2006. He rented an apartment with a friend for 34 years and
often received help from his five grown children in paying his
bills.
Petitioner provided all of his daily programs and tax
records for 2006 to his return preparer. The return preparer
made several mathematical and computational errors on
petitioner’s tax return for 2006. The return preparer
incorrectly reported petitioner’s gambling income and itemized
deductions, including his gambling losses. The return preparer
never returned petitioner’s records for 2006 despite petitioner’s
repeated requests. He has not yet been able to contact or locate
the return preparer, who provided no forwarding information when
he left the area.
Respondent received information from third-party gambling
establishments reporting that they had collectively paid
petitioner $329,527 in 2006, which is $70,883 more than
petitioner reported. Respondent did not disallow in the
deficiency notice any of the gambling losses petitioner claimed
on the return for 2006. Petitioner timely filed a petition.
-4-
Discussion
We must decide whether petitioner is entitled to deduct
gambling losses in addition to those reported on the return for
2006. We begin with petitioner’s gambling income. Gross income
includes all income from whatever source derived. Sec. 61(a).
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). Petitioner concedes that
his preparer incorrectly reported his gambling income. He
contends, however, that his return preparer also incorrectly
reported his gambling losses and that these losses were
sufficient to offset the unreported gambling income. Respondent
argues that petitioner may not deduct any additional losses
because petitioner lacks any records. We disagree.
A taxpayer is entitled to deduct uncompensated losses during
a given tax year. Sec. 165(a). Gambling losses are allowed only
to the extent of gambling gains. Sec. 165(d). A taxpayer must
prove gambling losses sustained during the taxable year to be
entitled to a deduction. Mack v. Commissioner, 429 F.2d 182 (6th
Cir. 1970), affg. T.C. Memo. 1969-26; Briseno v. Commissioner,
T.C. Memo. 2009-67. Where, as here, records are lost, taxpayers
are not entirely without a remedy. This Court may allow a
reasonable amount of deductible losses based on an estimate if
the taxpayer has no records to prove the actual amount of the
-5-
deduction. Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir.
1930); Briseno v. Commissioner, supra. We have done so where we
have been satisfied that a taxpayer has incurred unsubstantiated
gambling losses. See Drews v. Commissioner, 25 T.C. 1354 (1956).
This is a purely factual issue to be decided upon the facts and
circumstances of each case. Green v. Commissioner, 66 T.C. 538,
544 (1976); Fogel v. Commissioner, T.C. Memo. 1955-186, affd. per
curiam 237 F.2d 917 (6th Cir. 1956).
Petitioner habitually kept adequate records of his gambling
losses. He kept the losing tickets and the W-2Gs and would tape
the daily booklet shut each day. His return preparer entered the
records for 2006 incorrectly and then failed to return them to
petitioner. We are therefore unable to determine the exact
amount of petitioner’s gambling losses because of the missing
records. In these circumstances, we may make as close an
approximation of the losses as we can. Cohan v. Commissioner,
supra at 544; Doffin v. Commissioner, T.C. Memo. 1991-114.
Petitioner was a compulsive gambler who gambled every day
possible. We are confident after hearing his testimony that
petitioner placed as many losing bets as he did winning ones.
When he did win, he would place more bets, losing most of what he
had won. Petitioner did not own a home or a car. He did not
live a lavish lifestyle. Instead, he often depended on his grown
children for help in paying his bills. We are convinced that
-6-
petitioner sustained unreported gambling losses that were
sufficient to offset his unreported gambling income for 2006.
Petitioner’s credible and convincing testimony regarding the
extent of his gambling losses, together with the other evidence,
provides a sufficient basis for this decision. See, e.g., Drews
v. Commissioner, supra. We therefore conclude that petitioner is
not liable for a deficiency in tax for 2006. Accordingly, we
also conclude that petitioner is not liable for an accuracy-
related penalty under section 6662(a).
To reflect the foregoing and the concessions of the parties,
Decision will be entered
for petitioner.