T.C. Summary Opinion 2010-67
UNITED STATES TAX COURT
HONG ZHU, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1700-09S. Filed June 1, 2010.
Hong Zhu, pro se.
Jonathan Kalinski, for respondent.
LARO, Judge: This case was heard pursuant to the provisions
of section 7463 of the Internal Revenue Code in effect when the
petition was filed.1 Pursuant to section 7463(b), the decision
1
Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Some dollar amounts are rounded.
-2-
to be entered is not reviewable by any other court, and this
opinion shall not be treated as precedent for any other case.
Respondent determined an $8,251 deficiency in petitioner’s
2006 Federal income tax due to disallowed gambling losses.
Respondent also determined a $1,650 accuracy-related penalty
under section 6662(a). Respondent included those determinations
in a notice of deficiency issued to petitioner on October 20,
2008. Respondent later asserted an increased deficiency of
$103,221 and an additional accuracy-related penalty of
$20,644.20, due to $332,995 in unreported proceeds received from
the sale of stock. The parties now agree that petitioner had a
$327,539 basis in that stock and that petitioner did not report
the resulting short-term capital gain of $5,456 ($332,995 -
$327,539).
The issues for decision are: (1) Whether petitioner may
deduct her claimed gambling losses to the extent of her gambling
winnings, (2) whether petitioner is liable for an accuracy-
related penalty on overstated gambling losses, and (3) whether
petitioner is liable for an accuracy-related penalty on her
$5,456 unreported capital gain.
Background
The parties’ stipulation of facts and the accompanying
exhibits are incorporated herein by this reference. We find the
-3-
stipulated facts accordingly. When the petition was filed,
petitioner resided in California.
During 2006, petitioner earned $9,220 in wages working part
time at a restaurant. She also reported for that year $56,434 in
gambling winnings, for which she received a total of 14 Forms
W-2G, Certain Gambling Winnings, from Mirage Resort & Casino
(Mirage) and Pechanga Resort & Casino (Pechanga). The payor and
the winnings shown on each of these Forms W-2G are as follows:
Payor Winnings Total
Pechanga $2,500
Pechanga 2,500
Pechanga 1,700
Pechanga 4,000
Pechanga 2,000
Pechanga 10,034
Pechanga 10,000
Pechanga 10,000
Pechanga 4,000
Pechanga 3,000
Pechanga 2,500 $52,234
Mirage 1,500
Mirage 1,500
Mirage 1,200 4,200
56,434
Petitioner reported $56,434 in gambling losses on her 2006
Schedule A, Itemized Deductions.
Petitioner gambled for fun. She went to Mirage once or
twice, and she went to Pechanga an undetermined number of times.
-4-
She also gambled at a third location, the Bicycle Casino.2 She
typically went to a casino with approximately $500, and she bet
that money and continued to gamble with her winnings until she
lost all of her gambling money or left the casino for the day.
Petitioner estimates that her net loss from gambling was
approximately $2,000 or $3,000 in 2006.
Petitioner played at the casinos blackjack, mini baccarat,
pai gow poker, roulette, or slot machines. She gambled
predominantly at the slot machines and regularly bet $100 or
more. Petitioner used a card issued by Pechanga each time she
gambled there. The card tracked her wins and losses, and at the
end of the day, she cashed out the tokens and tickets she
received as winnings during the day. The casinos issued a Form
W-2G to petitioner when her winnings exceeded $1,200, and she did
not receive any such form when her winnings were under $1,200.
Three of the Forms W-2G that petitioner received from Pechanga
for 2006 reported respectively that she won $10,000, $10,000, and
$10,034 gambling at the slot machines. When Pechanga gave
petitioner the proceeds underlying those amounts, petitioner used
those proceeds to continue gambling at the slot machines until
she eventually lost all of those proceeds.
2
At trial, petitioner could not recall the number of visits
she made to the various casinos. She sometimes received several
Forms W-2G for a single visit, so the number of forms does not
correspond to the number of visits.
-5-
On or about January 28, 2007, Pechanga mailed to petitioner
a statement of her estimated wins and losses for 2006. The
statement informed petitioner: “Your personal records are the
best source data for justification of gaming win (loss) for IRS
reporting purposes. This data is un-audited and should be used
only for information purposes.” The statement further advised
petitioner: “Your estimated record of Cash In, Cash Out and
Actual Win (Loss) for calendar year 2006 is noted” as such:
Total Cash In Total Cash Out Win (Loss) Game Type
$2,100 $300 ($1,800) BJ
3,600 -0- (3,600) MB
32,102 18,600 (13,502) PGK
22,630 29,850 7,220 PIT
1
127,023 89,527 7,713 SLOT
1
We note that $7,713 does not equal $89,527 less
$127,023. In the case of the slot machines, the “Total
Cash In” reflects the total amount of cash that petitioner
put into the machines, and the “Total Cash Out” reflects
the total amount of cash that petitioner received from the
machines. We infer (and find) that the $127,023 includes
$45,209 of petitioner’s winnings that she reinvested into
future plays rather than took out of the machine, so that
her “Total Cash In” was actually $81,814 ($127,023 -
$45,209 = $81,814). After taking this finding into
account, the “Total Cash Out” of $89,527 less the “Total
Cash In of $81,814” equals the reported “Win” of $7,713
($89,527 - $81,814 = $7,713).
Petitioner received 21 Forms 1099-B, Proceeds From
Broker and Barter Exchange Transactions, documenting the
$332,995 that she received on the sale of her stock.
Petitioner offers no explanation for not reporting these
proceeds on her Federal income tax return.
-6-
Discussion
I. Gambling Losses
Gross income includes all income from whatever source
derived, including gambling winnings. Sec. 61; McClanahan
v. United States, 292 F.2d 630, 631-632 (5th Cir. 1961).
Taxpayers may deduct their gambling losses but only to the
extent of their gambling winnings. Sec. 165(d).
The burden of proof is generally on an individual
taxpayer to prove he or she is entitled to a specific
income tax deduction, such as a gambling loss; this burden
may shift to the Commissioner if certain statutory
requirements are met and the taxpayer introduces credible
evidence. Sec. 7491(a). We need not decide whether
section 7491(a) applies to this case because we decide the
parties’ gambling loss dispute on the basis of the record
at hand.
Where, as here, the record provides sufficient
evidence that a taxpayer has incurred gambling losses, but
the taxpayer is unable to substantiate the precise amount
of those losses, the Court may estimate the amount of the
losses and allow a deduction to that extent. See Drews v.
Commissioner, 25 T.C. 1354, 1355 (1956) (citing Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930)).
Although the record in this case is limited, we are
-7-
persuaded that petitioner incurred gambling losses
connected with her gambling winnings. While the record
does not allow us to pinpoint the amounts of those losses,
we believe it appropriate under the facts herein to measure
petitioner’s losses by using the statement that Pechanga
issued to her. The fact that the statement advises
petitioner that it may not be accurate does not lessen its
probative value under the facts herein, given petitioner’s
testimony that she used the card each time she gambled at
Pechanga.
Adding the total wins and losses from the statement,
we find that petitioner’s total net gambling loss at
Pechanga was $3,969 in 2006 (($1,800) + ($3,600) +
($13,502) + $7,220 + $7,713 = ($3,969)). Accordingly, we
hold that petitioner may deduct $52,234 of her gambling
losses at Pechanga; i.e., her losses to the extent of her
gambling income there. Petitioner has submitted no
documentary evidence, nor offered any helpful testimony,
regarding her losses from Mirage. We find that she did not
sufficiently substantiate any losses from Mirage. The
three Forms W-2G issued by Mirage show a total of $4,200 in
gambling winnings. We hold that petitioner may deduct her
remaining $3,969 in gambling losses at Pechanga on account
of the $4,200 in gains at the Mirage. In sum, we hold that
-8-
petitioner may deduct (as an itemized deduction) gambling
losses totaling $56,203 ($52,234 + $3,969).
II. Accuracy-Related Penalty on Overstated Gambling Losses
Section 6662(a) and (b)(1) imposes an accuracy-related
penalty equal to 20 percent of the portion of an
underpayment of tax attributable to a taxpayer’s negligence
or disregard of rules or regulations. Respondent bears the
burden of production with respect to the applicability of
that accuracy-related penalty included in the notice of
deficiency and must produce sufficient evidence that it is
appropriate to impose the penalty. See sec. 7491(c); see
also Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Once respondent meets this burden, the burden of proof
falls upon petitioner, who may carry her burden by proving
she was not negligent and did not act carelessly,
recklessly, or in intentional disregard of rules or
regulations. See Higbee v. Commissioner, supra at 447; see
also sec. 6662(c). Alternatively, petitioner may establish
that the underpayment was attributable to reasonable cause
and that she acted in good faith. See sec. 6664(c)(1).
The term “negligence” includes any failure to make a
reasonable attempt to comply with the internal revenue
laws, and the term “disregard” includes any careless,
reckless, or intentional disregard. See sec. 6662(c).
-9-
Negligence connotes a lack of due care or failure to do
what a reasonable and prudent person would do under the
circumstances. See Neely v. Commissioner, 85 T.C. 934, 947
(1985). Negligence includes a failure to maintain books
and records. We find respondent has met his burden of
production in that the record establishes that petitioner
overstated her gambling losses and had no documentation to
support deducting a gambling loss greater than that shown
on the Pechanga statement. See sec. 1.6662-3(b)(1), Income
Tax Regs. Petitioner’s sole argument for this lack of
documentation is that she gambled only for fun. We
consider this argument unavailing, and we sustain
respondent’s imposition of the accuracy-related penalty as
to petitioner’s overstated gambling losses.
III. Accuracy-Related Penalty on Unreported Capital Gain
Respondent asserts in his amended answer that
petitioner is liable for an accuracy-related penalty under
section 6662(a) on her $5,456 unreported capital gain.
Respondent bears the burden of proof with respect to this
assertion. See Rule 142(a).
Respondent has produced 21 Forms 1099-B, as well as
brokerage statements, indicating that petitioner made 21
trades during 2006 that were not reported on her Federal
income tax return. The regulations state that “Negligence
-10-
is strongly indicated where--(i) A taxpayer fails to
include on an income tax return an amount of income shown
on an information return, as defined in section
6724(d)(1)”. Sec. 1.6662-3(b)(1), Income Tax Regs.
“Information return” under section 6724(d)(1) is defined to
include returns of brokers under section 6045. Sec.
6724(d)(1)(B)(iii). Petitioner received the 21 information
returns and offers no substantial reason for not reporting
the stock sales shown thereon. We hold that petitioner is
liable for the accuracy-related penalty on the unreported
capital gain.
IV. Epilogue
We have considered all arguments made by the parties
and, to the extent not discussed above, conclude they are
without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.