T.C. Memo. 2010-247
UNITED STATES TAX COURT
PHU M. AND YVONNE D. AU, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16366-09. Filed November 10, 2010.
Phu M. and Yvonne D. Au, pro sese.
Anna A. Long, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined a $5,783 deficiency in
petitioners’ Federal income tax for 2006 and a $1,156.60 penalty
under section 6662(a). The deficiency and penalty resulted from
disallowance of gambling losses claimed to offset other income of
petitioners. All section references are to the Internal Revenue
Code (Code) in effect for 2006.
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FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioners resided in California at the time the petition was
filed.
On their jointly filed Form 1040, U.S. Individual Income Tax
Return, for 2006, petitioners reported adjusted gross income of
$83,041. On Schedule A, Itemized Deductions, they deducted
gambling losses totaling $40,488 as “Other Miscellaneous
Deductions”. Petitioners did not report any gambling winnings,
and they had no gambling winnings during 2006.
Petitioners’ 2006 Federal tax return was prepared using H&R
Block’s software known as TaxCut.
OPINION
Section 165(d) provides that “Losses from wagering
transactions shall be allowed only to the extent of the gains
from such transactions.” Petitioners acknowledge that they had
no gains from their gambling activities during 2006. Therefore
they are not entitled to deduct the losses that they claimed.
Section 6662(a) and (b)(1) and (2) imposes a 20-percent
accuracy-related penalty on any underpayment of Federal income
tax attributable to a taxpayer’s negligence or disregard of rules
or regulations or substantial understatement of income tax.
Section 6662(c) defines negligence as including any failure to
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make a reasonable attempt to comply with the provisions of the
Code and defines disregard as any careless, reckless, or
intentional disregard. Disregard of rules or regulations is
careless if the taxpayer does not exercise reasonable diligence
to determine the correctness of a return position that is
contrary to the rule or regulation. Sec. 1.6662-3(b)(2), Income
Tax Regs. An underpayment is substantial if the understatement
of tax exceeds the greater of 10 percent of the tax required to
be shown on the return or $5,000. Sec. 6662(d)(1)(A).
Considering the erroneous nature of the deduction and the amount
of the resulting underpayment of tax, respondent has satisfied
the burden of producing evidence that the penalty is appropriate.
See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 448-449
(2001).
An exception to the penalty under section 6662(a) applies in
cases where there was reasonable cause for any portion of the
underpayment and the taxpayer acted in good faith. Sec.
6664(c)(1). The determination of whether the taxpayer acted with
reasonable cause and in good faith depends on the pertinent facts
and circumstances, including the taxpayer’s efforts to assess
such taxpayer’s proper tax liability, the knowledge and the
experience of the taxpayer, and the reliance on the advice of a
professional, such as an accountant. Sec. 1.6664-4(b)(1), Income
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Tax Regs. Petitioners have the burden of showing reasonable
cause. See Higbee v. Commissioner, supra at 446-447.
Petitioners contend that they followed the instructions on
the tax preparation software that they used in preparing their
2006 tax return, asserting that the software was “approved by the
IRS”. They indicate that they were unaware of the provisions of
the Code and that they did not consult any Internal Revenue
Service (IRS) publications or professional tax advisers before
claiming deductions equaling almost half of their reported income
in 2006. The software instructions are not in the record, so we
cannot determine how the error occurred. We doubt that the
instructions, if correctly followed, permitted a result contrary
to the express language of the Code. Petitioners may have acted
in good faith but made a mistake. In the absence of evidence of
a mistake in the instructions or a more thorough effort by
petitioners to determine their correct tax liability, we cannot
conclude that they have shown reasonable cause for the
underpayment of tax on their 2006 return.
Petitioners ask the Court to consider correspondence
exchanged between them and various representatives of the IRS
before trial, in which an IRS representative offered to concede
the penalty. Petitioners declined the concession, because they
also sought relief from the interest accruing on the underpayment
and to have the deficiency reduced. In this proceeding, however,
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we have no jurisdiction over interest that has not been assessed.
See generally sec. 6404; Williams v. Commissioner, 131 T.C. 54,
55-56 (2008). The correspondence between petitioners and the IRS
representatives, therefore, is not relevant to the issues that we
decide.
Petitioners have also referred to their inability to pay the
amounts owing as a result of our rulings here. Their claimed
financial hardship can be raised in a proceeding commenced under
section 6330 only if and when collection efforts are made and a
notice of determination sustaining collection efforts is sent to
them. Ability to pay is also not relevant in this case.
Finally, with the notice of trial, sent 5 months before the
trial date, and at the call of the calendar, petitioners, as pro
se taxpayers, were offered the opportunity to confer with
volunteer attorneys to discuss the case and to consider the
possibility of negotiated settlement, without charge to
petitioners. They did not take advantage of the opportunities
when offered and sought delay to consult an attorney only after
the Court announced the impending resolution of the case against
them. Thus they gave up the possibility of pretrial settlement,
with possible savings to themselves, and prolonged the period in
which interest is accruing. The variety of services offered by
volunteer attorneys frequently results in negotiated settlements.
It is unfortunate when those who could benefit from the
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assistance offered by such attorneys do not take advantage of it.
After a case has been tried and the result stated, the
opportunity no longer exists. To reflect the foregoing,
Decision will be entered
for respondent.