Hastings v. Comm'r ( 2009 )

T.C. Memo. 2009-69
UNITED STATES TAX COURT
DONALD J. AND DENISE K. HASTINGS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3468-07. Filed March 30, 2009.
Jon J. Jensen, for petitioners.
Lisa R. Woods, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined deficiencies in
petitioners’ Federal income taxes for 2003 and 2004 and an
accuracy-related penalty for 2004 as follows:
Accuracy-Related Penalty
Year Deficiency Sec. 6662(a)
2003 $2,187 --
2004 13,408 $2,682
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Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
The primary issue for decision is whether petitioner Denise
Hastings was in the trade or business of gambling.
Hereinafter, references to petitioner are to petitioner
Denise Hastings, and references to Donald are to petitioner
Donald Hastings.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioners resided in
North Dakota.
Petitioner has a bachelor’s degree and has worked for many
years as a controller and as a manager of several different
accounting firms in North Dakota. Petitioner is not a certified
public accountant.
In October 1998 petitioner started her own accounting and
consulting business as a limited liability company under the name
Accounting & Consulting Plus, L.L.C. (ACP). Petitioner managed
ACP and kept the books and records. ACP’s clients generally were
business owners, and petitioner advised ACP’s clients on issues
relating to accounting and recordkeeping. In particular
petitioner advised ACP’s clients to keep their own set of
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business and accounting records rather than relying on bank
statements or other yearly summaries from third parties to
substantiate their business transactions. In 2003 and 2004
petitioner spent approximately 40 hours per week working on
behalf of ACP.
In 2003 and 2004 petitioner also spent some time each week
tending to other business activities and gambling.
In 2003 and 2004 petitioner received income from ACP of
$39,544 and $35,743, respectively, and petitioner received income
from her other business activities of zero and $9,088,
respectively.
In 2003 and 2004 petitioner gambled at several casinos in
North Dakota for a total of 63 days and 65 days, respectively.
At the casinos petitioner gambled only at the slot machines.
Petitioner gambled primarily on weekends and holidays and
generally for at least 8 hours at a time. Occasionally Donald
would accompany petitioner to the casinos and would play the slot
machines.
Petitioner attempted to learn more about slot machine
gambling by watching a video and by reading a number of books.
Petitioner developed her own approach and theory relating to slot
machine gambling. Upon arriving at a casino, petitioner would
survey the slot machines and talk with other patrons and
employees in an attempt to determine which slot machines were
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“hot”. Petitioner believed that the best time to play the slot
machines was in the evenings because of the money put in the
machines throughout the day by other gamblers. Petitioner
believed that slot machines generally pay out in cycles--when one
slot machine pays out other slot machines also are likely to pay
out. Petitioner also believed that she had higher success
playing the slot machines on the first day of each month because
it was a “better pay cycle day than any other day”.
Petitioner generally played the “high stakes” slot machines,
inserting $5 and $10 into the slot machines. Petitioner often
gambled over $10,000 during a single day, and, occasionally, she
won jackpots in excess of $15,000.
At the conclusion of gambling on any day petitioner would
cash out her winnings at the casino, and, upon returning home,
she would place the cash winnings in a home safe until her next
gambling trip. While petitioner generally used cash from her
home safe to gamble, occasionally she gambled with money
withdrawn from her personal checking account.
Petitioner did not have a separate bank account for her
gambling activity, and she did not create a written business plan
relating to her gambling activity.
Generally, petitioner tracked her gambling activity through
a player card that was provided to her by the casino. The player
card, when inserted into a casino’s slot machine, electronically
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tracked the amount of money petitioner gambled, her winnings, and
her losses on each slot machine. At the end of the year, the
casinos provided petitioner an annual profit and loss statement
relating to her gambling.
Occasionally, however, petitioner played the slot machines
without using her player card. Thus, the profit and loss
statements petitioner received from the casinos each year did not
reflect all of her gambling activity.
The casinos also provided petitioner a Form W-2G, Certain
Gambling Winnings, each time petitioner won a $1,200 slot machine
jackpot, which Form W-2G reflected the jackpot amount as “Gross
winnings”.
In 2003 and 2004 Donald was employed as a mechanic and as a
self-employed home repairman. In 2003 and 2004 Donald received
$47,092 and $37,440, respectively, in combined income from his
employment with the mechanic company and from his self-
employment.
For 2003 and 2004 petitioners timely filed their joint
Federal income tax returns on which petitioner treated her
gambling activity as a trade or business. Attached to each of
petitioners’ 2003 and 2004 joint Federal income tax returns was a
Schedule C, Profit or Loss From Business, relating to
petitioner’s gambling activity. On the 2003 Schedule C
petitioner claimed $151,162 in gambling winnings and $151,162 in
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gambling expenses. On the 2004 Schedule C petitioner claimed
$445,738 in gambling income and $445,738 in gambling expenses.
On their 2003 and 2004 joint Federal income tax returns
petitioners also reported petitioner’s (P’s) income from ACP and
from her other business activity, petitioners’ other income,
Donald’s income from his employment and self-employment, Donald’s
gambling income, and taxes due and paid, as follows:
P’s Income Petitioners’ Donald’s Income Taxes
Year ACP Other Other Income Employment Gambling Due Paid
2003 $39,544 -0- $6,632 $47,092 $300 $14,438 $12,471
2004 35,743 $9,088 13,393 37,440 -0- 15,298 15,298
On audit, in an attempt to substantiate her claimed Schedule
C gambling expenses for 2003 and 2004, petitioner submitted
player card profit and loss statements from two casinos for 2003
and from one casino for 2004, and Forms W-2G from three casinos
for 2003 and from four casinos for 2004. Reflected in the table
below for each year are the net gambling losses reported on the
player card profit and loss statements, the jackpot winnings
reported on the Forms W-2G, and the amount of gambling income and
expenses reported on the Schedules C relating to petitioner’s
gambling activity that were attached to petitioners’ joint
Federal income tax returns:
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Player Card Form Schedule C
Year Information W-2G Gambling
Profit (Loss) Jackpots Income Expenses
2003 ($66,308) $142,965 $151,162 ($151,162)
2004 (181,936) 445,738 445,738 (445,738)
During audit, respondent requested, but petitioner failed to
produce, player card profit and loss statements and Forms W-2G
from a number of the casinos at which petitioner gambled and
other records to substantiate petitioner’s gambling activity that
was not reflected in her player card information or the Forms W-
2G she had submitted to respondent.
Respondent also determined that during 2003 and 2004
petitioner was not in the trade or business of gambling, and
therefore respondent disallowed petitioner’s Schedule C treatment
of her gambling activity for 2003 and 2004. Instead, respondent
determined that for 2003 and 2004 petitioners were required to
report petitioner’s gross gambling income as “Other income” on
line 21 of petitioners’ joint Federal income tax returns and to
report petitioner’s gambling expenses as miscellaneous itemized
deductions on Schedule A, Itemized Deductions. As a result,
petitioners’ adjusted gross income for each year exceeded the
“applicable amount” provided under section 68, subjecting
petitioners’ claimed Schedule A itemized deductions (other than
gambling expenses) to the limitations on itemized deductions
provided under section 68. Respondent applied the section 68
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limitations to petitioners’ Schedule A itemized deductions (other
than gambling expenses) and determined the tax deficiencies in
issue.
OPINION
A taxpayer generally bears the burden of proving entitlement
to claimed expense deductions. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). Because petitioner has not maintained
and submitted adequate records to substantiate her claimed
gambling expenses, petitioners do not qualify for a shift in the
burden of proof under section 7491(a). See sec. 7491(a)(2).
To be carrying on a trade or business within the meaning of
section 162(a), an individual taxpayer must be involved in the
activity with continuity and regularity and with the objective of
making a profit. Commissioner v. Groetzinger, 480 U.S. 23, 35
(1987); sec. 1.183-2(a), Income Tax Regs. Determining whether a
taxpayer is carrying on a trade or business requires an
examination of all of the facts in each case. Commissioner v.
Groetzinger, supra at 36.
A taxpayer’s profit objective must be actual and honest.
See Evans v. Commissioner, 908 F.2d 369, 373 (8th Cir. 1990),
revg. T.C. Memo. 1988-468; Keanini v. Commissioner, 94 T.C. 41,
46 (1990); Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982),
affd. without published opinion 702 F.2d 1205 (D.C. Cir. 1983);
sec. 1.183-2(a), Income Tax Regs. Whether a taxpayer has an
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actual and honest profit objective is a question of fact to be
determined from all the relevant facts and circumstances.
Hastings v. Commissioner, T.C. Memo. 2002-310; sec. 1.183-2(a),
Income Tax Regs. We give greater weight to objective facts than
to a taxpayer’s statements of intent. Dreicer v. Commissioner,
supra at 645; sec. 1.183-2(a), Income Tax Regs.
The Court generally considers several nonexclusive factors
for determining whether a taxpayer carried on an activity with a
profit objective. Sec. 1.183-2(b), Income Tax Regs.
Manner in Which Activity Is Carried On
Petitioner did not carry on her gambling activity in a
businesslike manner. Petitioner did not have a written business
plan for her gambling activity. Petitioner did not have a
separate bank account for her gambling activity, and
occasionally, petitioner commingled personal and gambling funds.
See Glenn v. Commissioner, T.C. Memo. 1995-399, affd. without
published opinion 103 F.3d 129 (6th Cir. 1996); Ballich v.
Commissioner, T.C. Memo. 1978-497. Petitioner did not gamble on
a regular basis, but rather gambled irregularly and primarily on
weekends and holidays.
Petitioner did not maintain records relating to her gambling
activity in a businesslike manner. Although petitioner testified
that she tracked her gambling activity in a ledger which she kept
in her home safe, petitioner did not produce a ledger to
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respondent nor as evidence at trial. See sec. 6001; Hardwick v.
Commissioner, T.C. Memo. 2007-359; Lutz v. Commissioner, T.C.
Memo. 2002-89.
Petitioner claims that the player card statements and the
Forms W-2G constitute adequate records. Petitioner’s annual
player card statements and her Forms W-2G, however, were
incomplete. Petitioner’s lack of records and other evidence is
particularly troubling considering petitioner’s professional
training and employment as an accountant.
Expertise
Consulting with experts and developing one’s expertise may
indicate a profit objective. Sec. 1.183-2(b)(2), Income Tax
Regs. Petitioner, however, has not shown that she acquired any
gambling expertise. Petitioner’s strategy of observing the
casino’s slot machines and talking to casino employees and
patrons is insufficient. See Calvao v. Commissioner, T.C. Memo.
2007-57.
Time and Effort Expended
A taxpayer’s devotion of time and effort to an activity may
indicate a profit objective. Sec. 1.183-2(b)(3), Income Tax
Regs. Petitioner’s occasional and weekend gambling activity,
however, does not indicate a profit objective.
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In 2003 and 2004 petitioner spent the majority of her time
managing ACP and tending to other business activities.
Petitioner did not reduce the time she spent managing ACP and
tending to other business activities in order to pursue her
gambling activity.
Success in Carrying On Other Activities
If a taxpayer has engaged in other activities and made them
profitable, this success may indicate a profit objective, even
though the current activity is presently unprofitable. Sec.
1.183-2(b)(5), Income Tax Regs.
Petitioner’s apparent success in running ACP is indicative
of petitioner’s abilities, but the transferability thereof to
gambling is suspect.
History of Income or Loss With Respect to the Activity
A history of substantial losses may indicate that a taxpayer
did not have a profit objective. Golanty v. Commissioner, 72
T.C. 411, 427 (1979), affd. without published opinion 647 F.2d
170 (9th Cir. 1981); Canale v. Commissioner, T.C. Memo. 1989-619;
Ballich v. Commissioner, supra; sec. 1.183-2(b)(6), Income Tax
Regs.
Petitioner claims that she made a gambling profit in
subsequent years, but petitioner did not submit credible proof
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thereof. Petitioner persisted in her gambling activity despite
significant losses.
Amount of Occasional Profits
Occasional income earned from an activity in relation to the
amount of expenses incurred may indicate a profit objective.
Sec. 1.183-2(b)(7), Income Tax Regs.
Petitioner’s income from gambling in relation to her claimed
losses does not indicate that a profit potential existed in
petitioner’s gambling activity. See Bolt v. Commissioner, 50
T.C. 1007, 1014-1015 (1968).
Elements of Personal Entertainment or Recreation
The presence of entertainment or recreational purposes in
carrying on an activity may indicate that a taxpayer does not
have a profit objective. Sec. 1.183-2(b)(9), Income Tax Regs.
Petitioner testified that gambling was hard work that made
her tired and that she did not gamble with friends. Petitioner
argues that her gambling-related strategy and theories and her
desire to win money show that her objective in gambling was
primarily to earn a profit.
However, Donald’s occasionally accompanying petitioner to
the casinos suggests a recreational purpose to at least those
casino visits. Petitioner’s gambling-related strategy and
theories and her desire to win money are consistent with both a
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profit objective and a recreational purpose. See Calvao v.
Commissioner, supra.
Of the factors present in this case, five weigh against
petitioner and two are neutral. We conclude that for 2003 and
2004 petitioner has not shown that she had a profit objective in
carrying on her slot machine gambling activity and therefore that
petitioner in 2003 and 2004 was not in the trade or business of
gambling. We sustain respondent’s determinations relating
thereto.
Section 6662(a) and (b)(2) imposes an accuracy-related
penalty equal to 20 percent of any portion of underpayment of tax
that is attributable to a substantial understatement of income
tax. Section 6662(d)(1)(A) defines a “substantial
understatement” of income tax as one which exceeds the greater of
10 percent of the tax required to be shown on the return or
$5,000. The accuracy-related penalty does not apply with respect
to any portion of the underpayment as to which a taxpayer shows
reasonable cause and good faith. Sec. 6664(c).
Respondent bears the burden of producing sufficient evidence
to support imposition of the accuracy-related penalty; however,
petitioners bear the burden of showing that the reasonable cause
exception applies. See sec. 7491(c); Higbee v. Commissioner, 116
T.C. 438, 446-447 (2001).
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In view of our finding that petitioners had a $13,408
deficiency in their 2004 Federal income tax, respondent has shown
that petitioners substantially understated their Federal income
taxes for 2004.
At trial and on brief petitioners did not present evidence
and did not argue that the reasonable cause exception applies.
Petitioners have not otherwise shown that their 2004 underpayment
of tax was due to reasonable cause or that they acted in good
faith with respect to the underpayment. We sustain respondent’s
imposition of the $2,682 section 6662(a) accuracy-related penalty
for 2004.
To reflect the foregoing,
Decision will be entered
for respondent.