Freese v. Comm'r

T.C. Summary Opinion 2008-161
UNITED STATES TAX COURT
KEITH AND DINAH M. FREESE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 29452-07S. Filed December 23, 2008.
Keith and Dinah M. Freese, pro sese.
Lisa R. Woods, for respondent.
SWIFT, Judge: This case was heard pursuant to the
provisions of section 7463 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, and
this opinion shall not be treated as precedent for any other
case.
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Respondent determined a $3,364 deficiency in petitioners’
Federal income tax for 2005. The issue for decision is whether
petitioners’ 2005 gambling activity qualifies as a trade or
business.
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year in issue.
Background
Some of the facts have been stipulated and are so found.
Petitioners resided in Minnesota.
Over the years including 2005, petitioners have been
employed full time as employees--petitioner Dinah Freese in a
paper manufacturing plant and petitioner Keith Freese as a
cabinetmaker. Petitioner Keith Freese was also self-employed as
a cabinetmaker, conducting that activity out of his home and
garage.
In 1998 because of health problems that prevented
petitioners from participating in outdoor recreational
activities, petitioners began gambling together at a casino on an
Indian reservation.
Petitioners gambled one or two evenings a week and only on
slot machines. Petitioners gambled with cash that they either
brought with them from home or obtained at the casino by writing
personal checks or by withdrawing cash from an ATM.
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Petitioners did not keep a log of the cash gambled or the
time spent gambling. Petitioners did not maintain a separate
bank account, did not maintain books and records, and did not
otherwise keep track of their gambling income and expenses.
Petitioners did not maintain any meaningful records relating to
their gambling activity.
Each time each petitioner won a slot machine jackpot of
$1,200 or more, petitioners received from the casino a record
thereof on Form W-2G, Certain Gambling Winnings, and petitioners
did keep copies of these forms.
Petitioners occasionally used player cards given to them by
the casino which, if inserted into slot machines, enabled the
casino to keep track of petitioners’ gambling activity.
Petitioners however did not consistently use the player cards
when they gambled because petitioners believed that using player
cards enabled the casino to skew against them the winning odds on
the slot machines.
Casino printouts in evidence showing petitioners’ gambling
activity for 2005 are incomplete and do not accurately reflect
all of petitioners’ gambling activity. As indicated, petitioners
kept no record of the amount of cash they put into slot machines,
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and there are no records available of petitioners’ slot machine
winnings in amounts less that $1,200 for which petitioners did
not use player cards.
Petitioners state that their gambling activity every year is
pretty much “a wash.”
On their Federal income tax returns for 1998 through 2004
petitioners did not treat themselves as professional gamblers,
and they did not report their gambling income and expenses as a
trade or business on a Schedule C, Profit or Loss From Business.
Rather, petitioners reported income relating to their gambling
activity as “Other” income on the first page of their Federal
income tax returns, and they reported gambling expenses on
Schedule A, Itemized Deductions.
To prepare their 2005 Federal and State income tax returns,
however, petitioners hired Jerome Marshik (Jerome), a tax return
preparer and certified public accountant who practices in
Minnesota.
In connection with the preparation of petitioners’ 2005
Federal income tax return, Jerome did not ask for and petitioners
did not provide Jerome any casino records or other underlying
records relating to their 2005 gambling activity. Jerome asked
for and petitioners provided him only an estimated total dollar
amount for their 2005 slot machine jackpots of $1,200 or more, as
reflected on the Forms W-2G which petitioners received from the
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casino. Jerome did not ask for and petitioners did not provide
him any amount for slot machine gambling income not involving
jackpots of $1,200 or more.
With regard to gambling expenses, Jerome asked for and
petitioners gave him only an estimated total dollar amount for
their 2005 gambling expenses. Petitioners calculated that amount
by adding up the checks they wrote to the casino in 2005 for cash
and their 2005 ATM cash withdrawals. The total expense amount
petitioners gave to Jerome did not include cash that petitioners
brought with them from home and played at the slot machines.
Jerome advised petitioners that to avoid the cap on the
deduction of gambling expenses that would apply if gambling
expenses were reported on a Schedule A, petitioners could report
their gambling activity as that of a trade or business.1
Petitioners’ 2005 Federal income tax return, as filed with
respondent, reported petitioners’ gambling activity on two
Schedules C, one for each petitioner.
On her Schedule C for 2005, Dinah Freese reported gambling
income of $175,100, gambling expenses of $174,240, and a net
income of $860.
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Jerome Marshik also erroneously advised petitioners that
he should not attend the trial herein because he would not be
allowed to testify. Relying on that erroneous advice,
petitioners did not ask Jerome to attend the trial and to be a
witness.
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On his Schedule C, Keith Freese reported gambling income of
$143,868, gambling expenses of $148,068, and a net loss of
$4,200.
During respondent’s audit, petitioners requested and
obtained from the casino a list of slot machine jackpots
petitioners won during 2005, and petitioners provided that list
to respondent.
On audit respondent determined that each petitioner’s
gambling activity did not rise to the level of a trade or
business, and respondent moved petitioners’ gambling income from
the Schedules C to Other Income and petitioners’ gambling
expenses to a Schedule A, and respondent disallowed any gambling
expenses greater than petitioners’ gambling income.
Discussion
Petitioners’ gambling activity in 2005 clearly did not
qualify as a trade or business. Petitioners did not gamble with
continuity and regularity. Petitioners regarded their gambling
activity as recreation they shared, and petitioners did not
expect to earn a profit from gambling. Petitioners did not
maintain books and records relating to their gambling activity.
They did not conduct their gambling activity in a businesslike
manner. See Commissioner v. Groetzinger, 480 U.S. 23 (1987);
sec. 1.183-2(b), Income Tax Regs. Petitioners’ gambling activity
did not rise to the level of a trade or business, and petitioners
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are not allowed to deduct gambling expenses in excess of gambling
income.
We sustain respondent’s adjustments to petitioners’ 2005
gambling income and expenses.
Decision will be entered
for respondent.