Couple's Gambling Wasn’t a Business; Tax Deficiency Upheld

In the Matter of:
SUSAN E. MERCIER & JAMES H. MERCIER,
Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

United States Tax Court
Washington, DC 20217

ORDER OF SERVICE OF TRANSCRIPT

Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is hereby

ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to the Commissioner a copy of the pages of the transcript of the trial in this case before the undersigned judge at the Las Vegas, Nevada trial session containing the Court's oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155 in due course.

Eunkyong Choi
Special Trial Judge

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Place: Las Vegas, Nevada

Foley Federal Building & U.S. Cthse.
300 Las Vegas Boulevard, South
Room 4-400, 4th Floor
Las Vegas, Nevada 89101

March 8, 2023

The above-entitled matter came on for bench opinion, pursuant to notice at 9:38 a.m.

BEFORE: HONORABLE EUNKYONG CHOI
Special Trial Judge

APPEARANCES:

For the Petitioners:
No Appearance

For the Respondent:
No Appearance

PROCEEDINGS

(9:38 a.m.)

THE CLERK: Recalling from the calendar, docket number 7499-22S, Susan E. Mercier and James H. Mercier.

(Whereupon, a bench opinion was rendered.)

Bench Opinion by Judge Eunkyong Choi

THE COURT: This Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This case is a small tax case subject to the provisions of section 7463 and Rules 170 through 174. The oral findings of fact and opinion are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure and section references are to the Internal Revenue Code in effect at all relevant times.

This is a tax deficiency redetermination case. Petitioners challenged the Notice of Deficiency dated January 3rd, 2022, in which Respondent determined a deficiency in Petitioner's Federal income tax for taxable year 2019. The deficiency stems from unreported income from gambling winnings and other income from Form 1099.

Trial in this case was conducted during the Court's Las Vegas, Nevada, trial session on March 7th, 2023. Petitioners represented themselves. Inga Plucinski-Holbrook represented Respondent. The Court admitted into evidence the parties' Stipulation of Facts along with the tax exhibits and also admitted into evidence Exhibit 500-P, except pages 40 through 47, 501-P, 502-P, 504-P, 505-P, 506-P, 509-P, 510-P, and 511-P for Petitioners. On the evidence before us, and using the burden of proof principles explained below, the Court finds the following facts.

FINDINGS OF FACT

Petitioners resided in Nevada at the time they filed the petition in this case. In 2019, Ms. Mercier was employed at a Nevada charter school and Mr. Mercier operated an appliance repair business. During the year, Petitioners spent time gambling at several Nevada casinos. Petitioners gamble only on days when they earn extra players card, points, or receive some other advantage.

They play only video poker machines with the best odds of winning. When playing, they employ a strategy they developed in 2016. The strategy was based on statistical information about video poker. Both Petitioners have extensive knowledge of video poker. Based on the foregoing, Petitioners consider themselves professional gamblers.

Petitioners did not keep their own written record of their gambling activity for tax year 2019. Instead, they relied on casinos electronic records, which track a gambler's activity so long as the gambler uses their player card while gambling. Petitioners always used their player cards when gambling because of the benefits they received from using them such as free play and increased points for playing.

Ms. Mercier is an accountant. She prepared Petitioners' 2019 tax return. She initially included the gambling winnings from the Form W-2G in the return, but later decided not to include the winnings when she noticed that doing so increased the amount of tax due from Petitioners, which she believed to be in error. It was her understanding that because Petitioners had a net gambling loss, the gambling winnings reported in the Forms W-2G were not taxable.

Petitioners' tax for taxable year 2019 increased when Ms. Mercier included the income from Forms W-2G in the return because she reported the gambling losses on Schedule A, which resulted in lower itemized deductions than the standard deduction. Petitioners, therefore, chose not to report the income from Form W-2G in the 2019 return and took the standard deduction instead of itemizing their deductions.

Petitioners believe the law regarding the deduction of gambling losses is unfair. They do not believe they should be required to pay taxes on their gambling winnings when they had a net loss for the year. Petitioners also believed their rights as taxpayers were violated in that Respondent had not kept them informed, and that the taxpayer advocate was not available to assist them with their case due to a backlog caused by the COVID-19 pandemic.

OPINION

Generally, the Commissioner's determinations in a Notice of Deficiency are presumed correct and the taxpayer bears the burden of proving those determinations erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). In unreported income cases such as this, Respondent must establish some evidentiary foundation connecting the taxpayer with the income producing activity or demonstrating that the taxpayer actually received unreported income. See Weimerskirch v. Commissioner, 596 F.2d 358, 361 through 362 (9th Cir. 1979), reversing 67 T.C. 679 (1977); see also, Edwards v. Commissioner, 680 F.2d 1268, 1270 through 1271 (9th Cir. 1982), holding that the Commissioner's assertion of a deficiency is presumptively correct once some substantive evidence is introduced demonstrating that the taxpayer received unreported income.

The requisite evidentiary foundation is minimal and need not include direct evidence. See Banister v. Commissioner, T.C. Memo. 2008-201, aff'd, 418 F. App'x 637 (9th Cir. 2011). If Respondent introduces some evidence that the taxpayer received unreported income, the burden shifts to the taxpayer who must establish by a preponderance of the evidence that the deficiency was arbitrary or erroneous. See Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), aff'g T.C. Memo. 1997-97.

Petitioners stipulated to having received $19,612 of gambling winnings for taxable year 2019, which is $4,000 more than proposed in the Notice of Deficiency based on documentation they provided to Respondent. The issue in this case is not whether Petitioners received the gambling winnings. Instead, the issue is whether they may deduct their gambling losses on Schedule C, as would professional gamblers, or must deduct losses as an itemized deduction on Schedule A, as would casual gamblers.

Deductions are a matter of legislative grace, and the taxpayer generally bears the burden of proving entitlement to any deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). A taxpayer claiming a deduction on Federal income tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that expense to which the deduction relates has been paid or incurred. Section 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976); Menneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965); section 1.6001-1(a) income tax regs.

Generally, deductions are allowed only for activities that are conducted with the motive of making a profit. See section 183. Gambling activity may be considered a trade or a business if it is conducted with continuity, regularity, and for the primary purpose of earning a profit. Commissioner v. Groetzinger, 480 U.S. 23, 35, 107 S.Ct. 980, 987, 994 L.Ed 225 (1987).

A nine-factor test is used to determine whether gambling activity was for the primary purpose of earning a profit. See Treasury Reg. section 1.183-2(b). The factors include: (1) whether the activity was carried out in a business-like manner. Example, the taxpayer kept records; (2) the taxpayer's expertise; (3) the time and effort the taxpayer spent gambling; (4) the expectation that assets used in the activity may increase in value; (5) the taxpayer's success in nongambling activity; (6) the taxpayer's history of winnings and losses; (7) the amount of the occasional profits from gambling; (8) the taxpayer's financial status; and (9) the presence of elements of personal pleasure or recreation.

It should be noted that the regulation further provides that no one factor is determinative in making this determination. In addition, it is not intended that the factors described are to be taken into account in making the determination, or that a determination is to be made on the basis that the number of factors, whether or not listed in this paragraph, indicating a lack of profit objective, exceeds the number of factors indicating a profit objective or vice versa. Id.

We find that although Petitioners are serious about gambling, they were not professional gamblers. Petitioners are both sophisticated in that they are an accountant and a previous business owner. Petitioner wife acknowledged that as an accountant, she would advise a taxpayer operating a business to keep records. Petitioner husband acknowledged that for his appliance repair business, he did keep records.

Petitioners did not personally keep track of their gambling activity in 2019 choosing, instead, to rely on third-party information from casinos, even though they further acknowledge that the casinos record may be incomplete, as only jackpot winnings, not smaller winnings, are reported. Petitioners also did not keep a separate bank account to manage gambling winnings and expenses, but used their personal account, which is further evidence of the casual nature of their gambling.

Further, in previous years, Petitioners reported gambling losses on Schedule A as would a casual gambler, as they began to do for taxable year 2019. According to Petitioners, they did not know then that their gambling activity could be reported as business activity. But as evidenced by the Schedule C Ms. Mercier prepared for Mr. Mercier's appliance repair business, Petitioners were aware that business activities were to be reported on Schedule C.

Nevertheless, Petitioners did not attempt to offset their gambling winnings with their gambling losses on Schedule C until after receiving Respondent's Notice of Deficiency for taxable year 2019.

Accordingly, the Notice of Deficiency in this case is sustained. This concludes the Court's oral findings of fact and opinion in this case. A decision will be entered under Rule 155.

(Whereupon, at 9:57 a.m., the above-entitled matter was concluded.)