T.C. Memo. 2010-48

UNITED STATES TAX COURT

JOHN F. & ESTHER K. CHOW, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18774-08. Filed March 18, 2010.

John F. and Esther K. Chow, pro sese.

Sarah A. Herson, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: Respondent determined deficiencies of

$9,580.40 and $47,944.76 in petitioners’ Federal income taxes for

2004 and 2005, respectively. For 2004, respondent determined an

addition to tax of $2,089.35 under section 6651(a)(1) and an

amount to be determined under section 6651(a)(2). Respondent

also determined accuracy-related penalties of $1,916 and
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$7,493.59 under section 6662 for 2004 and 2005, respectively. 

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.

After concessions, the issues for decision are whether

petitioners are entitled to reduce rental income and capital

gains by amounts not conceded by respondent; whether petitioner

Esther K. Chow was a professional gambler, entitling her to

deduct fully her gambling losses against gambling income on

Schedule C, Profit or Loss From Business, as business losses or

whether those losses are deductible only on Schedule A, Itemized

Deductions, as itemized deductions; whether petitioners are

liable for additions to tax under section 6651(a) for late filing

of their 2004 Federal income tax return; and whether petitioners

are liable for penalties under section 6662(a) with respect to

their 2004 and 2005 returns.

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 San Gabriel, California, at the time that

they filed their petition.

Petitioner John F. Chow (Dr. Chow) is a retired physician. 

Petitioner Esther K. Chow (petitioner) studied as a medical

laboratory technician. From 1974 through 1994, petitioners
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operated a medical practice. They built a medical office and

pharmacy on property on Del Mar Avenue in Rosemead, California. 

In 2004 and 2005, petitioners’ income consisted of rental income,

gains from sales of real property, and Social Security benefits.

Petitioners’ rental property included residential property

on Lilac Place in Los Angeles and, before its sale in 2005, the

Del Mar Avenue property. They incurred various expenses,

including legal expenses, relating to the rental property. 

During 2005, they incurred expenses of $25 paid to the Department

of Water and Power and $70.20 paid to the Department of Building

and Safety with respect to the Lilac Place property.

The Del Mar Avenue property was sold in 2005 for $970,000. 

At that time, petitioners paid $51,760 to secure release of a

lien recorded against the property by their former attorney,

Kenneth Hopp. Hopp had represented petitioners in relation to a

civil rights action against San Bernardino County, California. 

The lien was filed after Hopp secured a judgment against

petitioners.

Also at the time the Del Mar Avenue property was sold,

petitioners paid $25,000 to Dr. Chow’s sister and her husband in

repayment of a loan. 

About 1987, petitioner began gambling. After Dr. Chow

underwent surgery in 2003, petitioner began playing slot machines

extensively and exclusively at the Morongo Casino in Cabazon,
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California. She gambled on 124 days in 2004 and 176 days in

2005. 

In 2004, petitioner won 15 jackpots of $2,000 or more, and

in 2005 she won 98 jackpots of $2,000 or more. In 2005, she won

two $10,000 jackpots; two $15,000 jackpots; and single jackpots

of $13,500, $13,530, $18,750, $19,200, $25,000, and $32,000. In

all, she had gambling winnings of $283,072 and gambling losses of

$339,832 in 2004. She had gambling winnings of $1,079,292 and

gambling losses of $1,232,005 in 2005. If the winnings and

losses are calculated on a net basis for each slot machine

session in which she played over a period of time and did not

take more than a 3-hour break, she had total gambling income of

$36,216 and losses of $93,862 in 2004 and income of $231,836 and

losses of $383,507 in 2005.

Petitioners did not use a professional preparer to prepare

their Federal income tax returns. The first Form 1040, U.S.

Individual Income Tax Return, for 2004 received by the Internal

Revenue Service (IRS) was signed on October 31, 2006, and

received on November 1, 2006. It was labeled “Amended Return” 

but was not on a Form 1040X, Amended U.S. Individual Income Tax

Return, prescribed for amended returns. On that return,

petitioners deducted on Schedule A $60,350 as gambling losses,

which they included in the amount of itemized deductions used to

offset their adjusted gross income. They reported no taxable
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income and no tax due. Copies of 31 Forms W-2G, Certain Gambling

Winnings, were attached to the return. 

On January 22, 2007, petitioners signed and sent to the IRS

a Form 1040X for 2004. They again included $60,350 as gambling

losses on Schedule A and deducted them against adjusted gross

income. They reported no taxable income and no tax due.

On February 5, 2007, petitioners signed and sent to the IRS

another Form 1040X for 2004. On this Form 1040X, petitioner was

identified as a “professional gambler since 1987”. On a Schedule

C, petitioners reported gambling income of $60,360 (the amounts

shown on the attached copies of Forms W-2G) and deducted “cash

capital used” of $88,650, showing a Schedule C loss of $28,540. 

Although the manner of computation is unclear from this Form

1040X, the reported adjusted gross income was reduced by amounts

that included the claimed gambling losses. Petitioners reported

no taxable income and no tax due.

Petitioners’ Form 1040 for 2005 was signed by petitioners

and sent to the IRS on April 17, 2006. Both petitioners were

shown as “retired”. On that return, they reported a $607,133

gain from sale of the Del Mar Avenue property. They deducted

from adjusted gross income $334,217.90 as gambling losses based

on a detailed “Gambling Statement For 2005” attached to the

return, but they did not include a Schedule C. Among the

deductions claimed on Schedule A as miscellaneous deductions were
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“loans reimbursements ($25,000 + $53,000)” totaling $78,000. 

Again petitioners reported no taxable income and no tax due.

On August 28, 2006, petitioners signed and sent to the IRS a

Form 1040 marked “Amended Return 2005”. Their occupations were

shown as “retired”. On Schedule A, petitioners claimed as

miscellaneous deductions “GAMBLING LOSSES: Capital used:

$1,054,170 WG forms: $710,543” and included $710,543 in the

total itemized deductions claimed. They also deducted $710,543

from adjusted gross income on the first page of the Form 1040 and

reported no taxable income and no tax due.

On February 5, 2007, petitioners signed and sent to the IRS

a Form 1040X for 2005. On this Form 1040X, petitioner was shown

as a “professional gambler since 1987 to present”. A Schedule C

was attached and reported a loss of $347,591, which was claimed

to reduce adjusted gross income. Petitioners reported $35,764 as

taxable income and $4,636 tax due.

Sometime before the Forms 1040X were submitted to the IRS in

February 2007, petitioner met with an IRS representative

concerning the proper method of reporting petitioners’ income and

losses. The use of Schedule C was commenced after discussions

with the IRS representative. Sometime before August 3, 2008,

(the date of the statutory notice), petitioners’ returns were

examined by the IRS. During the course of the examination, bank

records, including canceled checks, were delivered to the
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examining agent. The records were subsequently misplaced and

were not available by the time of trial in July 2009.

OPINION

Unfortunately, the parties have expended much effort during

the process of this case disputing matters that have no effect on

the decision to be entered. Petitioners have from the beginning

and through their posttrial briefs chosen to make spurious

attacks on respondent’s agents and counsel and to file motions

and requests for relief that have no reasonable basis in fact or

in law. Their claims range from deliberate destruction and

falsification of records to “elder abuse”. We will not detail or

address those claims in this opinion because they have no

colorable merit and do not affect the resolution of issues

properly before the Court.

Notwithstanding the difficulties created by petitioners’

approach to this case, the parties were able to settle

substantial issues and to enter into stipulations of many of the

controlling facts. Respondent has conceded charitable

contribution deductions and some rental expenses that had been

disallowed in the statutory notice. Other claimed rental

expenses and basis adjustments relating to petitioners’ sale of

the Del Mar Avenue property remain in dispute as personal

expenses or are unsubstantiated. The most significant issue is

classification of petitioner’s gambling losses as business losses
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of a professional gambler or losses in an activity not engaged in

for profit. If the former, the losses may fully offset the gains

reportable on Schedule C. If the losses are only reportable as

itemized deductions on Schedule A, the itemized deductions (other

than the gambling losses) are subject to reduction pursuant to

section 68. The addition to tax for late filing of petitioners’

2004 return and the accuracy-related penalty for both years also

remain in dispute.

As a general rule, taxpayers have the burden of proving that

they are entitled to the deductions that they claim. Rule

142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934); Rockwell v. Commissioner, 512 F.2d 882, 886 (9th Cir.

1975), affg. T.C. Memo. 1972-133. Under section 7491(a), the

burden of proof shifts to respondent if petitioners complied with

requirements to substantiate an item, maintained all required

records, and presented credible evidence as to a factual issue.

Rental Expenses

Petitioners claim expenses in 2004 and 2005 relating to

their Lilac Place rental property beyond the amounts allowed in

the statutory notice or conceded by respondent. The disputed

items for 2004 relate to lawsuits involving petitioners, a real

estate broker, and others. Although petitioners have presented

partial documents from several lawsuits, they have not presented

credible evidence or corroborating evidence that they paid in
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2004 the amounts that they claim for that year. They are not

entitled to any additional rental deductions for 2004.

For 2005, petitioners presented copies of two money orders

for $25 and $70.20 dated in 2005. The money orders appear to be

for public services relating to the Lilac Place property. 

Petitioners are entitled to an additional deduction of $95.20 on

Schedule E, Supplemental Income and Loss. 

Del Mar Avenue Property Adjustments

Petitioners seek to reduce their taxable gain on the sale of

the Del Mar Avenue property in 2005 by the amounts used to pay

off a judgment obtained by their former attorney and to pay back

a loan from relatives. Petitioners originally reported these

items as miscellaneous expenses on Schedule A. Respondent

contends that the origin of the judgment, i.e., attorney’s fees

incurred in civil rights litigation, was personal. 

Petitioners contend that removal of the judgment lien was

necessary to “clear title” to the Del Mar Avenue property and

that Hopp’s fees were deductible attorney’s fees. However,

respondent is correct that paying a judgment having a personal

origin does not increase petitioners’ basis in the property sold

and that attorney’s fees incurred in personal litigation are not

otherwise deductible. See generally United States v. Gilmore,

372 U.S. 39, 49 (1963) (holding that the origin and character of

the claim with respect to which the expense was incurred, not its
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consequence to the taxpayer, is controlling in the determination

of whether the expense is business or personal). The litigation

with petitioners’ former attorney had no relationship to

operating, acquiring, or defending title to the Del Mar Avenue

property. Payment of the judgment obtained by the attorney was a

nondeductible personal expense under section 262 and did not

increase petitioners’ basis in the Del Mar Avenue property under

section 1016. See Heger v. Commissioner, T.C. Memo. 1993-408,

affd. without published opinion 35 F.3d 561 (5th Cir. 1994).

Petitioners claim that they borrowed $25,000 from relatives

and repaid the loan at the time the Del Mar Avenue property was

sold. On their original Federal income tax return for 2005, they

deducted this amount as “loans reimbursements” on Schedule A. It

was not separately itemized on the schedules attached to the

amended returns for 2005. Petitioners have not presented

credible evidence that $25,000 was spent on amounts properly

added to the basis of the property. They have failed to satisfy

their burden of proof or to shift the burden of proof to

respondent with respect to this item.

Petitioner’s Gambling Activities

The parties have stipulated petitioner’s winnings and losses

as reflected in the records maintained by the Morongo Casino. 

Respondent has calculated the losses using a “session-based

analysis”, i.e., by netting wins and losses per slot machine
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session, as described in LaPlante v. Commissioner, T.C. Memo.

2009-226. Regardless of the methodology, petitioner’s losses

exceeded her winnings in each year. She is not, however,

entitled to deduct those losses against other income, even if we

conclude that she is a professional gambler. See sec. 165(d);

Boyd v. United States, 762 F.2d 1369, 1372-1373 (9th Cir. 1985);

Kochevar v. Commissioner, T.C. Memo. 1995-607. 

Petitioners rely on Commissioner v. Groetzinger, 480 U.S. 23

(1987), as similar to petitioner’s situation and the standard by

which she should be determined to be a professional gambler. In

Commissioner v. Groetzinger, supra at 35, the Supreme Court held

that “if one’s gambling activity is pursued full time, in good

faith, and with regularity, to the production of income for a

livelihood, and is not a mere hobby, it is a trade or business”. 

The Supreme Court did not hold, as petitioners contend, that all

gamblers are in the trade or business of gambling and that

classifying gamblers is improper discrimination. Respondent 

asserts that the facts of Groetzinger are not similar to those of

this case.

Consistent with other cases using the Groetzinger standard,

the parties analyze petitioner’s gambling activities with regard

to regulations promulgated under section 183 to identify

activities not engaged in for profit. See, e.g., Hastings v.
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Commissioner, T.C. Memo. 2009-69; Merkin v. Commissioner, T.C.

Memo. 2008-146.

Whether the taxpayer engages in an activity with the primary

purpose of making a profit is a question of fact to be resolved

based on all the facts and circumstances in a particular case. 

Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(a),

Income Tax Regs. While the test for whether a taxpayer engaged

in an activity with the intention of making a profit takes into

account the subjective intention of the taxpayer, greater weight

is given to the objective facts than is given to the taxpayer’s

mere statement of intent. See sec. 1.183-2(a), Income Tax Regs.

Section 1.183-2(b), Income Tax Regs., provides a

nonexclusive list of relevant factors to be weighed when

considering whether a taxpayer is engaged in an activity for

profit. The relevant factors are: (1) The manner in which the

taxpayer carried on the activity; (2) the expertise of the

taxpayer or his advisers; (3) the time and effort expended by the

taxpayer in carrying on the activity; (4) the expectation that

the assets used in the activity may appreciate in value; (5) the

success of the taxpayer in carrying on other activities for

profit; (6) the taxpayer’s history of income or losses with

respect to the activity; (7) the amount of occasional profits, if

any, that are earned from the activity; (8) the financial status
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of the taxpayer; and (9) whether elements of personal pleasure or

recreation are involved in the activity. No one factor is

determinative of whether an activity is engaged in for profit. 

Brannen v. Commissioner, 722 F.2d 695, 704 (11th Cir. 1984),

affg. 78 T.C. 471 (1982); Golanty v. Commissioner, supra at 426;

sec. 1.183-2(b), Income Tax Regs. Some of the factors do not

apply or are neutral here. 

Respondent asserts that petitioner had no business plan, did

not seek or follow expert advice, and did not adhere to her

alleged pattern of strategic times to gamble. Thus respondent

argues that petitioner did not carry on her activities in a

businesslike manner and did not use the skills involved in her

prior successful activity of managing Dr. Chow’s medical

practice. 

Petitioner testified that she had “on the job” training as a

professional gambler beginning in 1987; that she read a couple of

books about slot machine strategy; and that she had reasons for

gambling on particular days and during particular hours. The

nature of gambling or other high-risk activities makes comparison

to businesslike conduct of more traditional businesses difficult. 

There seem to be no recognizable standards for a businesslike

approach to slot machine gambling. Therefore these factors are

not conclusive. 
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The record contains information about petitioner’s history

of profits and losses only for the 2 years in issue. Petitioner

received substantial jackpots, but she continued to play until

the overall results, whether on a session-by-session basis or an

annual basis, were substantial losses. Her gambling and her

losses increased from 2004 to 2005, when the substantial proceeds

of the sale of the Del Mar Avenue property permitted her to

increase the “capital” she claims to have invested in the

gambling activity. Petitioners, however, were retired, and the

record suggests that sale of the Del Mar Avenue property

eliminated a substantial source of rental income. Petitioners’

other income would not permit petitioner to sustain such losses

indefinitely in the future. Petitioners’ situation is

distinguishable from cases respondent cites in which other

sources of income allowed a taxpayer to pursue an activity as a

hobby, without expectation of profit.

The parties dispute whether petitioner maintained

appropriate records of her gambling activities. Petitioners

claim that respondent’s agents are responsible for loss of

certain records and that, therefore, respondent cannot show that

they did not maintain adequate records. Petitioner did not

maintain a logbook, but the casino records of her activities

allowed the parties to reconstruct the stipulated amounts of

winnings and losses. Cf. Estate of Espinoza v. Commissioner,
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T.C. Memo. 2005-239. The schedules and Forms W-2G attached to

petitioners’ returns were detailed as to dates and amounts. 

While petitioners’ calculations of deductible losses were

erroneous, they appear to be attributable to a misunderstanding

of the law rather than to insufficient records.

Respondent acknowledges that petitioner engaged in gambling

during 2004 and 2005 with continuity and regularity. It is

unclear from her testimony whether she derived pleasure from it,

but that factor is generally neutral. See, e.g., Strickland v.

Commissioner, T.C. Memo. 2000-309. Petitioner strongly disputes

a suggestion by respondent’s agent that her gambling was

“compulsive” or “addictive”. Her activities appear similar to

those in other cases not involving professional gamblers, but

there is no evidence from either party sufficient to draw a

conclusion about psychological factors. Cf. Gagliardi v.

Commissioner, T.C. Memo. 2008-10. 

Bearing in mind that the expectation of profit is a matter

of subjective intent and need not be reasonable, see sec. 1.183-

2(a), Income Tax Regs., we believe that the preponderance of the

evidence favors petitioner’s claim that during 2004 and 2005 she

pursued gambling with a profit objective. This is a close case,

and petitioners would be prudent to abandon gambling as a

potential source of income. We conclude, however, that

petitioner was a professional gambler during 2004 and 2005 and
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may deduct her gambling losses to the extent of her gambling

winnings on Schedule C. Of course, she may not deduct any excess

losses from petitioners’ adjusted gross income from other

sources.

Late Filing of 2004 Return

Section 6651(a)(1) provides that, in the case of failure to

file a tax return on the date prescribed for filing (including

any extension of time for filing), there shall be added to the

tax required to be shown on the return an amount equal to 5

percent of that tax for each month or fraction thereof that the

failure to file continues, not exceeding 25 percent in the

aggregate, unless it is shown that the failure to file timely is

due to reasonable cause and not due to willful neglect. Under

section 7491(c), respondent has the burden of production and has

produced records showing that petitioners’ 2004 return was not

received by the IRS until November 2006.

Petitioners claim that they filed a Form 1040 for 2004 on

April 10, 2005, and that they always filed their tax returns on

time. The document that petitioners claim was their timely Form

1040 dated April 10, 2005, has attached Schedules C and E that

are identical to those attached to the Form 1040X sent to the IRS

in February 2007; they are not attached to the purported amended

return filed in November 2006. Petitioners claim that the
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attachments were erroneous due to rushing to include the document

as an exhibit to the stipulation.

After reviewing the entire history of petitioners’ filings

and shifting positions, we cannot accept the testimony concerning

a timely filed return for 2004. Because petitioners deny that

the return was late, they have not suggested any reasonable

cause. Therefore, petitioners are liable for an addition to tax

under section 6651(a) on the recomputed deficiency for that year.

Section 6662 Accuracy-Related Penalty

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

make a reasonable attempt to comply with the provisions of the

Internal Revenue 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. 

On each version of their Forms 1040, petitioners attempted

to deduct wagering losses against other income, directly contrary

to section 165(d). That issue alone justifies application of the
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penalty to the final recomputed deficiency for each year. 

Petitioners also claimed deductions that were contrary to section

262 or were not substantiated. They spoke to IRS representatives

but obviously rejected or misinterpreted the advice they

received. There is no indication that they ever sought

independent professional tax return preparation advice or

otherwise exercised reasonable diligence to determine the

correctness of their returns. As in Umstead v. Commissioner,

T.C. Memo. 1982-573, petitioners were negligent in displaying an

unwillingness to understand any explanation of the tax laws other

than their own misguided notions. Their tendency to use selfhelp caused problems with their returns and with their conduct of

this case, and they are urged to consult competent tax

professionals before filing their returns or engaging in

litigation in this Court in the future.

Petitioners also claim that there are no penalties due

because they owe no tax, but they are wrong about that. The

section 6662 penalty will apply to the recomputed deficiency for

each year. 

We have considered the other arguments of the parties. They

are irrelevant, moot, or without merit. To reflect concessions

and our conclusions stated above,

Decision will be entered

under Rule 155.