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 selfemployment. 

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 W2G 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.