# PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.T.C. Sum m ary Opi ni on 20 14 -7 8

UNITED STAT ES TAX COURT
DOUGLAS ZIERDT, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 1 43 37 -1 2S , 25 41 9- 12 S. Fi le d Au gu st18 , 20 14 .
Dou gl as Zierd t, p ro se. Co ry H. Ellen so n, fo r res po nd en t.

SUMM ARY OPINION GUY, Spec ia l Tri al Ju dg e: Thes e co ns ol id at edcas es were h eardpu rs ua ntto th e p ro vi si on s o f se ct io n 7 46 3 o f th e In te rn al Rev enue Co de ineffe ctwhen th e pe ti ti on s wer e fi le d. Pur su an t t o s ect io n 7 46 3( b) , th e d eci si on s t o b e en te redare 1
The se cas es were co ns ol id at edforpu rp os es of t ria l, b rie fin g, an d o pi ni on . 1 (co nt in ue d...)-2
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no t re vi ewab le by any

ot he r co urt, an d t hi s o pi ni onsh al l n otbe tre at edas pr eced en t fo r any

ot he r cas e. Res po nd en t d et erm in edde fic ie nc ie s i n p et it io ne r’s Fed eral in co m e ta x a nd accu racy-rela te d p en al ti es un de r se ct io n 6 66 2( a) fo r th e y ears an d i n the am ou nt s as fol lo ws: Pena lty

Year Defi ci en cy se c. 66 62 (a) 20 09 $7 ,68 1 $1 ,53 6 20 10 17 ,72 6 3,54 5 Pet it io ne r fi le d t im el y

pe ti ti on s fo r red et erm in at io n wi th th e Co urt p ur su an t t o se ct io n 6 21 3( a). At the ti m e th e p et it io ns were fi le d, p et it io ne r res id edin Cal ifo rn ia . The is su es forde ci si on are wh ethe r pe ti ti on er i s (1 ) en ti tl edto cert ai n de du ct io ns cla im edon Sch edul es C, Pro fitor Lo ss Fro m Bu si ne ss , forex pe ns es rel at edto hi s s to ckbr ok er an d g am bl in g a ct iv it ie s dur in g 2 00 9 a nd20 10 (y ears in is su e) an d (2 ) li ab le foraccu racy-rela te d p en al ti es un de r se ct io n 6 66 2( a).
(...co nt inue d) 1 Unl es s o th erwi se in di cat ed , sec ti on refer en ces are t o t he Int ern al Rev enue Co de (Co de ), as am en de d a ndineffe ctfor20 09 an d 2 01 0, an d R ul e ref eren ces are t o t he Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. Mo ne tary am ou nt s ar e ro un de d t o t he ne ares t d ol lar.-3
- Bac kg ro un d So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io ns of fact s, the supp le m en ta l s ti pu la ti on of f act s, an d t he acco m

pa nyin g e xh ib it s ar e in co rp or at edhe rei n b y

th is refe ren ce. I. Sto ckbr ok er Act iv ity Dur in g t he y ears inis su e p et it io ne r worke d p artti m e as a st oc kb ro ke r fo r W es te rnInt ern at io na l Se cu rit ie s. Pet it io ne r te st ifi edth athe st art edhi s wo rk da y s by purch as in g s ev eral ne wsp ap ers in cl ud in g In ve st or ’s Bus in es s Dai ly, th e Wall StreetJo urna l, Ba rro n’s, the New YorkTim es , th e Fi na nc ia l Ti m es , th e Los Ang el es Bu si ne ss Jo urna l, the Los Ang el es Tim es , th e Wash in gt on Po st , andth e SanFran ci sc o C hr on ic le . He furt he r te st ifi edth athe sp en t ap pr ox im at el y $3 ,30 2 on th es e p ub li cat io ns du rin g e ach of t he y ears inis su e, he pa idcas h fo r th e ne wsp ap ers , andhe di d n otob ta in rece ip ts forhi s p ur ch as es . II. Gam bl in g Act iv ity A. W ag eri ng Pet it io ne r co ns id ers hi m se lf apro fes si on al ga m bl er. He reg ul arl y

sp en ds th e aft ern oo n andev en in g h ou rs wage rin g o n h or se race s attra ck s i n s ou th ern Cal ifo rn ia , in cl ud in g S an taAni ta , Del Ma r, Hol lywoodPark , andLos Alam it os . He al so pl aces be ts on ho rs e rac es an d o th er s po rts ev en ts inCal ifo rn iaan d-4
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el se whe re i n t he Uni te d S ta te s re m ot el y vi a te le ph on e an d Web s it es su chas TVG an d Xp res sb et . Pet it io ne r as se rts th athe ha s re adbo ok s an d a tt en de d s em in ars to im pr ov e hi s g am bl in g s ki ll s, b uthe di d n otid en ti fy a sp eci fic bo okth athe read , andhe fai le d t o p ro du ce an y

reco rd s t o s ho w th athe att en de d apa rti cu lar se m in ar. Pet it io ne r so m et im es att em pt s t o re cru itne w cli en ts for hi s s to ck br ok er act iv ity whi le at t he race tra ck . In thi s re ga rd , he d is tri bu te s “ The Zierd t Let te r”-- a su m m ary of hi s tho ug ht s o n t he st oc k m ark et --t o p ot en ti al cli en ts , andhe so m et im es ho ld s b us in es s m eet in gs with e xi st in g c li en ts . Pet it io ne r sp en ds ap pr ox im at el y 45 ho ur s p er weekgam

bl in g. He adm it te dl y

de riv es pe rs on al en

joym en t fr om

th e act iv ity . B. Gam bl in g Lo ss es Pet it io ne r di d n otm ai nt ai n c om pl et e rec or ds of t he gro ss am ount s tha t h e wag ereddu rin g t he y ears inis su e, bu t h e ackno wled ge s tha t h e h adne t g am bl in g lo ss es (be fo re t ak in g i nt o a cco un t h is ot he r ga m bl in g- rel at edex pe ns es ) fo r eac h o f th e ta xabl e y ears 20 06 to 20 10 . C. Gam bl in g Ex pe ns es Inad di ti on to th e am ount s h e lo ston wage rs , pet it io ne r in cu rredga m bl in grel at edexpe ns es su chas t ran sp orta ti on co st s t o a ndfro m race tra ck s, fo odan d-5 -

be ve rag e expe ns es , parki ng an d e nt ry fees , andth e co stof s o- cal le d t ip sh eet s. Pet it io ne r pa idcas h fo r m os t o f th e it em s h e p ur ch as edwhi le ga m bl in g, an d h e d id no t o bt ai n re cei pt s. D. Reco rd s Pet it io ne r m ai nt ai ne d wri tt enlo gs of h is ga m bl in g- rel at edex pe ns es forth e y ears inis su e. The l og s g en eral ly lis t the da te , th e d is tanc e inm il es th athe dro ve to an d fr om

race tra ck s, the it em s tha t h e p ur ch as edwhi le th ere, an d t he co stof th os e it em s. Th e it em s l is te d i n t he lo gs in cl ud e ti p s he et s, g as ol in e p ur ch as es , pa rk in g fe es , raci ng form s, p ro gr am s, an d a dm is si on or e nt ry ti ck et s. Pet it io ne r’s da il y

ga m bl in g e xp en se s ra ng edfro m ap pr ox im at el y

$6 0 t o $1 00 an d $ 16 0 t o $ 20 0 p er d ay du rin g 2 00 9 a nd20 10 , res pe ct iv el y . Peti ti on er’s lo g fo r 20 10 in di cat es th athe no rm al ly spe nt$1 05 pe r da y on foo d a nd en te rta in m en t atth e rac etrack . 2 III. Cel lu lar Ph on e Rec or ds Pet it io ne r pa id$5 04 an d $ 49 1 fo r cel lu lar ph on e se rv ic e fo r 20 09 an d 2 01 0, res pe ct iv el y . He m ai nt ai ne d areco rdof h is cel lu lar ph on e cal ls for 20 09 di st in gu is hi ng cal ls rel at edto hi s s to ckbr ok er ac ti vi ty (oft enid en ti fy in g c li en ts by na m e) fro m

cal ls rel at edto hi s g am

bl in g a ct iv ity . Pet it io ne r’s lo g fo r 20 09 do es no t i nc lu de foo d a nden te rta in m en t ex pe ns es . 2-6
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Pet it io ne r’s reco rd s o f hi s ce ll ul ar p ho ne us e dur in g 2 00 9 i nd ic at e th at ap pr ox im at el y

on e-h al f of

hi s ca ll s tha t year rel at edto hi s s to ckbr ok er ac ti vi ty and th e rem ai ni ng cal ls rel at edto hi s g am bl in g a ct iv ity . Peti ti on er t es ti fie d tha t h e rare ly use d h is cel lu lar ph on e fo r pe rs on al cal ls du rin g 2 00 9. Pet it io ne r di d n otm ai nt ai n d et ai le d re co rd s re la te d t o h is cel lu lar ph on e u se in 20 10 . He tes ti fie d t ha t dur in g 2 01 0 abo ut30 % of h is cel lu lar ph on e cal ls were at tri bu tabl e to hi s s to ckbr ok er ac ti vi ty, 50 % of h is cal ls rel at edto hi s g am bl in g act iv ity , and20 % of h is cal ls were p ers on al . IV. Tax Re tu rn s fo r 20 09 an d 2 01 0 Pet it io ne r ti m el y

fil edFo rm s 1 04 0, U.S. In di vi du al Inc om e Tax Return, fo r 20 09 an d 2 01 0. Fo r bo th y ears , pet it io ne r rep orte d “ ga m in g i nc om e” as “ Oth er In co m e” o n l in e 2 1 o f hi s Fo rm s 1 04 0 a nd“ ga min g l os se s” inam ou nt s equa l t o h is ga m in g i nc om e und er “ Oth er Mi sc el lane ou s Deduc ti on s” on Sch edul es A, Ite m iz edDedu ct io ns . The p art ie s ag ree t ha t p et it io ne r ha d g am bl in g wi nn in gs of $7 ,78 0 an d $ 41 ,17 3 dur in g 2 00 9 a nd20 10 , res pe ct iv el y .

3 Pet it io ne r at ta ch edSch edul es C to bo th returns id en ti fy in g t he bu si ne ss act iv ity as “ St oc kb ro ke r”. Pet it io ne r di d n otfil e se pa rat e Sch edul es C fo r hi s Altho ug h t hi s amoun t i s $ 64 7 m or e th anpe ti ti on er re po rte d o n h is tax 3 return fo r 20 09 , th e p art ie s ag ree t ha t h e li ke wis e h adad di ti on al ga m bl in g l os se s of $6 47 th aty ear.-7 -

ga m bl in g a ct iv ity

bu t ra th er m is labe le d a ndco m m in gl edhi s g am

bl in g a nd st oc kb ro ke r ex pe ns es . A. Sche du le C fo r 20 09 Pet it io ne r rep orte d g ro ss rece ip ts of $ 55 ,38 2 o n S ch edul e C i n re sp ectof h is st oc kb ro ke r act iv ity

for20 09 . He als o re po rte d t ot al ex pe ns es of $ 52 ,73 5 in cl ud in g, i n re le va ntpa rt, $ 8,2 87 forrep ai rs an d m ai nt en an ce, $ 19 ,12 8 fo r of fic e ex pe ns es , and$5 ,54 8 fo r le ga l an d p ro fes si on al servi ces . Peti ti on er ex pl ai ne d a t tri al th atm os t o f th e rep ai rs an d m ai nt en an ce ex pe ns e rep res en te d h is ga m bl in g ex pe ns es at Ho ll ywoo d P ark , th e $ 19 ,12 8 a m ou ntid en ti fie d a s o ffi ce ex pe ns es rep res en te d t he to ta l o f hi s ce ll ul ar p ho ne ch arg es an d g am bl in g e xp en se s atSan ta Ani taan d Del Mar, an d the $5 ,54 8 e xp en se id en ti fie d a s l eg al an d p ro fes si on al se rv ic es rep res en te d h is ga m bl in g e xp en se s atLos Alam it os . B. Sch edul e C fo r 20 10 Pet it io ne r rep orte d g ro ss rece ip ts of $ 65 ,16 0 o n S ch edul e C i n re sp ectof h is st oc kb ro ke r act iv ity

for20 10 . He als o re po rte d t ot al ex pe ns es of $ 62 ,01 3, in cl ud in g $ 6,1 20 forin su ran ce (o th er tha n h eal th ), $3 ,56 8 fo r co m m is si on s an d fees , $9 ,32 8 fo r adve rti si ng , $4 ,82 7 fo r ut il it ie s, $ 9,5 63 forrep ai rs an d
m ai nt en an ce, $ 94 6 fo r m eal s an d e nt ert ai nm en t, an d $ 22 ,87 1 fo r of fic e ex pe ns es . Pet it io ne r ex pl ai ne d a t tria l tha t m os t o f th e ex pe ns es li st edab ov e rep res en te d t he-8
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to ta l o f hi s ce ll ul ar p ho ne ch arg es an d g am bl in g e xp en se s atva rio us race tra ck s du rin g 2 01 0. V. Noti ces of De fic ie nc y A. 20 09 Res po nd en t i ss ue d ano ti ce o f de fic ie nc y to pe ti ti on er fo r 20 09 di sa ll owi ng , fo r la ck of s ub st an ti at io n, $ 7,2 95 of t he de du ct io n h e cl ai m edonSch edul e C fo r rep ai rs an d m ai nt en an ce ex pe ns es an d t he ful l am ou nt s o f th e d educ ti on s h e cl ai m edforoff

ic e ex pe ns es an d l eg al an d p ro fes si on al servi ces . B. 20 10 Res po nd en t i ss ue d ano ti ce o f de fic ie nc y to pe ti ti on er fo r 20 10 di sa ll owi ng , fo r la ck of s ub st an ti at io n, $ 22 ,62 6 o f th e d educ ti on he cla im edon Sch edul e C fo r of fic e expe ns es an d t he ful l am ou nt s o f th e d educ ti on s h e cl ai m edforin su ran ce, co m m is si on s an d fe es , adv ert is in g, u ti li ti es , andrep ai rs an d m ai nt en an ce. As 4 pr ev io us ly m en ti on ed , res po nd en t al so de te rm in edth atpe ti ti on er i s l iabl e fo r accu racy-rela te d p en al ti es un de r se ct io n 6 66 2( a) fo r th e y ears inis su e.

Res po nd en t co nc ed es th atpe ti ti on er i s en ti tl edto Sch edul e C d educ ti on s 4 fo r 20 10 of $ 94 6 a nd$1 ,42 1 fo r m eal s an d e nt ert ai nm en t ex pe ns es an d t rav el ex pe ns es , res pe ct iv el y .-9
- Dis cu ss io n The Co m m is si on er’s d et erm in at io n o f a t axpa y er’s l iabi li ty in a n ot ic e o f de fic ie nc y

no rm al ly is p res um edco rrec t, an d the tax pa y er b ears th e b ur de n o f pr ov in g t ha t the de te rm in at io n i s i nc orrect . Rul e 1 42 (a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Pet it io ne r do es no t co nt en d t ha t the bu rd enof p ro of sh ift s to res po nd en t u nd er s ect io n 7 49 1( a). Inan y ev en t, b ecau se we de ci de th e is su es in di sp ut e o n t he pre po nd eran ce o f th e ev id en ce, the all oc at io n o f th e b ur de n o f pr oo f is im m at eri al . See Knud se n v . Comm is si on er, 1 31 T.C. 18 5, 1 89 (20 08 ). Deduc ti on s ar e a m at te r of leg is la ti ve gra ce, an d t he tax pa y er g en eral ly be ars th e b ur de n o f pr ov in g e nt it le m en t t o a ny deduc ti on cla im ed . Rul e 1 42 (a); INDOPCO, In c. v. Co m

m is si on er, 5 03 U.S. 79 , 84 (19 92 ); Ne w Col on ia l Ic e Co . v. Hel ve rin g, 2 92 U.S. 43 5, 4 40 (19 34 ). A tax pa y er m us t s ub st an ti at e d educ ti on s cl ai m edby keep in g a ndpro du ci ng ad equa te reco rd s tha t en ab le th e Co m m is si on er to de te rm in e th e ta xp ay er’s co rrec t t ax li ab il ity . Sec. 6 00 1; Hrad es ky v. Co m m is si on er, 6 5 T.C. 8 7, 8 9- 90 (19 75 ), aff’d p er cu ria m , 54 0 F .2d82 1 (5 th Cir . 19 76 ); M en eg uz zo v. Co m mis si on er, 4 3 T.C. 8 24 , 83 1- 83 2 (1 96 5) . A tax pa y er cl ai min g ade du ct io n m

us t d em on st rat e th atth e d educ ti on is all owabl e p ur su an t t o a st atut ory

pro vi si on an d m

us t fu rth er s ub st an ti at e th atth e ex pe ns e to whi chth e-1 0-

de du ct io n re la te s h as be enpa idor i nc urred . Sec. 6 00 1; Hrad es ky v. Co m m is si on er, 6 5 T.C. at89 -9 0. Whe n atax pay er es tabl is he s tha t h e o r sh e p ai d o r in cu rreda de du ct ib le ex pe ns e b utfai ls to est ab li sh th e am ou ntof t he de du ct io n, the Co urt n orm al ly m ay es ti m at e th e am ou ntall owabl e as a de du ct io n. Co han v . Comm is si on er, 3 9 F .2d 54 0, 5 43 -5 44 (2dCir . 19 30 ); Vani cekv. Co m m is si on er, 8 5 T.C. 7 31 , 74 2- 74 3 (1 98 5) . There m

us t b e su ffi ci en t ev id en ce i n t he reco rd , ho wev er, t o p erm itth e Co urt t o c on cl ud e th ata de du ct ib le ex pe ns e was pa idor i nc urredinat l eas t the am ountall owe d. Will ia m s v . Uni te d S ta te s, 2 45 F.2d55 9, 5 60 (5t h C ir. 1 95 7) . Und er s ect io n 1 62 (a), a d educ ti on is all owe d fo r or di na ry an d n eces sa ry ex pe ns es pa idor i nc urreddu rin g t he tax ab le y ear i n c arrying on an y tra de or bu si ne ss . The d et erm in at io n o f whe th er anex pe nd itur e sa ti sf ie s the requi rem en ts fo r de du ct ib il ity

un de r se ct io n 1 62 is a qu es ti on of f act . See Co m

m is si on er v . Hein in ge r, 32 0 U.S. 4 67 , 47 5 (1 94 3) . Pers on al , li vi ng , or fa m il y expe ns es are ge ne ral ly non de du ct ib le expe ns es . Sec. 2 62 (a). Sect io n 2 74 (d ) pr es cri be s m or e strin ge ntsubs tant ia ti on requi rem en ts be fo re a ta xp ay er m ay

de du ctcert ai n c at eg or ie s o f ex pe ns es , in cl ud in g t rav el ex pe ns es , m eal s an d e nt ert ai nm en t ex pe nd itur es , andex pe ns es rel at edto th e u se of l is te d pr op erty as d efi ne d i n s ect io n 2 80 F(d )(4 )(A). See San fo rdv. Co m m is si on er, 5 0-1 1-

T.C. 82 3, 8 27 (19 68 ), aff’d, 4 12 F.2d20 1 (2 d C ir. 1 96 9) . As rel ev an t h ere f orth e ta xabl e y ear 2 00 9, the term “ li st edpro pe rty” in cl ud es , in te r al ia , cel lu lar ph on es . Sec. 2 80 F(d )(4 )(A)(v ). Howev er, s ect io n 2 80 F(d )(4 ) was am en de d b y th e Sm al l Bu si ne ss Jo bs Act o f 20 10 , Pub . L. No. 11 1- 24 0, s ec. 2 04 3( a), 1 24 Sta t. at25 60 , whi chrem ov edcel lu lar ph on es fro m th e d efi ni ti on of l is te d p ro pe rty. T he am en dm en t i s ef

fect iv e fo r ta xabl e y ears be gi nn in g a fte r Decem be r 31 , 20 09 . Id. se c. 20 43 (b ). To s at is fy th e requi rem en ts of s ect io n 2 74 (d ), a ta xp ay er g en eral ly m us t m ai nt ai n a de qu at e rec or ds or p ro du ce s uf fic ie ntev id en ce co rro bo rat in g h is or h er own st at em en t, wh ic h, i n c om bi na ti on , are s uf

fic ie ntto est ab li sh th e am ou nt , dat e an d t im e, an d b us in es s p ur po se foreach ex pe nd itur e fo r tr av el , m eal s an d en te rta in m en t, o r bu si ne ss us e o f li st edpro pe rty. Sec. 1.2 74 -5 T(b) (2 ), (6 ), (c)( 1) , Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 4, 4 60 16 -4 60 17 (Nov . 6, 1 98 5) . Sect io n 1 .27 4- 5T(c )(2 ), Tem po rary Inco m e Tax Reg s., s up ra, p ro vi de s i n rel ev an t p artth at“ ad equa te reco rd s” ge ne ral ly con si stof a n a cco un t b oo k, a d iary , a lo g, a s ta te m en t o f expe ns e, tr ip sh eet s, o r a s im il ar re co rdm ad e ator n ear t he ti m e o f th e ex pe nd itur e o r us e, al on g wi th supp orti ng do cu m en tary ev id en ce. The Co urt m ay

no t u se th e ru le est ab li sh edinCo ha n v . Comm is si on er, 3 9 F .2dat 5 43
- 54 4, t o e st im at e ex pe ns es co ve redby sect io n 2 74 (d ). San fo rdv. Co m m is si on er,-1 2-

50 T.C. at 8 27 ; s ec. 1 .27 4- 5T(a ), Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 4 (No v. 6 , 19 85 ). I. Sto ckbr ok er Act iv ity A. Newsp ap er Ex pe ns es Altho ug h we d o n otdo ub t tha t p et it io ne r pu rch as edne wsp ap ers an d o th er fin an ci al publ ic at io ns as p artof h is st oc kb ro ke r act iv ity , he d idno t p ro du ce rece ip ts or o th er re co rd s t o s ub st an ti at e h is ne wsp ap er ex pe ns es . In s ho rt, pe ti ti on er’s t es ti m on y

asi de , th ere i s n o o bjec ti ve ev id en ce i n the reco rdto pe rm it th e Co urt t o d et erm in e o r at te m ptto est im at e th e am ou ntof a n a ll owabl e de du ct io n fo r th es e it em s. See W il li am s, 2 45 F.2dat 5 60 . Accor di ng ly, we ho ld th atpe ti ti on er i s n oten ti tl edto de du ct io ns forne wsp ap er ex pe ns es forth e y ears in is su e. B. Cel lu lar Ph on e Exp en se s

1. 2 00 9 Dur in g t he tax ab le y ear 2 00 9 c el lu lar ph on es were cl as si fie d a s l is te d pr op erty un de r se ct io n 2 80 F(d )(4 )(v ) an d, the refo re, were subjec t t o t he stric t subs tant ia ti on requi rem en ts of s ect io n 2 74 (d ). Pet it io ne r pa id$5 04 forcel lu lar ph on e se rv ic e dur in g 2 00 9, an d h e p ro du cedreco rd s i de nt ifyin g c al ls th athe m ad e to cli en ts inco nn ect io n wi th hi s s to ckbr ok er ac ti vi ty. Pet it io ne r’s reco rd s-1 3-

co rro bo rat e h is tes ti m on y th atap pr ox im at el y

on e-h al f of

hi s ce ll ul ar p ho ne us e in 20 09 was re la te d t o h is st oc kb ro ke r act iv ity . W e co nc lu de on th is reco rdth at pe ti ti on er h as sat is fie d t he stric t s ub st an ti at io n re qu ire m en ts pre sc rib edinsec ti on 27 4( d) an d t ha t h e is en ti tl edto a de du ct io n o f $2 52 (50 % of $ 50 4) for cel lu lar ph on e ex pe ns es for20 09 .

2. 2 01 0 Cel lu lar ph on es were n o l on ge r subjec t t o t he stric t s ub st an ti at io n requi rem en ts of s ect io n 2 74 (d ) in 20 10 . The rec or d s ho ws tha t p et it io ne r pa id $4 91 forcel lu lar ph on e se rv ic e dur in g 2 01 0, an d h e cre di bl y tes ti fie d t ha t ap pr ox im at el y

30 % of h is cel lu lar ph on e u se in20 10 was re la te d t o h is st oc kb ro ke r act iv ity . W e th eref or e co nc lu de th atpe ti ti on er i s en ti tl edto a de du ct io n o f $1 47 (30 % of $ 49 1) forcel lu lar ph on e ex pe ns es for20 10 . II. Gam bl in g Act iv ity Sect io n 1 65 (d ) pr ov id es th atlo ss es fro m wage rin g t ran sa ct io ns are al lo wed as de du ct io ns on ly to the ex te ntof t he ga in s fr om su chtra ns act io ns . W e h av e h el d th atth e p hr as e “ [l]os se s fr om wage rin g t ran sa ct io ns ” in sec ti on16 5( d) refe rs to am ount s ex pe nd edonwage rs , as d is ti ng ui sh edfro m ot he r ex pe ns es pa idor in cu rredincarry in g o n t he tra de or b us in es s o f ga m bl in g. Se e May o v . Co m m is si on er, 1 36 T.C. 81 , 90 -9 7 (2 01 1) ; M oo re v . Comm is si on er, T.C. Mem o.-1 4-

20 11 -1 73 . In thi s re gard , exp en se s p ai d o r in curredby a taxpay er i n c arrying on th e tr ad e o r bu si ne ss of g am bl in g, o th er tha n d ire ctwage rin g e xp en se s, ar e de du ct ib le un de r se ct io n 1 62 (a) wi th ou t re ga rdto sec ti on 16 5( d) . May o v . Co m m is si on er, 1 36 T.C. at 9 7. The pa rti es di sa gr ee wh ethe r pe ti ti on er was en ga ge d i n the tra de or b us in es s of ga m bl in g. Al th ou gh pe ti ti on er m ai nt ai ns th athe is a pr of es si on al ga m

bl er, res po nd en t d et erm in edth athe en ga ge d i n g am bl in g a s a h ob by, notas abu si ne ss , an d h e is no t en ti tl edto de du cthi s g am bl in g- rel at edexpe ns es un de r se ct io n 16 2( a). Inth e al te rn at iv e, res po nd en t d et erm in edth atpe ti ti on er fa il edto pro pe rly subs tant ia te th e g am

bl in g e xp en se s tha t h e rep orte d o n S ch edul es C. Und er s ect io n 1 83 (a), i f anact iv ity is no t en ga ge d i n fo r pr of it , th enno de du ct io n a ttrib ut ab le to th atact iv ity is all owe d e xc ep t t o t he ex te ntpro vi de d b y se ct io n 1 83 (b ). In p ert in en t p art , sec ti on 18 3( b) all ows th os e d educ ti on s tha t wou ldha ve be enall owabl e h adth e act iv ity be enen ga ge d i n fo r pr of iton ly to the ex te ntof g ro ss in co m e d eri ve d fr om th e act iv ity

(reduc edby deduc ti on s at tri bu tabl e to th e act iv ity th atare al lo wab le witho utreg ardto whet he r th e act iv ity was en ga ge d i n fo r pr of

it ). Sect io n 1 83 (c) d efi ne s an act iv ity no t en ga ge d i n fo r pr of

itas “ any act iv ity ot he r th anon e wit h re sp ectto whi chde du ct io ns are al lo wab le forth e ta xabl e y ear-1 5-

un de r se ct io n 1 62 or u nd er p arag rap h (1 ) or(2) of s ect io n 2 12 .” Dedu ct io ns are al lo wab le un de r se ct io n 1 62 or u nd er s ect io n 2 12 (1 ) or(2) if the tax pay er i s en ga ge d i n t he act iv ity

with t he actua l an d h on es t o bjec ti ve of m ak in g apro fit . Drei cer v . Comm is si on er, 7 8 T.C. 6 42 , 64 5 (1 98 2) , aff’d wit ho utpubl is he d op in io n, 7 02 F.2d12 05 (D.C. Cir . 19 83 ); Go lant y v. Co m m is si on er, 7 2 T.C. 4 11 , 42 5- 42 6 (1 97 9) , aff’d wit ho utpubl is he d o pi ni on , 64 7 F .2d17 0 (9 th Cir . 19 81 ). The ex is te nc e o f th e requi si te pro fitob jecti ve is a qu es ti on of f

actth atm us t be de ci de d o n t he ba si s o f th e en ti re re co rd . Groet zi ng er v . Comm is si on er, 8 2 T.C. 79 3, 8 03 (19 84 ), aff’d, 7 71 F.2d26 9 (7 th Cir . 19 85 ), aff’d, 4 80 U.S. 23 (1 98 7) ; s ec. 1 .18 3- 2( b) , Inc om e Tax Reg s. Inres ol vi ng th is factua l que st io n, gr eat er wei gh t i s g iv ento ob jecti ve fact s tha n t o atax pa y er’s s tate m en t o f in te nt . Sec. 1 .18 3- 2( a), In co m e Tax Reg s. Sect io n 1 .18 3- 2( b) , Inc om e Tax Reg s., s et s fo rth th e fo ll owi ng no ne xh au st iv e li stof f

act or s tha t m ay

be co ns id eredinde ci di ng whet he r a p ro fit ob jecti ve ex is ts : (1 ) th e m an ne r in whi chth e ta xp ay er ca rri es onth e act iv ity ; (2 ) th e ex pe rti se of t he tax pa y er o r hi s ad vi se rs ; (3 ) th e ti m e an d e ffo rt e xp en de d b y th e ta xp ay er i n c arrying on th e act iv ity ; (4 ) th e ex pe ct at io n tha t the ass et s u se d i n-1 6-

th e act iv ity

m ay ap pr eci at e in va lu e; (5) th e ta xp ay er’s s uc ces s i n c arrying on 5 ot he r si m il ar o r di ss im il ar ac ti vi ti es ; (6 ) th e ta xp ay er’s h is to ry of i nc om e o r lo ss es with re sp ectto th e act iv ity ; (7 ) th e am ou ntof o ccas io na l p ro fit s, i f an y , whi chare earn ed ; (8 ) th e fi na nc ia l s tatu s o f th e ta xp ay er; an d (9 ) an y ele m en ts in di cat in g pe rs on al pl eas ur e o r rec reat io n. No si ng le fact or , no r ev enth e ex is te nc e o f a
m ajor ity of f act or s s up po rti ng or r eb ut ti ng th e ex is te nc e o f a p ro fitob jecti ve , is co nt ro ll in g, an d a ll fact s an d c irc um st an ces with re sp ectto th e act iv ity are t o b e ta ke n i nt o a cco un t. Id .; s ee Gro et zi ng er v . Comm is si on er, 8 2 T.C. at80 3. A. Man ne r in Whi chPet it io ne r Carrie s Onth e Gam bl in g Act iv ity If a t ax pa y er ca rri es on th e act iv ity ina bu si ne ss li ke m an ne r an d m ai nt ai ns co m pl et e an d a ccu rat e b oo ks an d re co rd s, i t m ay in di cat e a p ro fitob

jecti ve . Sec. 1.1 83 -2 (b )(1 ), In co m e Tax Reg s. A ch an ge of o pe rat in g m etho ds or a do pt io n o f ne w tec hn ique s wi th th e ai m of i m pr ov in g p ro fit ab il ity

m ay als o i nd ic at e a p ro fit
m ot iv e. Id . Howev er, i f th e ta xp ay er’s rec or ds are n otus edto im pr ov e th e pe rfo rm an ce o f a l os in g o pe rat io n, s uc h re co rd s g en eral ly do n otin di cat e a p ro fit ob jecti ve . See Me rk in v. Co m m is si on er, T.C. Mem o. 2 00 8- 14 6. Pet it io ne r di d n otm ai nt ai n c om pl et e an d a ccu rat e rec or ds of h is ga m bl in g lo ss es or g am

bl in g- rel at edexpe ns es . He oft enerre d i n t al lying hi s d ai ly exp en se s. The pa rti es ag ree t ha t thi s fa ct or is no t re le va ntto ou r an al y si s. 5-1 7-

On s om e d at es in20 10 , th e st at edto ta l o f ex pe ns es ex ceed edactua l d ai ly exp en se s by m or e th an$1 00 . W e al so no te th atinso m e in st an ces pe ti ti on er’s rec or ds co nt ai n t wo d iff

eren t s ta te m en ts of e xp en se s fo r a s pe ci fic da te , andinot he r in st an ces he si m

pl y fai le d t o re co rdth e d at e. The re i s n o e vi de nc e th atpe ti ti on er ch an ge d h is op erat in g m etho ds , ado pt ed ne w tec hn ique s, o r an al yzedhi s g am bl in g l os se s an d g am

bl in g- rel at edex pe ns es in aneffo rt t o i m

pr ov e h is pe rfo rm an ce o r to en hanc e th e li ke li ho odof e arn in g a pr of itfro m th e act iv ity . W e co nc lu de th atpe ti ti on er d idno t co nduc t the ga m bl in g act iv ity ina bu si ne ss li ke m anne r. B. Exp ert is e o f Pet it io ne r orHis Adv is ers Prep arat io n fo r th e act iv ity by ext en si ve study

of i ts acce pt edbu si ne ss pr act ic es , or c on su lt at io n wi th th os e who are ex pe rt t he rei n, m ay in di cat e a p ro fit ob jecti ve wher e th e ta xp ay er ca rri es onth e act iv ity inacco rd an ce wi th su ch pr act ic es . Sec. 1 .18 3- 2( b) (2 ), In co m e Tax Reg s. Pet it io ne r di d n otid en ti fy sp eci fic bo ok s tha t h e h adread , andhe fai le d t o s ho w th athe att en de d apa rti cu lar se m in ar t o g ai n e xp ert is e in ga m bl in g. Al th ou gh he reg ul arl y co ns ul te d “ ti p sh eet s” be fo re p la ci ng be ts , we are n otpe rs ua de d t ha t p et it io ne r ach ie ve d any le ve l o f ex pe rti se ha nd ic ap pi ng ho rs e rac es . See Me rk in v. Co m m is si on er, T.C. Mem o. 2 00 8- 14 6 (f

in di ng th atread in g v id eo po ke r m ag azi ne s an d s co ut in g p ok er-1 8-

m ach in es on th e cas in o fl oo r di d n otva li da te th e ta xp ay er’s cl ai m th athe was a po ke r expe rt) . This fact orweig hs ag ai ns t p et it io ne r. C. Tim e an d Eff

ort Ex pe nd edinCarry in g Onth e Act iv ity The factth atth e ta xp ay er d ev ot es m uc h o f hi s p ers on al ti m e an d e ffo rt t o carry in g o n a n a ct iv ity

m ay in di cat e anin te nt io n t o d eri ve a pr of it . Sec. 1 .18 3- 2( b) (3 ), In co m e Tax Reg s. Pet it io ne r de vo te s ap pr ox im at el y 45 ho ur s p er weekto ga m bl in g. Hi s g am

bl in g re co rd s fr om

TVG andXpre ss be t s ho w th athe pl aced nu m ero us wage rs in20 09 an d 2 01 0. We con cl ud e th atpe ti ti on er d ev ot ed subs tant ia l t im e an d e ffo rt t o g am bl in g- -th is fact orweig hs inhi s fa vo r. D. Peti ti on er’s Su cces s i n C arrying OutOth er Si m il ar o r Dis si m il ar A ct iv it ie s The factth atth e ta xp ay er h as en ga ge d i n s im il ar ac ti vi ti es inth e p as t an d co nv ert edth em

fro m unpr of it ab le to pro fit ab le en te rp ris es m ay in di cat e th atth e act iv ity inqu es ti on was e ng ag edinfor pro fit , eve n t ho ug h t he act iv ity is pre se nt ly unpr of it ab le . Sec. 1 .18 3- 2( b) (5 ), In co m e Tax Reg s. Altho ug h p et it io ne r ha s ach ie ve d s uc ces s as a st oc kb ro ke r, th atact iv ity is no t s uf fic ie nt ly sim il ar t o wag eri ng on ho rs e rac es to pro vi de an y in si gh ts as t o h is pro fitm ot iv e wit h re ga rd to ga m bl in g. Pe ti ti on er d idno t o fferev id en ce tha t h e h as pro fit ab ly eng ag edin ot he r ga m

bl in g a ct iv it ie s. Th is fact orweig hs ag ai ns t p et it io ne r.-1 9-

E. Peti ti on er’s His to ry

of I nc om e o r Los s

“ A ser ie s o f lo ss es du rin g t he in it ia l o r st artup st ag e o f anact iv ity m ay no t ne ces sa ril y

be anin di cat io n t ha t the act iv ity is no t en ga ge d i n fo r pr of it .” Sec. 1.1 83 -2 (b )(6 ), In co m e Tax Reg s. Ho wev er, i f a t ax pa y er co nt in ue s t o s us ta in lo ss es be y on d t he pe rio d wh ic h c us to m ari ly is n eces sa ry to bri ng th e o pe rat io n t o pr of it ab le st atus , su chco nt in ue d l os se s, i f no t ex pl ai nabl e, m ay in di cat e th atth e act iv ity is no t en ga ge d i n fo r pr of it . Id. The “ go al m

us t b e to real iz e a p ro fiton th e en ti re o pe rat io n, wh ic h p res up po se s n oton ly futu re n etearn in gs bu t al so su ffi ci en t n etearn in gs to reco up th e lo ss es whi chha ve m ean whi le be ensu st ai ne d in th e in te rv en in g years.” Bes se nyey v. Co m mis si on er, 4 5 T.C. 2 61 , 27 4 (1 96 5) , aff’d, 3 79 F.2d25 2 (2 d C ir. 1 96 7) ; s ee al so Fo st er v . Comm is si on er, T.C. Mem o. 20 12 -2 07 . As d is cu ss edab ov e, al th ou gh we do no t h av e a co m pl et e p ic tu re, p et it io ne r adm it s tha t h e h adne t l os se s fr om hi s g am bl in g a ct iv ity

du rin g t he pe rio d 2 00 6 t o 20 10 . Peti ti on er’s h is to ry of u ni nt errupt edlo ss es is in di cat iv e o f a l ackof p ro fit ob jecti ve . See Go lant y

v. Co m m is si on er, 7 2 T.C. at42 7; Mo or e v . Comm is si on er, T.C. Mem o. 2 01 1- 17 3. Th is fact orweig hs ag ai ns t p et it io ne r.-2 0-

F. Occas io na l Pr of

it s

“ The am ou ntof p ro fit s i n re la ti onto th e am ou ntof l os se s i nc urred , andin rel at io n t o t he am ou ntof the tax pa y er’s i nv es tm en t an d t he va lu e o f th e as se ts us ed in th e act iv ity , m ay

pro vi de us efu l cr it eri a inde te rm in in g t he tax pa y er’s i nt en t.” Sec. 1 .18 3- 2( b) (7 ), In co m e Tax Reg s. Whil e p et it io ne r ha s p la cedwin ni ng be ts , he admit s tha t h is ga m

bl in g a ct iv ity

ha s n ev er b eenpro fit ab le . Whe n p et it io ne r’s ga m bl in g- rel at edexpe ns es are ad de d t o t he m ix , hi s l os se s fr om th e act iv ity

far ou ts tri p a ny gam

bl in g- rel at edin co m e. Thi s fa ct oris in di cat iv e o f hi s l ackof a pr of itm ot iv e. See Go lant y

v. Co m m is si on er, 7 2 T.C. at42 7- 42 8; Mo or e v . Co m m is si on er, T.C. Mem o. 2 01 1- 17 3. G. Peti ti on er’s Fi nanc ia l St atus

“ The factth atth e ta xp ay er d oe s n otha ve subs tant ia l i nc om e o r cap it al fro m so ur ces ot he r th anth e act iv ity m ay in di cat e th atanact iv ity

is en ga ge d i n fo r pr of it .” Sec. 1 .18 3- 2( b) (8 ), In co m e Tax Reg s. Subs tant ia l i nc om e fro m so ur ces ot he r th anth e act iv ity , parti cu larly if th e lo ss es fro m th e act iv ity

ge ne rat e subs tant ia l t ax be ne fit s, m ay in di cat e th atth e act iv ity

is no t en ga ge d i n fo r pr of it . Id . Peti ti on er ea rn ed$5 5,3 82 an d $ 65 ,16 0 a s a p art -ti m e st oc kb ro ke r du rin g 2 00 9 an d 2 01 0, re sp ect iv el y . If he is pe rm it te d t o d educ t h is ga m bl in g- rel at edex pe ns es fro m hi s s to ckbr ok er i nc om e, hi s t ax ab le in co m e wil l b e si gn ifi can tl y reduc ed .-2 1-

Fo r ex am pl e, th e d educ ti on s tha t p et it io ne r cl ai m edinres pe ctof h is gam bl in g act iv ity in20 10 wou ldha ve reduc edhi s t ax ab le in co m e to les s tha n $ 4,0 00 . Whi le itdo es no t ap pe ar tha t p et it io ne r ga m bl es with t he pri nc ip al go al of reduc in g h is tax li ab il ity , th e fac t tha t h e d eri ve s s ub st an ti al in co m e fro m th e st oc kb ro ke r act iv ity

all ows anin fere nc e to be dra wn tha t h e is no t en ga ge d i n t he ga m bl in g a ct iv ity

forth e p ro du ct io n o f in co m e. Thi s fa ct orweig hs ag ai ns t pe ti ti on er. H. Elem en ts of P ers on al Ple as ur e o r Rec reat io n The pre se nc e o f pe rs on al m ot iv es incarry in g o n an a ct iv ity m ay in di cat e th atth e act iv ity

is no t en ga ge d i n fo r pr of it , esp eci al ly whe re the re ar e el em en ts of recr eat io n o r pe rs on al pl eas ur e. Sec. 1 .18 3- 2( b) (9 ), In co m e Tax Reg s. As di sc us se d abo ve , pet it io ne r te st ifi edth athe en joy s trip s t o t he tra ckan d g am bl in g on ho rs e rac es . Thu s, thi s fa ct or weig hs ag ai ns t p et it io ne r. I. Co nc lu si on Co ns id eri ng all th e fac ts an d c irc um st an ces an d wei gh in g t he fact or s an al yzedab ov e, we ho ldth atpe ti ti on er d idno t co nduc t h is ga m bl in g a ct iv ity

ina bu si ne ss li ke m an ne r an d h e d idno t en ga ge inth atact iv ity with t he requi si te pro fit ob jecti ve du rin g t he y ears inis su e. Co ns eque nt ly, we su st ai n re sp on de nt ’s-2 2-

de te rm in at io ns th atpe ti ti on er i s n oten ti tl edto de du ct io ns un de r se ct io n 1 62 (a) fo r th e g am bl in g- rel at edex pe ns es he rep orte d o n S ch edul es C fo r 20 09 an d 2 01 0. III. Accu racy-Rel at edPen al ty Sect io n 6 66 2( a) an d (b )(1 ) an d (2 ) im po se s an accu racy-rela te d p en al ty equa l t o 2 0% o f th e am ountof a ny un de rp aym en t o f ta x t ha t i s due to th e ta xp ay er’s n eg li ge nc e o r di sr eg ardof rul es or r eg ul at io ns or t ha t i s at tri bu tabl e to an y subs tant ia l und ers ta te m en t o f in co m e ta x. Th e te rm “ ne gl ig en ce” i nc lu de s an y fai lu re t o m ak e a rea so nabl e at te m ptto co m pl y with t ax laws , and“ di sr eg ard ” in cl ud es an y

care le ss , reck le ss , or i nt en ti on al di sr eg ardof rul es or r eg ul at io ns . Sec. 6 66 2( c). An und ers ta te m en t m ean s the ex ces s o f th e am ou ntof t he tax requi redto be sh own on th e return o ve r th e am ou ntof t he tax im po se d wh ic h i s sh own on th e return, re du cedby any reb at e. Sec. 6 66 2( d) (2 )(A). An un de rs ta te m en t i s s ub st an ti al inth e cas e o f anin di vi du al if the am ou ntof t he un de rs ta te m en t fo r th e ta xabl e y ear e xc eed s the gre at er o f 10 % of t he tax requi red to be sh ownon th e return o r $5 ,00 0. Se c. 66 62 (d )(1 )(A). W ith re sp ectto anin di vi du al tax pa y er’s l iabi li ty for an y pe na lty , sec ti on 74 91 (c) p la ces on th e Co m mis si on er the bu rd enof p ro du ct io n, the reb y requi rin g th e Co m m is si on er t o c om e fo rwardwith s uf fic ie ntev id en ce i nd ic at in g t ha t i t i s ap pr op ria te to im

po se th e p en al ty. Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46
--2 3-

44 7 (2 00 1) . Once t he Co m m is si on er m eet s h is bu rd enof p ro du ct io n, the tax pa y er m us t co m e fo rwardwith p ers ua si ve ev id en ce tha t the Co m mis si on er’s de te rm in at io n i s i nc orrect . Id. at44 7; see Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. at 1 15 . Ass um in g (a s we d o) th atRu le 15 5 c om pu ta ti on s wi ll sh ow tha t pe ti ti on er s ub st an ti al ly und ers tate d h is in co m e ta x l iabi li ti es forth e y ears inis su e, res po nd en t wi ll ha ve sat is fie d h is bu rd enof p ro du ct io n. Sect io n 6 66 4( c)(1 ) pr ov id es anex cep ti onto th e im po si ti onof t he accu racyrel at edpe na lty

if the tax pa y er es tabl is he s tha t the re was reas on ab le cau se for , and th e ta xp ay er ac te d i n g oo d fa ith wi th res pe ctto , th e und erp aym en t. Sec . 1.6 66 4- 4( a), In co m e Tax Reg s. Th e d et erm in at io n o f whe th er the tax pa y er ac te d wi th reas on ab le cau se an d i n g oo d fa ith i s m ad e o n acas e-b y -cas e b as is , tak in g i nt o acco un t the pe rti ne ntfact s an d c irc um st an ces . Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Pet it io ne r pr ep aredhi s t ax returns hi m se lf. He d idno t fi le sep arat e Sch edul es C with h is returns , andin st eadhe cla im edde du ct io ns forga m bl in g ex pe ns es on Sch edul es C th atid en ti fie d t he bu si ne ss act iv ity as “ St oc kb ro ke r”. Su chin accu rat e an d m is le ad in g i nc om e ta x re po rti ng do es no t re fle cta reas on ab le at te m ptto co m pl y with t he Co de . In s um , we con cl ud e th atpe ti ti on er fa il edto sh ow tha t the re was reas on ab le cau se for , andth athe act edingo odfai th with-2 4-

res pe ctto , th e und erp aym en ts inth es e cas es . See s ec. 1 .66 64 -4 (a), In co m e Tax Reg s. Co ns eque nt ly, we ho ldth atpe ti ti on er i s l iabl e fo r acc ur acy-rela te d pe na lt ie s fo r 20 09 an d 2 01 0. To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te redun de r Ru le 15 5.