T.C. M em o . 2 0 1 7 -1 9 3

UNITED STATES TAX COURT

J A M ES BONEPARTE, J R., Pet i t io n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 8 5 63 -1 4
. Fi l edOct o b er 2 , 2 01 7
.

J am es Bo nep art e, J r., fo r h i m s el f. Kat h l een K. Raup , fo r res p o n den t .

M EM ORANDUM FINDINGS OF FACT AND OPINION
M ORRISON, J u d g e: Th e res p o nd en t (referred t o h ere as th e “ IRS”) i s s u ed two n ot i ces o f d efi ci en cy t o th e p et i t i o n er, J am es Bo nep art e, J r.: o n e fo r t h e 2 0 1 2 t ax y ear an do n e fo r t h e 2 0 13 t ax y ear. Th e IRS d et erm i n edth e fo l l owi n g- 2
-

[* 2 ] d efi ci en ci es i n i n co m e t ax , ad d i t i o n s t o t ax , an d accu racy -rel at edp en al t i es fo r th e 2 0 12 an d 2 0 1 3 t ax y ears . 1

Year Defi ci en cy Ad d i ti o n s t o t ax Accu racy rel at ed pen al ty Sec. 66 5 1 (a)(1 ) Sec.

6 6 5 1(a)(2 ) Sec.

6 6 5 4 (a) Sec.

66 6 2 (a) 20 1 2 $ 2 1,0 9 0 $ 1 ,1 8 7 --- --- $ 4 ,2 1 8 20 1 3 1 7,2 1 0 2 ,0 0 7 $ 2 6 8 $ 14 4 --- Bo n ep art e fi leda p et i ti o n u n der s ect i o n 6 2 1 3 (a) fo r red et erm i n at i o n o f t he d efi ci en ci es fo r b o th y ears . 2 W e h av e ju ri s d i ct io n u nd er s ect i o n 6 2 1 4 (a). Aft er we t ak e i n to acco u n tco n ces s i o n s b y th e IRS d es cri b edl at er i n th e
o p i n i o n , th e i s su es fo r d eci s i on are: 1
. W as Bo n ep art e a p ro fes s i o n al g am b ler i n 2 0 1 2 o r 2 0 13 ? W e h ol dth ath e
was n o t .

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de (“ Co d e”) i n effect fo r t h e y ears i n i s su e, an dal l Ru l e referen ces are t o the Tax Co u rtRu l es o f Pract i ce an dPro cedu re. Al l d o ll ar am o u n t s are ro u n d ed t o the n eares td ol lar.

2 Bo n ep art e res i d edi n New J ers ey wh en h e fi ledh i s p et i t i o n . Th erefo re, an y ap p eal o f o u r d eci s i o n i n th i s cas e wo u l dg o t o th e U.S. Co u rto f Ap p eal s fo r t h e Th i rdCi rcu i t u n l es s th e p art i es d es ig n at e t he Co u rto f Ap p eal s fo r an o th er ci rcu i t . See s ec. 7 4 8 2 (b )(1 ) an d(2 ).- 3
-

[* 3 ] 2
. Is Bo n ep art e en t i t l edt o an i t em i zedd edu ct i o n fo r wag eri n g l o s s es o f $ 1 8 ,0 00 fo r 2 0 1 2 ? W e h o l dth ath e i s s o en t i t l ed
. 3
. Is Bo n ep art e en t i t l edt o a d educt i o n o f $ 3,5 9 2 fo r p aym en to f real -es t at e t ax es fo r 2 0 1 2 ? W e h o l dth ath e i s n o ts o en ti t led
. 4
. Is Bo n ep art e l iab l e fo r anad d it i o n t o t ax u n d er s ect i o n 6 6 5 1 (a)(1 ) fo r 2 0 12 ? W e h o ldth ath e i s l i ab l e fo r t h e ad d i t i o n t o t ax . 5
. Is Bo n ep art e l iab l e fo r anaccu racy -rel at edp en al ty u n der s ect io n 6 6 6 2 (a) fo r 2 0 1 2 ? W e h ol dthath e i s l i ab l e fo r t h e p en al ty . To p l ace t h e fact s o f t h i s cas e i n p ers p ect i v e, i ti s h el pfu l t o u nd ers t an dth e fed eral -i n co m e-t ax treat m en to f g am b l i n g act i v i ty

an d h ow t h e i n co m e fro m g am b l in g act i v i ty

can b e rep o rt edo n fed eral -i n co m e-t ax retu rn s. Th e am o u n to f fed eral i n co m e t ax d ep en ds o n t ax ab le i n co m e. Sec. 1 (c). Cal cu l at i n g t ax ab l e i n co m e requ i res cal cu l at i o n s o f b o th g ro s s i n co m e an dad ju st edg ro s s i n co m e. Gro ss i n co m e i s d efi n edas al l i n co m e fro m wh at ev er s o u rce d eri v ed . Sec. 6 1 (a). Ad ju s t edg ro s s i n co m e i s d efi n edas g ro s s i n co m e m i n u s cert ai n d edu ct i o ns kn o wn
as ab o ve-t h e-l i n e d edu ct i o n s . Sec. 6 2 (a). On e ab ov e-t h e-l i n e d edu ct i o n i s t h e d educt i o n u n d er s ect i o n 6 2 (a)(1 ) fo r b us i n es s ex p en s es o f s el f-em p l o y ed t ax p ay ers .- 4
-

[* 4 ] Tax ab l e i n co m e fo r t ax pay ers wh o i t em i ze d edu ct i o n s i s equ al t o ad ju s t ed g ro s s i n co m e (i .e., t ax ab l e i n co m e m i n u s ab o v e-th e-l i n e d edu ct i o ns ) m i n u s i t em i zedd edu ct io n s an dth e p ers o n al -ex em p t i o n d edu ct i o n . Sec. 6 3 (a). On e i t em i zedd edu ct io n o f s i g n i fi can ce fo r t h i s cas e i s th e d edu ct i o n al l o wedu n d er
s ect i on 2 1 3 (a) fo r an am o u ntequ al t o th e m ed ical ex p en s es p ai db y th e t ax p ay er fo r t h e y ear m in u s a p ercen t ag e o f ad ju s tedg ro s s i n co m e. Th e p ercen t ag e o f ad ju s t edg ro ss i nco m e fo r t he 2 0 1 2 y ear i s 7 .5 %. Sec. 2 13 (a). Fo r 2 0 1 3 , i ti s 1 0 %. Id . An o ther i t em i zedd educt i o n i s th e d edu ct i on u n d er s ect io n 1 6 5 (a) fo r an y

“ l o ss ”. Fo r t ax p ay ers wh o t ak e t h e s t an d ardd edu ct io n , t ax ab le i n co m e i s equ al t o ad ju s t edg ro ss i nco m e (i .e., t ax ab l e i n co m e m in u s ab ov e-t h e-l i n e d edu ct i o n s )
m i n u s th e s t an dardd edu ct i o n an d th e p ers o n al -ex em p t i o n d edu ct i on . Sec. 6 3 (b ). Th e s tan dardd educt i o n i s a d o ll ar am o u n tth ati s ad ju s t edeach y ear fo r i n fl at i o n
an d v ari es acco rd i n g t o th e t ax pay er’ s fi l i n g s tatu s . Sec. 6 3(c). Fo r t ax y ear 2 0 1 2 , th e s t an d ardd edu ct io n fo r a t ax p ay er fi l i n g as s i n g l e was $ 5,9 5 0 . See 2 0 1 2 In s tru ct i o n s fo r Fo rm

1 0 4 0 , U.S. In d i v i dual In co m e Tax Retu rn . Fo r 2 0 1 3 i twas $ 6 ,1 0 0 . See 2 0 13 In s tru ct i o n s fo r Fo rm 1 04 0 , U.S. In d i vi du al In co m e Tax Retu rn . It em i zedd educt i o n s d o n ot affect th e t ax ab l e i n co m e o f t ax p ay ers wh o ch o o s e t h e
s t an d ardd edu ct i o n . Sec. 6 3 (b ).- 5
-

[* 5 ] Th e Co d e d o es n o t s et fo rt h s p eci fi c ru l es fo r d et erm i n in g i n co m e an dl o s s es fo r g am bl i n g act i v i ty ex cep tth ats ect i o n 1 6 5 (d ) p ro v i d es th at “ [l ] o s s es fro m wag eri n g tran s act i on s s h al l b e al l owedo n l y t o the ex t en to f t h e g ai n s fro m s u ch tran s act io n s .” Th e t ax at i o n o f g am b l i n g act i v i ty

i s d et erm i nedb y

th is Co d e p ro v is i o n as i ti n t eract s wi th th e m o re g en eral Co d e p ro vi si o n s . Fo r p ro fes s i on al g am

b l ers (i .e., th o s e t ax p ay ers wh o are i n th e b u s i n es s o f g am b l in g ), th e Co d e h as b een i n t erp ret edas d i s t i n g u i s h i n g b et ween two ty p es o f
ex p en s es . See M ay o v . Co m m i s s io n er, 1 3 6 T.C. 8 1 , 9 1 , 9 6 -9 7 (2 0 1 1 ) (h o ld i n g th atl o ss es fro m

wag eri n g tran sact io n s u n d er s ect i o n 1 6 5 (d ) i ncl u d e th e “ co s to f l o s i n g wag ers ” b ut n o tth e “ m o re g en eral ex pen ses i n cu rredi n th e co n du cto f a g am b l in g b u s i nes s”). Fi rs t , th ere are t he d i rect co st s o f g am b l i n g--es sen t i al l y

th e
co s to f p l aci n g a wag er. Seco n d , th ere are t h e i n d i rect ex p en s es o f g am b li n g , s u ch
as th e co s t o f trav el i n g t o th e cas i n o . W e refer t o th es e l at t er ex p en s es as the
n o n wag eri ng ex p en s es o f g am b l i n g . Th e co s t s o f wag eri n g are acco un t edfo r i n th e l o s s es an d g ai n s fro m wag eri n g tran s act i on s u n d er s ect i o n 1 6 5 (d ). Sect i on 1 6 5 (d ) g ov ern s p ro fes s i o n al g am b l ers . Offu tv . Co m

m i ss i o n er, 1 6 T.C. 1 2 1 4 (1 95 1 ) (fo l l o wed o n th i s p o i n tb y M ay o v . Co m

m i s s i o n er, 1 3 6 T.C. at9 0 ). Sect i o n 1 6 5 (d ) i s ap p l i ed b y co m p ari n g th e g ai n s fro m

wag eri n g tran s act i o n s fo r t h e y ear wi th the l o s s es fro m wag eri n g- 6
-

[* 6 ] tran s act i o ns fo r th e y ear. Sec. 1 .1 6 5 -1 0 , In co m e Tax Reg s . If th e g ai n s
ex ceed th e l o s s es , then there i s a d edu ct io n equ al t o t h e l o s ses . If th e l o s s es
ex ceed th e g ai n s , th en th e d edu ct i o n i s equ al t o the g ai n s . Th e d edu ct i o n i s an ab o ve-t h e-l i n e d edu ct i o n u n d er s ect i o n 6 2 (a). See, e.g ., Sch ol l en b erg er v . Co m m i s s i o n er, T.C. M em o . 2 0 0 9 -3 0 6 ; LaPl an t e v . Co m m is s io n er, T.C. M em o . 2 0 0 9 -2 2 6 ; M erk i n v . Co m m i s s i o n er, T.C. M em o . 2 0 0 8 -1 46 , s l i p o p . at7 (“ If a t ax p ay er i s en g ag edi n th e t rad e o r b u s i nes s o f g am bl i n g , h i s l os s es fro m g am b l in g , up t o the am o u nto f h i s g ai n s fro m s u ch tran s act i o ns , wo u ldb e d educt i b l e i n arri v i ng at h i s ad ju s t edg ro s s i n co m e. See s ecs . 6 2 , 1 6 5 (d ). Th u s , i f Dr. M erk i n ’ s g am

bl i n g act i v i ty

co ns t itu teda t rad e o r b u si n es s, h is l o s s es fro m g am b l in g as rep o rt edo n Sch edu l e C up t o t h e am o u n to f h i s g am b l i n g wi nn i n g s as rep o rt edo n thats ch edu l e wo ul db e d edu ct i b l e i n arri v i n g atad ju s t ed g ro s s i n co m e.”). W e n o wd i s cu s s th e n o n wag eri n g ex p en s es o f p ro fes s io n al g am b l i ng . Th es e ex pen s es are n o t co m pu tedas p arto f t he g ai n s o r l o s s es fro m wag eri n g tran s act io n s i n s ect io n 1 6 5(d ). M ay o v . Co m m i s si on er, 1 3 6 T.C. at9 7 . W e n eed
n o td i s cu s s fu rt h er t h e ap p ro p ri at e t ax treat m en t o f t h e n o n wag eri ng ex p en s es o f p ro fes s i on al g am

b l ers , o ther t h an t o o b s erv e th at , l i k e t h e t ax p ay er i n Ch o w v . Co m m i s s i o n er, T.C. M em o . 2 0 1 0 -4 8 , 9 9 T.C.M . (CCH) 1 1 9 3 , 1 19 4 (2 0 1 0 ), aff’ d ,- 7
-

[* 7 ] 4 8 1 F. Ap p ’ x 4 0 6 (9 th Ci r. 2 0 1 2 ), Bo n ep art e rep o rt edh i s n o n wag eri n g
ex p en s es o f g am

b li n g as an ab o v e-t h e-l i n e d edu ct i o n u n der s ect i o n 6 2 (a). Iti s n o t
n eces s ary t o s ay wh et h er t h i s i s th e co rrect way t o rep o rtth e n on wag eri n g
ex p en s es o f p ro fes s i o n al g am b l i n g b ecau s e, as we ex pl ai n b el o w, we h o l dth at Bo n ep art e i s n o ta p ro fes s i o n al g am b l er. A p ro fes s io n al g am

b l er (wh o i s s el f-em

p l o y ed ) i s ex p ect edb y

the IRS t o fi l l
o u ta Sch edu l e C, “ Pro fi to r Lo s s Fro m Bu s i n es s ”. Sch edu le C i s th e at t ach m en t t o Fo rm 1 0 4 0 th ati s co m p let edb y s el f-em pl o y edt ax p ay ers . Th e Sch edu l e C
co n tai n s v ari o us l i n e i t em s fo r rep o rt i n g i n co m e an dex p en s es fro m a b u s i n es s . Near t h e b o t t o m

o f t h e Sch edu l e C i s a l i n e i t em fo r t h e n etp ro fi t o r l o s s fro m th e b u s i n es s , l i n e 3 1 . Th e am o u nto n th i s l i n e o f t h e Sch edu l e C i s t o b e co p i edt o l i n e 1 2 o f t h e Fo rm

1 0 4 0 , wh ich i s l ab el ed“ Bu s i n es s i n co m e o r (l o s s ) * * * ”. Th e
v ert i cal p l acem en to f l i n e 1 2 o n th e Fo rm 1 0 4 0 i s s uch th atth e am o u n t o n l i n e 1 2 i s t ak en i n to acco u n t i n th e co m p u t at io n o f ad

ju s t ed g ro s s i n co m e. Th u s , the b u s i n es s ex p en s es rep o rt edo n Sch edu l e C, wh i ch are ari thm et i cal l y i n co rp o rat ed i n the b u s i n es s i n co m e o r l o ss am o u n t o n l i n e 1 2, are rep o rt edas an ab ov e-t h e-l i n e d educt i o n o n th e Fo rm

1 0 4 0 . As fo r t h e g ai n s an d l o s s es fro m wag eri ng tran s act io n s , th e i n s tru ct i o ns fo r t h e Sch edu l e C an dth e Fo rm 1 04 0 d o n otex p l ai n
ex act l y ho w a p ro fes s i o n al g am b ler s ho u l d rep o rtth em . Ho wev er, i f a- 8
-

[* 8 ] p ro fes s io nal g am

b l er rep o rt s th e l o ss es fro m wag eri n g tran s act i o n s an ywh ere
o n th e Sch edu l e C, t h es e rep o rt edl o s s es wo u l db e ch an n el edi n t o l i n e 1 2 o n th e Fo rm 1 0 4 0 an d t h erefo re i n co rp o rat ed i n to ad ju s t edg ro ss i nco m e. Th e l o s s es
wo u l db e rep o rt edas an ab o v e-t h e-l i n e d educt i o n. No w co n s i d er t h e t ax treat m en to f t h e g am b l i n g act i vi t i es o f cas ual g am b l ers , i .e., p ers on s wh o are n o tp ro fes s i o nal g am b l ers . Th e fi rs ts t ep i s t o d et erm i n e t h e g ai n o r l o ss fo r each wag eri n g t ran s act i o n . A wag eri n g t ran s act i o n
res u l ts i n a g ai n i f t h e wi n n i n g ex ceed s th e co s t o f t h e wag er. A wag eri n g tran s act io n res ul t s i n a l o ss i f t h e co s to f t h e wag er ex ceed s th e wi n ni n g . Th e g ai n s fo r al l wag eri n g t ran sact i o n s fo r wh i ch th ere i s a g ai n are t o tal ed . See s ec. 1 .1 65 -1 0 , In co m e Tax Reg s. Th es e are t h e g ai n s fro m wag eri n g tran s act i o n s wi th i n th e m ean i n g o f s ect i on 1 6 5(d ). Gro s s i n co m e i s i n creas edb y th i s t o t al g ai n . 3 Th i s i n creas e i n g ro s s i nco m e i s al so refl ect edi n ad ju s t ed g ro s s i n co m e. See s ec. 6 2 (a) (d efi n in g ad ju st edg ro s s i n co m e as g ro s s i nco m e m i n u s ab o ve-t h e3 Cal cu l at in g t he g ai n fro m each wag er b y s ub tract i n g th e co s to f t h e wag er i s co n s i s t en twi th th e h o l d i n g s i n cas es i n wh i ch th e Co u rt , drawi n g an an al o g y b et ween wag eri ng wi n n in g s an dth e reco v ery o f a cap it al i n v es t m en t , h as h el dth at a cas u al g am

b l er’ s g ro s s i n co m e fro m a wag eri n g tran s act i o n s h o ul d b e cal cu l at ed b y s ub tract i n g th e b et s p l acedt o p ro du ce t h e wi n n i n g s, n o tas a d edu ct i on i n cal cu l at in g ad

j u s t edg ro s s i nco m e o r t ax ab l e i n co m e, b u tas a p rel i m i n ary co m p u t at i o n i n d et erm i n i n g g ro s s i n co m e. See Lu t z v . Co m m i s s i o n er, T.C. M em o. 2 0 0 2 -8 9 (s l o tm ach i n e wi n n i n g s ); Ho ch m an v . Co m m i s s i o n er, T.C. M em o . 1 9 8 6 -2 4 (h o rs e race wi n n i n g s ).- 9
-

[* 9 ] l i ne d educt i o n s). Th e l o s s es fro m al l wag eri n g tran sact i o n s th at res u lt edi n a l o s s are t o t al ed . Th es e are t h e l o s s es fro m wag eri n g tran s act i o n s wi th i n th e
m ean i n g o f s ect i o n 1 6 5 (d ). If t h i s t o t al l o s s ex ceed s th e t o t al g ai n, then th e t ax p ay er i s en t i t l ed t o ani t em i zedd edu ct i o n equ al t o th e t o tal g ai n . Sec. 1 6 5 (d ). (Fo r ex am

p l e, co n s id er a cas ual g am b l er wh o m ak es o n l y

th e fo l l o wi n g wag ers th ro u g h ou tth e y ear: a wag er o f $ 1 0 fo r a wi n o f $ 50 , an dfi v e l o s i n g wag ers t o t al i n g $ 5 0 . Gro s s i nco m e i s i n creas edb y $ 4 0 . Th e t ax p ay er h as an i t em i zed d educt i o n o f $ 4 0.) As an i t em i zedd edu ct i o n , th e wag eri n g l o s s d o es n o tredu ce ad ju s t edg ro ss i nco m e. Th i s i s a d i s ad van t ag e fo r t h e t ax p ay er b ecau s e th e am o u n t
o f ad ju s t edg ro s s i n co m e affect s th e am o un to f cert ai n b el o w-t h e-l i n e d educt i o n s
s u ch as th e m ed i cal -ex pen s e d edu ct i o n. See s ec. 2 1 3 (a); s ee al s o s ec. 6 8 ; Cal v ao
v . Co m m i s s i o n er, T.C. M em o . 2 0 0 7 -5 7
. Th e n ex tth i n g t o co n s i d er i s th e t ax treat m en to f t h e n o n wag eri n g ex p en s es
o f g am b l i n g b y a cas u al g am

b ler. A d edu ct i on at tri b u t ab l e t o an y act i v i ty n o t
en g ag edi n fo r p ro fi t , s u ch as cas u al g am b l i n g , i s al l o wedo n l y t o th e ex t en t p ro v id edi n s ect i o n 1 8 3 (b ). Sec. 1 8 3 (a). Sect i o n 1 8 3 (b )(1 ) p ro v i d es th at a t ax p ay er i s al l o wedth e d edu ct io n s th atwo ul db e al l o wab l e wi th o utreg ardt o wh et h er t h e act i v it y

i s en g ag edi n fo r p ro fi t . Sect i o n 1 8 3 (b )(2 ) p ro v i d es thata t ax p ay er i s al l o weda d edu ct i o n eq u al t o th e am o u n to f t h e d edu ct i o ns th atwo u l d- 1 0 -

[* 1 0 ] b e al lo w ab l e o nl y

i f t h e act i v i ty

were en g ag edi n fo r p ro fi t , b u to n l y t o th e
ex t en tth atth e g ro s s i n co m e d eri v edfro m s uch act i v i ty fo r t h e t ax ab l e y ear
ex ceed s t h e d educt i o n s al l o wab l e b y reas o n o f s ect i o n 1 83 (b )(1 ). Recal l th ats ect i on 1 65 (d ) p ro v i d es th at “ [l ] o s s es fro m wag eri n g tran s act io n s s h al l b e al l owedo n l y t o t h e ex ten t o f t h e g ai n s fro m s u ch tran s act io n s ”. Th e d edu ct i o n u n d er s ect i o n 1 6 5 (d ) i s al lo wab l e wi th ou treg ardt o wh et h er t h e wag eri n g tran s act i o n s g i vi n g ri se t o th e l o s s es are en g ag edi n fo r p ro fi t. See M ay o v . Co m m i s s i o n er, 1 3 6 T.C. at9 0 . Th erefo re t h e d edu ct i o n al l o wed by

s ect i o n 1 6 5(d ) i s i n cl u d edi n th e d edu ct i o n s al l o wedb y s ect i on 1 8 3 (b )(1 ). Th e n o n wag eri n g ex p en s es o f cas u al g am b li n g o ft en fal l i n t o s ect i o n 1 8 3 (b )(2 ); an d i n th i s cas e t h ere i s n o d i s p ut e t h at Bo n ep art e’ s n o n wag eri n g
ex p en s es o f g am

b li n g wo ul dfal l i n t o th e s ect i o n 1 8 3(b )(2 ) cat eg ory i f h e i s
co n si d ereda cas u al g am

b l er. A cas u al g am

b l er b y d efi n i ti o n d o es n o t o p erat e a b u si n es s, d oes n o tfi l l o u t a Sch edu l e C, an dth erefo re wo u l dh av e n o am ou n t o n l i n e 1 2 o f Fo rm 1 0 40 fo r b u s i n es s i n co m e o r l o s s . As fo r t h e g ai n s fro m wag eri n g tran sact io ns , th e cas u al g am b l er i s i n s tru ct edb y

th e IRS t o rep o rts u ch g ai n s o n l i n e 2 1 o f Fo rm 1 0 4 0 , l ab el ed“ Oth er i n co m e”. 2 01 2 In s tru ct i o n s fo r Fo rm 1 04 0 , U.S. In d i v i dual In co m e- 1 1 -

[* 1 1 ] Tax Retu rn ; 2 0 1 3 In st ru ct i o n s fo r Fo rm 1 0 40 , U.S. In d i v idu al In co m e Tax Retu rn . Th i s l in e co rres p o n ds t o th e rep o rt i n g o f g ro s s i n co m e. To rep o rt th e
s ect i on 1 6 5 (d ) d edu ct i on fo r l o s s es fro m wag eri n g tran s act i o ns , th e cas u al g am b l er i s i ns tru ct edb y

th e IRS t o u s e l i n e 2 8 o f Sch edul e A, “ It em i zedDeduct i on s ”. In s tru ct i o n s fo r Sch edul e A (Fo rm 1 0 4 0 ), A-1
. W i th th i s b ack g ro u ndi n m i n d , we can n o ws eto u tth e fact s o f t h i s cas e.

FINDINGS OF FACT So m e fact s are s t i p u l at ed , an dth ey are s o fo u n d
. Bo n ep art e g radu at ed fro m W i l l iam s Co l l eg e i n M as s ach u s et t s wi th a B.A. i n h i s t ory i n 1 9 73
. Du ri n g 2 0 1 2 an d2 0 1 3 Bo n ep art e res i d edi n Newark , New J ers ey . Si n ce 1 9 8 1 Bo n ep art e h as wo rk ed fo r t h e Po rtAu th o ri ty o f New Yo rkan d New J ers ey . Duri n g 2 0 1 2 an d2 0 1 3 , Bo n ep art e was em p l o y ed fu l l-t i m e b y

th e Po rtAu tho ri ty

as a “ tu n nel b ri d g e ag en t ” atthe Li n co l n Tu n n el . Duri n g 2 0 1 2 an d 2 0 1 3 , Bo n ep art e’ s h o u rs o f wo rkdu ri ng each wo rkd ay u s u al l y co ns i s t edo f an 8
- h o u r s hi ftfro m

2 p .m . t o 1 0 p .m . Th e d ay s h e wo rk edfo l l o wedth e fo l l owi n g p at t ern o v er a 1 9-d ay

p eri o d: 4 d ay s o n , 2 d ay s o ff, 4 d ay s o n , 2 d ay s o ff, 5 d ay s
o n , an d2 d ay s o ff.- 1 2 -

[* 1 2 ] Bo n ep art e earn edap pro x i m at el y $ 3 5 p er h o u r atth e Po rtAu th o ri ty i n 2 0 1 2
an d 2 0 1 3 . Bo nep art e’ s an n u al earn i n g s fro m the Po rtAu th ori ty

fro m 2 0 0 8 th ro u g h 2 0 1 3 were: Year A m o u n t earn ed 2 0 0 8 $ 7 5 ,0 00 2 0 0 9 1 0 9 ,0 00 2 0 1 0 75 ,0 0 0 2 0 1 1 60 ,0 0 0 2 0 1 2 78 ,8 2 1 2 0 1 3 82 ,3 5 0 Bo n ep art e al s o recei vedret i rem en t d i s tri b u t i o n s i n 2 0 1 2 an d2 0 1 3 . Fo r 2 0 1 2 , h e rep o rt eda g ro ss ret i rem en td i s tri b ut i o n o f $ 4 4 ,5 50 , o f wh ich h e rep o rt ed$ 1 3 ,6 5 2
as i n cl ud ab l e i n i n co m e. Th e IRS d o es n o t co n t es tth e t ax treat m en th e rep o rt ed fo r t h i s d i s tri b u ti o n . Fo r 2 0 1 3 , h e rep o rt eda g ro s s ret irem en t d i st ri b u t i o n o f $ 4 9 ,2 7 8 , o f wh i ch h e rep o rt ed$ 1 0 ,7 5 3 as i ncl u d ab l e i n i n co m e. As ex p l ai n ed b el o w, th e n ot ice o f d efi ci en cy fo r 2 0 1 3 d et erm i n edth ath e d i dn o trep o rtth e $ 1 0 ,7 5 3 as i n co m e o n h i s 2 0 13 retu rn , b u tth e IRS h as s i n ce co n ced edth ath e d i d
. Al th o u g h a t ax p ay er’ s recei p t o f ret i rem en td is tri b u t i o n s m i g h t co n cei v ab ly affect th e d et erm i n at i o n o f wh et h er t he t ax p ay er i s a p ro fes s i on al g am b l er, s ee s ec. 1 .1 83 -2 (b )(8 ), In co m e Tax Reg s ., n ei th er p art y i n th i s cas e as k s t h e Co u rtt o m ak e fi nd i ng s o f fact reg ard i n g t h e ret i rem en td i st ri b u t i o n s o r t o draw co n cl u s i o n s- 1 3 -

[* 1 3 ] ab ou tBo n ep art e’ s p ro fes s i o n al s t atu s fro m h is recei p to f t he ret i rem en t d i s tri b u t i o n s . Bo n ep art e’ s g am

b l i n g act i v i ty Bo n ep art e reg u l arl y

dro ve b ackan dfo rt h t o At l an t i c Ci ty , New J ers ey , wh ere h e g am

b l ed
. 4 He t es ti fi edth ath e s p en t 7 5 % o f h i s n i g h t s i n h o t el s i n At l an t i c Ci ty

rat h er th an ath is h o u s e i n Newark . Do cu m en t ary ev i d en ce
s ub s t an t i at es th at h e t rav el edt o At l an ti c Ci ty freq u en tl y b u tn o t as freq u en t l y as h i s 7 5 % es ti m at e wo u lds u g g es t . W e fi n dth at h e s p en t3 3 %-5 0 % o f h i s n i g h t s i n At l an t i c Ci ty

i n 2 0 12 an d 5 0 %-6 7 % i n 2 0 1 3
. Bo n ep art e g am

b l ed ath o rs e racet rack s an d i n cas in o s . Atthe cas i n o s h i s p referred g am e was b accarat , b u th e al so p l ay edo th er t ab l e g am es as wel l as s l o t s . So m et im es h e g am

b l ed al o n e, an d s o m et i m es h e g am b l ed wi th a fri en d . He g am b l edp ri m ari l y

i n At lan t i c Ci ty . He d i dn otk eep a co n tem po ran eo us wri t t en l o g o f wi n n i n g s an dwag ers . As d es cri b edi n g reat er d et ai l b el o w, th e t ri al reco rd
co n tai n s s t at em en t s fro m cas in o s d es cri b i n g h i s wag eri n g act i v i ty du ri n g th e t wo y ears i n i s s u e, 2 0 1 2 an d2 0 1 3
. Th es e s t at em en t s s h o w th ath e l o s t m o n ey i n wag ers ateach cas i n o i n each o f t h e t wo y ears . W e al s o co n cl u d e t h at Bo n ep art e

4 Th e reco rdd o es n o t rev eal wh et h er Bo n ep art e l eft d irect l y fo r At lan t i c Ci t y fro m h i s p l ace o f wo rk

atth e Li n co l n Tu n n el o r wh et h er h e fi rs twen th o m e t o Newark , New J ers ey .- 1 4 -

[* 1 4 ] l o s tm o n ey

i n t ot al wag ers i n th e y ears 2 0 0 9 , 2 0 1 0 , an d 2 0 1 1
. Th e t ri al
reco rdd o es n o tco nt ai n s t at em en t s fro m cas i no s fo r t h es e y ears , b u th i s l o s s es at each cas i n o i n 2 0 1 2 an d2 0 1 3 (an dth e factth ath i s m et h o d o f g am b li n g , wh i ch
was u nch an g edo ver t h e y ears , was t o m ak e freq u en tb et s atu n s k i l l edg am es s u ch
as b accarat an ds l o ts ) s u g g es th e l o s tm on ey i n 2 00 9 , 2 0 1 0 , an d 2 0 1 1 , t o o . Th i s
s u g g es t i o n i s n o tco n trad i ct edb y h i s t ax retu rn s . Of th e t h ree y ears , 2 0 09 , 2 0 1 0 , an d 2 0 1 1 , o n l y

h i s retu rn fo r 2 0 0 9 i s i n th e reco rd . Onth att ax retu rn h e d i dn o t rep o rta t o t al wag eri n g g ai n fo r 2 0 0 9
. Becau s e Bo n ep art e l o s tm o ney i n t o t al wag ers i n th e y ears 2 0 0 9 -1 3 , a fo rt io ri h e d i dn o tearn a p ro fi tfro m g am b li n g fo r an y

o f t he y ears 2 0 0 9 -1 3 . Th i s i s b ecau s e t h e p ro fi t(an d l o s s ) fro m g am bl i n g i n cl u d es n o t ju s tth e wi n n i n g s fro m wag ers b utal s o th e n o nwag eri n g ex p en s es o f g am b li n g (i .e., ex p en s es o th er t h an th e am o un t s wag ered ). Tak i n g th es e ex p en s es i nt o co n s i d erat i o n i n m eas u ri n g h i s p ro fi ts o r l o s s es wo u l do n l y d ecreas e h i s p ro fi t s (an d i n creas e h i s l o s s es ). Fo r t ax y ear 2 0 1 2 , th e reco rdco n t ai n s an n u al s t at em en t s fro m 1 4 cas i n o s at wh i ch Bo n ep art e g am

b l ed . No n e o f t h e s t at em en ts s h o w s the am o u ntwag eredo r th e wi n n i n g s fo r an y

p art i cu l ar wag er. On e s t at em en t(fo r Go l d enNu g g et ) s h o ws th e am o un to f h is m o n th l y g ai n o r l o s s fo r each m o n th o f t h e y ear. An ot h er
s t at em en t(fo r Tru m

p Taj M ah al ) s h o ws th e am ou n to f h i s d ai l y g ai n o r l o s s fo r- 1 5 -

[* 1 5 ] each d ay

o f t h e y ear. On e s t at em en t (fo r NJ AW ) s h o ws t o t al wi n n i n g s fo r th e y ear an dt o t al wag ers fo r t h e y ear. Th e o ther 1 1 s t at em en t s s h o w o nl y th e t o t al
an n ual am ou n tth atBo n ep art e g ai n edo r l o statth e cas i n o th ati s s u edth e
s t at em en t . Th e t ab l e b el o ws h ows th e an nu al n etwag eri n g g ai n s o r l o s s es rep o rt edo n the 1 4 s t at em en t s . Cas i n o Netg ai n s / l os s es NJ AW ($ 2 17 ) Go l den Nu g getAt l an t i c Ci ty (2 ,9 5 8 ) Bal l y ’ s (1 ,1 1 5 ) Caes ars (At l an t ic Ci ty , N.J .) (5 6 ) Caes ars (Las Veg as , Nev .) (5 ) Fl am i ng o (2 1 ) Harrah ’ s (6 2 ) Sh o wb oat (6 6 6 ) Th e Qu adCas i no an d Res o rt (2 ) Tro p i can a Cas i n o an dRes ort (1 ,8 9 1 ) M ead o w l an d s Racet rack (5 6 ) Bo rg at a (6 2 2 ) Tru m p Taj M ah al (4 ,3 8 3 ) Tru m p Pl aza (2 ,8 3 3 ) To tal (1 4 ,8 8 7 ) As s h o wni n t h e t ab l e ab o v e, Bo n ep art e’ s an n u al l o s s atNJ AW was $ 2 1 7
. Th i s am ou n ti s n o t o n th e NJ AW s t at em en t . Rat h er, t he s t at em en ts h ows am o u n t s wag eredo f $ 2 , 0 4 8 an dam o u n t s wo n o f $ 1 ,8 3 1 . Th e d i fferen ce b et ween th es e
am ou n t s i s $ 2 17 . Fro m th i s s t at em en t Bo n ep art e arg u es th ath i s an n u al l o s s was $ 2 1 7 , equ al t o $ 2,0 4 8 m i n u s $ 1,8 3 1 . By co n tras t , the IRS arg u es th atBo n ep art e- 1 6 -

[* 1 6 ] h ada g ai n fo r th e y ear at th e NJ AW cas in o o f $ 1 ,8 3 1 . Bu tth i s co m p u t at i o n d o es no tacco un t fo r t h e $ 2 ,0 48 o f wag ers s h own o n th e s tat em en t . Th erefo re, we ag ree wi th Bo n ep art e o n th i s p o i n t . W e fi n d t h atBo n ep art e’ s an n ual l o s s at NJ AW was $ 2 1 7
. In t o t al , th e 1 4 s t at em en t s fo r t h e cas i n o s fo r t he 2 0 1 2 y ear s h o w Bo n ep art e h ad n etl o s s es o f $ 1 4 ,8 8 7 fro m wag ers du ri n g th aty ear. Fo r 2 0 1 3, there are an n u al s t at em en t s fro m 1 2 cas in o s atwh i ch Bo n ep art e g am b l ed . No n e o f t h e s tat em en t s s ho ws th e am o un twag eredo r t h e wi nn i n g s fo r
an y p art i cu l ar wag er. On e s t at em en t(fo r Go l d en Nu g g et ) s h o ws th e am o un to f h is
m o nt h l y g ai n o r l o s s fo r each m o n th o f t h e y ear. On e s t at em en t (fo r Tru m p Taj M ah al ) s ho ws th e am o u n t o f h i s d ai l y g ai n o r l o ss fo r each d ay o f th e y ear. Th e
o th er 1 0 s t at em en t s s h o w o nl y th e t o t al an nu al am o u n tth atBo n ep art e g ai n edo r l o s tatth e cas i n o th ati s su edth e s t at em en t . Th e t ab l e b el o w s h o ws th e an n u al n et g ai n s o r l o s s es rep o rt edo n the 1 2
s t at em en t s fo r 2 0 1 2
.- 1 7 -

[* 1 7 ] Cas i n o Netg ai n s / l o s s es

Tru m p Taj M ah al ($ 2 ,9 01 ) Po werb al l l o t t ery (8 ) Go l den Nu g g etAt lan t i c Ci ty (6 06 ) Tru m p Pl aza (5 ,1 78 ) Bal l y ’ s (1 ,0 77 ) Caes ars (At l an ti c Ci ty , N.J .) (1 26 ) Fl am in g o (1 ) Harrah ’ s (2 4 ) Sh o wb oat (1 22 ) Th e Qu adCas i no an dRes o rt (8 7 ) Bo rg at a (1 ,6 47 ) Tro pi can a Cas i n o an d Res o rt (8 32 ) To t al (1 2 ,6 09 ) In t o t al , th e 1 2 s t at em en t s fo r t h e cas i n o s fo r t he 2 0 1 3 y ear s h o w Bo n ep art e h ad n etl o s s es o f $ 1 2 ,6 0 9 fro m wag ers du ri n g th aty ear. 2 0 1 2 t ax retu rn Ap ri l 1 5 , 2 0 1 3 was th e du e d at e fo r Bo nep art e’ s 2 0 12 fed eral -i n co m e-t ax retu rn . OnJ u ne 7 , 2 0 13 , Bo n ep art e fi l edh i s 2 0 1 2 retu rn o n a Fo rm 1 0 40 . See i n fra p art4 . Hi s retu rn was l at e. Bo n ep art e p rep aredh i s retu rnh i m s el f an dd i d n o t
co n su l tan y

t ax p ro fes si o n al s .- 1 8 -

[* 1 8 ] Onh i s Fo rm

1 0 40 , Bo n ep art e rep o rt edth ath i s o ccup at i o n was “ T.B.A. Po rt Au th NY & NJ ”. Th i s p res u m ab ly m ean s To l l Bri dg e Ag en tPo rtAu th ori ty o f New Yo rk an dNew J ers ey . Bo n ep art e rep o rt edh i s i nco m e an dl o ss es fro m g am b l i n g act i vi ty

b o th as a p ro fes s i on al g am

b l er (o n th e Sch edu l e C) an das a cas u al g am b l er (i n co m e o n l i n e 2 1 o f Fo rm

1 0 4 0 an d l o s s o n l i n e 2 8 o f Sch edu le A). Hi s Sch edu l e C s t at ed th ath i s “ Pri n ci p al b u s i n es s o r p ro fes s i o n ” was

“p ro fes s i o n al g am

b l er”. Th e Sch edu l e C rep ort edth e fo l l o wi ng i n co m e an d
ex p en s es :- 1 9 -

[* 1 9 ] 2 0 1 2 Sch edu le C Am o u n tcl ai m ed In co m e Gro ss recei p t s $ 1 8 ,0 00 Retu rn s an dal l o wan ces (1 8 ,0 0 0 ) Gro ss i n co m e 0 Ex p en s es Car an dtru ckex p en s es 3 8 ,1 5 0 Dep reci at i o n 3 ,5 5 0 In s u ran ce 4 ,8 6 8 Leg al an dp ro fes s i on al s erv i ces 6 ,9 0 0 Offi ce ex pen s es 1 ,0 2 0 Ren t o r l eas e--v eh i cl es , m ach i n ery , an d equ ip m en t 3 0 0 Ren t o r l eas e--o th er b u s in es s p ro p ert y 1 ,1 2 8 Rep ai rs an dm ai n t en an ce 1 ,1 0 0 Sup p l i es 3 ,9 0 0 Trav el 1 2 ,9 0 0 Deduct i b l e m eal s an d en t ert ai n m en t 1 5 ,3 0 0 To tal ex p en s es 8 9 ,1 1 6 Netb u s i n es s i n co m e (8 9 ,1 1 6 ) Bo n ep art e dul y

co p i edth e -$ 8 9 ,1 1 6 en try fo r n etb u s i n es s i n co m e atth e b o t t o m o f th e Sch edu l e C t o l in e 1 2 o f h i s Fo rm 1 0 4 0. It is u n cl ear h o w Bo nep art e cal cu l at edth e $ 1 8 ,0 0 0 o f recei p t s an dth e $ 1 8 ,0 0 0 o f retu rn s an d al l o w an ces th ath e rep o rt edo n th e Sch edu l e C. Th u s , i ti s
u n cl ear wh et her h e i n t en d edt o rep o rtth atthe am o u n t o f h i s g ai n s fro m wag eri n g tran s act io n s was $ 1 8 ,0 0 0 an dth ath is l o s s es fro m wag eri n g tran sact i o n s was l i m i ted t o $ 1 8 , 0 0 0
. Th e t ot al ex p en s es rep o rt edo n th e Sch edu l e C were $ 89 ,1 16
.- 2 0 -

[* 2 0 ] Iti s ap p aren t th atBo n ep art e i n t en dedt o rep o rtth at $ 8 9 ,1 1 6 was th e am o u n t
o f n o nwag eri n g ex p en ses o f g am b l in g . Onl i n e 2 1 , “ Oth er i n co m e”, o f t h e Fo rm 1 0 4 0 , Bo n ep art e rep o rt ed$ 1 8 ,0 0 0
o f wh ath e l ab el ed“ Gam

b l i n g ” i n co m e. Th e p l acem en to f l in e 2 1 o n th e Fo rm 1 0 4 0 m ean tth atth e $ 1 8 ,0 0 0 Bo n ep art e rep o rt edo n th is l i ne was i n cl u d edi n g ro s s i n co m e. Bo n ep art e rep o rt edth ath i s ad ju s t edg ro s s i n co m e was $ 2 2 ,1 0 0. OnSch edu l e A, l in e 2 8, Bo n ep art e cl ai m edan $ 18 ,0 0 0 i t em i zedd edu ct i o n fo r “ G am b l i n g In co m e”. On thatSch edul e A h e al so cl ai m edan i t em i zed d educt i o n fo r $ 3 ,5 9 2 o f real -es t at e t ax es . Bo n ep art e al s o cl ai m edan i t em i zed d educt i o n fo r m ed i cal ex p en s es . Aft er red u ci n g h i s m ed ical ex p en s es o f $ 1 2 ,2 9 2 b y 7 .5 % o f h i s rep o rt edad

ju s t edg ro s s i n co m e (i .e., 7
. 5 % × $ 2 2,1 0 0 = $ 1 , 6 5 8 ), h e cl ai m eda m ed i cal -ex p en s e d edu ct i o n o f $ 1 0 ,6 3 4. Th e ret u rn rep ort edzero t ax ab l e i n co m e an dzero t ax . 2 0 1 3 t ax retu rn Ono r ab o u t Ap ri l 1 5 , 2 01 4 , Bo n ep art e t i m el y fi l edh i s 2 0 13 fed eral -i n co m et ax return o n a Fo rm

1 04 0 . Bo n ep art e p rep ared th e ret u rn h i m sel f an d d i d n o t
co n su l tan y

t ax p ro fes si o n al s .- 2 1 -

[* 2 1 ] Onh i s Fo rm

1 0 40 , Bo n ep art e rep o rt edth ath i s o ccup at i o n was “ T.B.A. Po rt Au th NY & NJ ”. As wi th h i s 2 0 1 2 retu rn , Bo n ep art e rep ort edh i s i n co m e an dl o s s fro m g am b l in g act i v i ty

b o th as a p ro fes s i o n al g am bl er (o n a Sch edu le C) an das a cas u al g am b l er (o n l i ne 2 1 o f Fo rm

1 0 4 0 an dl i n e 2 8 o f Sch edu l e A). Hi s Sch edu l e C fo r 2 0 1 3 s t at edth ath i s “ Pri nci p al b us i n es s o r p ro fes s i o n ”
was “p ro fes s io n al g am

b l er”. Th e Sch edu l e C rep o rt edth e fo l l o wi n g i n co m e an d
ex p en s es :- 2 2 -

[* 2 2 ] 2 0 1 3 Sch edu l e C Am o u n tcl ai m ed In co m e Gro ss recei p t s $ 1 0 , 0 0 0 Retu rn s an dal l o wan ces (1 0 ,0 0 0 ) Gro ss i n co m e 0 Ex p en s es Car an dtru ckex p en s es 3 8 ,0 0 0 Dep reci at i o n 1 ,7 7 5 In s u ran ce 3 ,8 0 0 Leg al an dp ro fes s i on al s erv i ces 6 ,5 0 0 Offi ce ex pen s es 1 ,3 8 0 Ren t o r l eas e--v eh i cl es , m ach i n ery , an d equ i p m en t 3 ,0 0 0 Ren t o r l eas e--o th er b u s in es s p ro p ert y 1 ,1 2 8 Rep ai rs an dm ai n t en an ce 2 ,1 0 0 Sup p l i es 3 ,9 0 0 Trav el 1 2 ,0 0 0 Deduct i b l e m eal s an d en t ert ai n m en t 1 4 ,0 0 0 To tal ex p en s es 85 ,7 8 3 a Netb u s i n es s i n co m e (8 5 ,7 8 3 )

a Th e act u al t o t al o f t h e ex p en s es i s $ 8 7,5 8 3 , n o t$ 85 ,7 8 3 as Bo n ep art e rep o rt ed . Th is i s p ro b ab l y du e t o a m ath erro r b y

Bo nep art e. Becau se we h o l dth ath e i s n o ten t i t l edt o d edu ctan y o f t h e n o n wag eri n g b u s in es s ex p en s es th ath e rep o rt ed o n h i s retu rn , h i s erro r d o es n o t affect o u r fi n d i n g s . Bo n ep art e dul y

co p i edth e -$ 8 5 ,7 8 3 en try fo r n etb u s i n es s i n co m e atth e b o t t o m o f th e Sch edu l e C t o l in e 1 2 o f h i s Fo rm 1 0 4 0. Onl i n e 2 1 o f th e Fo rm

1 0 4 0 , Bo n ep art e rep o rt edh e earn ed“ Gam b l i n g ” i n co m e o f $ 12 ,5 00 . He rep o rt edad j u s t edg ro s s i n co m e o f $ 19 ,7 4 6
.- 2 3 -

[* 2 3 ] OnSch edu l e A, l i n e 2 8 , Bo nep art e cl ai m eda $ 1 2,5 0 0 i t em izedd edu ct i o n fo r “ G am b l i n g In co m e”. On thatSch edul e A h e al so cl ai m edan i t em i zed d educt i o n fo r $ 3 ,4 0 7 o f real -es t at e t ax es . Bo n ep art e al s o cl ai m edan i t em i zed d educt i o n fo r m ed i cal ex p en s es . Aft er red u ci n g h i s m ed ical ex p en s es o f $ 8 ,1 1 2 b y 1 0 % o f h i s rep ort edad

j u s t edg ro s s i n co m e (i .e., 1 0 % × $ 19 ,7 4 6 = $ 1 , 9 7 5 ), h e cl ai m eda m ed i cal -ex p en s e d edu ct i o n o f $ 6 ,1 3 7
. Bo n ep art e rep o rt edo th er i t em s o f i n co m e: $ 8 2 ,3 50 i n wag es , $ 1 0 i n i n t eres t , $ 2 ,9 1 6 i n t ax ab l e s t at e t ax refu n ds , an d$ 1 0 , 7 5 3 i n t ax ab l e p en s i o n d i s tri b u t i o n s . Bo n ep art e al s o cl ai m eda $ 3 ,9 0 0 p ers o n al -ex em p t i o n d edu ct i o n . He rep ort edzero t ax ab l e i n co m e an dzero t ax (p re-cred i t ). He rep o rt eda wi th h o l d i n g cred i to f $ 8 ,2 9 0 fo r t h e 2 0 1 3 t ax y ear wh i ch h as n o t b een refu n d ed t o h i m . No t ice o f d efi ci en cy fo r 2 0 1 2 OnAu gu s t2 9 , 2 0 1 4, the IRS i s s u edBo n ep art e a n o ti ce o f d efi ci en cy fo r t h e 2 0 1 2 t ax y ear. Itd et erm i n ed a d efi ci en cy i n t ax o f $ 2 1 ,0 9 0 , an ad d it i o n t o t ax
u n d er s ect i o n 6 6 5 1 (a)(1 ) o f $ 1 ,1 8 7 , an da p en al ty u n d er s ect i o n 6 6 6 2 (a) o f $ 4 ,2 1 8
. Th e n o t i ce o f d efi ci en cy

s h o wedth e fo l l o w i n g ad j u s t m en t s t o t h e Sch edu l e C: th e $ 18 ,0 0 0 rep o rt edfo r “ Gro s s recei p t s ” was ad j u s t edt o zero ; th e $ 1 8 ,0 0 0 rep o rt edfo r “ Retu rn s an dAl l o w an ces ” was ad ju st edt o zero ; an d ev ery

l i n e i t em- 2 4 -

[* 2 4 ] fo r b us i n es s ex pen s es was ad j u s t edfro m th e am o un trep o rt edt o zero . Bo n ep art e co n t es t s th e d i s al l o w an ce o f t h e l i n e i t em s fo r b u s in es s ex pen s es . See i n fra p art1 fo r t h e d i s cu s s i on o f t h i s i s s ue. Th e ad ju s t m en t s t o t h e Sch edul e C i n creas ed Bo n ep art e’ s ad ju s tedg ro s s i n co m e t o $ 1 1 1,2 1 6. Th e i n creas e i n ad j u s tedg ro s s i n co m e i n tu rn res u lt edi n a
co m p u t at i o n al redu ct i o n o f Bo n ep art e’ s m ed i cal -ex p en s e d edu ct io n fro m $ 1 0 ,6 3 4 t o $ 3 ,9 5 1
. Ad d it i on al l y , th e n ot ice o f d efi ci en cy d i s al l o wed , fo r l ack o f s ub s t an t i at i o n , th e $ 3 , 59 2 real -es t at e t ax d edu ct i o n Bo n ep art e h adcl ai m edo n Sch edu l e A. Bo n ep art e co n t es t s th i s d i s al lo wan ce. See i n fra p art3 fo r t h e d i scu s s i o n o f t h i s i s su e. As n o tedab o v e, Bo n ep art e rep o rt ed $ 1 8 ,0 0 0 o f g am b l i n g i n co m e o n l i n e 2 1
o f Fo rm 1 0 4 0 , wh i ch res u l t edi n an $ 1 8 ,0 0 0 i n creas e i n h i s rep o rt edg ro s s i n co m e. Th e n ot i ce o f d efi ci en cy

m ad e n o ad

ju st m en tt o th e $ 1 8,0 00 o f rep o rt edg am b l i n g i n co m e. No r h as th e IRS s i n ce t h e n o t i ce o f d efi ci en cy m ad e an y

ch al l en g e t o th e $ 1 8 ,0 0 0 am o u nt . Bo n ep art e h as n o td en i edth atth e $ 1 8 , 0 0 0 am o u n t h e rep o rt edi s
co rrect . Thu s , fo r t h e p u rp o s e o f t h i s cas e we accep tth atBo nep art e’ s g ro s s i n co m e fo r 2 0 12 i n cl u d es $ 1 8,0 0 0 i n g am b l i n g i n co m e (i f h e i s co n s i dered a
cas u al g am

b l er).- 2 5 -

[* 2 5 ] Th e n o t i ce o f d efi ci en cy d i s al l o wedth e $ 18 ,0 0 0 i t em i zedd edu ct i o n th at Bo n ep art e cl ai m ed o n h i s Sch edu l e A fo r g am b l in g l o ss es . Bo n ep art e co nt es t s th i s d i s al lo wan ce. See i n fra p art2 fo r t h e d i scu s s io n o f t h i s i s su e. As n o tedab o v e, Bo n ep art e rep o rt ed $ 1 8 ,0 0 0 as “ Gro s s recei pt s ” o n h i s Sch edu l e C an d an o ffs et t i ng $ 1 8 ,0 0 0 as “ Return s an dAl l o wan ces ”. Th e IRS d i d
n o tt ak e t h e p o s i t i o n i n th e n o t ice o f d efi ci en cy th atth e $ 1 8 ,0 0 0 thatBo nep art e rep o rt edas g ro s s recei p t s o n h i s Sch edu le C i s p ro p erl y i n cl u d ab l e i n h i s g ro s s i n co m e as i n co m e fro m

cas ual g am

b l i n g (al o ng wi th th e $ 1 8 ,0 0 0 h e rep o rt edo n l i ne 2 1 o f h i s Fo rm

1 0 40 ). No r h as i tt ak en th atp os i t i o n s i n ce i ti ss u ed the n o t i ce
o f d efi ci en cy . Fo r h i s p art , Bo n ep art e d o es n o t co n ced e t h atth e $ 18 ,0 0 0 h e rep o rt edas g ro s s recei p t s o n h i s Sch edu le C i s i n cl u d ab l e i n h i s g ro s s i nco m e i n ad d it i o n t o th e $ 1 8,0 0 0 h e rep o rt edas g am b l in g i n co m e o n l i n e 2 1 o f h i s Fo rm 1 0 4 0
. Th e n o t i ce o f d efi ci en cy cal cu l at edBo n ep art e’ s t ax ab l e i n co m e as $ 9 8 ,6 5 6
. No t ice o f d efi ci en cy fo r 2 0 1 3 OnOct o b er 1 0 , 2 01 4 , th e IRS i s s u edBo n ep art e a n o t i ce o f d efi ci en cy fo r th e 2 0 13 t ax y ear. Th e IRS d et erm i n eda d efi ci en cy i n t ax o f $ 17 ,2 1 0 an d ad d it i o n s t o t ax u n d er s ect i on s 6 6 51 (a)(1 ) an d (a)(2 ), an d 6 6 5 4 o f $ 2 , 0 0 7 , $ 2 6 8 , an d $ 1 4 4 , res p ect iv el y .- 2 6 -

[* 2 6 ] Th e n o t i ce o f d efi ci en cy s t at edth at th e $ 1 7 ,2 1 0 d efi ci en cy res u l t edfro m

th e fo l l o w i n g d et erm i n at i o n s : ! Bo n ep art e fai l edt o rep o rt$ 1 0 , 7 53 i n IRA d i s tri b u ti on s . ! Bo n ep art e fai l edt o rep o rt$ 2 ,0 0 3 i n s t at e t ax refu n d s. ! Bo n ep art e fai l edt o rep o rt$ 1 0 i n i n t eres t i n co m e. ! Bo n ep art e fai l edt o rep o rt$ 8 2 , 3 50 i n wag es . ! Bo n ep art e was en t i t l edt o a $ 3 ,9 0 0 p ers o n al -ex em p t io n d edu ct i o n . Th e n ot i ce o f d efi ci en cy

d i d n o tm ak e an y

d et erm i n at i o n reg ard i n g Bo n ep art e’ s rep o rt i n g o f g am

b l i n g act i v i ty . Itcal cu l at edBo n ep art e’ s t ax ab l e i nco m e as $ 8 5 ,1 1 6 . Itd i dn o ti ncl u d e i n i t s cal cu l at i o n an y p ro fi to r l os s fro m

a s o l e p ro p ri et ors h i p (i .e., a b u s in es s fo r wh ich i n co m e an dex p en s es are rep o rt edo n a Sch edu l e C), an y

g am bl i n g i n co m e, o r an y

Sch edul e A d edu ct io n s . Fu rt h er ch an g es t o IRS p o s i t i o n s i nce t he n o t i ces o f d efi ci en cy Bo n ep art e fi leda t i m el y

p et i t i o n i n res p o n se t o th e n o ti ces o f d efi ci en cy fo r 2 0 1 2 an d2 0 1 3 . He res i d edi n New J ers ey wh en h e fi l edth e p et i ti o n. Th e IRS
an s wered
. Th en , o n J u n e 1 1 , 2 0 1 5, th e IRS wro te a l et t er t o Bo n ep art e s t at i n g th ati t h ad ch an g edi t s p o s i t i o n fro m th ati n th e n o t i ce o f d efi ci en cy fo r 2 0 1 3 an dth atth e
n ew p o s i t i o n was refl ect edi n an ex am i n at i o n rep o rtat t ach edt o th e l et t er. In i t s- 2 7 -

[* 2 7 ] p o s t tri al b ri ef, t h e IRS co n fi rm edth atth e ex am in at i o n rep o rtrefl ect s i t s p o s i t i on i n th i s cas e wi th res p ectt o th e am o u n to f t h e d efi ci en cy fo r 2 01 3
. Th e ex am i n at io n rep o rtfo r 2 01 3 s t at edth atBo n ep art e h ad a d efi ci en cy o f $ 1 5 ,8 3 5 . Th i s am o un tres u l t edfro m v ari ou s ad

ju s t m en t s t o Bo nep art e’ s retu rn
s h o wni n the ex am in at i o n rep o rt . Th e ex am i n at i on rep o rts t at edth atth e IRS h ad d i s al lo wedth e $ 8 5 , 7 8 3 b u s i n es s -ex p en s e d edu ct i o n th atBo n ep art e cl ai m edo n h i s Sch edu l e C. Bo n ep art e co n t es t s th i s ad ju s t m en t . See i n fra p art1 fo r t h e d i s cu s s i o n o f t h i s i s s u e. Th e ex am i nat i o n rep o rts t at edth atth e $ 2,9 1 6 i n i n co m e th atBo n ep art e rep o rt edfo r s tat e t ax refu n d s s h o u l db e reduced b y $ 9 1 3 ; thati s , fro m $ 2 , 9 1 6 t o $ 2 ,0 0 3
. Nei th er s i d e co n t es ts th atthe co rrect am o u nti s $ 2 , 0 0 3
. Becau s e o f t h e ad

ju s t m en ts d es cri b eds o far, Bo n ep art e’ s ad j u s tedg ro s s i n co m e,
as refl ect edi n th e ex am i n at io n rep o rt , b ecam e $ 1 0 4 , 6 16 . Th i s i n creas e i n Bo n ep art e’ s ad

ju s t edg ro s s i n co m e i n tu rn res u lt edi n a co m p u tat i on al ad

ju s t m en t t o h i s m ed i cal -ex p en se d edu ct io n . Th e d edu ct i o n was redu cedfro m th e $ 6 ,1 3 7 cl ai m edt o zero . Th e ex am i n at io n rep o rtfo r 2 01 3 m ad e a “ 0 .0 0 ”-d o ll ar ad ju s t m en t(i
. e., n o ad ju s t m en t ) t o t h e $ 1 2 , 5 0 0 th atBo n ep art e h adcl ai m edas an i t em i zedd edu ct i o n fo r g am bl i n g . Th e ex am i n at i o n rep o rts t at edn o p o s i t i o n an dm ad e n o ad ju s t m en t- 2 8 -

[* 2 8 ] reg ard in g t h e $ 1 2 , 5 0 0 i n g am b l i n g i n co m e Bo n ep art e rep o rt edo n l in e 2 1 o f h i s Fo rm 1 0 4 0
. Th e ex am i n at io n rep o rtfo r 2 01 3 s t at edn o p o si t io n reg ard i n g t h e $ 1 0,0 0 0 i n g ro s s recei p ts th atBo n ep art e rep o rt edo n h i s Sch edu l e C o r t h e $ 1 0 ,0 0 0 i n

“ Retu rn s an d Al l o wan ces ” o n th e s ch edul e. Th e ex am i n at i o n rep o rtd i dn o tt ak e th e p o si t i o n th atBo n ep art e was req u i red t o i n cl u d e t he $ 1 0 , 0 0 0 i n g ro s s recei p t s i n h i s g ro s s i n co m e i n ad d i t i o n t o th e $ 12 ,5 0 0 i n g am b l i n g i n co m e th ath e rep o rt ed
o n l i n e 2 1 o f h i s Fo rm 1 0 4 0. Fo r h i s p art , Bo n ep art e d o es n otco n ced e th atth e $ 1 0 ,0 0 0 h e rep o rt edas g ro ss recei pt s o n h is Sch edu l e C i s i n cl u d ab l e i n h i s g ro s s i n co m e i n ad d it i o n t o th e $ 1 2 ,5 0 0 th at h e rep o rt ed as g am b l i n g i n co m e o n l i n e 2 1
o f h i s Fo rm

1 0 4 0
. Th e ex am i n at io n rep o rtm ad e n o ad ju s tm en tt o the $ 3 ,3 0 4 real -es t at e-t ax d educt i o n Bo n ep art e cl ai m edo n Sch edul e A. Un l i ke t h e n o ti ce o f d efi ci en cy fo r 2 0 1 3 , th e ex am in at i o n rep o rt d i dn o tfi n d a d efi ci en cy

b as edo n (1 ) Bo n ep art e’ s al l eg edfai l ure t o rep ort$ 1 0 ,7 5 3 i n t ax ab l e ret i rem en td i s tri bu t i o n s , $ 1 0 i n i n t eres t , an d$ 8 2 ,3 50 i n wag es , an d(2 ) h i s
en t i t l em en tt o an u ncl ai m edp ers o n al -ex em p t i o n d educt i o n . Becau se t he IRS’ s l i ti g at i n g p o s i t i o n i s th atth e co m p u t at i o ns i n th e ex am i n at i o n rep o rtare co rrect ,- 2 9 -

[* 2 9 ] we co n cl u d e t h atth e IRS h as ret ract edth es e t wo d et erm i n at i o n s th ath ad b een refl ect edi n th e n ot i ce o f d efi ci en cy fo r 2 0 1 3. Th e ex am i n at io n rep o rtcal cu l at edBo n ep art e’ s t ax ab l e i n co m e as $ 7 9 ,6 0 9
. Th e ex am i nat io n rep o rts t at edth atBo n ep art e i s l iab l e fo r a s ect i o n 6 6 5 1 (a)(1 ) ad d it i o n t o t ax o f $ 1,8 8 6 an da s ect i o n 6 6 6 2 p en al ty o f $ 3 ,1 67 fo r 2 0 1 3
. In i t s b ri ef, t h e IRS s tat es th ati t s l i t i g at i n g p o s i t io n reg ard i n g t h e am o u n to f th e 2 0 13 d efi ci en cy

i s refl ect edi n th e co m

p u t at i on s i n the ex am in at i o n rep o rt . Th e IRS b ri ef s t at es th atthe IRS n o l o ng er as sert s an y ad d i t i o n s t o t ax o r p en al ti es fo r 2 0 1 3 . Th i s s t at em en tth u s wi th draws an y as s ert i o n b y

th e IRS fo r 2 0 1 3 reg ard i n g th e s ect i o n 6 6 5 1 (a)(1 ) ad d it i o n t o t ax (wh i ch was m en t i o n edi n t h e
n o t i ce o f d efi ci en cy

an dth e ex am i nat i o n rep ort ), th e s ect i o n 6 6 5 1 (a)(2 ) ad d i t i o n t o t ax (wh i ch was m en t i o n edi n th e n o t i ce o f d efi ci en cy ), th e s ect i o n 6 6 5 4 ad d i t i o n t o t ax (wh i ch was m en t i o n edi n th e n o t i ce o f d efi ci en cy ), an dthe s ect i o n 6 66 2 p en al ty (wh i ch was m en ti o n edi n the n o t i ce o f d efi ci en cy an d th e ex am in at i o n rep o rt ). Th e IRS’ s b ri ef al s o t ak es the p o s i t i o n thatth e $ 1 8,0 0 0 i tem izedd edu ct i o n fo r g am bl i n g l os s es th at Bo n ep art e cl ai m edfo r t ax y ear 2 0 1 2 s h o ul d b e al l o wedt o th e ex t en to f $ 12 ,8 39 . Th i s i s a co n ces s io n co m p aredwi th th e n o t i ce o f d efi ci en cy fo r 2 0 1 2 , wh ich h add et erm i nedth atth e am o u n t o f t h e d edu ct i o n was zero .- 3 0 -

[* 3 0 ] Becau s e o f t h e ch an g i n g p o s i t i o ns o f t h e IRS wi th res p ectt o th e am o u n t s o f th e d efi ci en ci es , we s u m

m ari ze th e IRS’ s p o s it i o n s wi th res p ectt o th e rel ev an t l i ne i t em s o f t h e ret u rn s i n t h e fo l l o wi n g t ab l e:- 3 1 -

[* 3 1 ]

Year an di t em Retu rn Def. no t i ce IRS’ s

l i t i g at i ng po s it i on Res u lt 2 0 1 2 Sch . C g ro s s recei p t s 1 8 ,0 0 0 a 0 0 0 Sch . C retu rn s & al lo w . 1 8 ,0 0 0 0 0 0 Sch . C b u s. ex p . 8 9 ,1 1 6 0 0 0 Gam b l in g i n co m e l i n e 2 1 1 8 ,0 0 0 1 8 ,0 0 0 1 8 ,0 0 0 1 8 ,0 0 0 AGI 2 2 ,1 0 0 1 1 1 ,2 1 6 1 1 1 ,2 1 6
-- b Sch . A g am

b l i n g d educt . 1 8 ,0 0 0 0 1 2 ,8 3 9 1 8 ,0 0 0 Sch . A real -es t at e t ax es 3 ,5 9 2 0 0 0 Sch . A m ed i cal p re-7
. 5 % 1 2 ,2 9 2 1 2 ,2 9 2 1 2 ,2 9 2 1 2 ,2 9 2 Sch . A m ed i cal p o s t -7 .5 % 1 0 ,6 3 4 3 ,9 5 1 3 ,9 5 1
-- b Tax ab l e i nco m e 0 9 8 ,6 5 6 No tco m pu t ed

-- b Tax 0 2 1 ,0 9 0 No tco m pu t ed

-- b 2 0 1 3 Sch . C g ro s s recei p t s 1 0 ,0 0 0 a
--- 0 0 Sch . C retu rn s & al lo w . 1 0 ,0 0 0
--- 0 0 Sch . C b u s. ex p . 8 5 ,7 8 3
--- 0 0 Gam b l in g i n co m e l i n e 2 1 1 2 ,5 0 0
--- 1 2 ,5 0 0 1 2 ,5 0 0 St at e t ax refu ndi n co m e 2 ,9 1 6 2 ,0 0 3 2 ,0 0 3 2 ,0 0 3 AGI 1 9 ,7 4 6 8 5 ,1 1 6 1 0 4 ,6 1 6
--- b Sch . A g am

b l i n g d educt . 1 2 ,5 0 0
--- 1 2 ,5 0 0 1 2 ,5 0 0 Sch . A real -es t at e t ax es 3 ,4 0 7
--- 3 ,4 0 7 3 ,4 0 7 Sch . A m ed i cal p re-1 0% 8 ,1 1 2
--- 8 ,1 1 2 8 ,1 1 2 Sch . A m ed i cal p o s t -1 0 % 6 ,1 3 7
--- 0
--- b Tax ab l e i nco m e 0 8 5 ,1 1 6 7 9 ,6 0 9
--- b Tax 0 1 7 ,2 1 0 1 5 ,8 3 5
--- b

aNei th er p art y

co n ten d s th atth e am o u n t s rep o rt edas g ro s s recei p t s o n t h e Sch edu l e C s h o u ldb e i n cl ud edi n i n co m e i n ad d i ti o n t o th e g am b l i n g i n co m e rep o rt eds ep arat el y

o n t h e Fo rm

1 0 4 0
. b Th i s i s an am o u n t th at wi l l b e co m p ut edo r reco m

p ut edu n d er Ru l e 1 55
.- 3 2 -

[* 3 2 ] Fi v e i ss ues rem ai n t o b e d eci d ed : (1 ) wh ether Bo n ep art e was a p ro fes s i o n al g am b l er an dth erefo re en t it l edt o n o n wag eri ng g am b l i n g ex p en se d edu ct io n s o f $ 8 9 ,1 1 6 an d$ 8 5 ,7 8 3 fo r 2 0 1 2 an d2 0 1 3, res p ect iv el y , (2 ) wh et h er h e i s en t i t l edt o
an i t em i zedd edu ct i o n o f $ 18 ,0 0 0 fo r l o ss es fro m wag eri n g tran s act i o n s fo r 2 0 1 2 , (3 ) wh et h er h e i s en t i t l edt o a $ 3 ,5 9 2 d edu ct i on fo r t h e p aym en to f real -es t at e t ax es fo r 2 01 2 , (4 ) wh et h er h e i s l i ab l e fo r an ad d i t i o n t o t ax u n d er s ect io n 6 6 5 1 (a)(1 ) fo r 2 0 1 2 , an d(5 ) wh et h er h e i s l i ab l e fo r an accu racy -rel at edp en al ty
u n d er s ect i o n 6 6 6 2 (a) fo r 2 0 12
. OPINION 1
. Bo n ep art e i s n o ten t i t l edt o d edu ct the n o nwag eri n g ex p en s es o f g am b l i n g fo r 2 0 12 o r 2 0 13
. Th e IRS d i sal l owedth e d educt i o n s Bo n ep art e cl ai m ed o n Sch edu l e C fo r th e n o nwag eri ng ex p en s es o f b ei n g a p ro fes s i o n al g am b l er (i .e., th e ex p en ses o t h er th an wag eri n g co st s ). Th es e ex p en s es , h e rep o rt ed , were $ 8 9 ,1 1 6 i n 2 0 1 2 an d $ 8 5 ,7 8 3 i n 2 0 1 3 . Bo n ep art e m ay d edu ctth es e ex p en s es o n ly i f h e i s a p ro fes s i on al g am

b l er. See i n fra p art1 .j. To b e a p ro fes s i on al g am b l er, t h e t ax p ay er m

u s ten g ag e i n g am

b li n g fo r p ro fi t. Sec. 1 8 3 (a), (b ), an d(c); s ec. 1 .1 8 3 -2 (a), In co m e Tax Reg s .; Co m m i s s i o n er
v . Gro et zi n g er, 4 8 0 U.S. 2 3 , 3 5 (1 9 8 7 ). Sect i o n 1 .1 8 3 -2 (b ), In co m e Tax Reg s .,- 3 3 -

[* 3 3 ] p ro v i d es n i n e fact o rs t o co n s i d er wh en d et erm i n i n g wh et h er an act i v i ty i s
en g ag edi n fo r p ro fi t : (1 ) t h e m an n er i n wh i ch th e t ax p ay er carri es o n the act i v i t y ; (2 ) t h e ex p ert i s e o f t h e t ax p ay er o r h i s ad v is ers ; (3 ) t h e t i m e an deffo rt ex pen d ed b y th e t ax p ay er i n carry i n g o n th e act i v it y ; (4 ) t h e ex p ect at i o n thatas s et s u s edi n th e act i v i ty

m ay ap p reci at e i n v al u e; (5 ) th e s ucces s o f t h e t ax p ay er i n carry i n g o n
o th er s i m i l ar o r d i s s i m il ar act i vi t i es ; (6 ) th e t ax p ay er’ s h i s t o ry o f i n co m e o r l o s s es wi th res p ect t o th e act i v i ty ; (7 ) t h e am o u n to f o ccas i o n al p ro fi t s , i f an y , wh i ch are
earn ed ; (8 ) t h e fi n an ci al s tatu s o f t h e t ax p ay er; an d (9 ) el em en t s o f p ers o n al p l eas u re o r recreat i o n. See, e.g ., Hen dri ck s v . Co m m i s s i o n er, 3 2 F.3 d9 4 , 9 8 (4 th Ci r. 1 9 94 ), aff’ g T.C M em o . 1 9 9 3-3 9 6 . Th es e fact o rs are n o tex cl u s i v e, an dn o
o n e fact o r i s d is p os i t iv e. Sec. 1 .1 8 3 -2 (b ), In co m e Tax Reg s .; Hen dri ck s v . Co m m i s s i o n er, 3 2 F.3 dat9 8 . As ex p l ai n ed b el o w, we fi n do n a p rep o n deran ce o f
ev i d en ce t h atBo nep art e was n o ta p ro fes s i o n al g am b l er fo r t h e y ears 2 0 1 2 an d 2 0 1 3
. 5

5 In a p ri o r cas e i nv o l v in g Bo n ep art e’ s 2 0 10 t ax y ear, we h el dth at Bo n ep art e was n ota p ro fes s i o n al g am b l er. Bo n ep art e v . Co m

m is s i o n er, T.C. M em o . 2 0 1 5
- 1 2 8 , at * 1 5 . Becau s e each t ax y ear s t an d s o n i t s o wn , o u r o p in i o n i n th e p ri o r cas e d o es no tco n tro l the o u t co m e o f t h i s o n e.- 3 4 -

[* 3 4 ] a. M an n er i n wh i ch th e t ax p ay er carri es o n th e act i v it y Th e m an n er i n wh i ch th e t ax p ay er carri es o n an act i v i ty m ay i n d i cat e a p ro fi t m o t i v e i f th e t ax p ay er act s i n a “ b u s in es s l i k e m an n er an dm ai n t ai n s
co m p l et e an daccu rat e b o o k s an dreco rd s ”, co n du ct s t h e act i v it y “ i n a m an n er
s ub s t an t i al l y

s i m i l ar” t o p ro fi t ab l e act i v it i es o f a s i m i l ar n atu re, o r at t em p ts t o i m p ro v e th e act i v it y ’ s p ro fi t ab i l i ty b y ad op t in g n ew o perat in g m et h od s an d t ech n i qu es an dab an d o n i n g u np ro fi t ab le m et h o d s . Sec. 1 .1 8 3 -2 (b )(1 ), In co m e Tax Reg s. If a g am

b l er k ep td et ai l edreco rd s o f t h e g am b l i n g act iv i ty , th at m i g h t
s up p ortth e g am

b l er’ s arg u m en tth ath e o r s h e h ada p ro fi tm ot i v e. A g am b l er
m i g h tk eep reco rd s i n o rd er t o t es tth e s u cces s o f a p art i cu lar t ech n ique. Bo n ep art e was n o ts u ch a g am b l er. He d i d n o tk eep an y reco rd s o th er t h an th e wi n /l o s s s t at em en t s p ro v i d ed b y th e cas i n o s. Th es e s t at em en t s g en eral l y s t at e o n l y th e ag g reg at e am o u n two n o r l o s t du ri n g th e y ear at a p art i cu l ar cas i n o . Th i s fact o r wei g h s ag ai n s tBo n ep art e. See Carm o dy v . Co m m i ss i on er, T.C. M em o . 2 0 1 6
- 2 2 5 , at * 2 0 -* 2 3 (h o l d i ng th att ax p ay er was n o t en g ag edi n h o rs e-raci ng act i v i ty fo r p ro fi t wh en h e d i dn oth av e a wri t t en b us i n es s p l an , d i d n o t u se s p read s h eet s
an d i n vo i ces t o m i n i m i ze l o s s es o r g en erat e p ro fi t s , an dd i dn oten g ag e i n an y
m ean i n g fu l fi n an ci al m an ag em en twi th res p ectt o h i s h o rs e-raci n g act i v it y ).- 3 5 -

[* 3 5 ] b
. Th e ex p ert i s e o f t h e t ax p ay er o r h i s ad vi s o rs Prep arat i o n fo r anact i v i ty b y ex t en s i v e s tud y

o f i t s accep t edb us i n es s , eco n om i c, an d s ci en t i fi c p ract i ces , o r co n s u l t at i o n wi th i n du s try ex p ert s , m ay i n d i cat e a p ro fi tm o t i v e wh ere t h e t ax p ay er carri es o n th e act i vi ty i n acco rd an ce wi th s u ch p ract i ces . En g dah l v . Co m m i s s io n er, 7 2 T.C. 6 5 9, 6 6 8 (1 9 7 9); s ec. 1 .1 83 -2 (b )(2 ), In co m e Tax Reg s . Effo rt s t o g ai n ex p eri en ce an d a wi l l in g n es s t o fo l l o wex p ertad v i ce m ay al s o i n d icat e a p ro fi t m o t i ve. Dwo rs h akv . Co m m i s s i o n er, T.C. M em o . 2 0 0 4 -2 4 9 , s l i p o p . at1 0 -1 1
. Bo n ep art e t es t ifi edth ath e s p en t t i m e wi th a fri en dwh o al s o g am b l ed freq uen t l y . He t es ti fi ed th atth i s fri en d h el pedh i m l earn ab o u tg am

b l i ng b u tth at th ey al s o “ wen t [al l ] o ver an dp art i ed ”. Bo n ep art e al so t es t i fi edth ath e p urch as ed b o o k s an dv i d eo s o n h ow t o wi n p l ay i n g s l o tm ach i n es an db accarat . Bo n ep art e’ s t es ti m on y

i s cred i b l e. Ho wev er, t he m ere fact th atBo n ep art e tri ed to l earn h o w t o wi n ats l o tm ach i n es an db accarat d o es n o t n eces s ari l y
s u g g es tth ath e p l ay edth es e g am es i n o rd er t o m ak e a p ro fi t . Iti s al s o co n s i s t en t wi th p lay i n g the g am es fo r recreat io n o r, al t ern at iv el y , try i n g t o l i m i t h i s l o s s es . W e are n o tp ers u ad edth atBo n ep art e’ s co n s u l t at i o ns wi th h i s fri en do r h i s b u y in g b o o k s an dv i d eo s s h owedth ath e i n t en d edt o h av e n etg ai ns . Th i s fact o r wei g h s ag ai n s tBo n ep art e.- 3 6 -

[* 3 6 ] c. Th e t i m e an deffo rtex p en d edb y th e t ax p ay er i n carry i n g o n th e act i v i ty Th e t i m e an deffo rtd ev o t edt o an act i v i ty m ay i n d i cat e a p ro fi tm o t i v e, p art i cu l arl y

i f th e act i v i ty d o es n o ti n cl u d e s ub s t an t i al recreat io n al as p ect s. Sec. 1 .1 83 -2 (b )(3 ), In co m e Tax Reg s . A t ax p ay er’ s wi th drawal fro m an o th er
o ccupat io n t o d ev o te m o s to f h i s o r h er en erg i es t o th e act i v i ty m ay b e ev i d en ce th atth e act i v it y

i s en g ag edi n fo r p ro fi t. Id
. Bo n ep art e’ s p ri m ary act i v i ty was wo rk i n g fu l l -t im e as a “ tu n n el b ri d g e ag en t” wi th th e Po rtAu th o ri ty . Al th o u g h h e g am b ledfreq u en t l y , h e g am

b l edo n l y i n h i s s p are t i m e. Fu rth erm o re, h e d eri v eda recreat i o n al b en efi t fro m h i s g am b l in g act i v i ty . Th i s i s wh y h e co n t in u edt o g am

b l e d es p i t e t h e l acko f p ro fi t . Th i s fact or wei g h s ag ai n s tBo n ep art e. d
. Ex p ect at i on th atas s et s u s edi n act iv i ty m ay ap p reci at e i n v al ue Th i s fact o r i s n eu tral an di s n o t ap p l i cab le i n th is cas e, as Bo n ep art e’ s g am b l in g d o es n o ti n v o lv e h ol d i n g as set s . e. Th e s u cces s o f the t ax p ay er i n carry i n g o n o th er s i m i l ar o r d i ss i m i l ar act i v i t i es Prev i o u s ex p eri en ce i n s i m il ar act iv i t i es an ds u cces s fu l co n vers i o n o f
u np ro fi t ab l e t o p ro fi t ab l e en t erp ri s es m ay i n d icat e a p ro fi tm ot i v e. Id . s ub p ara. (5 ).- 3 7 -

[* 3 7 ] Bo n ep art e h as n o h i s t o ry o f s u cces s wi th b u si n es s act i v i t i es b es i d es
wo rk i n g as a “ tu n n el b ri d g e ag en t ”. W o rk in g as a tu n n el b ri d g e ag en ti s n o t
n eces s ari l y

h el p fu l i n p rep ari n g s o m eo n e fo r a s ucces s fu l career as a g am bl er. Th i s fact or wei g h s ag ai n s tBo n ep art e. f. Th e t ax p ay er’ s h i st o ry o f i n co m e o r l o s s es wi th res p ectt o th e act i v i t y A s eri es o f y ears o f n eti n co m e wo ul db e a s tro n g i n d icat i o n th atth e act i v i t y i s en g ag edi n fo r p ro fi t . Id . s ubp ara. (6 ). Year aft er y ear o f l o ss es , h o wev er, m ay i n d i cat e a l acko f p ro fi tm ot i v e. Id
. Bo n ep art e h as a h i s t o ry

o f g am b l in g l o s s es . No th i n g i n th e reco rdi n d i cat es th ath e h as ev er p ro fi t edfro m g am b li n g . Bo n ep art e d i d n o tm ak e a p ro fi ti n 2 0 0 9 , 2 0 1 0 , 2 0 1 1 , 2 0 1 2, o r 2 0 1 3 . He h ad n etwag eri n g l os s es o f $ 1 4 ,8 8 7 i n 2 0 1 2 an d $ 1 2 ,6 0 9 i n 2 0 1 3 . Bo n ep art e’ s h i s t o ry o f s us t ai n edl o s s es i s i n di cat iv e o f a l acko f p ro fi t o b ject iv e. Th i s fact o r wei g h s ag ai n s t Bo n ep art e. g . Th e am ou n to f o ccas i o n al p ro fi t s, i f an y , wh i ch are earn ed Th e am ou n to f p ro fi t s earn edi n rel at io n t o th e am o u n t o f l o s s es i n cu rred
an d th e am o u n t o f t h e i n v es t m en tm ay i n d i cat e a p ro fi tm o t i v e. Id . s ub para. (7 ). Earn i n g of s ub s t an ti al p ro fi t s , ev en i f t h e p ro fi t s are s p o rad i c, g en eral l y i n d i cat es a p ro fi t m o t i v e i f th e t ax p ay er’ s i n v es t m en to r l os s es are rel at i v el y s m al l . Id . Th e
m ere o pp o rtu n i ty

t o earn a s ub s t an t i al p ro fi t m ay al s o i n d i cat e a p ro fi t m o t i v e. Id
.- 3 8 -

[* 3 8 ] In co n tras t, an o ccas i on al s m al l p ro fi tg en eral l y i nd i cat es a l acko f p ro fi t
m o ti v e i f t h e t ax p ay er’ s i nv es t m en to r l o s s es are rel at i v el y l arg e. Id
. Th e reco rds h o ws Bo n ep art e l o s tm o n ey g am b l i n g o v er s ev eral y ears an d d i dn o t earn ev en s p o rad i c p ro fi t s . Th i s fact o r wei g h s ag ai n s tBo n ep art e. h
. Th e fi n an ci al s t atu s o f t h e t ax p ay er Hav i n g s ub s t an t i al i n co m e fro m o th er s o u rces m ay i n d i cat e t hatth e act i v i ty i n qu es t i o n i s n o t en g ag edi n fo r p ro fi t , es p eci al l y wh ere l o s s es fro m

the act i v i t y g en erat e s ub s t an t ial t ax b en efi ts o r wh ere t h ere are recreat i o n al el em en t s i n v o l ved
. Id . s ub para. (8 ). Bo n ep art e earn ed$ 7 8 ,0 00 as an em p l o y ee o f t h e Po rtAu tho ri ty du ri n g 2 0 1 2 , an d$ 8 2 ,0 00 as an em p l o y ee o f t h e Po rtAu tho ri ty du ri n g 2 0 1 3 . Th i s i s
s ub s t an t i al i n co m e fro m an o th er s o u rce. If h e i s p erm i t t edt o d edu cth i s g am b l i n g rel at ed ex p en s es fro m

h i s Po rt Au th o ri ty

i n co m e, h i s t ax ab l e i n co m e wi ll b e
s i gn i fi can t l y

redu ced . Th e co m

b i n edrecreat i on al n atu re o f g am b l in g an dth e
s ub s t an t i al t ax b en efi t h e wo ul dg ai n fro m b ei n g p erm i t t ed t o d edu ct h is g am b l i n g rel at ed ex p en s es wei g h ag ai ns ta p ro fi tm o t i ve. See M o ore v . Co m m i s s io ner, T.C. M em o. 2 0 1 1 -1 7 3 (h o l d i n g t h att ax p ay er’ s fi n an ci al s tatu s d i dn o ti n d i cat e p ro fi t
m o ti v e wh en h e d eri v edb u l ko f i n co m e fro m em p l o ym en t o u t s i d e o f g am b l i n g ). Th i s fact or wei g h s ag ai n s tBo n ep art e.- 3 9 -

[* 3 9 ] i
. El em en t s o f p ers o n al p l eas u re o r recreat i o n Th e p res en ce o f p ers o n al o r recreat io n al el em en t s i n an act i v it y m ay i n d i cat e t h e ab s en ce o f a p ro fi tm o t i v e. Sec. 1 .1 8 3 -2 (b )(9 ), In co m e Tax Reg s . Th e m ere p res en ce o f a p ers o n al o r recreat i on al as p ect , h o w ev er, d o es n ot
n eces s ari l y

p recl u d e a p ro fi t m o t i v e. Id
. Bo n ep art e’ s g am

b l i n g i n v o l v edel em en t s o f p ers o n al p l eas u re an d recreat i o n . He t es t i fi ed th ath e t rav el edan d “p art ied ” wi th a fri en d i n co n jun ct i o n wi th h is g am

b li n g . Th is fact o r wei g h s ag ai n s t Bo n ep art e. j. Co n cl u si o n : W ei g h i n g th e fact o rs No n e o f t h e fact o rs wei g h s i n fav o r o f t h e fi nd i n g o f a p ro fi tm o t i v e, an dal l rel ev an t fact ors wei g h ag ai ns t th e fi nd i n g o f a p ro fi t m o t i ve. W e co n cl u d e o n a p rep o n d eran ce o f ev id en ce t h atBo n ep art e d i d n oten g ag e i n h i s g am b l i n g act i v i t y fo r p ro fi t. Th i s co n cl u s i o n , co m b i n edwi th th e co n cl u si on s i n o th er p o rt i o n s o f th i s o p i n i o n, m ean s th atBo n ep art e can n o td educth i s n o n wag eri n g ex p en s es o f g am b l in g . M o re s p eci fi cal ly , fo r 2 0 1 2 : ! Bo n ep art e’ s g ro ss i n co m e fro m g am b l i n g i s $ 1 8 ,0 0 0. See s upra p . 2 3
. ! Bo n ep art e i s en t i t l edt o a s ect i o n 1 6 5 (d ) d edu ct i o n o f $ 1 8 ,0 0 0. See i n fra p art 2
.- 4 0 -

[* 4 0 ] ! Bo n ep art e’ s s ect i o n 1 83 (b )(1 ) d edu ct i o n i s $ 1 8 , 0 0 0 , i d en t i cal t o h i s

s ect i o n 1 6 5 (d ) d edu ct i o n . ! Th erefo re, h i s s ect i o n 1 8 3(b )(2 ) d edu ct i on i s l i m i t edt o th e g ro s s i n co m e d eri v edfro m

g am b l i n g , $ 1 8 ,0 0 0 , m in u s th e s ect i o n 1 8 3 (b )(1 ) d edu ct i o n , $ 18 ,0 0 0 , wh i ch i s zero . ! No fu rt h er d edu ct i o n fo r g am b l i ng ex pen s es i s al l o w ed . See s ec. 1 83 (a). An dfo r 2 0 1 3 : ! Bo n ep art e’ s g ro ss i n co m e fro m g am b l i n g i s $ 1 2 ,5 0 0. See s upra p p . 2 6-2 7
. ! Bo n ep art e i s en t i t l edt o a s ect i o n 1 6 5 (d ) d edu ct i o n o f $ 1 2 ,5 0 0. See
s up ra p p . 2 6-2 7.
! Bo n ep art e’ s s ect i o n 1 83 (b )(1 ) d edu ct i o n i s $ 1 2 , 5 0 0 , i d en t i cal t o h i s
s ect i o n 1 6 5 (d ) d edu ct i o n . ! Th erefo re, h i s s ect i o n 1 8 3(b )(2 ) d edu ct i on i s l i m i t edt o th e g ro s s i n co m e d eri v edfro m

g am b l i n g , $ 1 2 ,5 0 0 , m in u s th e s ect i o n 1 8 3 (b )(1 ) d edu ct i o n , $ 12 ,5 0 0 , wh i ch i s zero . ! No fu rt h er d edu ct i o n fo r g am b l i ng ex pen s es i s al l o w ed . See s ec. 1 83 (a).- 4 1 -

[* 4 1 ] 2
. Bo n ep art e i s en t i t l edt o an $ 1 8 , 0 00 wag eri n g-l o s s d edu ct i o n fo r

2 01 2
. 6 A t ax p ay er wh o i s n o ti n th e t rad e o r b u si n es s o f g am bl i ng d edu ct s l o s s es fro m wag eri n g tran s act i o n s as an i t em i zedd edu ct i o n , b u to n l y t o th e ex t en to f g ai n s fro m

wag eri n g tran sact io n s . Sec. 1 6 5 (d ); s ec. 1 .1 6 5 -1 0 , In co m e Tax Reg s .;
s ee al so No rg aardv . Co m m i s s i o n er, 9 3 9 F.2 d8 7 4 , 8 7 8 (9 th Ci r. 1 9 9 1 ), aff’ g i n p art , rev ’ g i n p art o n o th er g ro u n ds T.C. M em o . 1 9 8 9 -3 9 0; Bri s en o v . Co m m i s s i o n er, T.C. M em o . 2 0 0 9 -6 7
. Onh i s 2 0 1 2 t ax return , Bo n ep art e rep ort edl o s s es fro m wag eri n g tran s act io n s o f $ 1 8 , 0 0 0 as an i t em i zedd edu ct i on o n h i s Sch edu l e A an d g ai n s fro m wag eri n g tran s act i o n s o f $ 1 8 ,0 0 0 o n l i n e 2 1 o f h is Fo rm 1 0 4 0. Th e IRS’ s p o s i t i on i s th atBo n ep art e s h o u l di n cl u de t he $ 1 8 ,0 0 0 o f g ai n s i n h i s g ro ss i n co m e, b u tth atth e i t em i zedd edu ct i o n s h o u l db e o n l y $ 1 2 ,8 3 9
. Recal l th atth e reco rdco n t ai n s s tat em en t s fro m 1 4 cas i n os reg ard i n g Bo n ep art e’ s wag eri ng act i v i ty fo r t h e y ear 2 0 12 . W e fo u n dth at the s t at em en t s
s h o wedan ag g reg at e l o s s fro m wag eri n g act i v it y

fo r t he y ear o f $ 1 4,8 8 7 . W e reject edth e IRS’ s i nt erp ret at i o n o f o ne o f t h e s tat em en t s , u n d er wh i ch th e

6 W e n eedn o t d et erm i n e t h e co rrect nes s o f t h e i t em i zedd edu ct io n th at Bo n ep art e cl ai m ed fo r l o s ses fro m wag eri n g tran s act i o n s fo r 2 0 1 3 b ecau s e th e IRS d i dn o t d i s al l o w the d edu ct i o n fo r t h aty ear.- 4 2 -

[* 4 2 ] ag greg at e l o s ses wo u ldh av e b een $ 1 2 ,8 3 9
. Th i s i s h ow i tarri v ed ati t s p o s i t i on th atth e i t em i zedd edu ct i on s h o u ld b e $ 1 2,8 3 9
. In fo rm u l at i n g i t s p o si t i on th atBo nep art e’ s i t em i zedwag eri ng -l o ss d educt i o n fo r 2 0 1 2 was o n l y $ 1 2 ,8 3 9 , th e IRS rel i eden t i rel y o n t h e s t at em en t s fro m th e 1 4 cas i no s . Th e IRS d o es n o tal l eg e t h atBo n ep art e g am b l edatcas i n o s
o th er t han th o s e 1 4. Nei th er d oes Bo n ep art e. W e t herefo re accep tas tru e t h e p ro p os i t i on th at th e 1 4 cas i no s t at em en ts refl ectal l o f Bo n ep art e’ s wag eri n g act i vi t i es i n 2 0 1 2. Th i s p ro p os i t i o n h el p s u s d et erm i n e t h e am ou n t o f Bo n ep art e’ s l o s s es fro m

wag eri n g tran sact i o n s . Bo n ep art e’ s wag eri ng tran s act i o n s fo r t he y ear fal l i n t o tw o g ro up s : th o s e fo r wh i ch th ere was a g ai n an d th o s e fo r wh i ch th ere was a l os s . As we ex p l ai n ed atthe b eg i nn in g o f t h e o p i n i o n, a cas u al g am b l er’ s g ro s s i n co m e i ncl u d es th e g ai n s fro m

wag eri n g tran sact io n s fo r wh i ch there was a g ai n . Th i s am o u n ti s al s o th e g ai n fro m

wag eri n g tran s act i o n s wi th i n th e m ean i n g o f s ect i o n 1 6 5 (d ). Th e p art i es h av e ag reedthatth e co rrecti n cl u s io n i n Bo n ep art e’ s g ro ss i n co m e i s $ 1 8 ,0 0 0 . Th i s i s th e am o un tBo n ep art e rep ort edo n h i s retu rn , an dth e IRS d i dn o t ad ju s ti t . Thu s, th e p art i es h av e ag reedth atBo n ep art e’ s g ai n s fro m h i s wag eri ng tran s act io n s fo r wh ich there were g ai n s fo r 2 0 1 2 equ al $ 1 8,0 00 . Th e 1 4 cas i n o
s t at em en t s i n cl u d e th e am o u nt s o f b o th (1 ) g ai n s fro m wag eri n g tran sact i o n s fo r- 4 3 -

[* 4 3 ] wh i ch th ere was a g ai n an d(2 ) l o s ses fro m wag eri n g tran sact i o n s fo r wh ich th ere was a l o s s . Th erefo re t he ag g reg at e l o s s fro m al l 1 4 s t at em en ts , -$ 1 4 ,8 8 7 , equ al s th e g ai n s fro m

wag eri n g t ran s act i o n s fo r wh i ch th ere i s a g ai n m i n us th e l o s s es fro m

wag eri n g tran sact i o n s fo r wh i ch there was a l o s s . It i s n o t , as th e IRS
as s u m es , ju s tth e l o s s es fro m wag eri n g tran s act io n s fo r wh ich th ere was a l o s s . As ex p l ai n edab o v e, t wo p ro p o s i t io n s are t ru e: (1 ) t h e g ai n s fro m wag eri n g tran s act io n s fo r wh ich there was g ai n t o t al $ 1 8 ,0 0 0 , an d (2 ) t h e g ai n s fro m wag eri n g tran s act i on s fo r wh i ch th ere was a g ai n m i n u s th e l o s ses fro m wag eri n g tran s act io n s fo r wh ich there was a l o s s eq u al -$ 1 4 ,8 8 7 . Itm at h em at i cal l y fo l l o ws fro m th es e t w o p ro p o s i t i o n s t h atth e l os s es fro m wag eri n g tran s act i o ns fo r wh i ch th ere i s a l o s s equ al -$ 3 2,8 8 7 (i .e., $ 1 8 ,0 0 0

! $ 3 2 ,8 8 7 = -$ 1 4 ,8 8 7 ). Bo n ep art e i s
en t i t l edt o a s ect i o n 1 6 5 (d ) d edu ct i o n equ al t o t h i s am o u n tt o th e ex t en to f g ai n s fro m wag eri n g tran s act i o n s . Th i s g ai n i s $ 1 8 ,0 00 . Th erefo re h i s s ect i o n 1 6 5 (d ) d educt i o n i s $ 1 8 ,0 0 0
. W e h o ldth atBo n ep art e i s en t i t l edt o a Sch edu l e A d edu ct i o n o f $ 1 8,0 0 0 fo r wag eri n g l o s s es fo r t he 2 0 1 2 y ear. 3
. Is Bo n ep art e en t i t l edt o a d educt i o n o f $ 3,5 9 2 fo r real -es tat e t ax es fo r 2 0 1 2 ? Bo n ep art e cl ai m ed a d edu ct io n o f $ 3 , 5 9 2 fo r real -es t at e t ax es fo r t he 2 0 1 2 t ax y ear. Th e IRS d i s al l o wedth i s d edu ct i o n i n th e n o t i ce o f d efi ci en cy fo r t h e- 4 4 -

[* 4 4 ] 2 0 1 2 t ax y ear. On b ri ef, t h e IRS co nt en d s t h atBo n ep art e fai l edt o
s ub s t an t i at e t h es e ex p en s es . Bo n ep art e d i dn o tad dres s th es e ex pen s es attri al o r i n h i s o p en i n g p o s t tri al b ri ef. In h i s an s weri n g p o s t tri al b ri ef, Bo n ep art e fi n al l y s ai d th i s ab o u tth e ex p en s es : Sch edu l e a d edu ct i o n fo r real es t at e t ax es , $ 3 ,5 9 2
. Supers t orm San dy d es tro y eda l o to f m

y actu al recei p t s as th ey b ecam e wat er-l o g g ed . I al s o i n fo rm edRes p o nd en tth atm y y o u n ger s is ter m arri edan dm o v ed fro m So u th Caro l i n a t o Ark an s as . I p ai dh er $ 9 0 0 a m on th fo r th e m o rt g ag e an d $ 1 2 0 0 i n p ro p ert y t ax fo r s i x m o n th s wh i l e s h e rel o cat edan dfo u n dn ew em p l o ym en t . I dro p p edth e real es t at e t ax an dwi l l ch arg e i t as N.O.L. l at er. W e u n d ers t an dth e ab o v e s t at em en tt o b e a co n ces s io n b y Bo n ep art e t h ath e i s n o t
en t i t l edt o th e d edu ct i o n . Acco rd i n g l y , we s u st ai n th e IRS’ s d et erm i n at i o n t h at Bo n ep art e i s n o ten t i t l edt o a d edu ct i o n i n an y am o u n tfo r real -es t at e t ax es fo r t h e 2 0 1 2 t ax y ear. 4
. Is Bo n ep art e l iab l e fo r anad d it i o n t o t ax u n d er s ect i o n 6 6 5 1 (a)(1 ) fo r 2 0 12 ? Th e IRS d et erm in edth atBo n ep art e i s l i ab l e fo r t h e s ect io n 6 65 1 (a)(1 ) ad d it i o n t o t ax fo r t h e 2 0 1 2 t ax y ear. Sect i o n 6 6 5 1 (a)(1 ) i m p o s es an ad d i t i o n t o t ax fo r fai l ure t o fi l e a t ax retu rnb y i t s fi li n g d ead l i ne (d et erm i nedb y t ak i n g i n t o
acco u n t an y

ex t en s i o n s o f t h atd ead l i n e) u n l es s th e t ax p ay er can es tab l i s h th atth e fai l u re t o fi l e i s du e t o reas o n ab l e cau s e an dn o tdue t o wi l l fu l n eg lect . Th e
s ect i on 6 6 5 1 (a)(1 ) ad d it i o n t o t ax i s 5 % o f t h e am o u n treq u i redt o b e s ho wnas t ax- 4 5 -

[* 4 5 ] o n th e ret u rn fo r each m o n th th e fai l u re t o fi le co nt i n ues , n o tt o ex ceed 2 5 % i n the ag g reg at e. Sec. 6 6 5 1 (a)(1 ), (b )(1 ). Th e IRS d et erm i n edan ad d i t i o n t o t ax
co rres p o n d i n g t o Bo n ep art e’ s retu rn b ei n g m o re t h an o ne m o n th l at e. Th erefo re i t d et erm i n edth ath e i s l i ab l e fo r an am o u n tequ al t o 5 % o f t h e am o un treq u iredt o b e s h own as t ax fo r t h e fai l u re t o fi l e t h e ret urn b y Ap ri l 1 5 , 2 0 1 3, an dan o th er 5 % fo r t h e fai l ure t o fi l e the ret u rn b y M ay 1 5 , 2 0 1 3. Th e IRS b ears the b u rd en o f p ro du ct i o n fo r ad d i t i on s t o t ax d et erm i n ed
u n d er s ect i o n 6 6 5 1 (a)(1 ). See s ec. 7 4 9 1 (c); Hi g b ee v . Co m m i ss i o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 -4 4 7 (2 0 01 ). Th e IRS s at i s fi es i t s b u rd en b y p ro du ci n g s u ffi ci en t
ev i d en ce t o es t ab l i s h th atth e t ax p ay er fai l edt o t i m el y fi l e a req u i redfed eral

i n co m e-t ax retu rn . See Wh eel er v . Co m m is s i o n er, 1 27 T.C. 2 0 0, 2 0 7 -2 0 8 (2 0 0 6 ), aff’ d , 5 2 1 F.3 d1 2 8 9 (1 0 th Ci r. 2 0 0 8 ); Hi g b ee v . Co m m i s s i o n er, 1 16 T.C. at4 4 7
. On ce t h e IRS h as s at i s fi edi t s b u rd en o f p ro du ct io n , th e t ax p ay er h as th e b u rd en o f p ro v in g th atth e ret u rn was n o t l at e, o r i f i twas fi l edl at e, t h atth e l at en es s was du e t o reas o n ab l e cau s e an dn otwi l l fu l n eg l ect . See Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 7
. Bo n ep art e’ s t ax retu rnfo r 2 01 2 was du e o n Ap ri l 1 5 , 2 01 3 . See s ec. 6 0 7 2 (a). Th e IRS p ro du cedth e en v el o pe t h atBo n ep art e u s ed t o m ai l th e retu rn . Th e d at e o n th e en v el o p e was J u n e 7 , 2 0 1 3 . Th e IRS al so p ro du cedth e retu rn- 4 6 -

[* 4 6 ] i t s el f fro m

i t s fi l es . Th e face o f t he ret u rnh as an IRS recei v eds t am p o f J u ne 7 , 2 01 3 . Bo nep art e d i d n o t t es t i fy as t o wh en h e fi l edth e ret u rn . Bo n ep art e arg u es o n b ri ef t h ath e h adan in cen t i v e t o fi l e h i s 2 0 1 2 return o n t i m e: He wan t ed t o o b t ai n a t ax refu n d . He al s o arg u es o n b ri ef t h at an IRS d at e s tam p i s

“ u n accep t ab l e” p ro o f o f t he d at e h e m ai l edth e ret u rn . W e h o ldth atth e d at e o n th e ret u rn ’ s en v el o p e an dth e IRS’ s d at e s t am p
s at i s fy th e IRS’ s b u rd en o f p ro du ci n g ev id en ce t h atBo n ep art e m ai l edh i s retu rn l at e. An dwe fi n dBo n ep art e h as n o tp ro v enthe ret u rn was t i m el y . 7 W e s us t ai n th e ad d i t i o n t o t ax u n d er s ect i o n 6 6 5 1 (a)(1 ). 5
. Is Bo n ep art e l iab l e fo r anaccu racy -rel at edp en al ty u n der s ect io n 6 6 6 2 (a) fo r 2 0 1 2 ? Th e IRS d et erm in edth atBo n ep art e i s l i ab l e fo r t h e s ect io n 6 66 2 (a)
accu racy -rel at edp en al ty

fo r t h e 2 0 1 2 t ax y ear. Sect io n 6 6 6 2 (a) i m p o s es a 2 0 % p en al ty o n an y

p o rt io n o f an u nd erp aym en to f t ax th ati s at tri b u t ab l e t o an y o f t h e
cau s es l i s t edi n s ect i o n 6 6 6 2 (b ). Th es e cau s es i n cl u d e “ [a] n y s ub s t an ti al

7 W e h av e n o read y ex p l an at i on fo r h o w th e retu rn co ul db e m ai l edb y Bo n ep art e o n t h e s am e d ay i twas recei v edb y

th e IRS. Bo n ep art e m ai l edth e retu rn fro m

New J ers ey . Itarri v edatan IRS o ffi ce i n Kan s as Ci ty , M i s s o u ri . Iti s u n l i k el y th atth e ret u rnco u l d b e s en tan drecei vedth e s am e d ay . Th i s s u gg es t s s o m e erro r i n ei th er t he d at e o n t h e en v el o p e o r th e IRS’ s d at e s tam p . Ho wev er, th i s s u g g es t i o n d o es n o tcau s e u s t o fi n dthatBo nep art e’ s retu rn was fi l edo n o r b efo re M ay

1 5 , 2 0 13
. Th i s i s wh ath e h as t o p ro v e t o s h o wth at th e IRS’ s p en al t y co m p u t at i o n i s i n co rrect .- 4 7 -

[* 4 7 ] u n d ers t at em en to f i n co m e t ax ” an d“ [n ] eg l i gen ce o r d i s reg ardo f ru l es o r reg u l at i o n s ”. Sec. 6 6 6 2 (b )(1 ) an d(2 ). In g en eral , an u n d ers t at em en t o f i nco m e t ax i s th e co rrect am o u n t o f t ax
m i n u s th e t ax actu al l y s ho wno n th e ret u rn . Sec. 6 6 62 (d )(2 )(A). An
u n d ers t at em en to f i n co m e t ax is s ub s t an ti al i f (1 ) t h e u n d ers t at em en tex ceed s 1 0 %
o f t h e co rrect t ax an d(2 ) t h e u n d ers t at em en tex ceed s $ 5 , 0 0 0 . Sec. 6 6 6 2 (d )(1 )(A);
s ec. 1 .6 6 62 -4 (b )(1 ), In co m e Tax Reg s . An u nd ers t at em en t i s redu ced , h o wev er, b y th e p o rt i o n at tri b u t ab le t o th e t reat m en to f ani t em fo r wh i ch th e t ax p ay er h ad

“ s ub s t an t i al au th o ri ty ”. Sec. 6 66 2 (d )(2 )(B)(i ). Co m p u t at i o n s b y

th e p art i es u n d er Ru l e 1 55 wi l l co n fi rm wh et h er t h ere was
a s ub st an t i al u n d ers t at em en t o f i n co m e t ax o n Bo n ep art e’ s 2 0 1 2 ret urn . Bo n ep art e d o es no targ u e h e h ad“ s ub s t an t i al au th o ri ty ” fo r an y p arto f th e u nd ers t at em en t . No r are we aware an y

o f s ub st an t i al au th o ri ty

fo r an y p arto f t h e u n d ers t at em en t . So n o redu ct i o n wi l l b e m ad e fo r t he “ s ub s t an t i al au th o ri ty ” ex cep t io n . Reg ard l es s o f wh et h er Bo n ep art e’ s u n d erp aym en tfo r t h e 2 0 1 2 t ax y ear i s du e t o a s ub st an t i al u n ders t at em en to f i n co m e t ax , we h o l dth at i ti s due t o
n eg li g en ce. Neg l i g en ce i ncl u d es an y fai lu re t o m ak e a reas o n ab l e at t em p tt o
co m p l y wi th th e t ax l aws . Sec. 6 6 6 2 (c); s ec. 1 .6 6 6 2-3 (b )(1 ), In co m e Tax Reg s . Neg li g en ce i s s tro n gl y

i nd i cat edwh ere a t ax p ay er fai l s t o m ak e a reas o n ab l e- 4 8 -

[* 4 8 ] at t em

p tt o d et erm in e the co rrect n es s o f a d edu ct i o n, cred i t , o r ex cl u si o n th at
wo u l ds eem

t o a reas o n ab l e p ers o n t o b e “ to o g oo dt o b e t ru e”. Sec. 1 .6 66 2
- 3 (b )(1 )(i i ), In co m e Tax Reg s . Neg l i g en ce al s o i n cl u d es a fai l u re t o m ai n t ai n
accu rat e reco rd s o r t o s ub s t an t i at e i t em s p ro perl y . Sec. 1 .6 6 62 -3 (b )(1 ), In co m e Tax Reg s . Bo n ep art e was n ot , i n o u r v i ew, a p ro fes s i o n al g am b l er. M an y

fact o rs p o i n tt o th e fact th ath e was n o to n e. Bo n ep art e’ s tri p s t o At lan t i c Ci ty were th erefo re p ers o n al tri p s . Th e ex p en s es o f t hes e t ri p s were p ers o n al ex p en s es . He
s h o u ldh av e real i zedi twas t o o g o o d t o b e t ru e th ath e co u l d av oi dt ax at io n o n h i s Po rtAu tho ri ty

wag es b y

m ak i n g p l eas u re t ri p s t o At l an t i c Ci ty . Fu rt herm o re, h e fai l edt o p ro v i d e an y

ev i d en ce t o s ub s t an t i at e h i s real -es t at e-t ax p aym en t s . On ce t h e IRS h as m eti t s b u rd en o f p ro du ci n g ev i d en ce t h at a t ax p ay er i s l i ab l e fo r a p en al ty , th e t ax p ay er b ears th e b urd en o f p ro v i n g th atthe p en al ty i s i n ap p ro p ri at e b ecau s e, fo r ex am p l e, t h e t ax p ay er act edwi th reas on ab l e cau s e an d i n g o o d fai th . Sec. 6 6 64 (c)(1 ) (p ro v i d i n g th atthe p en al ty u n d er s ect i on 6 6 6 2 (a) d o es no tap p l y

t o an y p o rt i o n o f t h e u n d erp aym en tt o th e ex ten tth atth e t ax p ay er h ad reas o n ab l e cau se fo r th atp o rt i o n o f t h e u n derp aym en t , an dact edi n g o o dfai t h wi th res p ect t o th atp o rt i o n ); Hi g b ee v . Co m m i s s i on er, 1 1 6 T.C. at4 4 7. Th e
ex i s t en ce o f reas o n ab l e cau s e an dg o o dfai th i s d et erm i n edo n a cas e-b y -cas e- 4 9 -

[* 4 9 ] b as i s , t ak i n g i n t o acco u n tal l p ert i n en tfact s an d ci rcu m st an ces . Sec. 1 .6 6 6 4
- 4 (b )(1 ), In co m e Tax Reg s . Th e reg u l at i o n s p ro v i d e t h e fo l l o w i n g g u i d an ce: Gen eral ly , th e m o sti m

p o rt an tfact o r i s the ex t en to f t h e t ax p ay er’ s effo rtt o as ses s th e t ax p ay er’ s p ro p er t ax l i ab i l i ty . Ci rcu m st an ces th at m ay i n d icat e reas o nab l e cau s e an dg o odfai th i n cl u d e an h o n es t m i s u n d ers t an d i n g o f fact o r l aw t h ati s reas o n ab l e i n l i gh t o f al l fact s an dci rcu m s t an ces , i n cl u d i n g th e ex peri en ce, kn o w l ed g e, an d edu cat i on o f t h e t ax p ay er. Id . Bo n ep art e d o es n o tas s ert th ath e h adreas on ab l e cau s e fo r t h e u n d erp aym en t
o r t h at h e act edi n g o o d fai th wi th res pect th e u n d erp aym en t . He d i dn o th i re a t ax -ret u rnp rep arer t o p rep are h i s 2 0 1 2 t ax retu rn . He t es t i fi edth ath e m ad e t h e d eci s i o n t o fi le h i s retu rn s as a p ro fes si o n al g am b l er s t art i n g wi th th e 2 00 9 t ax y ear. Ho wev er, h e d i d n o tex p l ai n wh ats t ep s h e t o o k t o as cert ai n thatth i s rep o rt i n g t reat m en t was co rrect u n d er t h e t ax l aw. No r i s t h ere ev id en ce o f h o w h e arri v edath i s d eci s i o n t o d edu ctreal -es t at e t ax es o n th e 2 0 1 2 retu rn . W e co n cl u d e th atBo n ep art e d i dn oth av e reas o n ab l e cau s e fo r t h e u n d erp aym en tan dd i d n o t act i n g o o d fai th wi th res p ectthe u n d erp aym en t . W e h o ldth atBo n ep art e i s l i ab l e fo r t h e accu racy -rel at edp en al ty u n der
s ect i on 6 6 6 2 (a) fo r 2 01 2
.- 5 0 -

[* 5 0 ] In reach i ng o u r h ol d i n g s, we h av e co n s i d eredal l arg um en t s m ad e, an d , t o th e ex t en tn o t m en t io n ed , we co n cl ud e t h atth ey are m o o t , i rrel ev an t, o r wi th o u t
m eri t . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.