151

1Petitioner filed a petition with respect to 2005 and 2006 (docket No. 

21212–10) in the name of Shiraz Noormohamed Lakhani and a petition 

with respect to 2007–09 (docket No. 24563–11) in the name of Shiraz 

Lakhani. The cases were consolidated by order of this Court dated August 

17, 2012. 

SHIRAZ NOORMOHAMED LAKHANI, PETITIONER v. 

COMMISSIONER OF INTERNAL REVENUE, 

RESPONDENT

SHIRAZ LAKHANI, PETITIONER v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 21212–10, 24563–11. 1 Filed March 11, 2014. 

For 2005–09, P, a professional gambler who bet on horse 

races, deducted his net wagering losses (either incurred 

during the year or carried over from prior years) in contravenVerDate Mar 15 2010 12:02 Apr 28, 2015 Jkt 000000 PO 00000 Frm 00001 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BV864A~1.142\LAKHANI JAMIE
152 142 UNITED STATES TAX COURT REPORTS (151) 

tion of I.R.C. sec. 165(d). R disallowed those deductions and 

imposed an I.R.C. sec. 6662(a) accuracy-related penalty for all 

years. P argues (1) he is entitled to deductions for pro rata 

shares of the track’s ‘‘takeout’’ from the parimutuel betting 

pools, which would wholly or partially offset the disallowed 

net wagering losses for the years at issue and (2) I.R.C. sec. 

165(d) unreasonably discriminates against business losses of 

professional gamblers and constitutes a violation of their constitutional right to the equal protection of the laws. With 

respect to R’s imposition of the I.R.C. sec. 6662(a) penalty, P 

argues he acted with reasonable cause and in good faith in 

deducting his net wagering losses for the years at issue. 

1. Held: Because ‘‘takeout’’ represents the track’s share of a 

parimutuel betting pool and the expenses discharged therefrom are obligations imposed on the track, not the bettors, P 

is not entitled to deduct a pro rata share of all or any portion 

thereof. 

2. Held, further, applying the I.R.C. sec. 165(d) limitation on 

the deductibility of wagering losses to the wagering losses of 

a professional gambler is not an unconstitutional violation of 

the Equal Protection Clause. 

3. Held, further, the I.R.C. sec. 6662(a) accuracy-related 

penalty is sustained for all years. 

Shiraz Noormohamed Lakhani, pro se. 

Nathan C. Johnston and Linette B. Angelastro, for 

respondent. 

HALPERN, Judge: By notices of deficiency (notices), 

respondent determined deficiencies in income tax and penalties for petitioner’s 2005–09 calendar taxable years as follows: 

Year Deficiency 

Penalty 

sec. 6662 

2005 $22,571 $4,514 

2006 18,462 3,692 

2007 9,918 1,984 

2008 7,401 1,480 

2009 5,965 1,193 

Unless otherwise indicated, all section references are to the 

Internal Revenue Code in effect for the years at issue, and 

all Rule references are to the Tax Court Rules of Practice 

and Procedure. All dollar amounts have been rounded to the 

nearest dollar. 

(151) LAKHANI v. COMMISSIONER 153

2There are also certain computational adjustments that follow from the 

adjustments at issue, but they are not in controversy, and we need not discuss them. 3Petitioner in his answering brief has not made reference by number to 

those findings of fact proposed by respondent to which he objects, as required by Rule 151(e)(3). We, therefore, deem petitioner to have conceded 

the accuracy of respondent’s proposed findings of fact with respect to which 

we discern he raises no objection in his answering brief, except to the extent that his own proposed findings of fact are inconsistent therewith. See 

Jonson v. Commissioner, 118 T.C. 106, 108 n.4 (2002), aff ’d, 353 F.3d 1181 

(10th Cir. 2003). 

After concessions, the issues for decision are whether petitioner, a professional gambler, is, for the years at issue, (1) 

entitled to a deduction for his losses from wagering transactions in excess of his gains from such transactions 

(whether those net losses were incurred during the taxable 

year or used by means of a net operating loss carryover) and 

(2) liable for the section 6662 accuracy-related penalty. 2

FINDINGS OF FACT 3

Some facts are stipulated and are so found. The stipulation 

of facts, with accompanying exhibits, is incorporated herein 

by this reference. 

At the time the petition was filed, petitioner resided in 

Woodland Hills, California. 

For each of the years at issue, petitioner, a certified public 

accountant, maintained an accounting practice, which 

included the preparation of tax returns for clients. He 

reported the income and expenses from his accounting practice on a Form 1040, U.S. Individual Income Tax Return, 

Schedule C, Profit or Loss From Business. During those 

years, petitioner was also a professional gambler whose gambling activities were limited to parimutuel wagering on horse 

races. To that end, petitioner placed bets on races occurring 

both at California racetracks and at racetracks in other 

States. He reported the results from his wagering on a separate Schedule C (gambling Schedule C) for each of the years 

at issue. On each of the gambling Schedules C, petitioner 

reported the gross amount he received on (winning) bets as 

‘‘Gross receipts or sales’’, and he reported the amounts he 

had bet as ‘‘Cost of goods sold’’, subtracting the latter from 

the former, to determine his gross income or his loss from 

154 142 UNITED STATES TAX COURT REPORTS (151) 

4 Although the miscellaneous other expenses petitioner deducted for 2005 

and 2006 are treated as nondeductible in the notice covering those years, 

respondent now concedes their deductibility on the grounds that they constitute deductible nonwagering business expenses of a professional gambler. See Mayo v. Commissioner, 136 T.C. 81, 97 (2011). 5Petitioner’s disallowed net wagering losses for the gambling loss years 

were as follows: 

Year Amount 

2005 $81,793 

2006 110,196 

2008 60,454 

2009 36,240 

gambling. He also reported and deducted miscellaneous other 

expenses associated with his gambling activities 4 and 

reported the sum of his gambling winnings, losses, and miscellaneous other expenses as his income or loss (net wagering 

income or loss, respectively) from gambling for the year. He 

then combined his net wagering income or loss with his 

accounting practice income for the year and reported the sum 

of the two on page 1, line 12 of his Form 1040 as his total 

net ‘‘Business income or (loss)’’ for the year. 

For each of 2005, 2006, 2008, and 2009 (gambling loss 

years), petitioner’s net wagering loss exceeded his accounting 

practice income, so that line 12 of each Form 1040 reported 

a business loss. For 2007, in which he reported a net 

wagering gain, and for 2009, petitioner claimed net operating 

loss carryover deductions all or a portion of which, presumably, arose out of unused net wagering losses incurred in 

prior years. Among respondent’s adjustments for each of the 

gambling loss years is the disallowance of petitioner’s deduction for his net wagering losses on the basis of section 165(d), 

which provides: ‘‘Losses from wagering transactions shall be 

allowed only to the extent of the gains from such transactions.’’ 5 Respondent also disallowed the net operating loss 

carryovers to 2007 and 2009. 

(151) LAKHANI v. COMMISSIONER 155

6 It is interesting to note that the nature of parimutuel betting came before our predecessor, the Board of Tax Appeals, in its first year. See 

McKenna v. Commissioner, 1 B.T.A. 326, 332 (1925), in which we stated: 

The question before us resolves itself to this: What was the actual gain 

resulting to the taxpayer from his handbook operations? In the pari mutuel system of wagering on horse racing the odds are fixed after the race 

is won. All the money bet forms a pool out of which payments of a fixed 

percentage are made to the State and to the licensed commission under 

whose auspices the races are run, the residue being apportioned to the 

bettors. Thus the track odds determined. * * * 

OPINION 

I. Deductibility of Petitioner’s Net Wagering Losses 

A. Parties’ Arguments 

1. Petitioner’s Arguments 

Petitioner bases his argument that he is entitled to deduct 

his wagering losses in excess of his wagering gains under 

sections 162(a) (as ordinary and necessary business 

expenses), 165(a) (as losses), and/or 212(1) (as expenses for 

the production of income) on two alternative grounds. One, 

for each of the parimutuel bets that he made he is entitled 

to deduct that portion of the bet equal to the takeout percentage that applies to the parimutuel pool formed to receive 

that bet. Two, section 165(d) is inapplicable to professional 

gamblers. We will address those arguments in turn. 

a. Deductibility of Takeout 

Before addressing petitioner’s arguments, we will describe 

the concepts of parimutuel wagering and takeout. 6

In parimutuel wagering, applicable to, among other events 

of chance, betting on horse races, the entire amount wagered 

is referred to as the betting pool or ‘‘handle’’. The pool can 

be managed to ensure that the event manager (in horse 

racing, the track) receives a share of the betting pool regardless of who wins a particular event or race. That share is 

referred to as the takeout, and the percentage, set by State 

law, varies from State to State, generally ranging from 15% 

to 25% and often depending upon the type of bet, e.g., 

‘‘straight’’ or ‘‘conventional’’ win, place, or show wagers or 

‘‘exotic’’ (multiple horse or multiple race) wagers, the latter 

156 142 UNITED STATES TAX COURT REPORTS (151) 

7The various types of straight or conventional wagers (i.e., bets to win, 

place, or show) and exotic wagers (e.g., exacta, quinella, and trifecta bets) 

each form separate and distinct parimutuel betting pools. See, e.g., Cal. 

Bus. & Prof. Code sec. 19412 (West 2008). 

usually resulting in higher takeout percentages. 7 The takeout is used to defray the track’s expenses, including purse 

money for the horse owners, taxes, license fees, and other 

State-mandated amounts. What remains from the takeout 

after those liabilities are provided for constitutes the track’s 

profits. The takeout may also be used to cover any shortfall 

in the amount available in the parimutuel pool, after reduction for takeout, to pay off the winning bettors. That circumstance, generally referred to as the creation of a ‘‘minus 

pool’’, arises by virtue of the requirement, in many States, 

that the track provide a minimum profit to winning ticket 

holders. See, for example, California Horse Racing Board 

Rule 1960, which provides, in pertinent part, as follows: ‘‘The 

association must pay to the holder of any * * * [winning 

ticket or tickets] the amount wagered * * * plus a minimum 

of 5% thereof. This requirement is unaffected by the existence of a parimutuel pool which does not contain sufficient 

money to distribute said 5% to all persons holding such 

tickets.’’ Thus, on those presumably rare occasions when an 

overwhelming favorite finishes in the money (wins, places, or 

shows) and, pursuant to the actual odds, pays something less 

than $2.10 on a $2 bet (say $2.05), the extra nickel due each 

winning bettor on a $2 bet will constitute an additional 

amount that must be extracted from the takeout, see, e.g., 

Cal. Bus. & Prof. Code (Cal. Code) sec. 19613.5 (West 2008), 

an occurrence that might cause the track to lose money on 

the race. The balance of the betting pool remaining after 

reductions for takeout and ‘‘breakage’’ (the odd cents not paid 

to winning bettors because payoffs are rounded down to the 

nearest dime), is paid out to the winning bettors. 

Petitioner argues that, in extracting takeout from the betting pools, ‘‘[t]he tracks are acting in the capacity of a fiduciary, i.e., collection of taxes and fees which they are remitting to the different state and local tax authorities.’’ He 

likens the process to that of an ‘‘employer collecting payroll 

taxes from the employees and remitting them to the IRS and 

the state agencies.’’ He argues that his pro rata share of the 

(151) LAKHANI v. COMMISSIONER 157

8The deductibility of petitioner’s 2007 wagering losses is not in dispute 

because they did not exceed his 2007 wagering gains. Therefore, they are 

fully deductible against those gains under sec. 165(d). 

9 It is unclear whether petitioner is arguing that he should be able to deduct those amounts in full or only that presumably lesser portion of each 

amount corresponding to the taxes and license fees paid by the track. On 

brief, he asks that we uphold his deducting the amounts that ‘‘he paid to 

the race tracks for taxes and licenses which in turn paid the same to the 

state and local [government]’’. The distinction is of no matter since we reject his argument that he is entitled to any deduction on account of takeout. 

takeout constitutes the business expense of a professional 

gambler and, as such, is not a loss from wagering transactions subject to disallowance under section 165(d). In support of that argument, petitioner relies primarily upon our 

Opinion in Mayo v. Commissioner, 136 T.C. 81, 97 (2011), in 

which we held that nonwagering business expenses claimed 

in connection with carrying on a gambling business are 

deductible under section 162(a) and not subject to the section 

165(d) limitation on the deductibility of wagering losses. 

At trial, petitioner argued that he is entitled to deductions 

or losses under section 162, 165, or 212 on the basis of a 

blended (average) takeout rate of 19% as applied to his 

wagers for the years at issue. On brief, he states his willingness to settle for a ‘‘minimum 15% take out percentage’’ as 

applied to those wagers. In the gambling loss years, he calculates that that would result in expense or loss deductions 

of $64,235 for 2005, $78,359 for 2006, $66,624 for 2007, 8

$46,919 for 2008, and $36,535 for 2009. 9 He argues for the 

deductibility of those amounts on the basis of Cohan v. 

Commissioner, 39 F.2d 540 (2d Cir. 1930), which holds that, 

in the absence of adequate substantiation of deductible 

expenditures, the taxpayer is entitled to a deduction, under 

section 162, for a reasonable estimate of such expenditures. 

See id. at 543–544. Only for 2009 does petitioner’s estimated 

takeout deduction exceed his disallowed net wagering loss. In 

the other three gambling loss years, the alleged takeout 

deduction covers only a fraction of the net wagering loss disallowance. See supra note 5. 

158 142 UNITED STATES TAX COURT REPORTS (151) 

b. Applicability of Section 165(d) 

Petitioner argues that section 165(d) does not apply to the 

expenses, including the net wagering losses, of a professional 

gambler. Petitioner states his position as follows: 

Professional gamblers should be allowed the same protection as any 

other profession when the activity is legal and conducted as a profession. 

In a lawful and democratic society, Congress enacted this law many decades ago, only because at that time, ‘‘gambling was taboo’’. Now gambling is legal in most States in the Union and this law is unjust, not 

interpreted correctly. In my opinion the intention of Congress, even then, 

was not to penalize any profession but to prevent abuse when it was conducted as a recreation. Section 165(d) should be considered unconstitutional and struck down as gambling is part of American life and professional gamblers are recognized in society and on television. 

In support of his view that, today, section 165(d) constitutes 

a discriminatory, unconstitutional deprivation of professional 

gamblers’ right to the equal protection of the laws, petitioner 

cites the following paragraph from our Memorandum Opinion 

in Tschetschot v. Commissioner, T.C. Memo. 2007–38, 2007 

WL 518989, at *5, in which we sustained the disallowance of 

a professional poker player’s net losses from tournament 

poker against the taxpayer’s equal protection argument: 

The moral climate surrounding gambling has changed since the tax 

provisions concerning wagering were enacted many years ago. Not only 

has tournament poker become a nationally televised event, but casinos 

or lotteries can be found in many States. Further, the ability for the 

Internal Revenue Service to accurately track money being lost and won 

has improved, and some of the substantiation concerns, particularly for 

professionals, no longer exist. That said, the Tax Court is not free to 

rewrite the Internal Revenue Code and regulations. We are bound by the 

law as it currently exists, and we are without the ability to speculate 

on what it should be. * * * 

Petitioner responds to the last two sentences of the quoted 

excerpt from Tschetschot with the hope that ‘‘the judiciary is 

at some time [presumably, meaning this Court in this case] 

going to take a bold stance and help to reverse section 165(d) 

of the Internal Revenue Code.’’ 

Lastly, petitioner relies on Cronan v. Commissioner, 33 

B.T.A. 668, 670 (1935), and Beaumont v. Commissioner, 25 

B.T.A. 474, 482 (1932), aff ’d, 73 F.2d 110 (D.C. Cir. 1934), 

in which we acknowledged with approval the Commissioner’s 

(151) LAKHANI v. COMMISSIONER 159

10 As noted supra, the takeout percentage is applied to the entire betting 

pool, but, because the winning bettors are entitled to recover the amounts 

of their bets (i.e., the amounts they contributed to the pool) plus their 

winnings, the takeout must, of necessity, come from the losing bets. 

position that losses incurred in betting on horse races for 

profit where legal are deductible. 

2. Respondent’s Arguments 

With respect to petitioner’s alleged right to a deduction for 

his pro rata share of the takeout, respondent argues (1) 

because takeout is paid from the pool remaining from losing 

bets, 10 it ‘‘is inseparable from the wagering transaction and 

constitutes wagering losses’’ subject to the section 165(d) 

limitation and (2) the taxes, license fees, and other expenses 

discharged from the takeout are expenses owed and paid by 

the track, not by the individual bettor. Respondent also 

argues that, even if a deduction for takeout were available to 

petitioner, his failure to furnish the factual information necessary to make a reasonable determination of the takeout 

percentage applicable to his losing bets (e.g., the extent to 

which those bets were attributable to the various parimutuel 

pools with varying takeout percentages at tracks in various 

States) is sufficient to bar petitioner’s right to a passthrough 

deduction for takeout. 

With respect to petitioner’s equal protection argument, 

respondent points out that, in Tschetschot, we rejected that 

argument on the basis of our holding in Valenti v. Commissioner, T.C. Memo. 1994–483, 1994 WL 534499. In Valenti, 

after noting the historical distinction between gambling and 

other forms of business activity, we held that ‘‘a classification 

that differentiates the business of gambling from other business has ‘a rational basis, and when subjected to judicial 

scrutiny * * * [it] must be presumed to rest on that basis if 

there is any conceivable state of facts which would support 

it’ ’’. Id., 1994 WL 534499, at *4 (quoting Carmichael v. S. 

Coal & Coke Co., 301 U.S. 495, 509 (1937)). We concluded: 

‘‘The argument that section 165(d) violates equal protection 

as applied to those engaged in the trade or business of gambling borders on the frivolous.’’ Id. Thus, respondent argues 

that petitioner’s equal protection argument is contrary to settled law and, therefore, should be rejected. 

160 142 UNITED STATES TAX COURT REPORTS (151) 

11Petitioner’s testimony at the trial, in which he agreed with respondent’s counsel that ‘‘all my bets are not on California horse tracks only’’, indicates that a substantial portion of his bets, probably a majority, were 

placed at tracks in California, his State of residence. Thus, California law 

applicable to takeout is particularly relevant to petitioner. Moreover, the 

various descriptions of parimutuel betting, in general, and takeout, in particular, available on the Internet indicate that California’s treatment of 

B. Analysis 

1. Petitioner’s Right to a Deduction for Takeout 

Petitioner makes no argument that a parimutuel betting 

pool is either a cost-sharing arrangement or a business entity 

(such as a partnership) in whose profits and losses he is entitled to share. His only argument is that, on his behalf, the 

track was paying his expenses, of a type, such as taxes and 

license fees, that he could deduct as, for instance, section 

162(a) ordinary and necessary business expenses. We agree 

with respondent that the taxes, license fees, and other 

expenses discharged from the takeout are expenses imposed 

upon the track, not the bettors. That that is so may be illustrated by Cal. Code secs. 19400–19668, addressing horse 

racing and, in particular, secs. 19610–19619, addressing 

license fees, commissions, and purses. 

The term ‘‘association’’ is defined in Cal. Code sec. 19403 

to mean ‘‘any person engaged in the conduct of a recognized 

horse race meeting.’’ Cal. Code sec. 19411 defines parimutuel 

wagering. In pertinent part, that section provides: ‘‘The 

association distributes the total wagers comprising each pool, 

less the amounts retained for purposes specified in this 

chapter [i.e., the takeout], to winning bettors based on the 

official race results.’’ The amounts retained represent a 

percentage of the total amount handled in conventional and 

exotic parimutuel pools. Cal. Code sec. 19610 (West 2008). 

The actual percentage retained is 15% for conventional pools, 

16.75% for exotic pools; it is 17.75% for harness racing 

tracks. Id. Cal. Code sec. 19611 sets forth the portions of the 

takeout that thoroughbred associations must pay as license 

fees, distribute to the California Thoroughbred Breeders 

Association (for expenses, educational, and other purposes), 

or distribute as purses and commissions. Nowhere in the 

statute is responsibility for any of those payments imposed 

on persons making bets. 11

(151) LAKHANI v. COMMISSIONER 161

takeout is typical of the other States where horse racing and parimutuel 

betting are permitted. See, e.g., Library Index, Sports Gambling, http:// 

www.libraryindex.com/pages/1611/Sports-Gambling-PARI–MUTUEL– 

GAMBLING: ‘‘The management’s share [of a betting pool] is called the 

takeout * * * [which is] set by state law and is usually around 20%. * * * 

This money goes toward track expenses, taxes, and the purse. Most states 

also require that a portion of the take-out goes into Breeder Funds to encourage horse breeding and health in the state.’’ 

12For example, assume 20% of a $100 parimutuel bet-to-win pool (i.e., 

$20) is wagered on a particular horse, and that horse wins. If the track’s 

takeout with respect to that pool is 20%, so that only $80 is available to 

pay the winners, the odds on that horse to win will have been 3:1; i.e., the 

$20 bet on the horse will return to the bettors $80 (the original $20 bet 

plus a $60 (3 × $20) profit). If the track’s takeout is 0% so that the entire 

$100 pool is available to pay the winners, the odds on that horse to win 

will have been 4:1; i.e., the $20 bet on the horse will return to the bettors 

$100 (the original $20 bet plus an $80 (4 × $20) profit). 

13 And since the amount paid out from the pool is net of takeout, no winner needs a deduction to make the amount distributed to him correspond 

to the sum of (1) his wager and (2) his taxable gain. 

14Petitioner virtually concedes that point on brief when he emphasizes 

the function of the takeout, noting that ‘‘racetracks do not operate for free, 

they have to pay to operate the racetrack * * * [p]lus they have to comply 

with the regulations promulgated by the Business and Professions Code 

and the [S]tate and local authorities to pay taxes to operate the racetrack.’’ 

(Emphasis added.) 

Petitioner’s attempt to analogize the track’s retention and 

disbursement of takeout to an employee’s payroll tax obligations with respect to his employees is misguided. First and 

foremost, none of the payments the track makes from the 

handle discharge any obligation of any bettor. And while 

reduction of the parimutuel pool by the amount of the takeout reduces the amount in the pool available to pay winning 

wagers (i.e., it reduces the bettor’s odds should he win 12), 

none of the takeout can be said to come from a winning bettor’s wager, which in all events must be returned to him in 

full and with at least a small profit. 13 Nor can the takeout 

be said to add to the loss of a losing bettor, who loses the 

same $2 whether the takeout is 15% of the handle, 20% of 

the handle, or none of it on account of a minus pool so deep 

as to deprive the track of any take after paying all winning 

wagers. 14 Moreover, not being an obligation or expense of 

the bettor, takeout cannot qualify as the bettor’s deductible 

162 142 UNITED STATES TAX COURT REPORTS (151) 

15The problem of unreported gambling gains has been mitigated, but not 

eliminated, by the payor’s obligation to report and, in some cases, withhold 

Federal and State taxes from large winnings. See IRS Form W–2G, 

nonwagering business expense under Mayo v. Commissioner, 

136 T.C. at 97. 

On the basis of the foregoing, we hold that petitioner is not 

entitled to a passthrough deduction, under section 162, 165, 

or 212, for a pro rata share of takeout. 

2. The Validity of Section 165(d) 

We agree with respondent that the reasoning in our 

Opinion in Valenti is dispositive of petitioner’s equal protection claim. In Valenti, we held that the application of section 

165(d) to the net gambling losses of a professional gambler 

does not violate the gambler’s constitutional right to the 

equal protection of the laws. We would add to Judge Raum’s 

refutation of the taxpayer’s argument to the contrary only 

that the dissipation, in recent times, of the historical moral 

opposition to gambling does not undercut the ‘‘rational basis’’ 

for treating professional gambling losses differently from 

other business-related losses. H.R. Rept. No. 73–704 (1934), 

1939–1 C.B. (Part 2) 554, is the report of the Committee on 

Ways and Means accompanying H.R. 7835, 73d Cong. (1934), 

which, as enacted, became the Revenue Act of 1934, ch. 277, 

48 Stat. 680. The Revenue Act of 1934 sec. 23(g), 48 Stat. at 

689, is the predecessor to section 165(d), and H.R. Rept. No. 

73–704, supra, 1939–1 C.B. (Part 2) at 570, explains that 

new provision as follows: 

Section 23(g). Wagering losses: Existing law does not limit the deduction of losses from gambling transactions where such transactions are 

legal. Under the interpretation of the courts, illegal gambling losses can 

only be taken to the extent of the gains on such transactions. A similar 

limitation on losses from legalized gambling is provided for in the bill. 

Under the present law many taxpayers take deductions for gambling 

losses but fail to report gambling gains. This limitation will force taxpayers to report their gambling gains if they desire to deduct their gambling losses. 

The basis for the enactment of section 23(g), as set forth in 

the last sentence of the foregoing committee report, still pertains to taxpayer reporting of gambling gains and losses. 

Therefore, it still constitutes a ‘‘rational basis’’ for the continued application of section 165(d) to the losses. 15 There being 

(151) LAKHANI v. COMMISSIONER 163

Certain Gambling Winnings, and accompanying instructions. 

no constitutional impediment to the continued application of 

section 165(d), we reiterate our admonition in Tschetschot 

that this Court ‘‘is not free to rewrite the Internal Revenue 

Code and regulations * * * [but is] bound by the law as it 

currently exists’’. Tschetschot v. Commissioner, 2007 WL 

518989, at *5. See also Nitzberg v. Commissioner, 580 F.2d 

357, 358 (9th Cir. 1978), rev’g T.C. Memo. 1975–228, and 

Mayo v. Commissioner, 136 T.C. 81, 90 (2011), both of which 

hold that a professional gambler’s wagering losses in excess 

of wagering gains are nondeductible under section 165(d). 

Lastly, we note that petitioner’s reliance on our decisions 

in Cronan and Beaumont is misplaced as both those 

decisions involved tax years before the effective date, and 

were superseded by the 1934 enactment, of section 23(g). 

C. Conclusion 

Petitioner is not entitled to deduct all or any portion of his 

net gambling losses. 

II. Imposition of the Section 6662(a) Accuracy-Related Penalty 

A. Applicable Law 

Section 6662(a) and (b)(1)–(3) provides for an accuracyrelated penalty (penalty) in the amount of 20% of the portion 

of any underpayment attributable to, among other things, 

negligence or intentional disregard of rules or regulations 

(without distinction, negligence), any substantial understatement of income tax, or any substantial valuation 

misstatement. Although the notices issued to petitioner state 

that respondent bases his imposition of the penalty upon 

‘‘one’’ of the three above-referenced grounds, it is clear that 

only the first two (negligence and substantial understatement of income tax) are potentially applicable herein. 

A substantial understatement of income tax exists for an 

individual if the amount of the understatement exceeds the 

greater of 10% of the tax required to be shown on the return 

or $5,000. See sec. 6662(d)(1)(A). At the conclusion of the 

trial, the Court asked respondent to provide the Court with 

computations, incorporating the issues settled before trial, 

that would show whether there would be a substantial 

understatement of income tax for each of the years at issue 

164 142 UNITED STATES TAX COURT REPORTS (151) 

16 Although petitioner did not incur (and, therefore, did not report) a net 

wagering loss for 2007, there was, nonetheless, a substantial understatement of income tax for that year attributable to petitioner’s carryover of 

net wagering losses from prior years. 

assuming we found for respondent on the section 165(d) 

issue. In response to that request, on May 16, 2013, 

respondent filed a status report for each of the consolidated 

cases establishing that petitioner’s understatements of 

income tax for the years at issue are substantial as they 

exceed both 10% of the correct tax and $5,000. 16 Therefore, 

we need not consider the grounds for determining whether 

petitioner was negligent within the meaning of section 

6662(b)(1). 

Section 6664(c)(1) provides that the penalty shall not be 

imposed with respect to any portion of an underpayment if 

a taxpayer shows that there was reasonable cause for, and 

that the taxpayer acted in good faith with respect to, that 

portion. 

The determination of whether a taxpayer acted with reasonable cause 

and in good faith is made on a case-by-case basis, taking into account 

all pertinent facts and circumstances. * * * Circumstances that may 

indicate reasonable cause and good faith include an honest misunderstanding of * * * law that is reasonable in light of all of the facts and 

circumstances, including the experience, knowledge, and education of the 

taxpayer. * * * [Sec. 1.6664–4(b)(1), Income Tax Regs.] 

B. Analysis 

Under section 7491(c), respondent bears the burden of 

production, but not the overall burden of proof, with respect 

to petitioner’s liability for the section 6662(a) penalty. See 

Higbee v. Commissioner, 116 T.C. 438, 446–447 (2001). We 

have previously stated that the ‘‘burden imposed by section 

7491(c) is only to come forward with evidence regarding the 

appropriateness of applying a particular addition to tax or 

penalty to the taxpayer.’’ Weir v. Commissioner, T.C. Memo. 

2001–184, 2001 WL 829881, at *5. By demonstrating that 

petitioner’s understatements of income tax exceed the thresholds for a finding of ‘‘substantial understatement of income 

tax’’ under section 6662, respondent has satisfied his burden 

of production. 

On brief, petitioner argues that he ‘‘should not be liable for 

the section 6662 penalty * * * because * * * [he] was not 

aware of section 165(d) * * * [,] there was reasonable cause 

(151) LAKHANI v. COMMISSIONER 165

and * * * [he] acted in good faith with respect to the understatement * * * [,] [he] did not intentionally ignore the law 

[, and he] exercised due care in reporting the numbers on his 

tax returns’’. We held in Carlebach v. Commissioner, 139 

T.C. 1, 16–17 (2012), that a taxpayer cannot avoid the 

application of the section 6662(a) penalty by pleading that he 

acted with reasonable cause and good faith on account of his 

ignorance of the applicable law. As we stated in that case: ‘‘A 

taxpayer’s ignorance of the law is no excuse for failure to 

comply with it.’’ 

Moreover, petitioner, a certified public accountant with an 

active tax preparation practice, and admittedly aware of section 165 governing the deductibility of losses, should have 

been aware of the section 165(d) limitation on net gambling 

losses. Also, as a professional gambler who regularly bets on 

horse races and understands parimutuel betting, he must 

have known that takeout represents the track’s share of the 

betting pool and that the expenditures therefrom satisfy 

obligations of the track, not the bettors. Moreover, as 

respondent points out, petitioner’s argument that he is entitled to deduct a pro rata portion of the takeout was not 

reflected on his returns for the years at issue and, more than 

likely, represents an argument developed for trial rather 

than a good-faith position taken at the time he prepared 

those returns. 

C. Conclusion 

Petitioner is liable for the section 6662(a) accuracy-related 

penalty for the years at issue. 

Decisions will be entered under Rule 155. 

f