TAX COURT OPINION

Case: John V. & Barbara J. Reshetar
Docket Number: 12702-10S
Judge: Holmes
Opinion Type: bench
Filed: 06/11/2013
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 JOHN V. AND BARBARA J. RESHETAR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) O R D E R Docket No. 12702-10S. Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith the pages of the to petitioners and to respondent a copy of transcript of Holmes at Saint Paul, Minnesota, containing his oral fact and opinion rendered at was heard. findings of the trial session at which the case in the above case before Judge Mark V. the trial In accordance with the oral findings of fact and opinion, a decision under Rule 155 will be entered. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. June 11, 2013 N 1 3 20U Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bench Opinion by Judge Mark V. Holmes May 8, 2013 John V. and Barbara J. Reshetar v. Commissioner Docket No. 12702-10S THE COURT: IN THE CASE OF JOHN V. AND BARBARA J. RESHETAR V. COMMISSIONER, DOCKET NUMBER 12702-10S, THE COURT HAS DECIDED TO RENDER A BENCH OPINION, AND THIS REPRESENTS THE COURT'S BENCH OPINION. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986 as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. The taxpayers in this case are a married couple who are Minnesota residents now, and were at the time they filed their petition. Mrs. Reshetar has already been granted Innocent Spouse Relief from any deficiency that might be found, so the case is really about Mr. Reshetar. In addition, the parties settled all the issues but one, whether for tax years 2005 and 2006, Mr. Reshetar was a professional gambler. I'm going to start with a little bit of I'm going to start with a little bit of background, here. Mr. Reshetar, who left college before 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 graduating, went to work for the family business, a steakhouse run by his dad. He worked there for about 25 years until, in 2005, his dad decided to sell the business, and he gave his son approximately $117,000 from the proceeds of that sale that Mr. Reshetar put into a savings account. He also won a job as a salesman at a local firm to support himself and his family. But his gambling habit, which had begun after Minnesota legalized casinos, quickly became a problem for him. He began taking money from the savings account in which he had placed his legacy, 13 moving it to a checking account, moving it to a 14 15 16 17 18 19 20 21 22 23 24 25 casino where it gradually disappeared into the maws of slot machines or beneath the felt tables of the blackjack dealers. On his tax returns for 2005 and 2006, he reported that he had received winnings in 2005. Those winnings were $95,600 and a remarkable $244,550 in 2006. But these remarkable amounts were completely offset by losses, and of course, losses that were greater than the amounts of his winnings are not eligible to be deducted as losses under section 165(d) of the code, even if he was a professional. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 Eventually, his gambling problem cost him his sales job, and at the end of 2006, with the assistance of his wife and help from Gamblers Anonymous, he quit gambling. That leaves behind, however, the question of whether he was in the trade or business of gambling in 2005 and 2006. The test, here,' is one of many facts and circumstances, a multi-columned, nine- part test as established by 26 C.F.R. 1.183-2(b), 10 which lists nine non-exclusive factors. In this 11 12 13 14 15 16 17 18 19 case, however, the nine factors are more than enough to deal with the case. Those nine factors are: 1: The manner in which the taxpayer carried on the activity; 2: The expertise of the taxpayer'or his advisors; 3: The time and effort expended by the taxpayer in carrying on the activity; 4: The expectation that assets used in the 20 activity may appreciate in value; 21 22 23 5: The success of the taxpayer in carrying on other similar or dissimilar activities; 6: The taxpayer's history of income or loss 24 with respect to the activity; 25 7: The amount of occasional profit, if any, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 which is earned; 2 3 4 5 6 8: The financial status of the taxpayer; 9: Whether elements of personal pleasure or recreation are involved. I'll take these in order: Number 1: Manner in carrying on the 7 activity. Here, Mr. Reshetar did not keep complete 8 9 and accurate books or records during the years at issue. His log of gambling activities, to the extent 10 he had one, was created afterwards. He had no 11 written business plan for gambling. He didn't even 12 maintain a separate bank account; instead/ co- 13 mingling the gambling winnings with his personal 14 funds, although he apparently kept some of his 15 winnings in a hidey-hole at home, presumably to 16 17 18 19 20 21 22 23 24 conceal them from other family members. In this, he is very similar to the taxpayer who is denied professional gambler status in Hastings v. Commissioner, T.C. Memo. 2009-69., which also featured a taxpayer who used statements generated by the casino and the forms generated by the casino to record gambling winnings -- those forms are called W- 2Gs -- and argued that those constituted adequate business records, but they were incomplete in the 25 Hastings case and they were incomplete here, as Mr. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 Reshetar credibly testified he didn't always use his 7 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 gambling card, which meant that he did not really have a handle on how much he was losing. 2: Expertise in the activity or consultation with experts. Here, Mr. Reshetar said that he observed the slot machines. He tried to get information from the slot machine girls who manned, or I suppose womaned, the slot machines and encouraged the gamblers to continue to gamble. In this sort of casual effort at expertise, he resembles the taxpayer who is denied professional gambler status in Calvao v. Commissioner, T.C. Memo. 2007-57. Indeed, Mr. Calvao went even further; he bought a slot machine, spent a significant amount of time studying how chips and cycles of slot machines worked, subscribed to a gambling magazine, and read 20 books on playing slot machines. UK Md found, there, u however, that his efforts and strategies were perfectly consistent with his desire to win money playing slot machines, but was also consistent with gambling purely for its entertainment or recreational aspects. Similarly, Mr. Reshetar's somewhat less organized efforts to learn about slot machines and the slot machines at his favorite casinos do not qualify as expertise in the subject matter. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 3: Time and effort expended in the 2 activity. It is true that the fact that a taxpayer 3 4 5 6 devotes much of his personal time and effort to carrying on an activity, particularly if it doesn't have substantial personal or recreational aspects, may indicate an intent to be profitable, and a 7 withdrawal from another occupation to devote most of 8 9 10 11 12 13 14 15 16 17 his energies to the activity in question may also be evidence that the activity is engaged in for profit. See 26 C.F.R. section 183-2 (b) (3). However, Mr. Reshetar gambled only 45 days in 2005 and 62 days in 2006, this again, according to his incomplete record. He may well have gambled more days than that, especially when he had a full-time job as a salesman during the years at issue. But ultimately, his gambling problem caused him to lose this job, which I do not hold is the same as 18 withdrawing from the occupation in response to 19 20 21 22 23 24 25 dawning success of a new trade or business. Again, this factor weighs against finding Mr. Reshetar a professional gambler for the years at issue. 4: The appreciation of assets, which is irrelevant in this context. 5: Success in similar activities. This actually weighs against Mr. Reshetar; he had no 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 success in other forms of gambling. 6: Is a history of income or losses with respect to the activity. Since a history of consistent and substantial losses indicates a lack of 5 profit objective, that, unfortunately, was here, as 6 it were, in spades. Mr. Reshetar did not make a 7 profit with his gambling activity. In fact, the log 8 9 10 11 12 13 14 15 16 17 18 he prepared years later shows that he lost significantly more money than he put into the gambling, losing $115,210 more than he won;in 2005, and $44,900 more than he won in 2006. 7: Amount of occasional profits èarned, if any. During the years at issue, Mr. Reshetar claimed gambling losses up to the amount of his winnings; as I said, had substantial losses beyond that, but these do not show any occasional profits over any sustained period of time. 8: Taxpayer's financial status. Mr. 19 Reshetar did have a full-time job, at least before it 20 21 22 23 24 25 was lost, and his income from that job would have allowed him to provide for his family better than he did. He earned over $40,000 in both years from his sales job while losing it all on gambling Which brings me to 9, elements of personal pleasure. This is a somewhat inaccurate description E 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 of this factor. The presence of personal motives in carrying on an activity may indicate that the 3 activity is not engaged in for profit. See 26 C.F.R. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 section 1.183-2(b) (9), although this is especially true when there are recreational elements involved, and that's why we usually call this factor whether there are elements of personal pleasure. I do find it hard to believe that Mr. Reshetar, though he had personal motives, could possibly have taken much pleasure in his deepening gambling problem. Still, he did not conduct his gambling activity with the requisite continuity or regularity, and I have to find that he did not have a profit motive. He was, in fact, suffering from a compulsion, not engaged in a trade or business. That leads me to the last issue in this case and in this session, as a whole, which is whether he should not pay a negligence or accuracy- related penalty for the understatement that resulted from reporting his gambling winnings and losses on Schedule C as a professional, rather than Schedule A as personal expenses. Internal Revenue Code section 6662(a) and (b) provide for an addition to tax when a deficiency is due either to negligence or substantial 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 understatement of income tax. Negligence, for purposes of section 6662(a) has been defined as a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985)., section 6662(d) of the Code defines a substantial underpayment as an understatement exceeding the greater of 10 percent of the correct liability or $5,000. Here, the IRS has met its burden of coming forward with some proof of negligence or substantial understatement. However, I did note that the tax returns that Mr. Reshetar and his wife filed for 2005 and 2006 were prepared by a certified public accountant. 16 Neither Mr. Reshetar nor the accountant went crazy 17 18 19 20 and ignored the Code by trying to deduct losses in excess of winnings, but I do find that it's more than likely than not that Mr. Reshetar reasonably relied on his CPA, particularly given Mr. Reshetar's own 21 modest education and lack of experience in taxation. 22 23 24 25 So I won't sustain the penalty, but everything else is sustained. There are other concessions and stipulations between the parties that need to be reflected in the decision. So it will be 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 entered under R.ule 155. This concludes the Bench Opinion in this case and this very long St. Paul session. Thank you very much. We are adjourned. (Whereupon, at 5:10 p.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com