TAX COURT OPINION

Case: William J. Reilly, III & Dianne M. Reilly
Docket Number: 999-10S
Judge: Colvin
Opinion Type: bench
Filed: 12/06/2010
Pages: 6

UNITED STATES TAX COURT WASHINGTON, DC 20217 WILLIAM J. REILLY, III AND DIANNE M. REILLY Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) O R D E R Docket No. 999-10S. Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to Petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at Philadelphia, Pennsylvania, on November 15, 2010, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, a decision will be entered for respondent. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. December 6, 2010 SERVED DEC - 9 2010 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 3 Bench Opinion by Judge Joseph Robert Goeke Reilly v. Commissioner Docket No. 999-10S November 15, 2010 THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This case was heard pursuant to the provisions of Section 7463 of the Internal Revenue Code in effect at the time the petition was filed. Pursuant to Section 7463(b), the decision to be entered is not reviewable by any other court and, as stated previously, this opinion shall not be treated as precedent for any other case. This opinion is rendered pursuant to Tax Court Rule of Practice and Procedure 152, herein after in this bench opinion rule references will be to the Tax Court Rules of Practice and Procedure, and section references will be to the Internal Revenue Code in effect during the taxable year 2007. This case is before the Court based upon the Court's deficiency jurisdiction, and arises as a result of the issuance of a notice of deficiency by Heritage Reporting Corporation (202) 628-4888 { 4 the Respondent to the Petitioners for the taxable year 2007. At the time the petition was filed the Petitioners resided in Pennsylvania. They timely filed the federal income tax return for 2007. On that return they did not include any gambling winnings or losses. The parties have stipulated that the Petitioners had gambling winnings of $3,859 in 2007, and that they sustained gambling losses in 2007 of $6,926. Petitioner did not itemize their deductions for 2007. The notice of deficiency increases Petitioners income based on the unreported gambling winnings. After the issuance of the notice of I deficiency Respondent, taking into account the fact the Petitioners had gambling losses in excess of their winnings, redetermined the amount of the deficiency. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Útrial Respondent seeks a deficiency of $136, 19 20 21 22 23 24 25 which is generated by the fact that Petitioners' gambling income is included as gross income and the offsetting losses, to the extent of the gambling winnings, must be included as an itemized deduction. This computationally results in a residual tax liability of $136. Petitioners maintain vehemently that their Heritage Reporting Corporation (202) 628-4888 " 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 5 gambling losses, to the extent of their gambling winnings, should be allowed as an adjustment to gross income and not simply as an itemized deduction¾. Petitioners did not cite any authority for this proposition but argue that basic fairness should permit them to offset the gambling winnings and losses dollar for dollar. Petitioners concede that under Section 165 (d) their losses are only allowable to the extent of their gambling gains in 2007. The question of whether the losses should be treated only as itemized deductions and not an adjustment to gross income requires an analysis of the most basic Internal Revenue Code sections. Section 61 defines gross income, and Section 62 defines adjustments which are made to arriverat adjusted gross income. Petitioners have conceded that they did not engage in their gambling activities as a trade or business. Therefore the gambling losses are not to be treated as a trade or business deduction under Sect gn 6L(.a) (1) , which would allow an adjustment for gambling losses in arriving at adjusted gross income. However, having determined that Petitioners did not engage in gambling as a trade or business, we Heritage Reporting Corporation (202) 628-4888 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 6 can find no other provision of Section 62 which would allow an adjustment to gross income for the gambling losses. Rather, the code permits gambling losses under Section 165(d) and Respondent's Treasury - ¿p Regulations recognize this under Section 1 0 of the Treasury Regulations. I a Q Section e.oo-su allows a deduction as an itemized deduction which is consistent with the fact that under Section 161 and Treasury Reg. Section 1.61- 1 deductions for arrigjng at taxable income that do not include business deductions defined in Section 1.162-1 of the Treasury Regulations are taken as itemized deductions. While we understand Petitioners frustrations with the fact that they are left with taxable income as a result of their casual gambling activities, we are bound by the provisions of the Internal Revenue Code and there is no allowance as an adjustment to gross income for gambling losses for persons not engaged in a trade or business. Therefore the only loss allowable is that of an itemized deduction. While the code itself read in its entireŸy supports this conclusion, Respondent cites us to case law which also follows this analysis. Specifically, Stein v. Commissioner, T.C. Memo.1984-403, affirmed Heritage Reporting Corporation (202) 628-4888 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 7 without published opinion, 770 F.2d 1075 (Third Circuit 1985), and Hochman v. Commissioner, T.C. Memo. 1986-24. Because Respondent has re-computed Petitioners' deficiency allowing the losses as an itemized deduction, there is no additional computation necessary, and a decision will be entered for the revised deficiency amount sought by Respondent at trial. This concludes the Court's oral findings of fact and opinion. Go off the record. (Whereupon, at 1:42 p.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888