TAX COURT OPINION

Case: James E. Snead & Hope R. Snead
Docket Number: 7556-18S
Judge: Morrison
Opinion Type: bench
Filed: 10/24/2019
Pages: 17

SEC UNITED STATES TAX COURT WASHINGTON, DC 20217 JAMES E. SNEAD & HOPE R. SNEAD, Petitioners v. Docket No. 7556-18S. COMMISSIONER OF INTERNAL REVENUE, Respondent ORDER OF SERVICE OF TRANSCRIPT 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 petitioner and respondent a copy of the pages of the transcript in the above case before Judge Richard T. Morrison, at Columbus, Ohio, on October 10, 2019, containing his oral facts of finding and opinion rendered at the conclusion of trial. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155. (Signed) Richard T. Morrison Judge Dated: Washington, D.C. October 24, 2019 SERVED Oct 25 2019 SEC 10/17/19 IN THE UNITED STATES TAX COURT In the Matter of: ) JAMES E. SNEAD & HOPE R. SNEAD ) Docket No. 7556-18S Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Pages: 1 through 15 Place: Columbus, Ohio Date: October 10, 2019 (973)406-2250loperationsperribers.netlwwwescriberssiet IN THE UNITED STATES TAX COURT In the Matter of: ) ) JAMES E. SNEAD & HOPE R. SNEAD, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, ) Docket No. 7556-18S ) ) ) ) ) ) Respondent. ) U.S. Courthouse 100 East Fifth Street 3rd Floor Columbus, Ohio 45202 October 10, 2019 The above-entitled matter came on for bench opinion, pursuant to notice at 9:04 a.m. BEFORE: HONORABLE RICHARD T. MORRISON Judge APPEARANCES: For the Petitioners: No Appearance For the Respondent: No Appearance 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 (973)406-2250]operations@escribers.net|wwwescribers.net P R O C E E D I N G S 2 (9:04 a.m.) THE CLERK: Recalling from the calendar docket number 7556-18S James E. Snead and Hope R. Snead. (Whereupon, a bench opinion was rendered.) . 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 Richard T. Morrison October 10, 2019 James E. Snead & Hope R. Snead v. Commissioner Docket No. 7556-18S 3 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 ON AS PRECEDENT IN ANY OTHER CASE. This proceeding was heard as a Small Tax Case pursuant to the provisions section 7463 of the Intennal 1 2 3 4 5 6 7 8 9 10 11 12 Revenue Code of 1986, as amended, and Rules 170 through 13 14 174 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the 15 authority granted by section 7459(b) of the Internal 16 Revenue Code of 1986, as amended, and Rule 152 of the Tax 17 Court Rules of Practice and Procedure. 18 In this bench opinion, unless otherwise stated, 19 all section numbers refer to the Internal Revenue Code of 20 1986, as amended and in effect for the tax years at issue. 21 All Rule numbers refer to the Tax Court Rules of Practice 22 23 24 and Procedure. Respondent, whom we refer to here as the IRS, issued a notice of deficiency to the married petitioners, 25 Mr. and Mrs. Snead, determining deficiencies of income tax cribers (973)4Óà÷225eloperations@escribersmetlwwwæscribersnet 4 of $7,912 for 2014; $10,757.65 for 2015; and $6,391 for 2016. The notice also determined accuracy-related penalties for all three years as well as an addition to tax for failure to timely file for 2015. The Sneads filed a timely petition for redetermination of the deficiencies, penalties, and addition to tax. They were residents of Ohio when they filed the petition. This Court has jurisdiction pursuant to section 6213(a) to redetermine the determinations in the notice of deficiency. 1 2 3 4 5 6 7 8 9 10 This case was tried in Columbus, Ohio, on 11 October 7 and 8, 2019. Before the trial the IRS conceded 12 the accuracy-related penalties in its pre-trial 13 memorandum.[R PTM] During trial and closing argument the 14 15 16 17 18 19 IRS did not assert that it still thought the addition to tax for 2015 was appropriate. We consider the addition to tax for 2015 to be waived by the IRS. After accounting for these concessions, and for other concessions made in the stipulation, there are three issues for decision. The first issue to consider is the tax treatment 20 of the Sneads' gambling activity during the years at 1ssue. 21 22 We first note that section 61 defines gross 23 income to mean income from whatever source. Gambling 24 winnings are includable in gross income. Merkin v. 25 Commissioner, T.C. Memo. 2008-146, slip op. at 7. (973)406-2250|operations@escribers.net|www.escäliersaet 5 The tax consequences of winning and placing bets are determined by grouping the betting activity for the year into discrete transactions. Sec. 165(d); Shollenberger v. Commissioner, T.C. Memo. 2009-306, slip op. at 7. For slot gambling, the relevant transaction involved has been often held to be a session of slot activity. See id., slip op. at 3-4. A session is a continuous span of gambling that ends when the player redeems his or her tokens. See id. A transaction results 1 2 3 4 5 6 7 8 9 10 in a gain if the payoffs from betting exceed the costs of 11 Placing bets and a loss if the costs of placing bets 12 13 14 15 16 17 exceed the payoffs. Id., slip op. at 6. For professional gamblers, gross income includes the sum of the gains so calculated. A professional gambler is allowed a deduction equal to the sum of all losses so calculated to the extent of the sum of all gains so calculated. Secs. 162(a), 62(a) (1); Merkin v. 18 Commissioner, slip op. at 7. This deduction in particular 19 is an above-the-line deduction, which is a deduction made 20 21 22 23 in the computation of adjusted gross income, or AGI, that reduces AGI. Commissioner v. Groetzinger, 480 U.S. 23, 25 (1987). For nonprofessional gamble y, known as casual 24 gamblers, gross income includes the sum of all the gains 25 so calculated. An itemized deduction is allowed equal to BilEEE (973)406-2250|operations@escribers.net|wwwæscribersnet the sum of all losses so calculated to the extent of the sum of all gains so calculated. Sec. 165(d). An itemized 6 deduction does not reduce AGI. Sec. 63(d). The notice of deficiency treated both Mr. and Mrs. Snead as casual gamblers. This is consistent with their returns, which did not claim that they were professional gamblers. The notice of deficiency determined that the amounts of gambling gains for both spouses that were includable in their gross income were $513,939 for 2014; $1,220,393 for 2015; and $92,867 for 2016. The notice of deficiency determined that the Sneads 1 2 3 4 5 6 7 8 9 10 11 12 were entitled to itemized deductions for gambling losses 13 14 15 16 17 related to the gambling activity of both Sneads equal to the gross income inclusions for 2014 and 2015, i.e., itemized deductions of $513,939 for 2014 and $1,220,393 for 2015. For 2016, the notice of deficiency allowed an itemized deduction for gambling losses of $74,827 18 allocable only to Mrs. Snead's gambling. At closing 19 argument, the IRS conceded that there should be an 20 additional itemized deduction equal to the amount of gross 21 22 income inclusions for Mr. Snead's gambling. This amount is $18,040. Thus, the IRS concedes that the Sneads are 23 entitled to an itemized deduction for gambling activity 24 25 equal to a total of $92,867 for 2016. The Sneads contend that Mrs. Snead was a L.___ ... (973)406-2250loperati nseescribersmet[wwwascibersmet . 7 1 2 3 4 5 6 7 8 9 10 11 12 professional gambler. This would have the effect of converting the itemized deductions for her gambling activity to above-the-line deductions, which factor into the computations of AGI. As a result, she would have no gambling income as reflected in the couple's AGI. The IRS contends that Mrs. Snead was not a professional gambler because she did not gamble primarily for profit. Section 1.183-2(b), Income Tax Regs., provides a nonexclusive list of factors to be weighed when considering whether a taxpayer is engaged in an activity for profit. We use these factors to distinguish between 13 Professional gamblers and casual gamblers. These factors 14 are: (1) the manner in which the taxpayer carried on the 15 activity; (2) the expertise of the taxpayer or the 16 taxpayer's advisers; (3) the time and effort expended by 17 18 the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may 19 appreciate in value; (5) the success of the taxpayer in 20 carrying on other similar or dissimilar activities; (6) 21 22 the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if 23 any, that are earned from the activity; (8) the financial 24 status of the taxpayer; and (9) whether elements of 25 personal pleasure or recreation are involved in the (973)406-2250loperation5@escribers.net|www.ascribersaet activity. We give greater weight to these objective factors than to the taxpayer's statement of intent. Sec. 8 1 183-2(a), (b), Income Tax Regs.; see also King v. Commissioner, 116 T.C. 198 , 205 (2001). Applying the Principles of section 1.183-2(b), Income Tax Regs., including the nine factors, we hold that Mrs. Snead did not gamble primarily to earn a profit. Therefore she was not a professional gambler. We discuss each factor in turn. Factor 1. Mrs. Snead did not carry out the gambling activity in a businesslike manner. Her record D keeping of her gambling activity--which was primarily keno, a type of slots--was not so detailed as to ascertain the effectiveness of her gambling strategies. In so 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 saying, we bear in mind that slot gambling has a negative 16 value on a long-term, probabilistic basis no matter what 17 strategy is used. 18 19 Factor 2. Mrs. Snead gambled regularly and consulted with an unidentified poker player about slot 20 strategies. She also watched online videos about keno 21 22 23 24 25 strategies. However, we are not impressed with the idea that Mrs. Snead accumulated expertise in the field of slot gambling or engaged in significant consultation with experts. Factor 3. Mrs. Snead spent significant time $73)406-2250(oper ionseescribers.netlwwwas¢ribersnet gambling, to the exclusion of her family life. 9 Nonetheless we observe that she did hold down a full-time job and that spending significant time gambling is also consistent with gambling as a hobby. Factor 4 is not relevant to the facts here. Factor 5. Mrs. Snead had never been successful in carrying out an activity like slot gambling. She argued that her gross jackpots per year went up from 2014 to 2015. But in 2015, her losses exceeded her winnings. 1 2 3 4 5 6 7 8 9 10 Furthermore, her success as an Air Force nurse -- she 11 attained the rank of first lieutenant -- does not appear 12 13 14 to be a reason to think she would be a successful slot gambler. Factor 6. Mrs. Snead had a history of losses 15 with respect to gambling. She lost money in each year at 16 issue. By one or more measures, the proportion of her 17 18 19 20 21 22 losses to wins may have fallen year after year. But the absolute amount of her losses for 2015 -- her last big year of gambling -- was large. That year, her total losses at the Cache Creek Casino Resort were over $445,000 | and at Thunder Valley Casino Resort were over $13,000. Factor 7. Mrs. Snead may have earned occasional 23 profits -- in that for a particular month she hit five 24 jackpots. However, temporary winning streaks are to be 25 expected given the high frequency with which she gambled (973)406-2250|operations@escriberspetlwww.esaibbrs.net 10 1 2 3 4 5 6 and the random nature of slot payoffs. Factor 8. Mrs. Snead's financial status was that she supported herself with her Air Force salary rather than her gambling activity. Factor 9. Gambling was not a pleasurable Pursuit for Mrs. Snead but instead was a way to deal with 7 mental anguish. That gambling was not a pleasurable 8 9 Pursuit but a way to deal with mental anguish does not suggest to us that Mrs. Snead gambled primarily to earn a 10 profit. 11 12 We hold that Mrs. Snead did not gamble primarily to earn a profit. She therefore was not a professional 13 gambler. Other than their argument that Mrs. Snead was a 14 professional gambler, the Sneads did not raise any other 15 dispute about the determinations in the notice of 16 deficiency with respect to their gambling activities. 17 Therefore we sustain those determinations with the 18 19 20 exception of the concession noted earlier for itemized deductions for 2016. The second issue to consider is the Sneads' 21 entitlement to deductions for cash charitable 22 contributions. 23 24 The Sneads claimed deductions for cash charitable deductions on their 2014 return in the amount 25 of $9,642 and on their 2015 return in the amount of 733406-2250loperationseherribers.net|wwwascribers.net . $8,626. 11 These deductions were disallowed by the notice of deficiency. The Sneads did not provide any documentary evidence or any specific testimony about the nature of the cash charitable contributions. We do not have any reasonable basis upon which to estimate the amount of such deductions to which they are entitled. For this reason, the deductions were properly disallowed. Furthermore, section 170(f) (8) (A) bars a 1 2 3 4 5 6 7 8 9 10 charitable-contribution deduction for any contribution of 11 12 $250 or more unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment 13 of the contribution by the donee. In the case of a cash 14 15 16 17 18 contribution, the acknowledgment must indicate (1) the amount of the cash and (2) whether the donee provided any goods or services in consideration, in whole or in part, for the cash. Sec. 170(f)(8) (B). Mr. Snead testified that the Sneads may have received such acknowledgments for 19 some of the cash contributions. But, he testified, these 20 21 acknowledgments would have been lost during the move the Sneads made after they retired from the Air Force in 2016. 22 Mr. Snead's unsure testimony about whether the Sneads 23 24 25 received acknowledgments originally is insufficient to convince us that for any cash contribution the Sneads received the acknowledgment that is required by section (973)406-2250|operations@escribersnet|www4scéershet 170(f)(8) (A) 12 for contributions exceeding $250. Of course, we do not know the amounts of any of the contributions, but the Sneads have the burden of proof, see Rule 142(a), including the burden of proving that their contributions were less than $250. We therefore conclude the deductions are barred by section 170(f)(8) (A). The third issue to consider is whether the Sneads are entitled to miscellaneous itemized deductions of $22,616 that they claimed on their 2015 return and that 1 2 3 4 5 6 7 8 9 10 were disallowed in the notice of deficiency. 11 12 13 14 15 The Sneads claim that they lost their records supporting these deductions in the 2016 move. Under Cohan v. Commissioner, 39 F.2d 540, 542-544 (2d Cir. 1930), if a taxpayer claims a deduction but cannot fully substantiate the expense underlying the deduction, the Court may 16 generally approximate the allowable amount, bearing 17 heavily against the taxpayer whose inexactitude in 18 19 substantiating the amount of the expense is of his or her own making. The Court must have some basis upon which to 20 make its estimate, however, else the allowance would 21 22 amount to "unguided largesse". Williams v. United States, 245 F.2d 559,560 (5th Cir. 1957); accord Vanicek v. 23 Commissioner, 85 T.C. 731, 742-743 (1985). A taxpayer 24 whose records are lost or destroyed because of 25 circumstances beyond his or her control may instead Cribers pf3)406-2250|operations@escribersmetlwww.escibersmet 1 substantiate expenses with other credible evidence. See 2 Malinowski v. Commissioner, 71 T.C. 1120, 1124, 1125 13 3 4 5 6 7 8 9 10 11 12 13 14 (1979). Here again, although the Court generally may estimate amounts, any estimate must have a reasonable evidentiary basis. See villarreal v. Commissioner, T.C. Memo. 1998-420, 76 T.C.M. (CCH) 920, 921-922 (1998). The Sneads provided no documents to support these deductions. Mr. Snead testified vaguely about the expenses corresponding to these deductions. But his testimony gives us no reasonable basis for estimating the amount of any of the expenses. We hold that the Sneads have not proven their entitlement to these deductions. In addition, these deductions are computationally barred by section 67(a). Section 67(a) 15 provides that the miscellaneous itemized deductions for 16 the year are allowed only to the extent that the aggregate 17 amount of miscellaneous itemized deductions exceeds 2% of 18 AGI. For 2015, the Sneads claimed $22,4 9, of A RT ( 19 miscellaneous itemized deductions before application of 20 the 2% floor. The notice of deficiency disallowed $22,616 21 of these deductions. The notice of deficiency also 22 determined that the Sneads' AGI for 2015 was $1,337,814, 23 which corresponds to a 2% floor of $26,757. The Sneads 24 have not contested the AGI determination except for the 25 argument we rejected that Mrs. Snead was a professional {973)40 -2250[operationsciescribers.netlwwusaibersenet- gambler. Therefore, even if the Sneads are otherwise entitled to the full $22,916 of miscellaneous itemized deductions they reported for 2016, these deductions would be precluded by section 67(a) because the $22,916 amount 14 does not exceed 2% of AGI. All other adjustments in the notice of deficiency have been resolved by the parties or are computational adjustments. To reflect the foregoing, A decision will be entered under Rule 155. This concludes the oral findings of fact and conclusions of law. (Whereupon, at 9:23 a.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 73)406-2250|operations@escribers.net|www.escríbers.net CERTIFICATE OF TRANSCRIBER AND PROOFREADER 15 CASE NAME: James E. Snead & Hope R. Snead v. Commissioner DOCKET NO.: 7556-18S We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 15 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Bruce Carlson on October 10, 2019 before the United States Tax 1 2 3 4 5 6 7 8 9 10 Court at its session in Columbus, OH, in accordance with 11 12 13 14 15 17 18 19 2° 21 22 23 24 25 the applicable provisions of the current verbatim reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. Meribeth Ashley, CET-507 Transcriber östt htaa Lori Rahtes, CDLT-108 Proofreader 10/15/19 Date 10/15/19 Date Cribers (9733406-2250Ínperationseescdberonet|wwvcescribersitet