TAX COURT OPINION

Case: Estate of Graciano V. Espinoza, Deceased; Elvira Espinoza, Executrix
Docket Number: 10433-04
Judge: Swift
Opinion Type: memo
Filed: 10/12/2005
Pages: 7

T.C. Memo. 2005-239 UNITED STATES TAX COURT ESTATE OF GRACIANO V. ESPINOZA, DECEASED, ELVIRA ESPINOZA, EXECUTRIX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 10433-04. Filed October 12, 2005. William E. Taqqart, Jr., for petitioner. Catherine G. Chang, for respondent. MEMORANDUM OPINION SWIFT, Judge: This matter is before us on a motion for an award under section 7430 of $1,657.50 in administrative costs, plus costs in connection with the instant motion. RVED OCT 1 2 2005 - 3 - In May of 2001, decedent filed for bankruptcy. Decedent listed in his bankruptcy filing total assets of $127,600 and debts in excess of $200,000. Also, in decedent's bankruptcy filing it is indicated that during 2000 and 2001 decedent purchased a $15,000 motorcycle, a $26,000 GMC Savana, a $51,000 GMC Sierra, and a $55,000 GMC Denali. Further, in decedent's bankruptcy filing, it is indicated that as of May of 2001 decedent owed a total of only $70,000 to the Nevada casinos at which he gambled. Six months later, in September or October of 2001, decedent's bankruptcy case was closed. The record does not reflect the resolution of decedent's bankruptcy proceeding. On decedent's 2000 Federal income tax return that was filed with respondent, decedent's $2,580,200 in total jackpot winnings was reported as "Other Income", and an offsetting miscellaneous itemized deduction in the amount of $2,580,200 was claimed on Schedule A, Itemized Deductions, as "gambling losses". On decedent's 2000 Federal income tax return, no gambling winnings were reported other than the above $2,580,200 in jackpot winnings reflected on the Forms W-2G that were mailed to respondent by the Nevada casinos. Also reported as income on decedent's 2000 Federal income tax return were total wages of $25,300, and interest income of $182. In connection with the Appeals Office consideration of decedent's protest, and after some difficulty in scheduling a meeting with decedent's accountant, decedent's accountant met with and provided to respondent's Appeals Office a few additional documents relating to decedent's gambling winnings and losses. Decedent's accountant, however, did not provide to respondent's Appeals Office any log or diary of decedent with regard to decedent's 2000 gambling activities. In a March 16, 2004, notice of deficiency mailed by respondent's Appeals Office, respondent sustained the adjustment made by the examining agent to decedent's claimed gambling losses (namely, of the total $2,580,200 in gambling losses claimed, respondent allowed $487,836 and disallowed for lack of substantiation $2,092,364). One of the estate's affidavits indicates that in connection with the protest and the appeal of respondent's gambling loss adjustment, employees in decedent's accountant's office spent 9.5 hours contacting employees of the Nevada casinos at which decedent gambled and gathering documents relating to decedent's gambling activities. On June 21, 2004, Elvira Espinoza, executrix of decedent's estate, filed the petition herein. As part of the pretrial preparation and exchange of documents, the estate's counsel provided additional explanation The disputed aspects of the instant motion for recovery of administrative costs involve whether respondent was substantially justified in his Appeals Office disallowance of $2,092,364 in claimed gambling losses and whether decedent's estate's net worth at the time of decedent's death exceeded $2 million. Discussion Under section 7430, among other requirements, no award of administrative costs is available either if the respondent's position was substantially justified or if an estate's net worth exceeded $2 million at the time of the decedent's death. Sec. 7430(c) (4) (A), (B) (i), (D) (i) (I); see also 28 U.S.C. sec. 2412(d) (2) (B) (2000). Generally, before respondent's examination office and Appeals Office, taxpayers have the burden of proving their entitlement to claimed expenses and losses. Norgaard v. Commissioner, 939 F.2d 874, 878 (9th Cir. 1991), affg. and revg. in part on another ground T.C. Memo. 1989-390. In connection with a motion for litigation or administrative costs, respondent has the burden of establishing that his position was substantially justified, and taxpayers have the burden of establishing that they satisfy the other requirements of section 7430. Rule 232(e). Section 165(d) provides a deduction för losses from wagering transactions up to the amount of winnings from wagering transactions. _ 9 _ understanding of that documentation, due to additional explanations with regard to the documentation provided by the estate's counsel and to additional information and explanation with regard thereto provided to respondent through contacts respondent's employees initiated with employees of the Nevada casinos. On the record before us, we believe it would be inappropriate for us to conclude herein that the documentation that was provided by or on behalf of decedent to respondent at the examination office and Appeals Office was so obvious and understandable that respondent should have conceded the claimed gambling losses in full without issuing a notice of deficiency and without expecting the estate to provide the additional explanation and information with regard thereto that eventually was used by respondent to properly understand and determine the amount of decedent's gambling losses. Further, we regard it as reasonable for respondent to expect decedent's representative, during the Appeals Office consideration of decedent's protest, to produce specific documentation, as contemplated by Rev. Proc. 77-29, 1977-2 C.B. 538, and to provide credible explanation thereof that adequately verifies decedent's gambling losses. We note that many of the documents included in the attachments to the submissions on the instant motion are not - 11 - We agree with respondent. In light of decedent's extensive gambling activities, decedent's large gambling losses, and decedent's $10,000 cash payment on the purchase of an automobile (noteworthy since $10,000 represented approximately one-half of decedent's total reported wages for 2000), reasonable questions have been raised by respondent as to decedent's sources of cash and as to decedent's estate's net worth on the date of death. For example, where did decedent in 2000 obtain $7 million to play the slot machines? What was the source of the $7 million in cash or credit, and did decedent have some undisclosed source of funds, or net worth, to make the wagers and to pay the casinos whatever credit the casinos extended to him? We do not regard the affidavits submitted (and the conclusory statements therein by decedent's wife and by decedent's accountant that decedent's net worth at no time exceeded $2 million) to be adequate. On the facts of this case and contrary to the estate's contention, we regard respondent's request for better verification of decedent's estate's net worth as neither "disingenuous" nor "outrageous". At one point in the estate's reply memorandum, to deflect a negative inference from decedent's use of $10,000 in cash on the purchase of an automobile, the estate states: "[after all] Approximately seven million dollars passed through * * * [decedent's] hands in 2000." That is exactly respondent's point. - 13 - For the reasons stated, we shall deny the motion for an award of administrative costs. An appropriate order will be entered.