TAX COURT OPINION

Case: Fiseha Desta
Docket Number: 11215-11
Judge: Gustafson
Opinion Type: bench
Filed: 05/22/2012
Pages: 20

UNITED STATES TAX COURT WASHINGTON, DC 20217 FISEHA DESTA, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ALS ) ) ) ) ) Docket No. 11215-11. ) ) ) ) ) ) ) ) ) ORD E R 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 to respondent a copy of the pages of the transcript of the trial in the above case before Judge David Gustafson at Washington, D.C., on May 11, 2012, containing his oral findings of fact and opinion. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated. Washington, D.C. May 22, 2012 SERVED May 23 2012 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 David Gustafson May 11, 2012 Fiseha Desta v. Commissioner Docket No. 11215-11 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, which shall not be relied on as precedent in. any other case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Rule 152 of the Tax Court Rules of Practice and Procedure. By notice of deficiency dated February 16, 2011, :respondent (the IRS) determined a defici;ency in the Federal income tax of Petitioner Fiseha Desta for the years 2007 and 2008, plus an accuracy-rela:ted penalty under section 6662(a) in each year. The issues for decision are the amounts of Mr. Desta's gambling winnings and losses in 2007 and 2008, and his liability for accuracy-related penalty on any understatements of tax. For the reasons explained hereafter, we largely sustain the IRS's position but allow Mr. Desta a small amount of additional deductions. The factual findings stated hereafter are based on the parties' stipulations ("Stip.") filed 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 April 11, April 26, and May 10, 2012, and on the evidence received at trial. For these findings we do not rely on requests for admission that were filed and served by the IRS and that Mr. Desta did not admit or deny in compliance with Rule 90. Trial of this case was conducted on May 10,, 2012, in Washington, D.C. Mr. Desta represented himself, and the IRS was represented by Charles Gorham. FINDINGS OF FACT Employment In the years 2007 and 2008, Mr. Desta was employed and was paid wages by MarcParc, Inc. His liability for tax on that employment is not in dispute. At trial Mr. Desta did not show or contend that he incurred any unreimbursed employee business expense in connection with that employment. Gambling activity In the years 2007 and 2008, Mr. Desta was also in the trade or business of gambling; and the activities, income, and losses at issue here were related to that trade or business. (Stip. 12.) His gambling activities other than purchasing lottery tickets took place primarily at three casinos -- Caesars in Atlantic City, New Jersey, Caesars in Las Vegas, Nevada, and Harrah's in Atlantic 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 City, New Jersey. (Stip. 18.) The three casinos he most often used were commonly owned, and we refer to them collectively as Caesars. To an extent we cannot determine, Mr. Desta also occasionally gambled at other casinos. Mr. Desta had an account with Caesars for which it assigned him a number and issued him a card. When he inserted his card into a slot machine or swiped the card at a gaming table, Caesars' system would track his amounts betted and won. Thus, Caesars maintained information about his gambling activity conducted on that card. _However, to an extent we cannot determine, Mr. Desta sometimes played slots or games off the card, and those bets and wins were not tracked. When a patron 4t the slot machines wins an amount of $1,200 or more.(whether on or off his card), the casino pays out the jackpot only upon the patron's acceptance of a Form W2-G, "Certain Gambling Winnings", of which the casino then files a copy with the IRS. (The Form W2-G makes no reports of amounts of bets placed.) For slot wins under $1,200, the machine pays out the jackpot without the preparation of a Form W2-G. Gambling wins and losses In 2007, petitioner won a total of no less Heritage Reporting Corporation (202) 628-4888 (cid:16)042 1 2 3 4 5 6 7 8 than $51,985 in slot machine and gaming winnings from Caesars in Atlantic City, New Jersey. This amount, reported on a "Gaming History Statement" generated by Caesars from its computer records, reflects the net wins of Mr. Desta's activity that was tracked on his card at the casinos; that is, it is the difference between an unknown total of wins and an unknown total of bets. The $51,985 amount is the total of his net 9 . slot wins of $17,675 and his net gaming table wins of 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 $34,310. Mr. Desta's Forms W2-G for 2007 reflect $21,200 of total slot wins of amounts over $1,200, which is an amount greater than the net of $17,675 that the casinos tracked. Presumably, the net figure on the "Gaming History Statement" both includes his wins under $1,:200 that he made on his card (and that are not reflected on Forms W2-G) and nets out the total slot bet.s that he made on his card. The $51,985 total tracked by Caesars does not account for bets that Mr. Desta made off the card, for wins under $1,200 that he made off the card, or for bets or wins that he made at non-Caesars casinos -- all of which are unquantifiable on our record. We therefore find that in 2007 his winnings from gambling, minus the bets he placed, was $51,985. In 2008 Mr. Desta won $200,000 from the D.C. 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 lottery. (Stip. 11) In that same year, he lost a net amount of $40,689 in slot machines and table gaming at the Caesars casinos. This amount, reported on a "Gaming History Statement" generated by Caesars from its computer records, reflects the net losses of Mr. Desta's activity that was tracked on his card at the casinos; that is, it is the difference between an unknown total of wins and an unknown total of bets. The $40,689 loss amount is the total of his net slot wins of $28,969 and his net gaming table losses of $69,658. Mr. Desta's Forms W2-G for 2008 reflect $38,404 of total slot wins of amounts over $1,200, which is an amount greater than the net of $28,969 that the casinos tracked. Presumably, the net figure on the "Gaming History Statement" both includes his wins under $1,200 that he made on his card (and that are not reflected on Forms W2-G) and nets out the total slot bets that he made on his card. The $40.,689 net loss tracked by Caesars, like the 2007 gain, does not account for bets that Mr. Desta made off the card, for wins under $1,200 that he made off the card, or for bets or wins that he made at non-Caesars casinos -- all of which are unquantifiable on our record. In 2008 his winnings from gambling (including the lottery), minus the bets that he placed, were 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 therefore $159,311 (i.e., $200,000 minus $40,689); but the IRS did not plead anything other than the slightly smaller amount that it determined in the notice of deficiency (explained below), and so we accept that 8 amount -- $158,721. Lottery tickets The parties stipulate that Mr. Desta spent $5,178.50 on lottery.tickets in 2007 (Stip. 13) and $9,952 in 2008 (Stip. 15). We cannot determine whether or to what extent Mr. Desta purchased in these years additional lottery tickets or scratch-off tickets. Travel expenses Mr. Desta drove to the Atlantic City casinos from his home in Alexandria, Virginia, sometimes in a a rental car. On occasions in 2007 when the record shows he made trips to gamble in Atlantic City, his bank statements show that he incurred car rental expenses totaling $637.57 and gasoline expenses totaling $443.74 -- for a 2007 total of $1,081.31. Mr. Desta's bank statements show that on such Atlantic City trips in 2008, he incurred car rental expenses totaling $1,373.33, gasoline expenses totaling $612.78, and hotel expenses totaling $126.21. In 2008 he flew to Las Vegas for his gambling, for 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 9 which he incurred air fare of $150, car rental expenses totaling $311.98, gasoline expense totaling $167.86, and hotel expenses totaling $133.50. These 2008 travel expenses total $2,875.66. Gambling records Mr. Desta kept no records of his gambling expenses or gambling winnings. He relied solely on his bank statements to show the activity. No deposits are identified as gambling winnings on those bank statements. On those bank statements Mr. Desta highlighted expenditures that he claims relate to his gambling. Tax returns For each of the years 2007 and 2008, Mr. Desta timely filed his tax returns on Form 1040. On those returns, he reported gambling winnings of $21,200 as "Other income" in 2007 and $237,050 in 2008 (i.e., the lottery winnings of $200,000 plus casino income of $37,050); and he claimed miscellaneous deductions for gambling losses in the same amounts, thereby entirely offsetting the gambling income. That is, he reported zero net income from gambling on both returns. On those returns he also claimed unreimbursed employee business expenses, which appear in fact to relate to vehicle and air fare expense for 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 10 his gambling. Administrative and Court proceedings Respondent issued its notice of deficiency in February 2011. On those notices, the IRS increased Mr. Desta's gambling income and disallowed all (in 2007) or some (in 2008) of the gambling losses he claimed. In 2007 the IRS determined gambling income of $51,985 and zero losses, for a net of $51,985 (the same figure we find). In 2008 the IRS determined gambling income of $238,404 and losses of $79,683, for a net of $158,721. The IRS also disallowed his claimed unreimbursed employee business expense; and determined him liable for the accuracy-related penalty under section 6662(a). Mr. Desta filed his petition in this Court in May 2011. At that time, he resided in Virginia. I. Burden of proof DISCUSSION The IRS's determination is presumed correct, and the taxpayer generally bears the burden to prove his entitlement to any deductions he claims. Rule 142(a). Deductions are strictly a matter of legislative grace, and taxpayers must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). 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 11 Furthermore, taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001- 1(a). Section 7491(c) may shift the burden of proof where, among other things, the taxpayer complied with substantiation requirements and produces credible proof, but Mr. Desta did not meet those criteria. II. Gambling wins.and losses Casinos set odds in order to ensure that the house makes a profit. Consequently, it is a statistical fact that most patrons win less than they bet. However, this generality does not satisfy an individual taxpayer's burden to prove the amounts of his own gambling income and loss, nor does it shift the burden to the IRS.a Mr. Desta had the burden to prove the amount of his gross winnings and gross bets, so as to show (as he had reported on his returns) that he was one of that majority of gamblers who had no net gain from gambling. He did not do so. The IRS's determination of Mr. Desta's income was based on information tracked and maintained by the casinos at which he gambled. An employee of the casinos testified credibly at trial about the system by which they gather this information. No doubt the system has imperfections and is subject to 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 12 mistakes, but there is no reason to doubt its substantial accuracy. Mr. Desta criticized it by observing that it tracks only activity undertaken on the card, so that bets made off the card are not netted against earnings. While that is true, it is also true that (a) that Mr. Desta made no serious attempt (other than the bank balance argument discussed below) to quantify the amounts of bets that he made off his card, and (b) that not only bets but also wins made off the card -- which he admitted he sometimes experienced -- are untracked. Mr. Desta also observed (and the casino employee acknowledged) that sometimes one patron will use another's card; and if another winning patron used Mr. Desta's card, then those wins would be wrongly attributed to Mr. Desta: However, that patron's bets would also be wrongly attributed to him, and in any event, he did not identify any specific circumstance in which he thought (much less proved) that his card was used by someone else. The imperfections of Caesars' tracking system likely help Mr. Desta as much as they hurt him, and -- more important -- he made no showing to correct or supersede the information yielded by that system, as we now show. Mr. Desta's only record of his gambling 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 13 activity is what is shown on his bank statements. He makes, in effect, two arguments from those statements. First, he seems to argue that the beginning and ending balances of those accounts show he suffered not wins but substantial losses -- and those balances do show a sad tale. His account balance was $6,363 on January 2, 2007, $4,131 on January 4, 2008, and about $46,000 (a total of two accounts) in December 2008, after his $200,000.win in March 2008. He evidently argues that this shows a modest net loss in 2007 (not a net gain of $51,985) and shows a net gain in 2008 of something like only $42,000 (not a net gain of $158,721). It does indeed appear that his jackpot dwindled away precipitously. However, his burden was to prove not just that his bank balance had not grown (in 2007) or had diminished (in 2008) but that he had expended the money on deductible expenses a- in this case, on bets. The bank balances alone do not constitute that próof. Moreover, if he took cash winnings away from the casino and spent them rather than depositing them in his bank account, then they would not be reflected in his bank balances; and we have only his unconvincing testimony to contradict that scenario. Second, Mr. Desta argues that specific 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 a 14 entries that he has highlighted on his bank statements do show the quantum of his bets. Those entries, he says, constitute instances in which he obtained money for betting. However, some of the highlighted entries are highly problematic. He testified that a $6,000 entry on April 15, 2008, was such an instance; however, that transaction took place near his home in Virginia (not near a Casino) and on a Tuesday (not on a weekend, when he testified that he did his gambling) and not before or after any other transactions that reference Atlantic City or Las Vegas. Other substantial transactions likewise took place in Virginia and on weekdays. Moreover, Mr. Desta had two accounts in 2008 (apparently a.savings account and a checking.account), and he treated as gambling expenses numerous transfers that he made from the savings account to the checking account, and then treated as gambling expenses the expenditures he made from the checking account -- thereby double-counting some of his expenditures. Admittedly, many of the highlighted entries are not problematic in these obvious ways. Many transactions do refer to Atlantic City, Las Vegas, or the Caesars casinos in particular and took place at times when the record shows that Mr. Desta was Heritage Reporting Corporation (202) 628-4888 15 gambling. Others took place in Virginia but immediately before he went to a casino. Excluding the visibly problematic transactions, it appears Mr. Desta . obtained cash at gambling sites (or immediately before going to those sites) in amounts totaling roughly $22,500 in 2007 and $71,500 in 2008. However, for two reasons we cannot simply deduct these amounts from his winnings. First, these transactions prove that Mr. Desta obtained cash, but they do not prove how much of it he actually spent on bets. On the one hand, it seems not unreasonable to assume that a gambler in Atlantic City with cash in hand probably uses his cash, or most of it, for gambling -- but Mr. Desta had the burden of proving this assertion, and the Court will not substitute.its assumption for proof. Second, even assuming Mr. Desta did place bets in these amounts, deducting them from his winnings determined above would be inappropriate, since those winnings are already net of bets placed on the card. It was Mr. Desta's burden to prove his gross winnings (which he did not do) and then to prove his bets to be deducted therefrom. At least some -- and maybe all -- of these cash withdrawals were among the bets already netted out of his winnings on 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 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 16 Caesars' "Gaming History Statements". Mr. Desta's bank statements therefore do not substantiate losses beyond what the IRS has allowed and the Court has sustained. III. Additional gambling expenses The IRS now concedes that Mr. Desta's gambling activity was a trade or business, so he is entitled to deduct the expenses of that trade or business. The parties stipulate that Mr. Desta spent $5,178.50 for lottery tickets in 2007 and $9,952 for lottery tickets in 2008. We have found that he also. incurred.travel expenses of $1,081.31 in 2007 and $2,875.66 in 2008. He is entitled to deduct these amounts. IV. Accuracy-related penalty . Section 6662 1mposes an "accuracy-related penalty" of 20 percent of the portion of the underpayment of tax that is attributable to the taxpayer's negligence or disregard of rules or regulations or that is attributable to any substantial understatement of income tax. Here the IRS asserts both that Mr. Desta's understatement was substantial and that it was attributable to negligence. Under section 7491(c), the Commissioner bears the burden of production and must produce sufficient evidence that 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 17 the imposition of the penalty is appropriate in a given case. Once the Commissioner meets this burden, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). A. Substantial understatement By definition, an understatement of income tax for an individual is substantial if it exceeds the greater of $5,000 or 10 percent of the tax required to be shown on the return. Sec. 6662(d) (1). It appears that in each of the years at issue, Mr. Desta's understatements will exceed both $5,000 and 10 percent of the tax required to be shown. However, we have upheld the IRS's determinations in large part but not entirely, and we will therefore instruct the parties to recompute the deficiencies pursuant to Rule 155. Consequently, since we do not yet know for certain what Mr. Desta's ultimately liability will be in either year, we will therefore also address the issue of negligence. B. Negligence For purposes of section 6662, the term "negligence" includes a failure to exercise ordinary and reasonable care in the preparation of a tax 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 18 return. 26 C.F.R. sec. 1.6662-3(b) (1). Negligence is 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 (1985). The term "disregard" includes any careless, reckless, or intentional disregard of the rules or regulations. Sec. 6662(c). It also "includes any failure by the taxpayer to keep adequate books and records to substantiate items properly." 26 C.F.R. sec. 1.6662-3(b) (1). By this standard, we find Mr. Desta's underpayments to be negligent. Mr. Desta was an experienced gambler -- for 15 to 20 years, he testified -- but he failed to keep records of his wins or of his bets placed (for which his bank statements were a completely inadequate substitute.) If by 2007 and 2008 he did not know the basics about proper reporting of gambling activity, it must be because he never undertook to learn those basics. He did not report his gross winnings on his returns but instead reported only the amounts that would be reported to the IRS by third parties -- i.e., his D.C. lottery winnings and his slot winnings above $1,200 that would appear on Forms W2-G. He thus made no attempt to report gaming table winnings or small slot winnings. 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 He made no calculation of his gambling losses but instead reported as losses the precise amount of the wins he had reported. His record-keeping and his tax 19 reporting were both negligent. C. Defenses A taxpayer who is otherwise liable for the accuracy-related penalty may avoid the liability if he successfully invokes one of three other provisions, which we briefly consider: First, section 6662(d) (2) (B) provides that an understatement may be reduced where the taxpayer had substantial authority for his treatment of any item giving rise to the understatement. There is no authority that would warrant Mr. Desta's position. Second, section 6662(d) (2) (B) provides that an understatement may be reduced where the relevant facts affecting the item's treatment were adequately disclosed on his tax return and the taxpayer had a reasonable basis for his treatment of that item. These criteria are not met here. Third, section 6664 (c) (1) pyovides that, if the taxpayer shows, first, that there was reasonable cause for a portion of an underpayment and, second, that he acted in good faith with respect to such portion, then no accuracy-related penalty shall be 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 imposed with respect to that portion. Whether·the taxpayer acted with reasonable cause and in good faith 20 depends on the pertinent facts and circumstances, including his efforts to assess his proper tax liability, his knowledge and experience, and the extent to which he relied on the advice of a tax professional 26 C.F.R. sec. 1.6664-4(b) (1). Mr. Desta presumably invokes this defense with his testimony that while he may have made mistakes on his tax return, they were innocent mistakes, and he attempted to comply with the tax laws in 2007 and 2008 as he has in every year. However, we cannot say that Mr. Desta proved either "good faith" or "reasonable cause". Our record does not show fraud or tax evasion, but Mr. Desta's reporting of only the third- party reported amounts creates grave doubt, that he did not allay, about his "good faith". His approach indicates not someone who was attempting to make a full reporting of his gambling activity but rather someone who was hoping to fly under the radar. And he makes no showing of "reasonable cause". He did testify that he hired someone to prepare his return, but he had no records to give that person that would have allowed the full reporting of his gambling activity, and it seems clear that Mr. Desta simply 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 21 provided the lottery winning amount and the information from his Forms W2-G. Mr. Desta, and not the return preparer, is responsible for the defects in his reporting. So that Mr. Desta's liabilities for tax and penalty can be recalculated to reflect the Court's holdings stated above, decision will be entered pursuant to Rule 155. This concludes the Court ' s oral Findings of Fact and Opinion in this case. (Whereupon, at 3:24 p.m., the bench opinion in the above-entitled matter was concluded.) a // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888