Ronald L. Buch, Judge
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit with this order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at St. Paul, Minnesota, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard.
In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155.
Bench Opinion by Judge Ronald L. Buch
March 30, 2023
Jacob Bright v. Commissioner of Internal Revenue
Docket No. 10095-22THE COURT: The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied upon as precedent in any other case. These oral findings of fact and opinion are made pursuant to the authority grated by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code, in effect at all relevant times.
Jacob Bright gambled extensively in 2019, and he had substantial winnings and substantial losses. He hired a return preparer who reported that Mr. Bright was a professional gambler, which all parties agree he was not. It is unclear where the return preparer obtained the amounts of winnings and losses that were reported on Mr. Bright's return. The Commissioner accepted the amount of winnings reported on Mr. Bright's return but disallowed the losses. Mr. Bright argues that he had less in winnings than reported on his return and that his losses were at least equal to his winnings. In support of his argument, Mr. Bright offers casino records showing at least some of his losses. Mr. Bright did not establish that his gambling winnings were less than what he reported on his return; however from casino records, the Court was able to reconstruct at least a portion of his gambling losses.
FINDINGS OF FACT
Jacob Bright has been gambling for half his life. Mr. Bright is 36 years old. He completed two years of college, where he studied automobile repair, but he performs storm restoration work as his occupation. He began gambling when he was 18, primarily to make money, but also for entertainment. He has gambled more frequently in the last 4 to 5 years. He cashes most of his paychecks to gamble and loses substantial amounts of money. His bank account records show that his account frequently had a low or negative balance in 2019. Mr. Bright recognizes and regrets the negative effect that gambling has had on his life.
Mr. Bright principally tries his luck at three casinos. These include Mystic Lake Casino and Treasure Island Resort and Casino in Minnesota, and Diamond Jo Worth Casino in Iowa. He plays different games including slot machines and table games, specifically blackjack, and he bets on sports. He primarily plays slot machines, and his sports betting takes place at Diamond Jo. He typically uses a player's card issued by a given casino to place bets from his balance on the card. The casinos track Mr. Bright's gambling activity while using the player's card. He almost always uses his player's card. He has obtained reports from the casinos summarizing his tracked activity for 2019.
According to casino records, Mr. Bright lost money. At Mystic Lake, he had an annual net loss of $22,375. The Mystic Lake activity report calculates the annual net loss as the sum of monthly net wins and losses. The monthly net losses included $1,932 for January, $1,091 for March, $3,886 for April, $160 for June, $78 for July, $16,779 for August, $4,100 for September, and $13,351 for December. The monthly net gains included $2,816 for February and $15,447 for November. The report does not include any data from May or October. At Treasure Island, Mr. Bright had an annual net loss of $16,580. This consisted of a $7,980 net loss from the pit gaming area, and an $8,600 net loss from the slot gaming area. The report calculated these net loss amounts by tracking the annual "dollars in" and "dollars out" per gaming area. For pit gaming, Mr. Bright put in $15,580 and got out $7,600. For slot machines, he put in $42,354 and got out $33,753. At Diamond Jo, he had an annual net loss of $894 from slot machine play; the report does not include amounts won or lost from sports betting in the calculation.
On those occasions when Mr. Bright had a sizable winning, the date, amount, and type of game was reported to the IRS on Form W-2G. Each W-2G listed "Slot Machines" as the source of the gross winnings. An IRS Wage & Income Transcript reflects the following wins:
• Mystic Lake - January 3, 2019 - $4,932
• Mystic Lake - January 25, 2019 - $2,000
• Mystic Lake - January 30, 2019 - $1,230
• Mystic Lake - February 4, 2019 - $1,796
• Mystic Lake - February 6, 2019 - $3,649
• Mystic Lake - February 7, 2019 - $3,932
• Treasure Island - July 1, 2019 - $1,792
• Treasure Island - July 2, 2019 - $1,483
• Mystic Lake - August 22, 2019 - $2,360
• Mystic Lake - August 23, 2019 - $2,050
• Mystic Lake - August 27, 2019 - $4,636
• Mystic Lake - August 30, 2019 - $1,588
• Mystic Lake - August 31, 2019 - $9,416
• Treasure Island - September 27, 2019 - $1,845
• Treasure Island - September 27, 2019 - $3,894
• Treasure Island - September 27, 2019 - $1,512
• Mystic Lake - November 15, 2019 - $25,317
• Mystic Lake - November 19, 2019 - $5,155
• Diamond Jo - November 27, 2019 - $2,131
• Diamond Jo - December 2, 2019 - $1,437
• Mystic Lake - December 9, 2019 - $15,010
• Mystic Lake - December 15, 2019 - $5,246
• Mystic Lake - December 16, 2019 - $6,332
• Mystic Lake - December 23, 2019 - $1,810
Mr. Bright hired a return preparer who was recommended to him, but he did not get what or whom he expected. Rather than the recommended preparer, the return preparer's daughter actually prepared his return. The return preparer reported that Mr. Bright was a professional gambler, although the parties appear to agree that he was not and the evidence does not support him being a professional gambler. When the preparer presented Mr. Bright with his completed return, he did not review it. He is unaware of how the preparer came up with his reported gambling income. As relevant to this Opinion, the return showed $240,895 of gross receipts from "professional gambling" and an equal amount of expenses on Schedule C, Profit or Loss from Business. The expenses reduced the net profit from gambling to zero.
The Commissioner determined that the reporting on Mr. Bright's return was incorrect. In a notice of deficiency dated April 22, 2022, the Commissioner determined a tax deficiency of $68,214 and a substantial understatement penalty pursuant to section 6662(a) of $13,643. The Commissioner determined that Mr. Bright was not allowed to report gambling winnings and losses on Schedule C because he was not a professional gambler. The Commissioner accepted the reported amount of gambling winnings and moved them on the return but disallowed the gambling losses reported on Schedule C. Mr. Bright subsequently filed an amended return on which he reported gambling losses to the extent of his winnings on Schedule A, Itemized Deductions. The Commissioner did not allow the adjustments reported on the amended return and based his notice of deficiency on the original return.
While residing in Minnesota, Mr. Bright filed a petition challenging the Commissioner's determinations. In his petition, Mr. Bright contends that the Commissioner erred in computing his gambling wins and losses and in denying gambling losses and deductions. He also contends that he acted reasonably in his tax reporting and is not liable for the section 6662(a) penalty. The Commissioner agrees that Mr. Bright is not liable for the penalty.
In this case, no one disagrees with the basics of how gambling winnings and losses are to be reported. Under section 61(a), gross income includes all income from whatever source derived, including gambling winnings. Coleman v. Commissioner, T.C. Memo. 2020-146 at *12. Gross income from gambling is calculated per session of gambling. See Shollenberger v. Commissioner, T.C. Memo. 2009-306. For amateur gamblers, sessions with gains should be totaled and included as other income. Id.; Estate of Chow v. Commissioner, T.C. Memo 2014-49 at *12. Amateur gamblers can deduct losses to the extent of their winnings pursuant to section 165(d) but must separately report those losses as an itemized deduction on Schedule A. Coleman v. Commissioner, T.C. Memo. 2020-146 at *12. They cannot deduct gambling losses if they use the standard deduction. See Estate of Chow v. Commissioner, T.C. Memo 2014-49 at *12; Bon Viso v. Commissioner, T.C. Memo 2017-154.
At its core, this is a substantiation case. Mr. Bright argues that he should not be bound by the amount of gambling winnings reported on his return. Rather, he contends that $110,553, the cumulative reported amount on the Forms W-2G, is the better amount. Alternatively, he contends that his gambling income should be zero, because the IRS has no logical basis for using either the amount reported on the returns or the Forms W-2G such that a deficiency based on either figure is a "naked assessment." The Commissioner, on the other hand, argues that he reasonably relied on the amount of the gambling winnings reported on the 2019 return. The Commissioner further contends that Mr. Bright has failed to meet his burden of proving that the Commissioner's determination is incorrect or that he may deduct losses under section 165(d).
Income from Gambling Winnings
Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The burden of proof may shift to the Commissioner in certain circumstances. I.R.C. § 7491(a)(1). To shift the burden, taxpayers must have complied with applicable substantiation and record-keeping requirements and have cooperated with the Commissioner's reasonable requests "for witnesses, information, documents, meetings, and interviews." I.R.C. § 7491(a)(2). Because Mr. Bright has not kept adequate records of his gambling activities, the record does not support shifting the burden to the Commissioner.
Mr. Bright failed to establish that his winnings were less than what he reported on his return. Although he is unaware of how his return preparer calculated the reported amounts, he has failed to demonstrate that the amounts he reported were erroneous. Further, Forms W-2G show that he had gambling winnings from slot machines of at least $110,553, which represents only part of his winnings. Casinos are required to issue Forms W-2G only for slot machine jackpots of $1,200 or more and are not required to keep track of smaller winnings. See Coleman v. Commissioner, T.C. Memo. 2020-146 at *4-5. Given the frequency of Mr. Bright's gambling and the fact that he played games other than slot machines, we know that he had winnings beyond what was reported on those forms. For example, casino reports show that Mr. Bright gambled during the months for which he was not issued a Form W-2G. In sum, the Forms W-2G clearly do not reflect all of Mr. Bright's gambling winnings, and he has failed to negate his own reporting.
Deductions for Gambling Losses
Taxpayers bear the burden of proving they are entitled to deductions. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). That burden often requires substantiation. Higbee v. Commissioner, 116 T.C. 438, 440 (2001). Taxpayers must maintain records sufficient to establish the amount of each deduction. See I.R.C. § 6001; Rogers v. Commissioner, T.C. Memo. 2014-141, at *17; Treas. Reg. § 1.6001-1(a), (e). Where a taxpayer establishes that he paid or incurred a deductible expense but does not establish its precise amount, we may supply an estimate. See Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). However, we must have some basis upon which an estimate can be made. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). We may apply this rule to estimate a gambler's losses for purposes of a deduction pursuant to section 165. See, e.g., Coleman v. Commissioner, T.C. Memo. 2020-146 at *13. In past cases, taxpayers have substantiated gambling losses with evidence such as casino ATM receipts, checks made payable to casinos, bank statements, and evidence about the taxpayer's modest lifestyle and overall financial condition, among other things. Id. at *14.
Casino documents, coupled with Mr. Bright's testimony, make clear the he suffered substantial gambling losses. He testified that he has lost more than he has gained from gambling, and that gambling has made life financially difficult for him. Indeed, the casino reports confirm his testimony, showing that even with some sizable winnings, he lost more than he won for those times when his wins and losses were captured. Although the casino records do not capture the full picture, they provide a sufficient basis upon which we can make an estimate. Because each casino's records report Mr. Bright's activity in a different way, our estimation method differs per casino.
For Mystic Lake, we estimate a minimum amount of loss by calculating the difference between Mr. Bright's Form W-2G winnings from Mystic Lake for a given month and his net gain or loss from Mystic Lake's casino report for that month. For example, his Form W-2G winnings at Mystic Lake for January totaled $8,162, but he had an overall net loss of $1,192, he must have lost $9,354. For him to have won $8,162 and yet netted a loss of $1,192, he must have lost $9,354. Thus, we conclude that Mr. Bright lost at least that much at Mystic Lake in January. For months in which he had a net loss but no Form W-2G winnings, our loss estimate is limited to the net loss. We estimate the annual loss from Mystic Lake by adding the monthly amounts.
To reach this conclusion, we accept Mr. Bright's testimony that he rarely gambled when not using his casino card. Again, Mr. Bright's testimony in this regard is supported by the documents from the casinos. For example, in November 2019, Mr. Bright won $25,317 in slots at Mystic Lake. On the player's estimated win/loss statement from Mystic Lake, November 2019 is one of only two months where Mr. Bright did not net a loss. When comparing the Forms W-2G and the Mystic Lake statement, it is clear that the W-2G winnings reported by that casino are likewise reflected in the statement. From that, we infer that his W-2G earnings were likewise included in the statements from the other casinos.
For Treasure Island, we estimate Mr. Bright's loss differently depending on the type of play. Unlike Mystic Lake, the Treasure Island activity report shows only annual net gain or loss, but it tracks the source of the gain or loss as being from either slot machines or the pit area. It also tells us the dollars Mr. Bright put into each area. Because he had net losses from both, we know that his actual loss was at least the amount of money he put in. However, for slot machines, we also know that his loss includes the amount of his annual Form W-2G winnings from Treasure Island because for him to have netted a loss, he must have also lost what he won. For the pit, Mr. Bright put in $15,580. For slots, he put in $42,354, and he had annual Form W-2G winnings of $10,526. We estimate his annual losses from Treasure Island by combining these amounts.
For Diamond Jo, we estimate Mr. Bright's loss similarly to Mystic Lake. Diamond Jo's records report an annual net loss from slot machines. Thus, we estimate loss by calculating the difference between Mr. Bright's annual Form W-2G slot machine winnings from Diamond Jo, or $3,568, and his annual net loss of $894.
From the three casinos for which we have information, Mr. Bright suffered gambling losses of at least $191,756, which is the sum of the $118,834 he lost at Mystic Lake, the $68,460 he lost at Treasure Island, and the $4,462 he lost at Diamond Jo. Mr. Bright may deduct the $191,756 loss pursuant to section 165(d).
Mr. Bright failed to establish that his gambling winnings were less than what he reported on his own return. And he failed to establish gambling losses in the amount he reported on his return. Casino records, however, establish that he had gambling losses of no less than $191,756. While we recognize that his gambling losses may have been greater, the record only supports this amount. Decision will be entered under Rule 155.
This concludes the Court's oral findings of fact and opinion in this case.
(Whereupon, at 10:21 a.m., the above-entitled matter was concluded.)