Famuyiwa v. Commissioner

MEMORANDUM FINDINGS OF FACT AND OPINION

Respondent determined deficiencies and additions to petitioners' Federal income taxes as follows:

Respondent and petitioner have resolved all Schedule C deduction issues for both tax years. The only issues left unresolved are: (1) The amount by which the gross gambling income of petitioner Idowu Famuyiwa*619 (petitioner) exceeded his gambling losses for 1986; (2) whether petitioner underreported his taxable income for 1986 due to negligence or intentional disregard of rules or regulations, so as to be liable for an addition to tax under section 6653(a); (3) whether petitioner substantially understated his income tax for 1986, so as to be liable for an addition to tax under section 6661; and (4) whether petitioners are jointly liable for an addition to tax under section 6651(a)(1) for failing to file their 1985 return in timely fashion.

Some of the facts have been stipulated and are so found. We incorporate the stipulation of facts and attached exhibits.

Because petitioner filed his 1986 Federal income tax return "married filing separately," our decision with respect to that year binds only him, and not his ex-wife, petitioner Florence Famuyiwa. Our decision regarding 1985 applies to both petitioners.

FINDINGS OF FACT

Petitioners resided in Inglewood, California, when they filed their petition in this case.

On January 4, 1986, petitioner won $ 192,372 on two bets at a thoroughbred racetrack. He promptly deposited the proceeds in his checking account at Century Federal Savings and*620 Loan Association. During the remainder of 1986, petitioner had no additional net gambling income and insubstantial or negative income from other sources.

Petitioner was a compulsive gambler during 1986. During January 1986 petitioner drew three checks totaling $ 120,055.60 on his checking account, and lost the major part of the proceeds of these checks gambling in Las Vegas, Nevada, where he played blackjack and craps and bet on horse races.

Subsequent to January 4, 1986, petitioner made a total of $ 172,470.05 in cash withdrawals, as set forth in the appendix. Many of the withdrawals occurred at or near racetracks or casinos. Petitioner continued to gamble several times a week, for the most part at Southern California racetracks, and took at least 2 additional trips to gamble in Las Vegas.

Petitioner spent part of the proceeds of his 1986 gambling winnings on the following items:

Petitioner also invested $ 20,000 of his gambling winnings by opening an account with Prudential Bache, a securities broker. Petitioner had access to this account by obtaining *621 cash advances against a Prudential Bache credit card. He lost no more than $ 10,000 of that amount in gambling. During 1986, petitioner had personal expenditures of $ 25,000 paid out of gambling winnings. Petitioner spent $ 13,692 of his gambling winnings on business expenditures (in addition to the truck) during 1986, which helped to fund petitioner's loss from the operation of his small contracting business.

In sum, at least $ 75,592 of the $ 192,372 petitioner won at the track on January 4, 1986, was not lost by gambling, so petitioner might have had as much as $ 116,780 of net gambling losses subsequent to his big winnings.

Petitioners' 1985 joint Federal income tax return was filed on May 1, 1986, more than 2 weeks late.

ULTIMATE FINDINGS OF FACT

Applying the rule of Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), we find that petitioner had gambling losses of $ 100,000 during the taxable year 1986, resulting in taxable income from gambling of $ 92,372.

We also find that petitioner has failed to sustain his burden of proof so that he is liable for the various additions to tax in amounts appropriate to the redetermined deficiencies arising from the*622 parties' concessions and our finding of the amount of his gambling losses for 1986.

OPINION

Allowable Gambling Deductions

Section 165(d) provides for a deduction for losses from gambling transactions, to the extent of gains from such transactions. Respondent's determination disallowing petitioner's deduction is presumptively correct. Welch v. Helvering, 290 U.S. 111, 78 L. Ed. 212, 54 S. Ct. 8 (1933). Petitioner has the burden of establishing that he sustained the gambling losses respondent disallowed. Norgaard v. Commissioner, 939 F.2d 874 (9th Cir. 1991), affirming in part and reversing in part a Memorandum Opinion of this court; Schooler v. Commissioner, 68 T.C. 867, 869 (1977); Rule 142(a).

Section 6001 requires taxpayers to keep records adequate to substantiate their income and deductions. When a taxpayer fails to keep such records, but a court is convinced deductible expenditures were made, the court "should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making." Cohan v. Commissioner, supra at 544. In gambling cases, this Court *623 has invoked the rule of Cohan only when it is convinced that petitioner incurred some gambling losses. See Drews v. Commissioner, 25 T.C. 1354 (1956); Doffin v. Commissioner, T.C. Memo 1991-114; Forman v. Commissioner, T.C. Memo 1988-64; Kalisch v. Commissioner, T.C. Memo 1986-541, affd. without published opinion 838 F.2d 461 (3rd Cir. 1987). We are convinced that petitioner suffered substantial gambling losses.

Respondent does not claim that petitioner had gambling income in 1986 in addition to his January 4 winnings. Thus, respondent does not argue for application of the principle that, when it is established that petitioner had unreported gambling income, petitioner must substantiate gambling losses greater than those additional winnings before being allowed any deduction against reported winnings. Schooler v. Commissioner, 68 T.C. 867, 869 (1977).

Respondent instead argues, in effect, that the Court has "no satisfactory basis for estimating the amount of petitioner's losses." Rivera v. Commissioner, T.C. Memo 1988-497. We disagree. *624 Unlike the taxpayer in Rivera, petitioner gave credible testimony and did not doctor his records. Petitioner's credible testimony and documentary evidence provide a sufficient basis for decision. See, e.g., Drews v. Commissioner, supra; Doffin v. Commissioner, supra; Forman v. Commisioner, supra; Kalisch v. Commissioner, supra; Fiaschetti v. Commissioner, T.C. Memo 1967-33.

Petitioner claimed to have lost all $ 192,372 gambling during frequent trips to Nevada casinos and several thoroughbred racetracks. The net result, according to petitioner, is that he had no net gambling income in 1986, and thus owes no tax on his gambling winnings. Petitioner appeared to have backed away from that proposition by substantiating only $ 172,470.05 in cash transactions during 1986. We have concluded that at least $ 75,592 was not lost by petitioner in gambling transactions. Subtracting that amount from petitioner's gambling winnings yields $ 116,780 that could have been lost in gambling transactions.

Owing to the skimpy record, we have been forced to make certain assumptions*625 in determining the allowable deduction. Petitioner's credible testimony and documentation were sufficient to show that a deduction is in order, but insufficient to show the precise amount of that deduction. Bearing heavily upon the taxpayer, we find that $ 100,000 is allowable as a deduction for gambling losses under section 165(d), leaving petitioner with net gambling income of $ 92,372 for the taxable year 1986.

Negligence

Respondent determined additions to petitioner's tax for 1986, asserting that petitioner was negligent in failing to keep records adequate to substantiate his gambling losses. Section 6653(a) provides that if any part of an underpayment is caused by negligence or disregard of rules or regulations, the underpaying taxpayer is liable for an addition to tax equal to 5 percent of the underpayment and 50 percent of the interest payable on the underpayment, as computed under section 6001. A taxpayer is "negligent" when he fails to do what a reasonable, prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985). Petitioner has the burden of proving that respondent's additions to tax for negligence *626 were erroneous. Bixby v. Commissioner, 58 T.C. 757, 791 (1972).

Respondent has announced that "An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation will usually be acceptable evidence for substantiation of wagering winnings and losses." Rev. Proc. 77-29, 1977-2 C.B. 538. Petitioner had no record keeping system. Petitioner submitted no evidence nor made any argument that would explain why his method of substantiation was reasonable and the determination of respondent was erroneous. We therefore uphold respondent's determination that petitioner is liable for the addition to tax under section 6653(a), as applied to the deficiency resulting from our holding on the amount of his net gambling income for 1986.

Substantial Understatement

Section 6661 provides for an addition to tax if the taxpayer understates his income tax liability by the greater of 10 percent of his true tax liability or $ 5,000. We have already decided that petitioner understated his net gambling income for 1986. If the Rule 155 computation reveals that petitioner's understatement of his 1986 tax*627 liability was substantial, we will sustain the resulting addition to tax under section 6661.

1985 Late Filing

Respondent determined that petitioners are jointly liable for an addition to tax for late filing of their 1985 return. Section 6651(a)(1) provides for an addition to tax when a taxpayer fails to file a timely return, unless the failure is due to reasonable cause and not due to willful neglect. The parties stipulated that petitioners' joint return was filed on May 1, 1986, more than 2 weeks late.

Petitioners claimed that they filed a request for an extension of time to file, but introduced no evidence on this point. Petitioner husband said that he provided respondent with a copy of their Form 4868, and urged the Court to verify independently that petitioners filed Form 4868 with the Fresno service center.

As we told petitioner at trial, the Court's role is to hear the evidence presented at trial, not to investigate claims on its own. We also warned petitioner that we were writing on a "clean slate" and that we would disregard any prior investigation by respondent. See Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). Despite*628 these warnings, petitioner chose to rely on respondent to introduce evidence favorable to his case. While we understand that petitioner had inferior investigatory resources, we believe that it was not beyond his means to provide the court a photocopy of the extension form. Nor does the fact that during 1986 petitioner was in the grip of his gambling compulsion provide an excuse for the late filing of his 1985 return. Cf. Heber v. Commissioner, T.C. Memo 1989-85 ("vague testimony about being depressed and in a bad state of health" insufficient to overturn addition to tax for late filing); Faulkner v. Commissioner, T.C. Memo 1980-90 (illness of taxpayer's preparer insufficient to overturn addition to tax for late filing). Petitioners had the burden of proof and failed to carry it. Therefore, we uphold respondent's determination against petitioners for late filing under section 6651(a)(1) for the taxable year 1985.

To reflect concessions and our findings and conclusions.

Decision will be entered under Rule 155

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