Mayo v. COMMISSIONER OF INTERNAL REVENUE, 15527-03.

• Citation: 136 T.C. 81,136 T.C. No. 4
• Decision Date: 25 January 2011
• Docket Number: No. 15527-03.,15527-03.
• Parties: RONALD ANDREW MAYO AND LESLIE ARCHER MAYO, Petitioners,<BR>v.<BR>COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

136 T.C. No. 4

RONALD ANDREW MAYO AND LESLIE ARCHER MAYO, Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15527-03.

01-25-2011

[136 T.C. No. 2]

Ronald Andrew Mayo and Leslie Archer Mayo, pro sese.

Michael S. Hensley, for respondent.

GALE, Judge.

Respondent determined a deficiency of $9,732 in Federal income tax and an accuracy-related penalty under section 6662(a) and (b)(2)^[1] of $1,387 with respect to petitioners' 2001 taxable year.^[2] Respondent subsequently

[136 T.C. No. 3]

conceded that petitioner Ronald Andrew Mayo (petitioner)^[3] was in the trade or business of gambling during 2001 and allowed petitioner's gambling expenses (which totaled $142,728) to be deducted as trade or business expenses to the extent of his gross receipts from gambling ($120,463). The foregoing concessions resulted in a reduced deficiency and accuracy-related penalty of $6,993 and $1,387, respectively. The issues for decision are:

(1) Whether petitioner's engagement in the trade or business of gambling entitles him to deduct the losses from his gambling business from gross income without regard to section 165(d), which allows wagering losses only to the extent of wagering gains;

(2) whether petitioner is entitled to deduct the expenses, other than the costs of wagers, incurred in carrying on his gambling business pursuant to section 162(a) without regard to section 165(d); and

(3) whether petitioners are liable for an accuracy-related penalty under section 6662(a) and (b)(2) for substantial understatement of income tax.

4 FINDINGS OF FACT

Some of the facts have been stipulated and are so found. We incorporate by this reference the stipulation of facts and the exhibits attached thereto.^[4] Petitioners resided in California when the petition was filed.

The parties have stipulated that petitioner was engaged in the trade or business of gambling on horse races during 2001. During that year he wagered $131,760 on the outcome of horse races and won $120,463 as a result of the wagers he placed. Petitioners attached a Schedule C, Profit or Loss From Business, to the 2001 Federal income tax return on which they reported the results of petitioner's gambling business. On the Schedule C petitioners reported as gross receipts the $120,463 of proceeds from petitioner's winning wagers and deducted as an expense the $131,760 in wagers petitioner placed (wagering expenses).

[136 T.C. No. 5]

Petitioners also claimed the following as expenses on the Schedule C (collectively, business expenses):

 Expense Amount
                 Car and truck $3,109
                 Interest 91
                 Office 256
                 Travel 776
                 Meals & entertainment 1,651
                 Telephone & Internet 670
                 Admission/Entry fees 1,251
                 Subscriptions 1,056
                 Handicapping data 1,960
                 ATM fees 148
                 _______
                 Total 10,968
                

Petitioners deducted the total of the wagering expenses and business expenses ($142,728) from the reported gross receipts from wagering ($120,463), resulting in a reported net loss on the Schedule C of $22,265. This figure was claimed as a business loss, which petitioners deducted from gross income.^[5]

On June 9, 2003, respondent sent petitioners a notice of deficiency for 2001 in which he determined that petitioner was not engaged in the trade or business of gambling and was therefore required to claim any gambling losses (but only to the extent of gambling gains) as itemized deductions (pursuant to section 63) and subject to the limitation of section 68, rather than as trade or business expenses under section 62(a)(1). On

[136 T.C. No. 6]

August 11, 2003, respondent sent petitioners a Notice CP2000 in which he conceded that petitioner was in the trade or business of gambling and that petitioners were therefore entitled to deduct petitioner's wagering expenses and business expenses on Schedule C, but only to the extent of his gross receipts from gambling. Consequently, respondent allowed Schedule C expenses of only $120,463, the amount of gross receipts reported from gambling, thereby eliminating the $22,265 net loss from gambling that petitioners had claimed as a deduction from gross income. Respondent's limitation of petitioners' allowable deductions from gambling to $120,463 effectively disallowed both the excess of the $131,760 in wagering expenses over the $120,463 in gross receipts from gambling ($11,297) and business expenses claimed in connection with the conduct of the gambling business ($10,968).

OPINION

I. Application of Section 165(d) to the Trade or Business of Gambling

Section 162(a) generally allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". Section 165(d), however, provides that "Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions." The parties have stipulated that petitioner was in the trade or business of gambling on horse races in 2001 and that he "wagered" a total of $131,760 on the outcome of horse

[136 T.C. No. 7]

races and won a total of $120,463 as a result of this wagering during that year. Petitioner's wagering expenses thus come within the description of both section 162(a) and section 165(d). See, e.g., Boyd v. United States, 762 F.2d 1369, 1372-1373 (9th Cir. 1985); Nitzberg v. Commissioner, 580 F.2d 357, 358 (9th Cir. 1978), revg. T.C. Memo. 1975-154 and T.C. Memo. 1975-228; Offutt v. Commissioner, 16 T.C. 1214, 1215 (1951); Crawford v. Commissioner, T.C. Memo. 2010-54; Valenti v. Commissioner, T.C. Memo. 1994-483.

Petitioner contends that under Commissioner v. Groetzinger, 480 U.S. 23 (1987), the limitation of section 165(d) on the deduction of gambling losses does not apply to professional gamblers. Citing the Supreme Court's observation that "basic concepts of fairness * * * demand that * * * [gambling] activity be regarded as a trade or business just as any other readily accepted activity", id. at 33, petitioner contends that section 165(d) does not apply to an individual engaged in the trade or business of gambling since it does not apply to other trades or businesses.

In 1951 this Court considered whether an individual engaged in the trade or business of gambling is subject to the section 165(d) limitation on wagering losses, holding that the limitation applied in these circumstances. Offutt v. Commissioner, supra at

[136 T.C. No. 8]

1215-1216;^[6] accord Skeeles v. United States, 118 Ct. Cl. 362, 372, 95 F. Supp. 242, 246-247 (1951). In recent years we have repeatedly rejected the claim that Groetzinger modified this settled law and should be read as confining the application of section 165(d) to casual or recreational gamblers and eliminating the section's limitation on the deduction of the gambling losses of professional gamblers. See Crawford v. Commissioner, supra; Lyle v. Commissioner, T.C. Memo. 1999-184, affd. without published opinion 218 F.3d 744 (5th Cir. 2000); Valenti v. Commissioner, supra.

In Valenti we considered this claim regarding Groetzinger at length. We observed that, even though the gambling losses of a professional gambler fall under both the section 162(a) allowance of deductions for trade or business expenses and the section 165(d) limitation on the deduction of losses from wagering, it is a well-settled principle that section 165(d), as the more specific statute, trumps the more general provisions of section 162(a). The former provision operates as a limitation on deductions otherwise allowable under the latter. See Nitzberg v. Commissioner, supra at 358; see also Boyd v. United States, supra at 1372-1373; Skeeles v. United States, supra at 247.

[136 T.C. No. 11]

Commissioner, T.C. Memo. 1995-607; Kozma v. United States, supra, an individual or partnership engaged in providing gambling services to others, see Estate of Todisco v. Commissioner, supra; Nitzberg v. Commissioner, supra; Ward v. Commissioner, supra, or an individual engaged in both, see Skeeles v. United States, supra; Offutt v. Commissioner, supra.

In Commissioner v. Groetzinger, supra at 32, the Supreme Court made the following observations regarding section 165(d):

Federal * * * legislation * * * [has] been reluctant to treat gambling on a parity with more "legitimate" means of making a living. * * * And the confinement of gambling-loss deductions to the amount of gambling gains, a provision brought into the income tax law as § 23(g) of the Revenue Act of 1934 * * * and carried forward into § 165(d) of the 1954 Code, closed the door on suspected abuses * * * but served partially to differentiate genuine gambling losses from many other types of adverse financial consequences sustained during the tax year. * * *

Thus, contrary to petitioner's contention, the Supreme Court acknowledged the congressional decision to treat gambling losses differently from other losses for purposes of the Federal income tax, even when incurred as a "means of making a living". This passage cannot be readily reconciled with petitioner's contention that Commissioner v. Groetzinger, 480 U.S. 23 (1987), removed the section 165(d) limitation on losses from wagering transactions when incurred in the conduct of a trade or business.

The legislative history of the enactment of the Revenue Act of 1934 (1934 Act), ch. 277, sec. 23(g), 48 Stat. 689, the predecessor of section 165(d), also supports the conclusion that

[136 T.C. No. 12]

the limitation on losses from wagering transactions was intended to apply to all such losses, even if incurred in the conduct of a trade or business. Before enactment of 1934 Act sec. 23(g), there was no statutory provision specifically directed at wagering losses. The courts had determined the deductibility of losses from gambling on the basis of the predecessors of section 165(c)(2) that allowed deductions for losses incurred in any transaction entered into for profit, though not connected with a trade or business.^[9] Caselaw and administrative rulings before enactment of 1934 Act sec. 23(g) held that the...