                   T.C. Summary Opinion 2009-22



                     UNITED STATES TAX COURT



      DIANA M. PRICE SKORE AND JOSEPH SKORE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5002-05S.               Filed February 18, 2009.



     Mark Moktarian, for petitioners.

     Kris H. An, for respondent.



     DEAN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code

(Code) in effect when the petition was filed.    Pursuant to

section 7463(b), the decision to be entered is not reviewable by

any other court, and this opinion shall not be treated as

precedent for any other case.   Unless otherwise indicated,

subsequent section references are to the Code in effect for the
                                    - 2 -

year in issue, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

     For 2002 respondent determined a $22,615 deficiency and a

$4,523 accuracy-related penalty under section 6662(a).

Respondent, from third-party payor records, determined that

petitioners received and failed to report various items of

income1 for which the Internal Revenue Service (IRS) proposed an

adjustment of $139,069 to petitioners’ gross income.       The parties

have filed a “Stipulation of Settled Issues” in which they agree

that petitioners received the following income items in 2002:

                     Item                               Amount

         Interest Bank of America                         $467
         Gambling income                                 9,600
         Interest Toby Skore
           Survivors Trust                               7,603
         Interest William Skore Decedent’s
           Unified Credit Trust (Skore Trust)            4,645
         Business income Skore Trust                     1,033
         Capital gain Skore Trust                      116,189
           Total                                       139,537


     1
      The notice of deficiency sets forth the following:

                            Return          Reported         Proposed
            Item            Showed           to IRS           Change

         Interest             $468          $12,715          $12,247
         Capital Gain/
           Dividend         24,824          141,013          116,189
         Small
           Business           –0-             1,033              1,033
         Other
           Income            4,004           13,604            9,600
             Total          29,296          168,365          139,069
                                 - 3 -

       The issues remaining for decision are whether petitioners

are:    (1) Entitled to offset or reduce with their claimed

capitalized expenditures the $116,189 capital gain that passed

through the Skore Trust; (2) entitled to offset their gambling

losses against their gambling income; and (3) liable for the

accuracy-related penalty.

                             Background

       Some of the facts have been stipulated and are so found.

The stipulation of facts and the exhibits received into evidence

are incorporated herein by reference.     When the petition was

filed, petitioners resided in California.

       William and Toby Skore, parents of Joseph Skore (Mr. Skore),

created the Skore Trust for estate planning purposes.     Mr.

Skore’s parents transferred their interests in their house (the

Sycamore property) to the Skore Trust.     The Skore Trust’s

beneficiaries include Mr. Skore, his brother, and his sister (who

also served as the Skore Trust’s trustee).

       William Skore passed away in January 2000; Toby Skore passed

away in February 2001.    Thereafter, the trustee used the Sycamore

property as a rental property.    The trustee sold the Sycamore

property in 2002.    The trustee filed a Form 1041, U.S. Income Tax

Return for Estates and Trusts, for 2002 and issued Schedules K-1,

Beneficiary’s Share of Income, Deductions, Credits, etc., to the

Skore Trust’s beneficiaries.    On the Form 1041, the trustee
                                - 4 -

reported a $351,6662 capital gain and equal distribution of the

sale proceeds to the Skore Trust’s beneficiaries.    The trustee

did not report expenses for repairs or improvements with respect

to the Sycamore property in 2002.   Mr. Skore did not seek

reimbursement from the Skore Trust or its trustee for any

expenditures that he may have made in 2002.

      Petitioners timely filed their 2002 Form 1040, U.S.

Individual Income Tax Return.   Petitioners reported adjusted

gross income of $32,772; claimed deductions of $36,837 on

Schedule A, Itemized Deductions; and reported zero tax.

Petitioners did not claim deductions for the $54,971.16 in

expenses that Mr. Skore alleges he paid with respect to the Skore

Trust’s Sycamore property on their 2002 Form 1040.    Petitioners

claimed a refund of a $2,348 overpayment for withheld tax.

Respondent, however, issued petitioners a notice of deficiency.

In response, petitioners filed a timely petition with the Court,

seeking redetermination of the deficiency.

                            Discussion

I.   Burden of Proof

      The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer bears the burden to prove

that the determinations are in error.    See Rule 142(a); Welch v.



      2
      $850,000 (amount realized) - $498,334 (adjusted basis) =
$351,666 capital gain.
                               - 5 -

Helvering, 290 U.S. 111, 115 (1933).   But the burden of proof on

factual issues that affect the taxpayer’s tax liability may be

shifted to the Commissioner where the taxpayer introduces

credible evidence with respect to the issue.    See sec.

7491(a)(1).   Petitioners have not alleged that section 7491(a)

applies; however, the Court need not decide whether the burden

shifted to respondent since there is no dispute as to any factual

issue.   Accordingly, the case is decided by the application of

law to the undisputed facts, and section 7491(a) is inapplicable.

II.   Mr. Skore’s Entitlement To Offset or Reduce the $116,189
      Capital Gain by $54,971.16 in Capitalized Expenses

      Mr. Skore alleges that he paid the following expenses on

behalf of the Skore Trust in 2002:

                     Description                   Amount

         Dewey Pest Control                        $125.00
         Y.G. Painting-LaJolla, Sycamore          2,420.00
         Home Depot-Sycamore                      1,145.97
         Thrifty Rooter-LaJolla, South Martel
           Sycamore, Formosa Ave.                   270.00
         Air Affair-plumbing & heating               90.00
         QBI Locksmith-Sycamore                     118.50
         “Tashman-Sycamore”                         395.20
         Westside Wholesale
           Elec. & Lighting                         154.00
         C.A. Intl. Tile                             26.24
         Perfect Floors                           1,890.00
         Albee’s Disc. Appliance                    310.88
         TAG Designs-architectural                2,500.00
         City of L.A. Fin. Tax & Permit Div.      1,218.54
         L.A. Dept. of Bldg. & Safety               217.19
         Orchard Supply-Sycamore                     78.94
         Shlomo Ashash-Formosa Ave.,
           Sycamore                              25,975.00
         Mini Blinds-Sycamore                       280.70
         Hollywood Plumbers-Formosa Ave.            850.00
                                  - 6 -

          Gardner-Sycamore, Formosa Ave.            1,650.00
          Additional work various props.           15,255.00
                                                 1
            Total                                  54,971.16
     1
      The Court notes that the expenses appear to be repairs;
i.e., expenditures made for the purpose of keeping the property
in an ordinarily efficient operating condition, see Ill. Merchs.
Trust Co. v. Commissioner, 4 B.T.A. 103, 106 (1926), rather than
capital expenditures that are made for permanent improvements or
betterments made to increase the property’s value or
substantially prolong its useful life, see secs. 1.162-4,
1.263(a)-1, Income Tax Regs.

     Mr. Skore claimed $81,938.34 in expenses.     The Court has

reduced that figure to $54,971.16 by the following unrelated

personal expenses, see sec. 262(a):

                    Description                     Amount

          Country Villa-boarding Toby Skore         $605.00
          Hancock Park-boarding Toby Skore           174.18
          Care Toby Skore Jan. 1 to Feb. 6         6,000.00
          “Ex. B” various nursing/care1            3,422.00
          “Ex. C” various prescription1
            drugs/medical services               16,766.00
             Total                               26,967.18
     1
      Although petitioners did not claim nor prove entitlement to
deductions for these expenditures, they might have qualified as
medical expenses under sec. 213(a) subject to the definition of a
dependent in sec. 152, the 7.5-percent floor, and reductions for
the amounts that Mr. Skore received to reimburse him for the care
of his parents.

     Mr. Skore testified that the $26,967.18 amount related to

the care of his parents and that he did not know “why it was

there.”

     Petitioners argue that Mr. Skore held an equitable interest

in the Skore Trust’s property, and since Mr. Skore paid expenses

to improve the Skore Trust’s property, which was eventually sold,
                                - 7 -

Mr. Skore should be able to offset his share of the passed-

through capital gain with his capitalized expenses “in the

fairness of justice.”    He is not asking for an “ordinary

deduction of $60,000 [but rather he is] reducing the capital gain

at 28 percent by the capitalized item.”

       It is oft repeated that State law determines the nature of

property rights, while Federal law determines the appropriate tax

treatment of those rights.    United States v. Natl. Bank of

Commerce, 472 U.S. 713, 722 (1985); Aquilino v. United States,

363 U.S. 509, 513 (1960).    Pursuant to California law, legal

title to a trust’s assets vests, generally, in the trustee while

the equitable or beneficial interest in the trust’s assets vests

in its beneficiaries.    See Title Ins. & Trust Co. v. Duffil, 218

P. 14 (Cal. 1923); Reagh v. Kelley, 89 Cal. Rptr. 425, 436 (Cal.

Ct. App. 1970).    The Court concludes that Mr. Skore held an

equitable interest in the Skore Trust’s assets under California

law.    Federal law nonetheless precludes petitioners from using

the expenditures either as an “offset” against or as a reduction

from Mr. Skore’s share of the passed-through capital gains.

       As a general rule, a trust is a taxpayer separate and apart

from its beneficiary for Federal income tax purposes.    United

States v. Norton, 250 F.2d 902, 905 (5th Cir. 1958).    On that

premise, the Federal courts have disallowed deductions, offsets,

or reductions for trust expenditures claimed by a trust’s
                                  - 8 -

beneficiaries–-whether the expenditures were capital or

noncapital.    For example, in United States v. Norton, supra, the

beneficiary sought to deduct payments that he made for interest

accrued on the trust’s income tax deficiency before and after the

trust’s termination.      The Court of Appeals for the Fifth Circuit

held that the beneficiary was not entitled to deduct the interest

accrued before the trust’s termination because the obligation was

not imposed upon the beneficiary; rather, the indebtedness was an

obligation of the trust.      Id. at 905-906.

     In Erdman v. Commissioner, 315 F.2d 762 (7th Cir. 1963),

affg. 37 T.C. 1119 (1962), the beneficiary claimed a deduction

for legal expenses paid by the trust to determine the owner of

the trust’s property, i.e., a capital expenditure, for which the

trustee had failed to claim a deduction.        The court disallowed

the deduction.    It reasoned that a taxpayer could not claim a

deduction for expenses of management, conservation, or

maintenance of property held for the production of income unless

the expenses were those of the taxpayer.        Id. at 765.   There, the

expenses were capital expenditures of the trust, not of the

beneficiary.     Id.

     Similarly, in Herter v. Commissioner, T.C. Memo. 1961-19,

the estate’s beneficiary sought to deduct certain travel expenses

that she paid in connection with the administration of her

husband’s estate.      The Court stated that even if the travel
                                - 9 -

expenses constituted ordinary and necessary expenses of the

estate, they were not deductible by the beneficiary because the

estate of a decedent is an entity separate from its heirs under

the Federal tax law.     Id.; see also Goelet v. United States, 266

F.2d 881, 883 (2d Cir. 1959) (beneficiaries and trustees of the

decedent were entitled to refunds of Federal income taxes they

paid on account of the trustees’ failure to deduct certain repair

expenses from the trust’s distributable income because the

trustees proved that they were entitled to the deductions).

     Lastly, in Mellott v. United States, 257 F.2d 798 (3d Cir.

1958), the estate’s beneficiaries claimed the estate’s 1950 net

operating loss on their 1949 individual returns and sought

refunds of the resulting overpayments.    The court disallowed the

loss.   The taxpayers did not point to any relevant provision but

rather asserted equitable arguments--fair treatment of the estate

and its beneficiaries.    The court explained that “equitable

considerations cannot prevail in allowance of deductions”, id. at

801, because whether a deduction is permissible depends upon

legislative grace and a taxpayer must “‘point to an applicable

statute and show that he comes within its terms’”, id. at 800-801

(quoting New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934)).   The court explained further that a loss may be claimed

only by the taxpayer who sustained the loss.    Id. at 801.     There,

the loss was sustained by the estate, not its beneficiaries.
                               - 10 -

     The Skore Trust is an entity separate and apart from its

beneficiaries.   The Skore Trust was required to take into account

its income items and expenditures (whether capital or otherwise)

under its accounting method.   See secs. 641(b), 643.   Its

beneficiaries were required to take into account their share of

the passed-through income items and allowable deductions or

credits.   See secs. 643(a), 652, 662.   The Skore Trust did not

deduct the Sycamore property’s “ordinary and necessary expenses”,

if any, see sec. 162, or capitalize the Sycamore property’s

capital expenditures, if any, into its basis, see secs. 263,

1016(a)(1).3   Because the Skore Trust failed to account for the

expenditures, these items were not reflected in the

beneficiaries’ allocable shares of distributable net income.

Thus, petitioners are not entitled to offset or reduce their

share of the passed-through capital gain by the expenditures that

were not taken into account by the Skore Trust.    See secs.

643(a), 652, 662.

     Moreover, petitioners have pointed to no Code provision (or

any other authority) allowing a beneficiary to use a trust’s

expenses to offset or reduce the beneficiary’s share of the

passed-through items of income or gain where the trust failed to

take its items into account under its accounting method.      See


     3
      Had the trustee taken the expenditures into account, the
Skore Trust and its beneficiaries would have had lower income tax
liabilities.
                                - 11 -

Erdman v. Commissioner, supra.     Petitioners’ equitable arguments

do not prevail upon the Court.    See Mellott v. United States,

supra at 801.    Therefore, petitioners are not entitled to use the

expenditures Mr. Skore made on behalf of the Skore Trust as an

offset against or a reduction from his share of the passed-

through capital gain.     Respondent’s determination is sustained.

III.    Gambling Losses

       As is relevant here, section 165(a) and (c) allows

individuals a deduction for gambling losses incurred in the trade

or business of gambling or in a transaction entered into for

profit.    Gambling losses are allowed only to the extent of the

gains from wagering transactions.    Sec. 165(d).   But gambling

losses are allowed only if substantiated.      See Hardwick v.

Commissioner, T.C. Memo. 2007-359; Lutz v. Commissioner, T.C.

Memo. 2002-89; Rev. Proc. 77-29, sec. 1, 1977-2 C.B. 538, 538

(“The purpose of this revenue procedure is to provide guidelines

to taxpayers concerning the * * * responsibility for maintaining

adequate records in support of [gambling] winnings and losses.”);

see also sec. 6001 (a taxpayer must keep records sufficient to

establish the amounts of the items required to be shown on his

Federal income tax return).

       Mr. Skore claims that he had gambling losses to offset or

reduce his gambling income.    He testified:   “I have some records

[of my gambling losses] and we’re going back many, many years ago
                                 - 12 -

and unfortunately I don’t know where they are now, so I couldn’t

produce anything.”    He also testified that the casino keeps track

of gamblers’ losses, but the casino does not allow anyone to take

the casino’s records.      On cross-examination Mr. Skore testified:

“I know they keep track of my time [with my player’s card, but

track] of my losses, * * * no, I don’t know.”     According to Mr.

Skore, his gambling losses for 2002 were around $15,000 to

$20,000.

      Petitioners have provided no evidence to substantiate the

gambling losses other than Mr. Skore’s testimony.     The Court does

not accept his uncorroborated, self-serving testimony.     See Urban

Redev. Corp. v. Commissioner, 294 F.2d 328, 332 (4th Cir. 1961),

affg. 34 T.C. 845 (1960); Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).    Accordingly, the Court holds that petitioners are not

entitled to offset the gambling winnings with the purported

gambling losses.     Respondent’s determination is sustained.

IV.   Accuracy-Related Penalty

      Initially, the Commissioner has the burden of production

with respect to any penalty, addition to tax, or additional

amount.    Sec. 7491(c).    The Commissioner satisfies this burden of

production by coming forward with sufficient evidence that

indicates that it is appropriate to impose the penalty.     See

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).      Once the

Commissioner satisfies this burden of production, the taxpayer
                               - 13 -

must persuade the Court that the Commissioner’s determination is

in error by supplying sufficient evidence of reasonable cause,

substantial authority, or a similar provision.      Id.

     In pertinent part, section 6662(a) and (b)(1) and (2)

imposes an accuracy-related penalty equal to 20 percent of the

underpayment that is attributable to:    (1) Negligence or

disregard of rules or regulations; or (2) a substantial

understatement of income tax.4   Section 6662(c) defines the term

“negligence” to include “any failure to make a reasonable attempt

to comply with the provisions of this title,” and the term

“disregard” to include “any careless, reckless, or intentional

disregard.”   Negligence also includes any failure by the taxpayer

to keep adequate books and records or to substantiate items

properly.   Sec. 1.6662-3(b)(1), Income Tax Regs.

     Section 6664(c)(1) is an exception to the section 6662(a)

penalty:    no penalty is imposed with respect to any portion of an

underpayment if it is shown that there was reasonable cause

therefor and the taxpayer acted in good faith.    Section

1.6664-4(b)(1), Income Tax Regs., incorporates a facts and

circumstances test to determine whether the taxpayer acted with

reasonable cause and in good faith.     The most important factor is



     4
      Because the Court finds that petitioners were negligent or
disregarded rules or regulations, the Court need not discuss
whether there is a substantial understatement of income tax. See
sec. 6662(b); Fields v. Commissioner, T.C. Memo. 2008-207.
                               - 14 -

the extent of the taxpayer’s effort to assess his proper tax

liability.   Id.   “Circumstances that may indicate reasonable

cause and good faith include an honest misunderstanding of fact

or law that is reasonable in light of * * * the experience,

knowledge, and education of the taxpayer.”    Id.

     Petitioners conceded that they received and failed to report

Mr. Skore’s gambling income and his share of the Skore Trust’s

passed-through capital gain.    Mr. Skore did not properly

substantiate his gambling losses as required by the Code and the

regulations.    In addition, petitioners have pointed to no Code

provision allowing petitioners to offset or reduce Mr. Skore’s

share of the Skore Trust’s passed-through capital gain by the

expenditures he made with respect to the Skore Trust’s assets.

     The Court finds that respondent has met his burden of

production, petitioners were negligent, and they did not

establish a defense for their noncompliance with the Code’s

requirements.    Respondent’s determination is therefore sustained.

     To reflect the foregoing,


                                          Decision will be entered

                                     for respondent.
