                    T.C. Summary Opinion 2008-17



                        UNITED STATES TAX COURT



     THOMAS PATRICK AND CHRISTINE E. DAWSON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20323-06S.              Filed February 20, 2008.



     Thomas Patrick and Christine E. Dawson, pro sese.

     Harry J. Negro, for respondent.



     RUWE, Judge:     This case was heard pursuant to the provisions

of section 74631 of the Internal Revenue 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.



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year in issue.
                               - 2 -

     Respondent determined a $4,190 deficiency in petitioners’

Federal income tax for 2004 and an $838 accuracy-related penalty

under section 6662 due to negligence.

     The issues for decision are whether petitioners are entitled

to net their gambling losses against their gambling winnings in

computing adjusted gross income and whether they are liable for a

section 6662(a) accuracy-related penalty due to negligence.

                            Background

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

The stipulation of facts and the attached exhibits are

incorporated by this reference.   Petitioners resided in

Williamstown, New Jersey, at the time they filed their petition.

     During 2004, petitioner Thomas Dawson was employed full time

as a building inspector, and petitioner Christine Dawson was

employed full time as a registered nurse.

     During 2004, petitioners gambled at casinos in Atlantic

City, New Jersey.   Most of petitioners’ gambling consisted of

playing $5- or $10-pull slot machines.   Neither petitioner was a

professional gambler.   Their combined jackpots received from

Atlantic City casinos in 2004 totaled $208,420; however, their

combined gambling losses for 2004 exceeded the $208,420 jackpots

that they won.   In other words, petitioners’ gambling activities

during 2004 resulted in a net loss.
                               - 3 -

     On their 2004 Federal income tax return, petitioners

reported adjusted gross income of $145,694 which did not include

any of the jackpots.   Petitioners did not claim deductions on

their 2004 return for any of their gambling losses.   Petitioners

did not report their gambling jackpots and losses because their

gambling activities failed to produce net winnings in 2004.

     After examining petitioners’ 2004 return, respondent

determined that petitioners’ casino jackpots were gambling

winnings and increased petitioners’ adjusted gross income by

$208,420.   Respondent also determined that petitioners were

entitled to itemized deductions for gambling losses of $208,420.

     While respondent allowed itemized deductions for gambling

losses in the same amount that he increased petitioners’ adjusted

gross income, the increase in adjusted gross income triggered

certain limitations on other deductions.   As a result, respondent

disallowed a $490 tuition deduction, disallowed job-related and

miscellaneous expenses of $4,178, decreased total itemized

deductions by $6,267, and disallowed a $6,200 deduction for

personal exemptions.   These adjustments, based on respondent’s

adjustment to petitioners’ adjusted gross income, are

computational adjustments required by law.

     In their petition, petitioners claim that it makes no sense

to increase their adjusted gross income because their gambling
                                - 4 -

activities produced a net loss for 2004.     Petitioners are

contesting only the propriety of increasing their adjusted gross

income.    They have not contested the accuracy of the

computational adjustments that flow from increasing their

adjusted gross income.

                             Discussion

     Gross income includes all income from whatever source

derived, including gambling income.     See sec. 61; Jackson v.

Commissioner, T.C. Memo. 2007-373.      The jackpots that petitioners

received constitute gambling income.      A taxpayer in the trade or

business of gambling may deduct wagering losses to the extent

allowable in computing adjusted gross income.     A taxpayer who was

not in the trade or business of gambling may deduct wagering

losses only to the extent allowable as an itemized deduction to

compute taxable income.    See Calvao v. Commissioner, T.C. Memo.

2007-57.    Petitioners were not professional gamblers and were not

in the trade or business of gambling.     Therefore, their gambling

losses were not deductible in arriving at adjusted gross income,

and respondent’s determination to increase petitioners’ adjusted

gross income by the amount of jackpots received in 2004 was

correct.    Since that resolves the only issue petitioners raised

regarding the tax deficiency, respondent’s deficiency

determination of $4,190 is sustained.
                               - 5 -

     With regard to respondent’s determination that petitioners

are liable for the accuracy-related penalty under section 6662(a)

due to negligence, petitioners argue that when they prepared

their 2004 return, they concluded that since their gambling

activity produced a net loss, they had no gambling income to

report.   Petitioner Thomas Dawson testified that this was the way

petitioners had filed returns in prior years and that he was not

aware of the previously stated rules that precluded the netting

of gambling winnings and losses in determining adjusted gross

income.   He explained that he used simple logic in determining

that petitioners’ gambling activity did not produce income.

     Section 6662(c) defines negligence as “any failure to make a

reasonable attempt to comply with the provisions” of the Code.

After hearing the testimony presented, we conclude that

petitioners made an honest attempt to comply with their reporting

requirements.   Petitioners do not purport to be tax experts and

when preparing their returns concluded that they did not have to

report gambling income because their nonbusiness gambling

activity resulted in a net loss.   While their conclusion was

incorrect, we do not think that their error negates the

reasonableness of their attempt to comply with their reporting
                               - 6 -

requirements.   We hold that petitioners are not liable for the

section 6662 penalty due to negligence.


                                            Decision will be entered

                                       for respondent as to the

                                       deficiency and for petitioners

                                       as to the accuracy-related

                                       penalty.
