                     T.C. Summary Opinion 2006-95



                        UNITED STATES TAX COURT



         JANICE G. SPENCER AND FRED E. EGERTON, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16626-04S.             Filed June 27, 2006.



     Janice G. Spencer, pro se.

     Michael L. Bowman, for respondent.




     COUVILLION, Special Trial Judge:     This case was heard

pursuant to section 7463 in effect when the petition was filed.1

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.




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

     Respondent determined a deficiency of $2,525 in petitioners’

Federal income tax for 2002.

     The sole issue for decision is whether gambling winnings of

Janice G. Spencer (petitioner), who is not a professional

gambler, are required to be reported as gross income, or whether

the winnings may be offset by the losses that were incurred in

connection with the gambling activity.

     Some of the facts were stipulated.    Those facts, with the

exhibits annexed thereto, are so found and made part hereof.

Petitioners, husband and wife, were legal residents of

Independence, Missouri, at the time they filed their petition.

     Petitioners filed a joint Federal income tax return for

2002.    On their Form 1040, U.S. Individual Income Tax Return,

they reported wage and salary income of $30,314, of which

$24,717.64 was earned by petitioner Janice G. Spencer, and

$5,595.86 was earned by her spouse, Fred E. Egerton (Mr.

Egerton).    Petitioners also reported Social Security income of

$7,728, of which the reported taxable portion was $1,089.

Petitioners claimed a $395 tax credit pursuant to Form 8880,

Credit for Qualified Retirement Savings Contributions.2

     Petitioners did not claim any itemized deductions and

instead claimed the standard deduction under section 63.


     2
      The Social Security income and the retirement savings
contributions credit are believed to be attributable to
petitioner Fred E. Egerton.
                               - 3 -

     During the year 2002, petitioner won $13,400 on slot

machines at several casinos.   The payers issued information

returns to evidence these winnings; however, the $13,400 won by

petitioner was not included by petitioners as income on their

2002 Federal income tax return.    Although petitioner experienced

some losses at these casinos, petitioners did not deduct any

gambling losses on their return.   Petitioners contend that the

reason why petitioner’s gambling winnings were not included as

income on their 2002 income tax return is because petitioner’s

gambling losses exceeded her winnings, and, therefore, the

winnings did not have to be reported as income.   Respondent,

although agreeing that the losses were at least equal to the

winnings, does not share that view.

     In the notice of deficiency, respondent determined that the

$13,400 in gambling winnings constituted gross income and that

petitioners were entitled to an itemized deduction in an amount

equal to their gambling losses, instead of the standard deduction

previously claimed.   As a result of treating their winnings and

losses in that way, a larger amount of the Social Security

benefits was determined to be taxable (over the amount reported

by petitioners), and the $395 credit for qualified retirement

savings was eliminated.

     Petitioners take issue with respondent’s adjustment as to

the character of their gambling winnings.   They contend that,
                               - 4 -

because their gambling losses exceeded their gambling winnings,

the winnings did not have to be reported as gross income, nor

could their gambling losses be claimed as deductions, since they

were not professional gamblers.   Respondent does not dispute that

petitioners sustained gambling losses at least equal to or even

greater than their gambling winnings.   However, respondent

disagrees with petitioners’ position as to how the gambling

winnings and losses are to be treated for income tax purposes.

     The law is clear that income from gambling is includable in

gross income under section 61.3   Moreover, gambling losses are

deductible only to the extent of the taxpayer’s winnings from

similar transactions.   Sec. 165(d); Offutt v. Commissioner, 16

T.C. 1214 (1951); sec. 1.165-10, Income Tax Regs.   If a taxpayer

is a professional gambler and is engaged in the trade or business

of gambling, the income and losses therefrom are reported for

income tax purposes as a trade or business activity.   As such,

the losses sustained in the activity are deductible as ordinary

and necessary expenses paid or incurred in carrying on a trade or

business under section 162(a), subject to section 165(d), which

limits the deduction for losses to the extent of the gains

realized from gambling.   Boyd v. United States, 762 F.2d 1369,




     3
      Because the issue in this case is legal in nature, sec.
7491, which in some circumstances shifts the burden of proof to
respondent, is not applicable.
                                - 5 -

1372 (9th Cir. 1985); Valenti v. Commissioner, T.C. Memo. 1994-483.

     The parties agree that petitioners were not professional

gamblers and were not engaged in gambling as a trade or business

activity.    Therefore, the income and losses from the activity

could not be reported on their return on Schedule C, Profit or

Loss From Business.    Petitioners’ gambling winnings,

nevertheless, constituted gross income under section 61(a), and

such income was required to be reported on Form 1040 of their

income tax return.    Petitioners did not report any of their

gambling winnings on their income tax return.    The deductions for

losses attributable to the gambling activity were allowed by

respondent (to the extent of the winnings) as an itemized

deduction.    Sec. 63(b) and (c); Stein v. Commissioner, T.C. Memo.

1984-403, affd. without published opinion 770 F.2d 1075 (3d Cir.

1985); Heidelberg v. Commissioner, T.C. Memo. 1977-133.     As a

consequence, respondent sustained the aforedescribed adjustments

giving rise to the determined deficiency.

     Petitioners contend that itemized-deduction treatment of

their gambling income and losses is unfair, and that they can

simply ignore the winnings and the losses by not reporting the

same on their return.    They take strong issue with respondent’s

determination that causes them to recognize a greater amount of

their Social Security benefits as gross income and to lose the

tax credit and the standard deduction, both of which are
                               - 6 -

unrelated to their gambling activity.     Petitioners also argue

that, if their gambling winnings have to be reported as income on

their tax return, then the losses should be allowed as deductions

on the Form 1040, or “above the line”.     The Court rejects that

argument because to treat the income and losses in that fashion

would effectively remove any distinction between a professional

gambler and a nonprofessional gambler.     Petitioners are in that

latter category, and their only entitlement to the deduction for

their gambling losses is the manner in which respondent

determined it as an itemized deduction.     Petitioners have cited

no authority, and indeed there is no authority to support their

argument that unrelated income and credits are immune from the

effects of the manner in which respondent treated their gambling

winnings and losses.   The Court, therefore, sustains respondent.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                           Decision will be entered

                                       for respondent.
