                                                  SANG J. PARK & WON KYUNG O, PETITIONERS v.
                                                     COMMISSIONER OF INTERNAL REVENUE,
                                                                 RESPONDENT

                                                  SANG J. PARK, PETITIONER v. COMMISSIONER                                 OF
                                                        INTERNAL REVENUE, RESPONDENT
                                               Docket Nos. 14159–09, 30063–09.                          Filed June 13, 2011.

                                                  P, a South Korean national and nonresident alien, had U.S.
                                               gambling winnings and interest income that was not effec-
                                               tively connected with a U.S. trade or business. Held: The
                                               Treaty of Friendship, Commerce and Navigation, U.S.-S. Kor.,

                                                                                                                                   569




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                                      570                136 UNITED STATES TAX COURT REPORTS                                       (569)


                                               art. XI, par. 5(b), Nov. 28, 1956, 8 U.S.T. 2217, provides
                                               exceptions to the most-favored-nation treatment under art. XI,
                                               par. 3 and thus does not extend to South Korean nationals the
                                               more favorable treatment regarding exemption from U.S.
                                               income tax of gambling winnings as provided for in some
                                               bilateral income tax treaties that the United States has
                                               entered into with other foreign countries. Held, further, P’s
                                               gambling activities were not personal services or a U.S. trade
                                               or business; thus the gambling income is not considered
                                               income that is effectively connected with a U.S. trade or busi-
                                               ness and is taxable under I.R.C. sec. 871(a). Held, further, the
                                               interest income reported by a third-party U.S. national bank
                                               is excluded from Federal income tax under I.R.C. sec. 871(i)(1)
                                               and (2) as income from bank deposits. Ps have not shown that
                                               the remaining interest income is from deposits that qualify for
                                               U.S. tax exemption under I.R.C. sec. 871(i). Held, further, Ps
                                               are liable for the accuracy-related penalties under I.R.C. sec.
                                               6662(a) and (b)(1) or (2).

                                           Denis M. McDevitt, for petitioners.
                                           Erin K. Salel, for respondent.

                                                                                  OPINION

                                         COHEN, Judge: In these consolidated cases, respondent
                                      determined a deficiency of $134,350 in income tax and an
                                      accuracy-related penalty of $20,774 with respect to the
                                      jointly filed 2006 Federal income tax return of Sang J. Park
                                      (petitioner) and Won Kyung O (petitioner wife) and a defi-
                                      ciency of $23,821 in income tax and an accuracy-related pen-
                                      alty of $4,438 with respect to petitioner’s 2007 income tax
                                      return. Unless otherwise indicated, all section references are
                                      to the Internal Revenue Code in effect for the years in issue,
                                      and all Rule references are to the Tax Court Rules of Prac-
                                      tice and Procedure.
                                         The issues for decision are: (1) Whether petitioner’s 2006
                                      and 2007 gambling winnings are subject to tax under section
                                      871(a); (2) whether petitioner’s gambling income is effectively
                                      connected with a U.S. trade or business; (3) whether the
                                      interest income earned in 2006 and 2007 is subject to tax;
                                      and (4) whether the section 6662(a) accuracy-related pen-
                                      alties imposed should be sustained.




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                                      (569)                           PARK v. COMMISSIONER                                         571


                                                                               Background
                                         These cases were submitted fully stipulated under Rule
                                      122. The stipulated facts are incorporated as our findings by
                                      this reference. Petitioners are married and are citizens and
                                      residents of the Republic of South Korea (South Korea) and
                                      had South Korean passports during the years at issue. Peti-
                                      tioners were nonresident aliens in 2006 and 2007, i.e., they
                                      were not citizens of the United States, and neither had a
                                      permanent resident card (green card). Petitioner has a Social
                                      Security number that he obtained while attending college in
                                      the United States in the mid-1970s.
                                         Petitioner works as a full-time, high-ranking business
                                      executive for a large chemical company in South Korea. Peti-
                                      tioner’s employer pays for petitioners’ son to attend school in
                                      the United States and for petitioners to travel to the United
                                      States to visit their son. Petitioner wife also has other family
                                      living in the United States.
                                         During the years in issue, petitioners traveled to the
                                      United States for vacation and to visit family a number of
                                      times. Petitioner enjoys gambling, and during these trips he
                                      frequented the Pechanga Resort & Casino (Pechanga) in
                                      Temecula, California, to play the slot machines. Petitioner
                                      gambled at Pechanga on 20 of the approximately 68 days
                                      that he was in the United States in 2006 and on 11 of the
                                      approximately 46 days that he was in the United States in
                                      2007. With respect to the gambling activity, petitioner did
                                      not have a business plan and did not keep books and records.
                                      Petitioner did not use for gambling money that was needed
                                      to support his family. Petitioner wife had no involvement in
                                      any gambling or gaming activities.
                                         In 2006, petitioner won 138 slot machine jackpots of $1,200
                                      or more, with total gambling winnings of $431,658. Pechanga
                                      withheld 30 percent of the winnings for payment of Federal
                                      income tax on three of those jackpots (two jackpots of
                                      $50,000 and one of $1,600), for a total of $30,480 withheld
                                      for taxes. A report prepared by Pechanga showed that peti-
                                      tioner had losses that exceeded his 2006 winnings by $4,663.
                                         On February 18, 2007, petitioner provided his Social Secu-
                                      rity number to Pechanga and signed a Form W–9, Request
                                      for Taxpayer Identification Number and Certification, certi-
                                      fying that he was not subject to backup withholding and that




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                                      572                136 UNITED STATES TAX COURT REPORTS                                       (569)


                                      he was a U.S. person (including a U.S. resident alien). In
                                      2007, petitioner won 43 slot machine jackpots of $1,200 or
                                      more, with total gambling winnings of $103,874. Pechanga
                                      withheld 30 percent of the winnings for payment of Federal
                                      income tax on three jackpots (jackpots of $2,620, $1,440, and
                                      $1,380), for a total of $1,632. A report prepared by Pechanga
                                      showed that petitioner had losses that exceeded his 2007
                                      winnings by $45,130.50.
                                         Petitioner received from sources within the United States
                                      other income that was not effectively connected with a U.S.
                                      trade or business in 2006: (1) Interest income of $6,585; (2)
                                      capital gain income of $52,792; and (3) dividend income of
                                      $7,471 (taxable at a rate of 15 percent under the Convention
                                      for the Avoidance of Double Taxation and the Prevention of
                                      Fiscal Evasion with Respect To Taxes on Income and the
                                      Encouragement of International Trade and Investment, U.S.-
                                      S. Kor., art. 12, par. (2)(a), June 4, 1976, 30 U.S.T. 5253
                                      (U.S.-Korea income tax treaty)). Petitioner wife had no U.S.
                                      source income.
                                         Petitioners filed a Form 1040, U.S. Individual Income Tax
                                      Return, for 2006 as married filing jointly, prepared by a
                                      bookkeeping service. Petitioners did not report any gambling
                                      winnings or any associated expenses. They did report peti-
                                      tioner’s other U.S. source income. The payer of the interest
                                      income was listed as Bank of America.
                                         In 2007, petitioner also received from sources within the
                                      United States income that was not effectively connected with
                                      a U.S. trade or business: (1) Interest income of $11,830 and
                                      (2) dividend income of $3,046 (taxable at a rate of 15 percent
                                      under the U.S.-Korea income tax treaty, art. 12, par. (2)(a)).
                                         Petitioner filed a Form 1040 for 2007 and reported the
                                      interest and dividend income from sources within the United
                                      States, but he did not report the gambling income or any
                                      associated expenses. The payer of $11,662 of interest income
                                      was listed as ‘‘FEDL HOME LOAN BK CONS DISC’’. Petitioner’s
                                      2007 return was prepared by a certified public accountant.
                                         Pechanga reported petitioner’s jackpot winnings of $1,200
                                      or more to the Internal Revenue Service (IRS) on completed
                                      Forms W–2G, Certain Gambling Winnings, for 2006 and
                                      2007. The IRS examined the 2006 and 2007 tax returns and
                                      determined that petitioner received unreported gambling
                                      income of $431,658 in 2006 and $103,874 in 2007. The IRS




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                                      (569)                           PARK v. COMMISSIONER                                         573


                                      did not receive reporting from third parties with respect to
                                      the interest income of $6,585 and $11,662, as reported on the
                                      2006 and 2007 tax returns, respectively. However, the IRS
                                      made adjustments to the interest income as reported on the
                                      2007 return to reflect information reported from third par-
                                      ties: (1) $4 less $1 withholding from Wells Fargo Bank, N.A.
                                      (a U.S. national bank chartered and regulated by the Office
                                      of the Comptroller of the Currency) and (2) $165 from First
                                      Clearing, L.L.C. The IRS sent a notice of deficiency to peti-
                                      tioners on March 23, 2009, for determined deficiencies and
                                      an accuracy-related penalty with respect to 2006. On
                                      November 9, 2009, the IRS sent a notice of deficiency to peti-
                                      tioner for determined deficiencies and an accuracy-related
                                      penalty with respect to 2007.
                                         The parties agree that petitioners are nonresident aliens
                                      and that for both 2006 and 2007 Forms 1040 were erro-
                                      neously filed instead of Forms 1040NR, U.S. Nonresident
                                      Alien Income Tax Return.

                                                                                Discussion
                                        Gambling winnings, including slot machine winnings, are
                                      gross income. See sec. 61; United States v. Monteiro, 871 F.2d
                                      204, 206 (1st Cir. 1989); Johnston v. Commissioner, 25 T.C.
                                      106, 107–108 (1955). In general, ‘‘interest * * *, dividends,
                                      rents, salaries, wages, premiums, annuities, compensations,
                                      remunerations, emoluments, and other fixed or determinable
                                      annual or periodical gains, profits, and income’’ that are
                                      received by a nonresident alien from sources within the
                                      United States and that are not effectively connected with a
                                      U.S. trade or business are subject to a 30-percent tax. Sec.
                                      871(a)(1). Gambling winnings paid to a nonresident alien fall
                                      within this provision, with limited exceptions. See sec. 871(j);
                                      Abeid v. Commissioner, 122 T.C. 404, 406–407 (2004); Barba
                                      v. United States, 2 Cl. Ct. 674, 675–678 (1983). The parties
                                      agree that petitioner’s U.S. gambling winnings are consid-
                                      ered U.S. source income.
                                        Generally, a recreational or casual gambler’s gross income
                                      from a wagering transaction should be calculated by sub-
                                      tracting the bets placed to produce the winnings, not as a
                                      deduction in calculating adjusted gross income or taxable
                                      income but as a preliminary computation in determining




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                                      574                136 UNITED STATES TAX COURT REPORTS                                       (569)


                                      gross income. See Lutz v. Commissioner, T.C. Memo. 2002–
                                      89. A recreational gambler who plays the slot machines rec-
                                      ognizes a wagering gain or loss at the time tokens are
                                      redeemed and the taxpayer can definitely calculate the
                                      amount above or below basis (the wager) realized. See
                                      Shollenberger v. Commissioner, T.C. Memo. 2009–306.
                                         Section 6001 and the regulations thereunder require tax-
                                      payers to keep permanent records sufficient to substantiate
                                      the amounts of income, deductions, and credits shown on
                                      their tax returns. Sec. 1.6001–1(a), Income Tax Regs. Peti-
                                      tioner did not keep books and records with respect to his
                                      gambling activities. Petitioner’s slot machine jackpot
                                      winnings of $1,200 or more for the years in issue are
                                      included in the record, but petitioners have not supplied evi-
                                      dence with respect to the wagering money used to generate
                                      the winnings on a per-session basis or otherwise.
                                         A nonresident generally cannot deduct or offset gambling
                                      losses against gambling winnings. See sec. 873; Barba v.
                                      United States, supra; cf. sec. 165(d); Shollenberger v.
                                      Commissioner, supra (gambling losses other than in the
                                      trade or business of gambling are allowable, if at all, as
                                      itemized deductions in calculating taxable income); Mack v.
                                      Commissioner, T.C. Memo. 1969–26 (gambling losses
                                      incurred other than in the trade or business of gambling are
                                      allowable for U.S. citizens or aliens residing in the United
                                      States to the extent of the gambling winnings), affd. 429 F.2d
                                      182 (6th Cir. 1970). Thus, a nonresident alien who is not
                                      engaged in gambling as a business within the United States
                                      is subject to tax under section 871(a)(1) on gross income from
                                      gambling without a deduction for gambling losses.
                                         When gambling winnings of $1,200 or more from a bingo
                                      game or slot machine play are paid, the payer is required to
                                      inform the IRS of the payments. See sec. 6041(a); sec. 7.6041–
                                      1(a), Temporary Income Tax Regs., 42 Fed. Reg. 33286 (June
                                      30, 1977); see also Lyszkowski v. Commissioner, T.C. Memo.
                                      1995–235 (describing the information reporting requirements
                                      for slot machine jackpots), affd. without published opinion 79
                                      F.3d 1138 (3d Cir. 1996). In determining the amount won
                                      from such games, for a bingo game or slot machine play, the
                                      amount wagered is not deducted. See sec. 7.6041–1(b)(1) and
                                      (2), Temporary Income Tax Regs., supra.




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                                      (569)                           PARK v. COMMISSIONER                                         575


                                        For nonresident aliens, section 1441(a) generally requires
                                      the payer of gambling winnings to withhold from such items
                                      a tax equal to 30 percent and to submit the amounts with-
                                      held to the IRS. The withholding entity also must file a Form
                                      1042–S, Foreign Person’s U.S. Source Income Subject to
                                      Withholding, with the IRS to report these gambling winnings
                                      and provide a copy of the form to the recipient for whom the
                                      form is prepared. See sec. 1.1461–1(b) and (c), Income Tax
                                      Regs.
                                        The tax and withholding requirements apply to U.S. source
                                      gambling winnings of nonresident alien individuals unless
                                      the proceeds are exempt under provisions not relevant here
                                      or a treaty provision applies. See sec. 894(a).
                                        When interpreting a treaty, we begin with the text of the
                                      treaty and the context in which the written words are used.
                                      E. Airlines, Inc. v. Floyd, 499 U.S. 530, 534 (1991); Sumitomo
                                      Shoji Am., Inc. v. Avagliano, 457 U.S. 176, 179–180 (1982).
                                      The plain words of the treaty control unless their effect is
                                      contrary to the intent of the signatories. Sumitomo Shoji
                                      Am., Inc. v. Avagliano, supra at 180; Amaral v. Commis-
                                      sioner, 90 T.C. 802, 812 (1988). The words of a treaty are to
                                      be interpreted according to their ordinary meaning as under-
                                      stood in the public law of nations. Amaral v. Commissioner,
                                      supra at 812. Where the Internal Revenue Code provides for
                                      the taxation of income, ‘‘Whatever basis there may be * * *
                                      for relieving the * * * tax must be found in the words or
                                      implications of the * * * [treaty].’’ Maximov v. United States,
                                      373 U.S. 49, 51 (1963); cf. DiPortanova v. United States, 231
                                      Ct. Cl. 623, 690 F.2d 169, 177 (1982).
                                        The U.S.-Korea income tax treaty entered into force on
                                      October 20, 1979. Article 4, paragraph (1) of this treaty pro-
                                      vides:
                                        A resident of one of the Contracting States may be taxed by the other
                                      Contracting State on any income from sources within that other Con-
                                      tracting State and only on such income, subject to any limitations set forth
                                      in this Convention. For this purpose, the rules set forth in Article 6
                                      (Source of Income) shall be applied to determine the source of income.

                                        Article 6, paragraph (9) of the U.S.-Korea income tax
                                      treaty provides that income not otherwise addressed, as is
                                      the case with gambling income, shall be determined by each
                                      of the Contracting States in accordance with its own law.




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                                      576                136 UNITED STATES TAX COURT REPORTS                                       (569)


                                      The U.S.-Korea income tax treaty does not establish an
                                      exemption from tax for South Korean residents with respect
                                      to U.S. gambling income, and there is no provision permit-
                                      ting South Korean residents to deduct gambling losses or to
                                      otherwise net gambling losses against gambling winnings.
                                      Accordingly, petitioner’s gambling winnings are taxable
                                      under section 871(a)(1), and no deductions are permitted for
                                      gambling losses.
                                         Petitioners do not argue that petitioner’s gambling income
                                      is not taxable under the U.S.-Korea income tax treaty, but
                                      they contend that the Treaty of Friendship, Commerce and
                                      Navigation, U.S.-S. Kor., art. XI, Nov. 28, 1956, 8 U.S.T.
                                      2217 (FCN treaty), entitles them to exemption from U.S. tax
                                      on the gambling income.
                                         The FCN treaty is one of a series of Friendship, Commerce
                                      and Navigation Treaties that the United States signed with
                                      various countries after World War II. The treaties were ini-
                                      tially negotiated for the purpose of encouraging American
                                      investment abroad but also secured reciprocal rights that
                                      granted protection to foreign businesses and individuals
                                      operating in the United States. See MacNamara v. Korean
                                      Air Lines, 863 F.2d 1135, 1138 (3d Cir. 1988) (citing Walker,
                                      ‘‘Treaties for the Encouragement and Protection of Foreign
                                      Investment: Present United States Practice’’, 5 Am. J. Comp.
                                      L. 229 (1956)); Spiess v. C. Itoh & Co. (America), Inc., 643
                                      F.2d 353, 359 (5th Cir. 1981). South Korea and the United
                                      States signed the FCN treaty with the goals of ‘‘strengthening
                                      the bonds of peace and friendship traditionally existing
                                      between’’ each other and of ‘‘encouraging closer economic and
                                      cultural relations between their peoples.’’ FCN treaty,
                                      Proclamation.
                                         Article XI, paragraph 3 of the FCN treaty provides:
                                        Nationals and companies of either Party shall in no case be subject,
                                      within the territories of the other Party, to the payment of taxes, fees or
                                      other charges imposed upon or applied to income, capital, transactions,
                                      activities or any other object, or to requirements with respect to the levy
                                      and collection thereof, more burdensome than those borne by nationals,
                                      residents and companies of any third country.

                                      This provision extends ‘‘most-favored-nation’’ status to
                                      nationals and companies of South Korea and the United
                                      States. A most-favored-nation status assures nationals of the




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                                      (569)                           PARK v. COMMISSIONER                                         577


                                      other signatory treatment equivalent to the most favorable
                                      treatment afforded any other foreign nationals. See
                                      MacNamara v. Korean Air Lines, supra at 1142–1143.
                                         Within the same article, paragraph 5(b) applies reserva-
                                      tions to this most-favored-nation provision:
                                        Each Party reserves the right to: (a) extend specific tax advantages on
                                      the basis of reciprocity; (b) accord special tax advantages by virtue of
                                      agreements for the avoidance of double taxation or the mutual protection
                                      of revenue; and (c) apply special provisions in allowing, to non-residents,
                                      exemptions of a personal nature in connection with income and inheritance
                                      taxes.

                                        Petitioners maintain that because residents of certain third
                                      countries would not be subject to tax on gambling winnings
                                      from within the United States under bilateral income tax
                                      treaties that those countries have entered with the United
                                      States, the most-favored-nation provision of FCN treaty
                                      article XI, paragraph 3, entitles them to Federal income tax
                                      exemption. Petitioners refer to IRS Publication 515, With-
                                      holding of Tax on Nonresident Aliens and Foreign Entities,
                                      and the section addressing ‘‘Other Income’’, which states:
                                        Gambling income of residents (as defined by treaty) of the following for-
                                      eign countries is not taxable by the United States: Austria, Czech
                                      Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy,
                                      Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russian Federation,
                                      Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey,
                                      Ukraine, and the United Kingdom.

                                        Respondent asserts that the reservations of FCN treaty
                                      article XI, paragraph 5(b) apply to preclude application of the
                                      most-favored-nation provision of FCN treaty article XI, para-
                                      graph 3, and that petitioner’s U.S. gambling income is sub-
                                      ject to U.S. income tax.
                                        Certain foreign countries, including Japan, have entered
                                      into income tax treaties with the United States that have
                                      treaty benefits excluding U.S. gambling income from the Fed-
                                      eral taxable income of their residents. See Convention for the
                                      Avoidance of Double Taxation and the Prevention of Fiscal
                                      Evasion With Respect to Taxes on Income, U.S.-Japan, Nov.
                                      6, 2003, Tax Treaties (CCH) par. 5201 (U.S.-Japan income tax
                                      treaty). The Senate report from the Committee on Foreign
                                      Relations stated that the principal purposes of the U.S.-
                                      Japan income tax treaty are to reduce or eliminate double




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                                      578                136 UNITED STATES TAX COURT REPORTS                                       (569)


                                      taxation of income earned by residents of either country from
                                      sources within the other country, to prevent avoidance or
                                      evasion of the taxes of the two countries, to promote close
                                      economic cooperation between the two countries, and to
                                      eliminate possible barriers to trade and investment caused
                                      by overlapping taxing jurisdictions of the two countries. See
                                      Senate Comm. on Foreign Relations, S. Exec. Rept. 108–9, at
                                      1–2 (2004).
                                         Article 21, paragraph 1 of the U.S.-Japan income tax
                                      treaty provides:
                                      Items of income beneficially owned by a resident of a Contracting State,
                                      wherever arising, not dealt with in the foregoing Articles of this Conven-
                                      tion * * * shall be taxable in that Contracting State.

                                      The U.S. Department of the Treasury Technical Explanation
                                      of the 2003 U.S.-Japan Income Tax Treaty (Feb. 25, 2004),
                                      Tax Treaties (CCH) par. 5233, states that
                                        Examples of items of income covered by Article 21 include income from
                                      gambling, punitive (but not compensatory) damages, covenants not to com-
                                      pete, and income from certain financial instruments to the extent derived
                                      by persons not engaged in the trade or business of dealing in such
                                      instruments * * *.

                                        FCN treaty article XI, paragraph 5(b), expressly reserved
                                      the right to extend specific tax advantages on the basis of
                                      reciprocity and accord special tax advantages by virtue of
                                      agreements for the avoidance of double taxation or the
                                      mutual protection of revenue. This reservation encompasses
                                      the more favorable treatment with respect to Federal income
                                      tax of U.S. gambling winnings, as extended to Japan and
                                      other relevant countries through the bilateral income tax
                                      treaties. The most-favored-nation provision under article XI,
                                      paragraph 3 of the FCN treaty is thus not available when the
                                      reservations of paragraph 5(b) apply.
                                        We conclude that the plain language of the FCN treaty does
                                      not extend to petitioners the more favorable treatment—Fed-
                                      eral income tax exemption—with respect to gambling
                                      winnings as provided for in the relevant bilateral income tax
                                      treaties between the United States and other countries.




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                                      (569)                           PARK v. COMMISSIONER                                         579


                                      Trade or Business Within the United States
                                         Petitioners argue that if a treaty provision does not exempt
                                      the gambling winnings from income tax, then the income is
                                      from personal services of petitioner and taxable as income
                                      effectively connected with a U.S. trade or business.
                                         Income of a nonresident alien individual that is effectively
                                      connected with the conduct of a trade or business in the
                                      United States is generally subject to tax in the same manner
                                      and at the same rates as that of a U.S. person. See sec.
                                      871(b). The phrase ‘‘trade or business within the United
                                      States’’ generally includes the performance of personal serv-
                                      ices within the United States at any time within the taxable
                                      year. Sec. 864(b). Deductions are allowed to the extent that
                                      they are related to effectively connected income. See sec.
                                      873(a). Section 165(d) provides that gambling losses may be
                                      deducted against gambling winnings.
                                         Petitioners rely on Robida v. Commissioner, T.C. Memo.
                                      1970–86, affd. 460 F.2d 1172 (9th Cir. 1972), to support their
                                      position that petitioner’s gambling winnings income is
                                      income from personal services. Robida addressed ‘‘earned
                                      income’’ under section 911 (regarding foreign earned income
                                      and taxation of U.S. citizens or residents). Petitioners con-
                                      tend that the term ‘‘earned income’’ in section 911(b)(1)(A)
                                      ‘‘incorporates the same language as in * * * section 864(b)
                                      and the regulations as income attributable to ‘services per-
                                      formed’ and is certainly consistent with the definition of
                                      income from personal services used in * * * section 864(b).’’
                                         The issue in Robida was whether the taxpayer, a citizen
                                      of the United States, ‘‘earned’’ income abroad with respect to
                                      his slot machine winnings for purposes of the foreign earned
                                      income exclusion for U.S. citizens under section 911. It was
                                      determined that the taxpayer’s ‘‘diligent application of an
                                      unusual skill or knowledge gained during his previous
                                      employment with a manufacturer of slot machines’’ resulted
                                      in ‘‘earned income’’, as compared to assuming risk and win-
                                      ning the income in a game of chance. Robida v. Commis-
                                      sioner, 460 F.2d at 1174–1175.
                                         Petitioner exhibited no such use of personal skills or
                                      strategies when he played the slot machines. Thus, peti-
                                      tioners’ reliance on Robida to claim that the gambling
                                      winnings were derived from the performance of personal




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                                      580                136 UNITED STATES TAX COURT REPORTS                                       (569)


                                      services is misplaced. Petitioner’s gambling winnings income
                                      is not income from personal services.
                                         Petitioners did not initially argue that petitioner’s gam-
                                      bling activity constituted a trade or business, but respondent
                                      addressed this issue in his opening brief. In their reply brief
                                      petitioners argued that petitioner’s gambling activities were
                                      a trade or business because petitioner had a profit motive in
                                      playing slot machines and petitioner was willing to commit
                                      the capital necessary to carry out his gambling activity.
                                         To be engaged in a trade or business within the meaning
                                      of section 1402(a), an individual must be involved in an
                                      activity with continuity and regularity, and the primary pur-
                                      pose for engaging in the activity must be for income or profit.
                                      Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987). If one’s
                                      ‘‘gambling activity is pursued full time, in good faith, and
                                      with regularity, to the production of income for a livelihood,
                                      and is not a mere hobby, it is a trade or business’’. Id. Cases
                                      using the Groetzinger standard have analyzed the taxpayer’s
                                      gambling activities with regard to regulations promulgated
                                      under section 183 to identify activities not engaged in for
                                      profit. See, e.g., Chow v. Commissioner, T.C. Memo. 2010–48;
                                      Hastings v. Commissioner, T.C. Memo. 2009–69; Merkin v.
                                      Commissioner, T.C. Memo. 2008–146.
                                         Whether the taxpayer engages in an activity with the pri-
                                      mary purpose of making a profit is a question of fact to be
                                      resolved on the basis of all the facts and circumstances in a
                                      particular case. Golanty v. Commissioner, 72 T.C. 411, 426
                                      (1979), affd. without published opinion 647 F.2d 170 (9th Cir.
                                      1981); sec. 1.183–2(a), Income Tax Regs. Section 1.183–2(b),
                                      Income Tax Regs., provides a nonexclusive list of relevant
                                      factors to be weighed when considering whether a taxpayer
                                      is engaged in an activity for profit. The relevant factors are:
                                      (1) The manner in which the taxpayer carried on the activity;
                                      (2) the expertise of the taxpayer or his advisers; (3) the time
                                      and effort expended by the taxpayer in carrying on the
                                      activity; (4) the expectation that the assets used in
                                      the activity may appreciate in value; (5) the success of the
                                      taxpayer in carrying on other activities for profit; (6) the tax-
                                      payer’s history of income or losses with respect to the
                                      activity; (7) the amount of occasional profits, if any, that are
                                      earned from the activity; (8) the financial status of the tax-
                                      payer; and (9) whether elements of personal pleasure or




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                                      recreation are involved in the activity. No one factor is deter-
                                      minative of whether an activity is engaged in for profit.
                                      Brannen v. Commissioner, 722 F.2d 695, 704 (11th Cir.
                                      1984), affg. 78 T.C. 471 (1982); Golanty v. Commissioner,
                                      supra at 426; sec. 1.183–2(b), Income Tax Regs.
                                         Petitioners do not address the factors of section 1.183–2(b),
                                      Income Tax Regs., and do not persuade us that petitioner’s
                                      primary purpose for engaging in the gambling activity was
                                      for income or profit. Petitioners have not shown that peti-
                                      tioner’s gambling activities are a trade or business within the
                                      United States.
                                      Interest Income
                                         The parties have stipulated that petitioners earned U.S.
                                      source interest income in 2006 and 2007 that was not effec-
                                      tively connected with a U.S. trade or business. Petitioners
                                      contend that the interest income is excludable from tax as
                                      simple interest on deposits under section 871(i)(1) and (2)(A).
                                      Respondent requested information from petitioners to dem-
                                      onstrate that the interest income was from bank deposits to
                                      be considered ‘‘earnings from deposits’’, as petitioners con-
                                      tend. In their brief, petitioners state that they ‘‘are still
                                      attempting to provide this evidence, but it is quite apparent
                                      from the face of the tax return that this is bank interest and
                                      nothing more.’’
                                         Respondent asserts that petitioners have failed to present
                                      credible evidence regarding the type of interest income
                                      received in 2006 and 2007. Respondent concedes that article
                                      13, paragraph (2) of the U.S.-Korea income tax treaty pro-
                                      vides for a reduced tax rate of 12 percent on the interest
                                      income for 2006 and 2007, but respondent contends that it
                                      is not excludable from Federal income tax.
                                         Section 871(a)(1) generally provides that a tax of 30 per-
                                      cent is imposed, as relevant here, on interest that a non-
                                      resident alien individual receives from sources within the
                                      United States, provided that the income is not effectively
                                      connected with the conduct of a U.S. trade or business.
                                      Article 13, paragraph (2) of the U.S.-Korea income tax treaty
                                      provides that for interest income the tax rate is 12 percent
                                      instead of 30 percent. Section 871(i)(1) and (2) provides an
                                      exception for interest on deposits that is not effectively con-




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                                      nected with a trade or business within the United States.
                                      Section 871(i)(3) provides:
                                      For purposes of paragraph (2), the term ‘‘deposit’’ means amounts which
                                      are—
                                           (A) deposits with persons carrying on the banking business,
                                           (B) deposits or withdrawable accounts with savings institutions char-
                                        tered and supervised as savings and loan or similar associations under
                                        Federal or State law, but only to the extent that amounts paid or cred-
                                        ited on such deposits or accounts are deductible under section 591
                                        (determined without regard to sections 265 and 291) in computing the
                                        taxable income of such institutions, and
                                           (C) amounts held by an insurance company under an agreement to pay
                                        interest thereon.

                                         Petitioners reported interest income on the 2006 and 2007
                                      tax returns that was not reported to the IRS by the payers
                                      listed on the returns. In the 2007 notice of deficiency,
                                      respondent adjusted the interest income to reflect reporting
                                      from third parties that had not been reported on the tax
                                      returns, including interest income that was reported to the
                                      IRS by Wells Fargo, N.A., a U.S. national banking institution.
                                         Although petitioners did not supply evidence with respect
                                      to the interest income from Wells Fargo, N.A., it was the
                                      bank that directly reported the interest income to the IRS.
                                      The interest income from Wells Fargo, N.A., was erroneously
                                      included by respondent in the adjusted amount because it is
                                      excludable as deposits with persons carrying on the banking
                                      business. See sec. 871(i)(1), (2), and (3).
                                         Interest income for 2007 was reported from another third
                                      party, First Clearing, L.L.C., but this entity is not a U.S.
                                      chartered national bank, and petitioners have not shown that
                                      this interest income qualifies for an exception from tax. See
                                      Rule 142(a).
                                         Petitioners have been unable to supply documentation with
                                      respect to the interest income they reported on the tax
                                      returns to demonstrate the reported interest income is from
                                      deposits as defined in section 871(i)(3) to be excepted from
                                      tax under section 871(i)(1) and (2). Tax returns do not estab-
                                      lish the truth of the facts stated therein. Lawinger v.
                                      Commissioner, 103 T.C. 428, 438 (1994); Wilkinson v.
                                      Commissioner, 71 T.C. 633, 639 (1979); Roberts v. Commis-
                                      sioner, 62 T.C. 834, 837 (1974). The 2006 and 2007 interest
                                      income, except the excludable 2007 interest income from




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                                      Wells Fargo, N.A., is subject to income tax at the rate of 12
                                      percent according to the provisions of the U.S.-Korea income
                                      tax treaty.
                                      Section 6662(a) Penalties
                                         Petitioners contest the imposition of accuracy-related pen-
                                      alties for the years in issue. Section 6662(a) and (b)(1) and
                                      (2) imposes a 20-percent accuracy-related penalty on any
                                      underpayment of Federal income tax attributable to a tax-
                                      payer’s negligence or disregard of rules or regulations, or
                                      substantial understatement of income tax. Section 6662(c)
                                      defines negligence as including any failure to make a reason-
                                      able attempt to comply with the provisions of the Internal
                                      Revenue Code and defines disregard as any careless, reck-
                                      less, or intentional disregard. Disregard of rules or regula-
                                      tions is careless if the taxpayer does not exercise reasonable
                                      diligence to determine the correctness of a return position
                                      that is contrary to rules or regulations. Sec. 1.6662–3(b)(2),
                                      Income Tax Regs. Disregard of rules or regulations is reck-
                                      less if the taxpayer makes little or no effort to determine
                                      whether a rule or regulation exists. Id.
                                         There is a substantial understatement of income tax if the
                                      amount of the understatement exceeds the greater of 10 per-
                                      cent of the tax required to be shown on the return or $5,000.
                                      Sec. 6662(d)(1)(A).
                                         Under section 7491(c), the Commissioner bears the burden
                                      of production with regard to penalties and must come for-
                                      ward with sufficient evidence indicating that it is appropriate
                                      to impose penalties. See Higbee v. Commissioner, 116 T.C.
                                      438, 446 (2001). However, once the Commissioner has met
                                      the burden of production, the burden of proof remains with
                                      the taxpayer, including the burden of proving that the pen-
                                      alties are inappropriate because of reasonable cause or
                                      substantial authority under section 6664. See Rule 142(a);
                                      Higbee v. Commissioner, supra at 446–447.
                                         Respondent has met the burden of production by showing
                                      that petitioners’ failure to report gambling and interest
                                      income for the years in issue resulted in understatements of
                                      their income tax for the years in issue by more than $5,000
                                      and by more than 10 percent of the tax required to be shown
                                      on the returns.




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                                        The accuracy-related penalty under section 6662(a) is not
                                      imposed with respect to any portion of the underpayment as
                                      to which the taxpayer acted with reasonable cause and in
                                      good faith. Sec. 6664(c)(1); Higbee v. Commissioner, supra at
                                      448. The decision as to whether a taxpayer acted with
                                      reasonable cause and in good faith is made on a case-by-case
                                      basis, taking into account all of the pertinent facts and cir-
                                      cumstances. Sec. 1.6664–4(b)(1), Income Tax Regs. ‘‘Cir-
                                      cumstances that may indicate reasonable cause and good
                                      faith include an honest misunderstanding of fact or law that
                                      is reasonable in light of all of the relevant facts and cir-
                                      cumstances, including the experience, knowledge, and edu-
                                      cation of the taxpayer.’’ Id. Reliance on professional advice
                                      may constitute reasonable cause and good faith if, under all
                                      the circumstances, such reliance was reasonable and the tax-
                                      payer acted in good faith. See United States v. Boyle, 469
                                      U.S. 241, 250–251 (1985); Freytag v. Commissioner, 89 T.C.
                                      849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501
                                      U.S. 868 (1991); sec. 1.6664–4(b)(1), Income Tax Regs. In
                                      order for reliance on professional advice to excuse a taxpayer
                                      from negligence, the taxpayer must show that the profes-
                                      sional had the requisite expertise, as well as knowledge of
                                      the pertinent facts, to provide informed advice on the subject
                                      matter. See David v. Commissioner, 43 F.3d 788, 789–790
                                      (2d Cir. 1995), affg. T.C. Memo. 1993–621; Freytag v.
                                      Commissioner, supra at 888.
                                        Petitioners contend that they could reasonably rely on
                                      Pechanga to follow the law and on the tax preparer to prop-
                                      erly report the gambling winnings income. Pechanga did not
                                      withhold the 30-percent tax from all of petitioner’s gambling
                                      winnings and reported the winnings on Forms W2–G. How-
                                      ever, petitioner signed a Form W–9 in 2007 that erroneously
                                      represented his status for withholding purposes. Petitioners
                                      have failed to provide any evidence concerning information
                                      provided to or advice received from their tax return pre-
                                      parers and/or other professionals.
                                        Petitioner was educated in the United States and is a high-
                                      ranking executive at a large chemical company. These factors
                                      tend to weigh against petitioners’ claim of reasonable cause
                                      and good faith with respect to all or part of the underpay-
                                      ments.




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                                         We conclude that petitioners’ underpayments of Federal
                                      income tax were the result of negligence or disregard of rules
                                      or regulations under section 6662(a) and (b)(1). We also con-
                                      clude that petitioners have not shown that they had reason-
                                      able cause for and acted in good faith regarding the under-
                                      payments. Thus, we sustain the IRS determination that peti-
                                      tioners are liable for the penalties for 2006 and 2007 under
                                      section 6662(a).
                                         We have considered all arguments of the parties, and to
                                      the extent not mentioned they are moot or without merit. To
                                      reflect concessions and our conclusions stated above,
                                                                        Decisions will be entered under Rule 155.

                                                                               f




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