                        T.C. Memo. 2005-239



                      UNITED STATES TAX COURT



            ESTATE OF GRACIANO V. ESPINOZA, DECEASED,
            ELVIRA ESPINOZA, EXECUTRIX, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10433-04.                Filed October 12, 2005.




     William E. Taggart, Jr., for petitioner.

     Julie E. Vanderluis and Catherine G. Chang, for respondent.



                        MEMORANDUM OPINION

     SWIFT, Judge:   This matter is before us on a motion for an

award under section 7430 of $1,657.50 in administrative costs,

plus costs in connection with the instant motion.
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     Unless otherwise indicated, all section references are to

the Internal Revenue Code, and all Rule references are to the Tax

Court Rules of Practice and Procedure.


Background

     Graciano V. Espinoza (decedent) died on January 12, 2002,

survived by his wife Elvira, decedent’s executrix herein, and

other unnamed relatives.

     During 2000 and in prior years, decedent was addicted to

slot machine gambling.   Decedent’s gambling activities occurred

at casinos in Reno, Nevada.

     During 2000, decedent put a total of approximately $7

million into slot machines at the Nevada casinos via either cash

or casino credit card, and decedent won 526 tax-reportable

jackpots paying decedent total winnings of $2,580,200 with an

average jackpot of approximately $5,000.   Also during 2000,

decedent won other nonjackpot or “hand-paid” winnings.

     During 2000, decedent purchased an automobile with $10,000

in cash (in 100 $100 bills).

     In early 2001, the Nevada casinos at which decedent gambled

mailed to respondent numerous Forms W-2G, Certain Gambling

Winnings, for 2000, the cumulative total of which reflected

decedent’s $2,580,200 in slot machine jackpots.

     The above Forms W-2G did not include decedent’s other “non-

jackpot” slot machine winnings and did not reflect decedent’s

gambling losses.
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     In May of 2001, decedent filed for bankruptcy.    Decedent

listed in his bankruptcy filing total assets of $127,600 and

debts in excess of $200,000.   Also, in decedent’s bankruptcy

filing it is indicated that during 2000 and 2001 decedent

purchased a $15,000 motorcycle, a $26,000 GMC Savana, a $51,000

GMC Sierra, and a $55,000 GMC Denali.    Further, in decedent’s

bankruptcy filing, it is indicated that as of May of 2001

decedent owed a total of only $70,000 to the Nevada casinos at

which he gambled.

     Six months later, in September or October of 2001,

decedent’s bankruptcy case was closed.    The record does not

reflect the resolution of decedent’s bankruptcy proceeding.

     On decedent’s 2000 Federal income tax return that was filed

with respondent, decedent’s $2,580,200 in total jackpot winnings

was reported as “Other Income”, and an offsetting miscellaneous

itemized deduction in the amount of $2,580,200 was claimed on

Schedule A, Itemized Deductions, as “gambling losses”.

     On decedent’s 2000 Federal income tax return, no gambling

winnings were reported other than the above $2,580,200 in jackpot

winnings reflected on the Forms W-2G that were mailed to

respondent by the Nevada casinos.

     Also reported as income on decedent’s 2000 Federal income

tax return were total wages of $25,300, and interest income of

$182.
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     In October of 2001, respondent began an audit of decedent’s

2000 Federal income tax return.

     During respondent’s audit, the accountant who had prepared

decedent’s 2000 Federal income tax return provided to

respondent’s examining agent some documents relating to

decedent’s gambling activities.   However, no diary or log

reflecting decedent’s specific gambling winnings and losses was

provided to respondent’s agent.

     In late 2001 or early 2002, respondent’s audit examination

was closed, and a 30-day letter was issued to decedent in which

respondent proposed to allow $487,836 and to disallow $2,092,364

of decedent’s total claimed $2,580,200 gambling losses for 2000.

     The proposed disallowance of $2,092,364 in claimed gambling

losses was based on the agent’s understanding that the documents

that had been provided to respondent by decedent’s accountant

substantiated only $487,836 in gambling losses.

     Based on the claimed gambling losses to be disallowed,

respondent’s examining agent proposed a deficiency of $812,224 in

decedent’s 2000 Federal income tax.

     As indicated, on January 12, 2002, decedent died.

     In early 2002, decedent’s accountant filed on behalf of

decedent’s estate a protest to respondent’s proposed disallowance

of gambling losses, and an Appeals Office hearing was requested

on behalf of decedent.
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     In connection with the Appeals Office consideration of

decedent’s protest, and after some difficulty in scheduling a

meeting with decedent’s accountant, decedent’s accountant met

with and provided to respondent’s Appeals Office a few additional

documents relating to decedent’s gambling winnings and losses.

     Decedent’s accountant, however, did not provide to

respondent’s Appeals Office any log or diary of decedent with

regard to decedent’s 2000 gambling activities.

     In a March 16, 2004, notice of deficiency mailed by

respondent’s Appeals Office, respondent sustained the adjustment

made by the examining agent to decedent’s claimed gambling losses

(namely, of the total $2,580,200 in gambling losses claimed,

respondent allowed $487,836 and disallowed for lack of

substantiation $2,092,364).

     One of the estate’s affidavits indicates that in connection

with the protest and the appeal of respondent’s gambling loss

adjustment, employees in decedent’s accountant’s office spent 9.5

hours contacting employees of the Nevada casinos at which

decedent gambled and gathering documents relating to decedent’s

gambling activities.

     On June 21, 2004, Elvira Espinoza, executrix of decedent’s

estate, filed the petition herein.

     As part of the pretrial preparation and exchange of

documents, the estate’s counsel provided additional explanation
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of the documents that had been provided by decedent’s accountant

to respondent’s examination office and Appeals Office, and

respondent’s trial counsel initiated telephone conversations with

employees of the Nevada casinos concerning the documentation that

had been provided, as a result of which respondent’s trial

counsel concluded that decedent in 2000 incurred with regard to

his gambling activities, and was entitled to deduct in full, the

total $2,580,200 in gambling losses claimed on decedent’s 2000

Federal income tax return.

     On or about February 28, 2005, the parties entered into a

settlement under the terms of which it was agreed that the

$2,092,364 in gambling losses that had been disallowed by

respondent in respondent’s notice of deficiency would be conceded

by respondent.

     Also, as part of the settlement, it was agreed that no claim

would be made by the estate for the recovery of litigation costs,

but the estate reserved the right to make a claim for

administrative costs.

     On March 28, 2005, the estate filed the instant motion for

recovery of $1,657.50 in administrative costs, plus additional

costs of prosecuting the instant motion.

     Respondent agrees that under the settlement that was entered

into the estate substantially prevailed with regard to the amount

in controversy.
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     The disputed aspects of the instant motion for recovery of

administrative costs involve whether respondent was substantially

justified in his Appeals Office disallowance of $2,092,364 in

claimed gambling losses and whether decedent’s estate’s net worth

at the time of decedent’s death exceeded $2 million.


Discussion

     Under section 7430, among other requirements, no award of

administrative costs is available either if the respondent’s

position was substantially justified or if an estate’s net worth

exceeded $2 million at the time of the decedent’s death.    Sec.

7430(c)(4)(A), (B)(i), (D)(i)(I); see also 28 U.S.C. sec.

2412(d)(2)(B) (2000).

     Generally, before respondent’s examination office and

Appeals Office, taxpayers have the burden of proving their

entitlement to claimed expenses and losses.   Norgaard v.

Commissioner, 939 F.2d 874, 878 (9th Cir. 1991), affg. and revg.

in part on another ground T.C. Memo. 1989-390.   In connection

with a motion for litigation or administrative costs, respondent

has the burden of establishing that his position was

substantially justified, and taxpayers have the burden of

establishing that they satisfy the other requirements of section

7430.   Rule 232(e).

     Section 165(d) provides a deduction for losses from wagering

transactions up to the amount of winnings from wagering

transactions.
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     Rev. Proc. 77-29, 1977-2 C.B. 538, provides guidelines to

taxpayers with respect to the maintenance of records relating to

gambling activities and describes records that generally will be

treated as sufficient to substantiate wagering gains and losses.

The records generally are to be contemporaneous with the gambling

activity, such as a log or diary, and are to reflect information

such as:


     (1) Date and type of specific wagers or wagering activity;

     (2) Name and location of gambling establishment;

     (3) Names of other gamblers present;

     (4) Amounts won and lost.


     In addition, with regard specifically to slot machine

gambling, the maintenance and retention by taxpayers of wagering

tickets, bank withdrawals, credit records, and information

relating to specific slot machines is recommended in order to

provide credible and verifiable information as to the taxpayers’

gambling winnings and losses.

     Although not completely clear from the record, it appears

herein that respondent’s ultimate pretrial concession to allow

decedent’s total claimed gambling losses was based essentially on

the same documentation that had been provided to respondent’s

examination office and Appeals Office.   However, it also appears

that respondent’s concession was based on a significantly better
                              - 9 -

understanding of that documentation, due to additional

explanations with regard to the documentation provided by the

estate’s counsel and to additional information and explanation

with regard thereto provided to respondent through contacts

respondent’s employees initiated with employees of the Nevada

casinos.

     On the record before us, we believe it would be

inappropriate for us to conclude herein that the documentation

that was provided by or on behalf of decedent to respondent at

the examination office and Appeals Office was so obvious and

understandable that respondent should have conceded the claimed

gambling losses in full without issuing a notice of deficiency

and without expecting the estate to provide the additional

explanation and information with regard thereto that eventually

was used by respondent to properly understand and determine the

amount of decedent’s gambling losses.

     Further, we regard it as reasonable for respondent to expect

decedent’s representative, during the Appeals Office

consideration of decedent’s protest, to produce specific

documentation, as contemplated by Rev. Proc. 77-29, 1977-2 C.B.

538, and to provide credible explanation thereof that adequately

verifies decedent’s gambling losses.

     We note that many of the documents included in the

attachments to the submissions on the instant motion are not
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self-explanatory and that a mere reading thereof does not

necessarily establish, or verify, or make clear, the amount of

decedent’s gambling losses for 2000.   On the record before us, we

conclude that respondent was reasonable and substantially

justified in seeking additional information and understanding of

the documents provided at the examination office and Appeals

Office before conceding the gambling losses in issue, and it

appears that respondent did not receive that information and

explanation or understanding until shortly before trial.

     With regard to decedent’s net worth, the estate argues that

an affidavit of decedent’s surviving wife, who was also executrix

of decedent’s estate, decedent’s bankruptcy filing, and the large

amount of gambling losses decedent incurred in 2000 should

satisfy respondent that as of the January 12, 2002, date of

decedent’s death, decedent’s estate’s net worth was less than $2

million, and therefore that the estate is not precluded under

section 7430(c)(4)(A)(ii) and (D)(i)(I) from receiving an award

of administrative costs.

     Based on the $7 million that decedent in 2000 wagered on

slot machines, decedent’s 526 slot machine jackpots averaging

$5,000 each, and decedent’s purchase in 2000 of an automobile

with $10,000 in cash, respondent asserts that the estate should

be required to produce financial records that establish with

greater specificity and credibility the amount of decedent’s

estate’s net worth on the date of death.
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     We agree with respondent.    In light of decedent’s extensive

gambling activities, decedent’s large gambling losses, and

decedent’s $10,000 cash payment on the purchase of an automobile

(noteworthy since $10,000 represented approximately one-half of

decedent’s total reported wages for 2000), reasonable questions

have been raised by respondent as to decedent’s sources of cash

and as to decedent’s estate’s net worth on the date of death.

     For example, where did decedent in 2000 obtain $7 million to

play the slot machines?   What was the source of the $7 million in

cash or credit, and did decedent have some undisclosed source of

funds, or net worth, to make the wagers and to pay the casinos

whatever credit the casinos extended to him?

     We do not regard the affidavits submitted (and the

conclusory statements therein by decedent’s wife and by

decedent’s accountant that decedent’s net worth at no time

exceeded $2 million) to be adequate.    On the facts of this case

and contrary to the estate’s contention, we regard respondent’s

request for better verification of decedent’s estate’s net worth

as neither “disingenuous” nor “outrageous”.

     At one point in the estate’s reply memorandum, to deflect a

negative inference from decedent’s use of $10,000 in cash on the

purchase of an automobile, the estate states:    “[after all]

Approximately seven million dollars passed through * * *

[decedent’s] hands in 2000."     That is exactly respondent’s point.
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If decedent was not worth much, what was decedent’s source for

the $7 million used in 2000 for his gambling activities?    As

noted, decedent apparently owed the Nevada casinos only $70,000,

suggesting that decedent had access to millions of dollars to

either play the slot machines with cash or to pay off the casinos

to the extent the casinos allowed decedent to play the slot

machines on credit (over the $70,000 decedent owed the casinos).

     In our opinion, neither the fact that decedent incurred

large gambling losses nor the fact that decedent filed for

bankruptcy establishes for decedent’s estate a negative net worth

on the date of death.

     In 2000, decedent realized large gambling winnings and large

gambling losses, but he reported nominal wage income and had

significant cash on hand to use for the purchase of an

automobile.   These facts suggest to us substantial assets, and we

believe respondent to have been reasonable in the request for

more specific information about decedent’s net worth, which

information has not been provided.

     We commend trial counsel for negotiating a favorable

settlement with regard to decedent’s claimed gambling losses.

That favorable settlement or concession by respondent, however,

does not necessarily translate into an award of administrative

costs against respondent, even the relatively modest amount

sought herein.   See Sokol v. Commissioner, 92 T.C. 760, 767

(1989).
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     For the reasons stated, we shall deny the motion for an

award of administrative costs.


                                      An appropriate order will

                                 be entered.
