                   T.C. Summary Opinion 2005-3



                     UNITED STATES TAX COURT



                 PANSY V. PANAGES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16154-03S.          Filed January 4, 2005.


     Pansy V. Panages, pro se.

     Paul K. Voelker, 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, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
                               - 2 -

     Respondent determined a deficiency of $6,161 in petitioner’s

Federal income tax for 2001, and a section 6662(a) penalty of

$1,232.

     The issues for decision are:   (1) Whether petitioner’s

gambling activity amounted to a trade or business under section

162, thereby allowing her to deduct gambling losses on Schedule

C, Profit or Loss From Business, of her Federal income tax

return, and (2) whether petitioner is liable for the section

6662(a) penalty.

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

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

Petitioner’s legal residence at the time the petition was filed

was Sparks, Nevada.

     Before entering the flower business, petitioner completed

her freshman year of high school and had some floral industry

training.   Petitioner then opened a flower shop in Reno, Nevada.

The Flower Bucket Florist (flower shop) was organized as a

corporation with petitioner as the sole stockholder.   At the time

of trial, petitioner’s flower shop was open 12 hours a day,

Monday through Saturday, and a few hours on Sunday.    The flower

shop paid petitioner a $66,310 salary during 2001.

     In addition, petitioner operated as sole stockholder another

business, F.B. Wholesale, Inc. (F.B. Wholesale), which was a

wholesale market that purchased flowers from growers and brokers
                                - 3 -

and then resold the flowers to retail florists.   The flower shop

is one of F.B. Wholesale’s customers.   F.B. Wholesale paid

petitioner a $7,200 salary during 2001.   Finally, petitioner

earned $26,160 in rent from two other businesses and $4,848 in

the lease of a portion of her home to an elderly lady.

     During the year in issue, petitioner was nearly 70 years of

age and had begun making plans for retirement.    As a result, she

began training her two daughters to assume control of the flower

shop; however, petitioner was still actively involved in the

flower shop during 2001.    Because petitioner planned to hand over

management of the flower shop to her daughters, when she turned

65, she began looking for other ways to supplement her monthly

Social Security benefits.

     Petitioner believed she had a talent for winning at slot

machines and began playing the machines at different locations.

She eventually gambled almost exclusively at one grocery store

(Smith's) that had the type of machines she liked, known as

progressive machines.   She began cultivating relationships with

some of the grocery employees and started “tipping” them so they

would alert her to what machines had not “paid out” recently.

Petitioner usually played the machine or machines that had gone

the longest without a winner.   On her 2001 tax return, she

deducted as business expenses $6,000 in tips she paid grocery

employees for that information.   Petitioner estimated she spent
                               - 4 -

20 to 25 hours a week playing the slot machines at Smith’s.     All

of her gambling occurred after the flower shop was closed for the

evening.   Smith’s was on the route petitioner traveled from the

flower shop to her home.

     During 2000, petitioner contacted an Internal Revenue

Service (IRS) agent for information on how to file her income tax

return as a professional gambler.   Petitioner never sought

information from other professional gamblers as to what was

required to become a professional gambler for tax purposes.     She

was reluctant to publicize her status as a professional gambler

because of a perceived stigma attached to that occupation.    She

discussed her tax status as a professional gambler only on one

occasion with an IRS agent.   She was advised by the agent to

simply file a Schedule C with her income tax return and was

advised of her responsibility to pay self-employment taxes on any

profit realized.   Because petitioner reported a loss on her 2001

return, she did not pay any self-employment taxes.2

     On Schedule C of her 2001 return, petitioner listed

“Professional Gambler” as her principal business and reported

negative income of $5,050 and $8,129 in expenses for a total loss

of $13,179.   Petitioner kept records verifying the exact dates


     2
          There is no evidence in the record that, in her quest
to qualify as a professional gambler, petitioner inquired or
received any information that a basic and fundamental requisite
of a trade or business, including that of a professional gambler,
is that the activity be engaged in for profit.
                                - 5 -

and amounts of her winnings, tips, and ATM charges and attached

those records to her Schedule C.   Respondent agreed at trial that

petitioner kept meticulous records.     Nevertheless, on her Form

1040, U.S. Individual Income Tax Return, petitioner listed her

occupation as “Floral Manager”.

     For gambling to reach the level of a trade or business

activity it must be “pursued full time, in good faith, and with

regularity, to the production of income for a livelihood, and * *

* not a mere hobby”.    Commissioner v. Groetzinger, 480 U.S. 23,

35 (1987).    The Supreme Court, in Groetzinger, held that a

taxpayer who spent between 60 and 80 hours per week at dog races

qualified as a professional gambler even though the taxpayer

received income during the year from interest, dividends, capital

gains, and salary earned before his job was terminated.

Likewise, a taxpayer who spent 35 hours a week at a horse track

after losing his job as a salesman and who was seeking a new

sales job qualified as a professional gambler for purposes of

section 162.    Rusnak v. Commissioner, T.C. Memo. 1987-249.

     Unlike the taxpayers in the cited cases, petitioner did not

pursue gambling full time.    She gambled regularly but only after

she finished working at her flower shop.     She frequently stopped

at Smith’s to play the slot machines on her way home from work.

As she reported on her tax return, her occupation was “floral

manager”.    The fact that petitioner earned income from
                                   - 6 -

investments and rent does not in and of itself bar her from being

a professional gambler.       Petitioner, however, does not qualify as

a professional gambler because her situation does not satisfy the

test laid out by the Supreme Court.        In Commissioner v.

Groetzinger, supra at 33, the Court stated that, if a taxpayer

“devotes his full-time activity to gambling, and it is his

intended livelihood source, it would seem that basic concepts of

fairness * * * demand that his activity be regarded as a trade or

business”.       Petitioner’s livelihood was not her winnings from

slot machines; instead, her primary income came from her flower

shop.       Her gambling was not a trade or business under section

162.       Consequently, petitioner may not deduct her losses on a

Schedule C but must itemize them.3

        Respondent determined a section 6662(a) penalty of $1,232

against petitioner.       Section 6662(a) provides for a 20-percent

addition to tax for any underpayment to which the section

applies.       Respondent determined that section 6662(b) applies to



       3
          If petitioner qualified as a professional gambler for
purposes of sec. 162, she still could claim her losses only to
the extent she had gains. Sec. 165(d); Praytor v. Commissioner,
T.C. Memo. 2000-282. Because petitioner does not qualify as a
professional gambler, it is not necessary to address whether
petitioner may deduct ATM charges and tips to grocery store
employees as expenses because her slot machine losses alone
exceeded her winnings; therefore, she may not deduct the charges
or tips. In the notice of deficiency, respondent disallowed all
of petitioner’s claimed deductions for gambling losses and other
expenses in excess of gambling income. That computation is
sustained by the Court.
                                 - 7 -

petitioner because (1) petitioner was negligent or disregarded

rules or regulations, or (2) petitioner’s deficiency represented

a substantial understatement of income tax.

     Negligence is defined as “any failure to make a reasonable

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

disregard includes “careless, reckless, or intentional

disregard.”    Sec. 6662(c).   The Court holds that petitioner was

not negligent, nor did she disregard rules or regulations when

she filed as a professional gambler on her 2001 tax return.      She

consulted with an IRS agent and inquired as to how to file her

tax returns as a professional gambler.    She then followed the

guidelines of the agent, which were simply to include a Schedule

C with her income tax return.    The Court finds petitioner’s

testimony credible.    Petitioner kept adequate records verifying

her level of gambling activity and attached the records to her

Schedule C.    In addition, once petitioner received the notice of

deficiency from respondent, she ceased her gambling activity

while awaiting a decision by this Court.    Petitioner’s actions

amount to reasonableness under section 6662(c), and her actions

are not considered by the Court to be “careless, reckless, or

intentional disregard.”

     Section 6662(b) also provides an addition to tax in the

amount of 20 percent for any “substantial understatement of

income tax.”    A substantial understatement is defined as the
                               - 8 -

greater of 10 percent of the tax required to be shown on the

return or $5,000.   Sec. 6662(d)(1)(A).    Petitioner’s

understatement does amount to more than $5,000; however, she

qualifies for a reduction of the understatement.     Sec.

6662(d)(1)(B).   Section 6662(d) provides for a reduction of the

understatement if the taxpayer supplied the relevant facts

affecting the tax treatment on the return and if there was a

reasonable basis for the tax treatment.     Sec. 6662(d)(2)(B)(ii).

As previously discussed, petitioner attached adequate records to

her 2001 income tax return, and she had a reasonable basis for

believing she qualified as a professional gambler simply by

filing a Schedule C.   Therefore, petitioner’s understatement for

purposes of determining whether it amounts to a “substantial

understatement of income tax” is reduced to zero.     Sec.

6662(d)(1)(A).   Petitioner is not liable for the section 6662(a)

penalty.4

     Reviewed and adopted as the report of the Small Tax Case

Division.


                                       Decision will be entered

                               under Rule 155.


     4
          At trial, respondent agreed that, if the Court held
that petitioner was not a professional gambler, she could deduct
her gambling expenses as itemized deductions. In addition,
respondent conceded that petitioner was also entitled to itemized
deductions of $200, $458, and $1,376, respectively, for
charitable contributions, taxes, and interest.
