                              T.C. Memo. 2017-193



                         UNITED STATES TAX COURT



                 JAMES BONEPARTE, JR., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 28563-14.                         Filed October 2, 2017.



      James Boneparte, Jr., for himself.

      Kathleen K. Raup, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MORRISON, Judge: The respondent (referred to here as the “IRS”) issued

two notices of deficiency to the petitioner, James Boneparte, Jr.: one for the 2012

tax year and one for the 2013 tax year. The IRS determined the following
                                         -2-

[*2] deficiencies in income tax, additions to tax, and accuracy-related penalties for

the 2012 and 2013 tax years.1

                                                                       Accuracy-
                                                                        related
     Year   Deficiency                  Additions to tax                penalty

                             Sec.             Sec.          Sec.         Sec.
                          6651(a)(1)       6651(a)(2)      6654(a)      6662(a)
     2012    $21,090        $1,187              ---          ---        $4,218
     2013      17,210        2,007             $268         $144            ---

Boneparte filed a petition under section 6213(a) for redetermination of the

deficiencies for both years.2 We have jurisdiction under section 6214(a).

        After we take into account concessions by the IRS described later in the

opinion, the issues for decision are:

1.      Was Boneparte a professional gambler in 2012 or 2013? We hold that he

        was not.



        1
        Unless otherwise indicated, all section references are to the Internal
Revenue Code (“Code”) in effect for the years in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded
to the nearest dollar.
        2
       Boneparte resided in New Jersey when he filed his petition. Therefore, any
appeal of our decision in this case would go to the U.S. Court of Appeals for the
Third Circuit unless the parties designate the Court of Appeals for another circuit.
See sec. 7482(b)(1) and (2).
                                         -3-

[*3]

2.     Is Boneparte entitled to an itemized deduction for wagering losses of

       $18,000 for 2012? We hold that he is so entitled.

3.     Is Boneparte entitled to a deduction of $3,592 for payment of real-estate

       taxes for 2012? We hold that he is not so entitled.

4.     Is Boneparte liable for an addition to tax under section 6651(a)(1) for 2012?

       We hold that he is liable for the addition to tax.

5.     Is Boneparte liable for an accuracy-related penalty under section 6662(a) for

       2012? We hold that he is liable for the penalty.

       To place the facts of this case in perspective, it is helpful to understand the

federal-income-tax treatment of gambling activity and how the income from

gambling activity can be reported on federal-income-tax returns. The amount of

federal income tax depends on taxable income. Sec. 1(c). Calculating taxable

income requires calculations of both gross income and adjusted gross income.

Gross income is defined as all income from whatever source derived. Sec. 61(a).

Adjusted gross income is defined as gross income minus certain deductions known

as above-the-line deductions. Sec. 62(a). One above-the-line deduction is the

deduction under section 62(a)(1) for business expenses of self-employed

taxpayers.
                                        -4-

[*4] Taxable income for taxpayers who itemize deductions is equal to adjusted

gross income (i.e., taxable income minus above-the-line deductions) minus

itemized deductions and the personal-exemption deduction. Sec. 63(a). One

itemized deduction of significance for this case is the deduction allowed under

section 213(a) for an amount equal to the medical expenses paid by the taxpayer

for the year minus a percentage of adjusted gross income. The percentage of

adjusted gross income for the 2012 year is 7.5%. Sec. 213(a). For 2013, it is 10%.

Id. Another itemized deduction is the deduction under section 165(a) for any

“loss”.

      For taxpayers who take the standard deduction, taxable income is equal to

adjusted gross income (i.e., taxable income minus above-the-line deductions)

minus the standard deduction and the personal-exemption deduction. Sec. 63(b).

The standard deduction is a dollar amount that is adjusted each year for inflation

and varies according to the taxpayer’s filing status. Sec. 63(c). For tax year 2012,

the standard deduction for a taxpayer filing as single was $5,950. See 2012

Instructions for Form 1040, U.S. Individual Income Tax Return. For 2013 it was

$6,100. See 2013 Instructions for Form 1040, U.S. Individual Income Tax Return.

Itemized deductions do not affect the taxable income of taxpayers who choose the

standard deduction. Sec. 63(b).
                                         -5-

[*5] The Code does not set forth specific rules for determining income and losses

for gambling activity except that section 165(d) provides that “[l]osses from

wagering transactions shall be allowed only to the extent of the gains from such

transactions.” The taxation of gambling activity is determined by this Code

provision as it interacts with the more general Code provisions.

      For professional gamblers (i.e., those taxpayers who are in the business of

gambling), the Code has been interpreted as distinguishing between two types of

expenses. See Mayo v. Commissioner, 136 T.C. 81, 91, 96-97 (2011) (holding

that losses from wagering transactions under section 165(d) include the “cost of

losing wagers” but not the “more general expenses incurred in the conduct of a

gambling business”). First, there are the direct costs of gambling--essentially the

cost of placing a wager. Second, there are the indirect expenses of gambling, such

as the cost of traveling to the casino. We refer to these latter expenses as the

nonwagering expenses of gambling.

      The costs of wagering are accounted for in the losses and gains from

wagering transactions under section 165(d). Section 165(d) governs professional

gamblers. Offut v. Commissioner, 16 T.C. 1214 (1951) (followed on this point by

Mayo v. Commissioner, 136 T.C. at 90). Section 165(d) is applied by comparing

the gains from wagering transactions for the year with the losses from wagering
                                         -6-

[*6] transactions for the year. Sec. 1.165-10, Income Tax Regs. If the gains

exceed the losses, then there is a deduction equal to the losses. If the losses

exceed the gains, then the deduction is equal to the gains. The deduction is an

above-the-line deduction under section 62(a). See, e.g., Schollenberger v.

Commissioner, T.C. Memo. 2009-306; LaPlante v. Commissioner, T.C. Memo.

2009-226; Merkin v. Commissioner, T.C. Memo. 2008-146, slip op. at 7 (“If a

taxpayer is engaged in the trade or business of gambling, his losses from

gambling, up to the amount of his gains from such transactions, would be

deductible in arriving at his adjusted gross income. See secs. 62, 165(d). Thus, if

Dr. Merkin’s gambling activity constituted a trade or business, his losses from

gambling as reported on Schedule C up to the amount of his gambling winnings as

reported on that schedule would be deductible in arriving at adjusted gross

income.”).

      We now discuss the nonwagering expenses of professional gambling.

These expenses are not computed as part of the gains or losses from wagering

transactions in section 165(d). Mayo v. Commissioner, 136 T.C. at 97. We need

not discuss further the appropriate tax treatment of the nonwagering expenses of

professional gamblers, other than to observe that, like the taxpayer in Chow v.

Commissioner, T.C. Memo. 2010-48, 99 T.C.M. (CCH) 1193, 1194 (2010), aff’d,
                                        -7-

[*7] 481 F. App’x 406 (9th Cir. 2012), Boneparte reported his nonwagering

expenses of gambling as an above-the-line deduction under section 62(a). It is not

necessary to say whether this is the correct way to report the nonwagering

expenses of professional gambling because, as we explain below, we hold that

Boneparte is not a professional gambler.

      A professional gambler (who is self-employed) is expected by the IRS to fill

out a Schedule C, “Profit or Loss From Business”. Schedule C is the attachment

to Form 1040 that is completed by self-employed taxpayers. The Schedule C

contains various line items for reporting income and expenses from a business.

Near the bottom of the Schedule C is a line item for the net profit or loss from the

business, line 31. The amount on this line of the Schedule C is to be copied to line

12 of the Form 1040, which is labeled “Business income or (loss) * * *”. The

vertical placement of line 12 on the Form 1040 is such that the amount on line 12

is taken into account in the computation of adjusted gross income. Thus, the

business expenses reported on Schedule C, which are arithmetically incorporated

in the business income or loss amount on line 12, are reported as an above-the-line

deduction on the Form 1040. As for the gains and losses from wagering

transactions, the instructions for the Schedule C and the Form 1040 do not explain

exactly how a professional gambler should report them. However, if a
                                        -8-

[*8] professional gambler reports the losses from wagering transactions anywhere

on the Schedule C, these reported losses would be channeled into line 12 on the

Form 1040 and therefore incorporated into adjusted gross income. The losses

would be reported as an above-the-line deduction.

      Now consider the tax treatment of the gambling activities of casual

gamblers, i.e., persons who are not professional gamblers. The first step is to

determine the gain or loss for each wagering transaction. A wagering transaction

results in a gain if the winning exceeds the cost of the wager. A wagering

transaction results in a loss if the cost of the wager exceeds the winning. The

gains for all wagering transactions for which there is a gain are totaled. See sec.

1.165-10, Income Tax Regs. These are the gains from wagering transactions

within the meaning of section 165(d). Gross income is increased by this total

gain.3 This increase in gross income is also reflected in adjusted gross income.

See sec. 62(a) (defining adjusted gross income as gross income minus above-the-

      3
       Calculating the gain from each wager by subtracting the cost of the wager
is consistent with the holdings in cases in which the Court, drawing an analogy
between wagering winnings and the recovery of a capital investment, has held that
a casual gambler’s gross income from a wagering transaction should be calculated
by subtracting 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 gross income. See Lutz v. Commissioner, T.C.
Memo. 2002-89 (slot machine winnings); Hochman v. Commissioner, T.C. Memo.
1986-24 (horse race winnings).
                                        -9-

[*9] line deductions). The losses from all wagering transactions that resulted in a

loss are totaled. These are the losses from wagering transactions within the

meaning of section 165(d). If this total loss exceeds the total gain, then the

taxpayer is entitled to an itemized deduction equal to the total gain. Sec. 165(d).

(For example, consider a casual gambler who makes only the following wagers

throughout the year: a wager of $10 for a win of $50, and five losing wagers

totaling $50. Gross income is increased by $40. The taxpayer has an itemized

deduction of $40.) As an itemized deduction, the wagering loss does not reduce

adjusted gross income. This is a disadvantage for the taxpayer because the amount

of adjusted gross income affects the amount of certain below-the-line deductions

such as the medical-expense deduction. See sec. 213(a); see also sec. 68; Calvao

v. Commissioner, T.C. Memo. 2007-57.

      The next thing to consider is the tax treatment of the nonwagering expenses

of gambling by a casual gambler. A deduction attributable to any activity not

engaged in for profit, such as casual gambling, is allowed only to the extent

provided in section 183(b). Sec. 183(a). Section 183(b)(1) provides that a

taxpayer is allowed the deductions that would be allowable without regard to

whether the activity is engaged in for profit. Section 183(b)(2) provides that a

taxpayer is allowed a deduction equal to the amount of the deductions that would
                                        - 10 -

[*10] be allowable only if the activity were engaged in for profit, but only to the

extent that the gross income derived from such activity for the taxable year

exceeds the deductions allowable by reason of section 183(b)(1).

      Recall that section 165(d) provides that “[l]osses from wagering

transactions shall be allowed only to the extent of the gains from such

transactions”. The deduction under section 165(d) is allowable without regard to

whether the wagering transactions giving rise to the losses are engaged in for

profit. See Mayo v. Commissioner, 136 T.C. at 90. Therefore the deduction

allowed by section 165(d) is included in the deductions allowed by section

183(b)(1).

      The nonwagering expenses of casual gambling often fall into section

183(b)(2); and in this case there is no dispute that Boneparte’s nonwagering

expenses of gambling would fall into the section 183(b)(2) category if he is

considered a casual gambler.

      A casual gambler by definition does not operate a business, does not fill out

a Schedule C, and therefore would have no amount on line 12 of Form 1040 for

business income or loss. As for the gains from wagering transactions, the casual

gambler is instructed by the IRS to report such gains on line 21 of Form 1040,

labeled “Other income”. 2012 Instructions for Form 1040, U.S. Individual Income
                                       - 11 -

[*11] Tax Return; 2013 Instructions for Form 1040, U.S. Individual Income Tax

Return. This line corresponds to the reporting of gross income. To report the

section 165(d) deduction for losses from wagering transactions, the casual gambler

is instructed by the IRS to use line 28 of Schedule A, “Itemized Deductions”.

Instructions for Schedule A (Form 1040), A-1.

      With this background in mind, we can now set out the facts of this case.

                              FINDINGS OF FACT

      Some facts are stipulated, and they are so found.

      Boneparte graduated from Williams College in Massachusetts with a B.A.

in history in 1973.

      During 2012 and 2013 Boneparte resided in Newark, New Jersey.

      Since 1981 Boneparte has worked for the Port Authority of New York and

New Jersey. During 2012 and 2013, Boneparte was employed full-time by the

Port Authority as a “tunnel bridge agent” at the Lincoln Tunnel. During 2012 and

2013, Boneparte’s hours of work during each work day usually consisted of an 8-

hour shift from 2 p.m. to 10 p.m. The days he worked followed the following

pattern over a 19-day period: 4 days on, 2 days off, 4 days on, 2 days off, 5 days

on, and 2 days off.
                                        - 12 -

[*12] Boneparte earned approximately $35 per hour at the Port Authority in 2012

and 2013. Boneparte’s annual earnings from the Port Authority from 2008

through 2013 were:

                               Year Amount earned

                               2008      $75,000
                               2009      109,000
                               2010       75,000
                               2011       60,000
                               2012       78,821
                               2013       82,350

Boneparte also received retirement distributions in 2012 and 2013. For 2012, he

reported a gross retirement distribution of $44,550, of which he reported $13,652

as includable in income. The IRS does not contest the tax treatment he reported

for this distribution. For 2013, he reported a gross retirement distribution of

$49,278, of which he reported $10,753 as includable in income. As explained

below, the notice of deficiency for 2013 determined that he did not report the

$10,753 as income on his 2013 return, but the IRS has since conceded that he did.

Although a taxpayer’s receipt of retirement distributions might conceivably affect

the determination of whether the taxpayer is a professional gambler, see sec.

1.183-2(b)(8), Income Tax Regs., neither party in this case asks the Court to make

findings of fact regarding the retirement distributions or to draw conclusions
                                        - 13 -

[*13] about Boneparte’s professional status from his receipt of the retirement

distributions.

Boneparte’s gambling activity

      Boneparte regularly drove back and forth to Atlantic City, New Jersey,

where he gambled.4 He testified that he spent 75% of his nights in hotels in

Atlantic City rather than at his house in Newark. Documentary evidence

substantiates that he traveled to Atlantic City frequently but not as frequently as

his 75% estimate would suggest. We find that he spent 33%-50% of his nights in

Atlantic City in 2012 and 50%-67% in 2013.

      Boneparte gambled at horse racetracks and in casinos. At the casinos his

preferred game was baccarat, but he also played other table games as well as slots.

Sometimes he gambled alone, and sometimes he gambled with a friend. He

gambled primarily in Atlantic City. He did not keep a contemporaneous written

log of winnings and wagers. As described in greater detail below, the trial record

contains statements from casinos describing his wagering activity during the two

years in issue, 2012 and 2013. These statements show that he lost money in

wagers at each casino in each of the two years. We also conclude that Boneparte

      4
       The record does not reveal whether Boneparte left directly for Atlantic City
from his place of work at the Lincoln Tunnel or whether he first went home to
Newark, New Jersey.
                                         - 14 -

[*14] lost money in total wagers in the years 2009, 2010, and 2011. The trial

record does not contain statements from casinos for these years, but his losses at

each casino in 2012 and 2013 (and the fact that his method of gambling, which

was unchanged over the years, was to make frequent bets at unskilled games such

as baccarat and slots) suggest he lost money in 2009, 2010, and 2011, too. This

suggestion is not contradicted by his tax returns. Of the three years, 2009, 2010,

and 2011, only his return for 2009 is in the record. On that tax return he did not

report a total wagering gain for 2009.

      Because Boneparte lost money in total wagers in the years 2009-13, a

fortiori he did not earn a profit from gambling for any of the years 2009-13. This

is because the profit (and loss) from gambling includes not just the winnings from

wagers but also the nonwagering expenses of gambling (i.e., expenses other than

the amounts wagered). Taking these expenses into consideration in measuring his

profits or losses would only decrease his profits (and increase his losses).

      For tax year 2012, the record contains annual statements from 14 casinos at

which Boneparte gambled. None of the statements shows the amount wagered or

the winnings for any particular wager. One statement (for Golden Nugget) shows

the amount of his monthly gain or loss for each month of the year. Another

statement (for Trump Taj Mahal) shows the amount of his daily gain or loss for
                                       - 15 -

[*15] each day of the year. One statement (for NJAW) shows total winnings for

the year and total wagers for the year. The other 11 statements show only the total

annual amount that Boneparte gained or lost at the casino that issued the

statement. The table below shows the annual net wagering gains or losses

reported on the 14 statements.

                           Casino                 Net gains/losses

               NJAW                                    ($217)
               Golden Nugget Atlantic City            (2,958)
               Bally’s                                (1,115)
               Caesars (Atlantic City, N.J.)             (56)
               Caesars (Las Vegas, Nev.)                  (5)
               Flamingo                                  (21)
               Harrah’s                                  (62)
               Showboat                                 (666)
               The Quad Casino and Resort                 (2)
               Tropicana Casino and Resort            (1,891)
               Meadowlands Racetrack                     (56)
               Borgata                                  (622)
               Trump Taj Mahal                        (4,383)
               Trump Plaza                            (2,833)
                Total                                (14,887)

      As shown in the table above, Boneparte’s annual loss at NJAW was $217.

This amount is not on the NJAW statement. Rather, the statement shows amounts

wagered of $2,048 and amounts won of $1,831. The difference between these

amounts is $217. From this statement Boneparte argues that his annual loss was

$217, equal to $2,048 minus $1,831. By contrast, the IRS argues that Boneparte
                                         - 16 -

[*16] had a gain for the year at the NJAW casino of $1,831. But this computation

does not account for the $2,048 of wagers shown on the statement. Therefore, we

agree with Boneparte on this point. We find that Boneparte’s annual loss at

NJAW was $217.

      In total, the 14 statements for the casinos for the 2012 year show Boneparte

had net losses of $14,887 from wagers during that year.

      For 2013, there are annual statements from 12 casinos at which Boneparte

gambled. None of the statements shows the amount wagered or the winnings for

any particular wager. One statement (for Golden Nugget) shows the amount of his

monthly gain or loss for each month of the year. One statement (for Trump Taj

Mahal) shows the amount of his daily gain or loss for each day of the year. The

other 10 statements show only the total annual amount that Boneparte gained or

lost at the casino that issued the statement.

      The table below shows the annual net gains or losses reported on the 12

statements for 2012.
                                         - 17 -

[*17]

                             Casino                Net gains/losses

                  Trump Taj Mahal                     ($2,901)
                  Powerball lottery                        (8)
                  Golden Nugget Atlantic City            (606)
                  Trump Plaza                          (5,178)
                  Bally’s                              (1,077)
                  Caesars (Atlantic City, N.J.)          (126)
                  Flamingo                                 (1)
                  Harrah’s                                (24)
                  Showboat                               (122)
                  The Quad Casino and Resort              (87)
                  Borgata                              (1,647)
                  Tropicana Casino and Resort            (832)
                   Total                              (12,609)

        In total, the 12 statements for the casinos for the 2013 year show Boneparte

had net losses of $12,609 from wagers during that year.

2012 tax return

        April 15, 2013 was the due date for Boneparte’s 2012 federal-income-tax

return.

        On June 7, 2013, Boneparte filed his 2012 return on a Form 1040. See infra

part 4. His return was late. Boneparte prepared his return himself and did not

consult any tax professionals.
                                      - 18 -

[*18] On his Form 1040, Boneparte reported that his occupation was “T.B.A. Port

Auth NY & NJ”. This presumably means Toll Bridge Agent Port Authority of

New York and New Jersey.

      Boneparte reported his income and losses from gambling activity both as a

professional gambler (on the Schedule C) and as a casual gambler (income on line

21 of Form 1040 and loss on line 28 of Schedule A).

      His Schedule C stated that his “Principal business or profession” was

“professional gambler”. The Schedule C reported the following income and

expenses:
                                         - 19 -

[*19]

                       2012 Schedule C                   Amount claimed

        Income
         Gross receipts                                      $18,000
         Returns and allowances                              (18,000)
         Gross income                                              0
        Expenses
         Car and truck expenses                                38,150
         Depreciation                                           3,550
         Insurance                                              4,868
         Legal and professional services                        6,900
         Office expenses                                        1,020
         Rent or lease--vehicles, machinery, and
           equipment                                              300
         Rent or lease--other business property                 1,128
         Repairs and maintenance                                1,100
         Supplies                                               3,900
         Travel                                                12,900
         Deductible meals and entertainment                    15,300
          Total expenses                                       89,116
        Net business income                                   (89,116)

Boneparte duly copied the -$89,116 entry for net business income at the bottom of

the Schedule C to line 12 of his Form 1040.

        It is unclear how Boneparte calculated the $18,000 of receipts and the

$18,000 of returns and allowances that he reported on the Schedule C. Thus, it is

unclear whether he intended to report that the amount of his gains from wagering

transactions was $18,000 and that his losses from wagering transactions was

limited to $18,000. The total expenses reported on the Schedule C were $89,116.
                                       - 20 -

[*20] It is apparent that Boneparte intended to report that $89,116 was the amount

of nonwagering expenses of gambling.

      On line 21, “Other income”, of the Form 1040, Boneparte reported $18,000

of what he labeled “Gambling” income. The placement of line 21 on the Form

1040 meant that the $18,000 Boneparte reported on this line was included in gross

income.

      Boneparte reported that his adjusted gross income was $22,100.

      On Schedule A, line 28, Boneparte claimed an $18,000 itemized deduction

for “Gambling Income”. On that Schedule A he also claimed an itemized

deduction for $3,592 of real-estate taxes. Boneparte also claimed an itemized

deduction for medical expenses. After reducing his medical expenses of $12,292

by 7.5% of his reported adjusted gross income (i.e., 7.5% × $22,100 = $1,658), he

claimed a medical-expense deduction of $10,634.

      The return reported zero taxable income and zero tax.

2013 tax return

      On or about April 15, 2014, Boneparte timely filed his 2013 federal-income-

tax return on a Form 1040. Boneparte prepared the return himself and did not

consult any tax professionals.
                                      - 21 -

[*21] On his Form 1040, Boneparte reported that his occupation was “T.B.A. Port

Auth NY & NJ”.

      As with his 2012 return, Boneparte reported his income and loss from

gambling activity both as a professional gambler (on a Schedule C) and as a casual

gambler (on line 21 of Form 1040 and line 28 of Schedule A).

      His Schedule C for 2013 stated that his “Principal business or profession”

was “professional gambler”. The Schedule C reported the following income and

expenses:
                                           - 22 -

[*22]

                         2013 Schedule C                 Amount claimed

        Income
         Gross receipts                                       $10,000
         Returns and allowances                               (10,000)
         Gross income                                               0
        Expenses
         Car and truck expenses                                 38,000
         Depreciation                                            1,775
         Insurance                                               3,800
         Legal and professional services                         6,500
         Office expenses                                         1,380
         Rent or lease--vehicles, machinery, and
          equipment                                              3,000
         Rent or lease--other business property                  1,128
         Repairs and maintenance                                 2,100
         Supplies                                                3,900
         Travel                                                 12,000
         Deductible meals and entertainment                     14,000
          Total expenses                                        85,783a
        Net business income                                    (85,783)
        a
         The actual total of the expenses is $87,583, not $85,783 as Boneparte
        reported. This is probably due to a math error by Boneparte. Because
        we hold that he is not entitled to deduct any of the nonwagering
        business expenses that he reported on his return, his error does not
        affect our findings.

Boneparte duly copied the -$85,783 entry for net business income at the bottom of

the Schedule C to line 12 of his Form 1040.

            On line 21 of the Form 1040, Boneparte reported he earned “Gambling”

income of $12,500. He reported adjusted gross income of $19,746.
                                       - 23 -

[*23] On Schedule A, line 28, Boneparte claimed a $12,500 itemized deduction

for “Gambling Income”. On that Schedule A he also claimed an itemized

deduction for $3,407 of real-estate taxes. Boneparte also claimed an itemized

deduction for medical expenses. After reducing his medical expenses of $8,112

by 10% of his reported adjusted gross income (i.e., 10% × $19,746 = $1,975), he

claimed a medical-expense deduction of $6,137.

       Boneparte reported other items of income: $82,350 in wages, $10 in

interest, $2,916 in taxable state tax refunds, and $10,753 in taxable pension

distributions. Boneparte also claimed a $3,900 personal-exemption deduction.

       He reported zero taxable income and zero tax (pre-credit). He reported a

withholding credit of $8,290 for the 2013 tax year which has not been refunded to

him.

Notice of deficiency for 2012

       On August 29, 2014, the IRS issued Boneparte a notice of deficiency for the

2012 tax year. It determined a deficiency in tax of $21,090, an addition to tax

under section 6651(a)(1) of $1,187, and a penalty under section 6662(a) of $4,218.

       The notice of deficiency showed the following adjustments to the Schedule

C: the $18,000 reported for “Gross receipts” was adjusted to zero; the $18,000

reported for “Returns and Allowances” was adjusted to zero; and every line item
                                          - 24 -

[*24] for business expenses was adjusted from the amount reported to zero.

Boneparte contests the disallowance of the line items for business expenses. See

infra part 1 for the discussion of this issue.

         The adjustments to the Schedule C increased Boneparte’s adjusted gross

income to $111,216. The increase in adjusted gross income in turn resulted in a

computational reduction of Boneparte’s medical-expense deduction from $10,634

to $3,951.

         Additionally, the notice of deficiency disallowed, for lack of substantiation,

the $3,592 real-estate tax deduction Boneparte had claimed on Schedule A.

Boneparte contests this disallowance. See infra part 3 for the discussion of this

issue.

         As noted above, Boneparte reported $18,000 of gambling income on line 21

of Form 1040, which resulted in an $18,000 increase in his reported gross income.

The notice of deficiency made no adjustment to the $18,000 of reported gambling

income. Nor has the IRS since the notice of deficiency made any challenge to the

$18,000 amount. Boneparte has not denied that the $18,000 amount he reported is

correct. Thus, for the purpose of this case we accept that Boneparte’s gross

income for 2012 includes $18,000 in gambling income (if he is considered a

casual gambler).
                                        - 25 -

[*25] The notice of deficiency disallowed the $18,000 itemized deduction that

Boneparte claimed on his Schedule A for gambling losses. Boneparte contests this

disallowance. See infra part 2 for the discussion of this issue.

        As noted above, Boneparte reported $18,000 as “Gross receipts” on his

Schedule C and an offsetting $18,000 as “Returns and Allowances”. The IRS did

not take the position in the notice of deficiency that the $18,000 that Boneparte

reported as gross receipts on his Schedule C is properly includable in his gross

income as income from casual gambling (along with the $18,000 he reported on

line 21 of his Form 1040). Nor has it taken that position since it issued the notice

of deficiency. For his part, Boneparte does not concede that the $18,000 he

reported as gross receipts on his Schedule C is includable in his gross income in

addition to the $18,000 he reported as gambling income on line 21 of his Form

1040.

        The notice of deficiency calculated Boneparte’s taxable income as $98,656.

Notice of deficiency for 2013

        On October 10, 2014, the IRS issued Boneparte a notice of deficiency for

the 2013 tax year. The IRS determined a deficiency in tax of $17,210 and

additions to tax under sections 6651(a)(1) and (a)(2), and 6654 of $2,007, $268,

and $144, respectively.
                                        - 26 -

[*26] The notice of deficiency stated that the $17,210 deficiency resulted from the

following determinations:

      !      Boneparte failed to report $10,753 in IRA distributions.

      !      Boneparte failed to report $2,003 in state tax refunds.

      !      Boneparte failed to report $10 in interest income.

      !      Boneparte failed to report $82,350 in wages.

      !      Boneparte was entitled to a $3,900 personal-exemption deduction.

The notice of deficiency did not make any determination regarding Boneparte’s

reporting of gambling activity. It calculated Boneparte’s taxable income as

$85,116. It did not include in its calculation any profit or loss from a sole

proprietorship (i.e., a business for which income and expenses are reported on a

Schedule C), any gambling income, or any Schedule A deductions.

Further changes to IRS position since the notices of deficiency

      Boneparte filed a timely petition in response to the notices of deficiency for

2012 and 2013. He resided in New Jersey when he filed the petition. The IRS

answered.

      Then, on June 11, 2015, the IRS wrote a letter to Boneparte stating that it

had changed its position from that in the notice of deficiency for 2013 and that the

new position was reflected in an examination report attached to the letter. In its
                                        - 27 -

[*27] posttrial brief, the IRS confirmed that the examination report reflects its

position in this case with respect to the amount of the deficiency for 2013.

      The examination report for 2013 stated that Boneparte had a deficiency of

$15,835. This amount resulted from various adjustments to Boneparte’s return

shown in the examination report. The examination report stated that the IRS had

disallowed the $85,783 business-expense deduction that Boneparte claimed on his

Schedule C. Boneparte contests this adjustment. See infra part 1 for the

discussion of this issue. The examination report stated that the $2,916 in income

that Boneparte reported for state tax refunds should be reduced by $913; that is,

from $2,916 to $2,003. Neither side contests that the correct amount is $2,003.

Because of the adjustments described so far, Boneparte’s adjusted gross income,

as reflected in the examination report, became $104,616. This increase in

Boneparte’s adjusted gross income in turn resulted in a computational adjustment

to his medical-expense deduction. The deduction was reduced from the $6,137

claimed to zero.

      The examination report for 2013 made a “0.00”-dollar adjustment (i.e., no

adjustment) to the $12,500 that Boneparte had claimed as an itemized deduction

for gambling. The examination report stated no position and made no adjustment
                                        - 28 -

[*28] regarding the $12,500 in gambling income Boneparte reported on line 21 of

his Form 1040.

      The examination report for 2013 stated no position regarding the $10,000 in

gross receipts that Boneparte reported on his Schedule C or the $10,000 in

“Returns and Allowances” on the schedule. The examination report did not take

the position that Boneparte was required to include the $10,000 in gross receipts

in his gross income in addition to the $12,500 in gambling income that he reported

on line 21 of his Form 1040. For his part, Boneparte does not concede that the

$10,000 he reported as gross receipts on his Schedule C is includable in his gross

income in addition to the $12,500 that he reported as gambling income on line 21

of his Form 1040.

      The examination report made no adjustment to the $3,304 real-estate-tax

deduction Boneparte claimed on Schedule A.

      Unlike the notice of deficiency for 2013, the examination report did not find

a deficiency based on (1) Boneparte’s alleged failure to report $10,753 in taxable

retirement distributions, $10 in interest, and $82,350 in wages, and (2) his

entitlement to an unclaimed personal-exemption deduction. Because the IRS’s

litigating position is that the computations in the examination report are correct,
                                        - 29 -

[*29] we conclude that the IRS has retracted these two determinations that had

been reflected in the notice of deficiency for 2013.

      The examination report calculated Boneparte’s taxable income as $79,609.

The examination report stated that Boneparte is liable for a section 6651(a)(1)

addition to tax of $1,886 and a section 6662 penalty of $3,167 for 2013.

      In its brief, the IRS states that its litigating position regarding the amount of

the 2013 deficiency is reflected in the computations in the examination report.

The IRS brief states that the IRS no longer asserts any additions to tax or penalties

for 2013. This statement thus withdraws any assertion by the IRS for 2013

regarding the section 6651(a)(1) addition to tax (which was mentioned in the

notice of deficiency and the examination report), the section 6651(a)(2) addition to

tax (which was mentioned in the notice of deficiency), the section 6654 addition to

tax (which was mentioned in the notice of deficiency), and the section 6662

penalty (which was mentioned in the notice of deficiency and the examination

report).

      The IRS’s brief also takes the position that the $18,000 itemized deduction

for gambling losses that Boneparte claimed for tax year 2012 should be allowed to

the extent of $12,839. This is a concession compared with the notice of deficiency

for 2012, which had determined that the amount of the deduction was zero.
                                        - 30 -

[*30] Because of the changing positions of the IRS with respect to the amounts of

the deficiencies, we summarize the IRS’s positions with respect to the relevant

line items of the returns in the following table:
                                      - 31 -

[*31]

                                                          IRS’s
                                           Def.       litigating
        Year and item       Return        notice       position        Result

2012
Sch. C gross receipts       18,000a            0               0           0
Sch. C returns & allow.     18,000             0               0           0
Sch. C bus. exp.            89,116             0               0           0
Gambling income line 21     18,000        18,000          18,000      18,000
AGI                         22,100       111,216         111,216          --b
Sch. A gambling deduct.     18,000             0          12,839      18,000
Sch. A real-estate taxes     3,592             0               0           0
Sch. A medical pre-7.5%     12,292        12,292          12,292      12,292
Sch. A medical post-7.5%    10,634         3,951           3,951          --b
Taxable income                   0        98,656    Not computed          --b
Tax                              0        21,090    Not computed          --b

2013
Sch. C gross receipts       10,000a           ---              0           0
Sch. C returns & allow.     10,000            ---              0           0
Sch. C bus. exp.            85,783            ---              0           0
Gambling income line 21     12,500            ---         12,500      12,500
State tax refund income      2,916         2,003           2,003       2,003
AGI                         19,746        85,116         104,616         ---b
Sch. A gambling deduct.     12,500            ---         12,500      12,500
Sch. A real-estate taxes     3,407            ---          3,407       3,407
Sch. A medical pre-10%       8,112            ---          8,112       8,112
Sch. A medical post-10%      6,137            ---              0         ---b
Taxable income                   0        85,116          79,609         ---b
Tax                              0        17,210          15,835         ---b
a
 Neither party contends that the amounts reported as gross receipts on the
Schedule C should be included in income in addition to the gambling income
reported separately on the Form 1040.
b
  This is an amount that will be computed or recomputed under Rule 155.
                                        - 32 -

[*32] Five issues remain to be decided: (1) whether Boneparte was a professional

gambler and therefore entitled to nonwagering gambling expense deductions of

$89,116 and $85,783 for 2012 and 2013, respectively, (2) whether he is entitled to

an itemized deduction of $18,000 for losses from wagering transactions for 2012,

(3) whether he is entitled to a $3,592 deduction for the payment of real-estate

taxes for 2012, (4) whether he is liable for an addition to tax under section

6651(a)(1) for 2012, and (5) whether he is liable for an accuracy-related penalty

under section 6662(a) for 2012.

                                     OPINION

1.    Boneparte is not entitled to deduct the nonwagering expenses of gambling
      for 2012 or 2013.

      The IRS disallowed the deductions Boneparte claimed on Schedule C for

the nonwagering expenses of being a professional gambler (i.e., the expenses other

than wagering costs). These expenses, he reported, were $89,116 in 2012 and

$85,783 in 2013. Boneparte may deduct these expenses only if he is a

professional gambler. See infra part 1.j.

      To be a professional gambler, the taxpayer must engage in gambling for

profit. Sec. 183(a), (b), and (c); sec. 1.183-2(a), Income Tax Regs.; Commissioner

v. Groetzinger, 480 U.S. 23, 35 (1987). Section 1.183-2(b), Income Tax Regs.,
                                        - 33 -

[*33] provides nine factors to consider when determining whether an activity is

engaged in for profit: (1) the manner in which the taxpayer carries 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 assets used in

the activity may appreciate in value; (5) the success of the taxpayer in carrying on

other similar or dissimilar activities; (6) the taxpayer’s history of income or losses

with respect to the activity; (7) the amount of occasional profits, if any, which are

earned; (8) the financial status of the taxpayer; and (9) elements of personal

pleasure or recreation. See, e.g., Hendricks v. Commissioner, 32 F.3d 94, 98 (4th

Cir. 1994), aff’g T.C Memo. 1993-396. These factors are not exclusive, and no

one factor is dispositive. Sec. 1.183-2(b), Income Tax Regs.; Hendricks v.

Commissioner, 32 F.3d at 98. As explained below, we find on a preponderance of

evidence that Boneparte was not a professional gambler for the years 2012 and

2013.5




         5
        In a prior case involving Boneparte’s 2010 tax year, we held that Boneparte
was not a professional gambler. Boneparte v. Commissioner, T.C. Memo. 2015-
128, at *15. Because each tax year stands on its own, our opinion in the prior case
does not control the outcome of this one.
                                         - 34 -

[*34] a.      Manner in which the taxpayer carries on the activity

        The manner in which the taxpayer carries on an activity may indicate a

profit motive if the taxpayer acts in a “businesslike manner and maintains

complete and accurate books and records”, conducts the activity “in a manner

substantially similar” to profitable activities of a similar nature, or attempts to

improve the activity’s profitability by adopting new operating methods and

techniques and abandoning unprofitable methods. Sec. 1.183-2(b)(1), Income Tax

Regs.

        If a gambler kept detailed records of the gambling activity, that might

support the gambler’s argument that he or she had a profit motive. A gambler

might keep records in order to test the success of a particular technique.

Boneparte was not such a gambler. He did not keep any records other than the

win/loss statements provided by the casinos. These statements generally state only

the aggregate amount won or lost during the year at a particular casino. This fac-

tor weighs against Boneparte. See Carmody v. Commissioner, T.C. Memo. 2016-

225, at *20-*23 (holding that taxpayer was not engaged in horse-racing activity

for profit when he did not have a written business plan, did not use spreadsheets

and invoices to minimize losses or generate profits, and did not engage in any

meaningful financial management with respect to his horse-racing activity).
                                        - 35 -

[*35] b.     The expertise of the taxpayer or his advisors

      Preparation for an activity by extensive study of its accepted business,

economic, and scientific practices, or consultation with industry experts, may

indicate a profit motive where the taxpayer carries on the activity in accordance

with such practices. Engdahl v. Commissioner, 72 T.C. 659, 668 (1979); sec.

1.183-2(b)(2), Income Tax Regs. Efforts to gain experience and a willingness to

follow expert advice may also indicate a profit motive. Dworshak v.

Commissioner, T.C. Memo. 2004-249, slip op. at 10-11.

      Boneparte testified that he spent time with a friend who also gambled

frequently. He testified that this friend helped him learn about gambling but that

they also “went [all] over and partied”. Boneparte also testified that he purchased

books and videos on how to win playing slot machines and baccarat.

      Boneparte’s testimony is credible. However, the mere fact that Boneparte

tried to learn how to win at slot machines and baccarat does not necessarily

suggest that he played these games in order to make a profit. It is also consistent

with playing the games for recreation or, alternatively, trying to limit his losses.

We are not persuaded that Boneparte’s consultations with his friend or his buying

books and videos showed that he intended to have net gains. This factor weighs

against Boneparte.
                                         - 36 -

[*36] c.     The time and effort expended by the taxpayer in carrying on the
             activity

       The time and effort devoted to an activity may indicate a profit motive,

particularly if the activity does not include substantial recreational aspects. Sec.

1.183-2(b)(3), Income Tax Regs. A taxpayer’s withdrawal from another

occupation to devote most of his or her energies to the activity may be evidence

that the activity is engaged in for profit. Id.

       Boneparte’s primary activity was working full-time as a “tunnel bridge

agent” with the Port Authority. Although he gambled frequently, he gambled only

in his spare time. Furthermore, he derived a recreational benefit from his

gambling activity. This is why he continued to gamble despite the lack of profit.

This factor weighs against Boneparte.

       d.    Expectation that assets used in activity may appreciate in value

       This factor is neutral and is not applicable in this case, as Boneparte’s

gambling does not involve holding assets.

       e.    The success of the taxpayer in carrying on other similar or dissimilar
             activities

       Previous experience in similar activities and successful conversion of

unprofitable to profitable enterprises may indicate a profit motive. Id. subpara.

(5).
                                        - 37 -

[*37] Boneparte has no history of success with business activities besides

working as a “tunnel bridge agent”. Working as a tunnel bridge agent is not

necessarily helpful in preparing someone for a successful career as a gambler.

This factor weighs against Boneparte.

      f.     The taxpayer’s history of income or losses with respect to the activity

      A series of years of net income would be a strong indication that the activity

is engaged in for profit. Id. subpara. (6). Year after year of losses, however, may

indicate a lack of profit motive. Id.

      Boneparte has a history of gambling losses. Nothing in the record indicates

that he has ever profited from gambling. Boneparte did not make a profit in 2009,

2010, 2011, 2012, or 2013. He had net wagering losses of $14,887 in 2012 and

$12,609 in 2013. Boneparte’s history of sustained losses is indicative of a lack of

profit objective. This factor weighs against Boneparte.

      g.     The amount of occasional profits, if any, which are earned

      The amount of profits earned in relation to the amount of losses incurred

and the amount of the investment may indicate a profit motive. Id. subpara. (7).

Earning of substantial profits, even if the profits are sporadic, generally indicates a

profit motive if the taxpayer’s investment or losses are relatively small. Id. The

mere opportunity to earn a substantial profit may also indicate a profit motive. Id.
                                        - 38 -

[*38] In contrast, an occasional small profit generally indicates a lack of profit

motive if the taxpayer’s investment or losses are relatively large. Id.

      The record shows Boneparte lost money gambling over several years and

did not earn even sporadic profits. This factor weighs against Boneparte.

      h.     The financial status of the taxpayer

      Having substantial income from other sources may indicate that the activity

in question is not engaged in for profit, especially where losses from the activity

generate substantial tax benefits or where there are recreational elements involved.

Id. subpara. (8).

      Boneparte earned $78,000 as an employee of the Port Authority during

2012, and $82,000 as an employee of the Port Authority during 2013. This is

substantial income from another source. If he is permitted to deduct his gambling-

related expenses from his Port Authority income, his taxable income will be

significantly reduced. The combined recreational nature of gambling and the

substantial tax benefit he would gain from being permitted to deduct his gambling-

related expenses weigh against a profit motive. See Moore v. Commissioner, T.C.

Memo. 2011-173 (holding that taxpayer’s financial status did not indicate profit

motive when he derived bulk of income from employment outside of gambling).

This factor weighs against Boneparte.
                                       - 39 -

[*39] i.     Elements of personal pleasure or recreation

      The presence of personal or recreational elements in an activity may

indicate the absence of a profit motive. Sec. 1.183-2(b)(9), Income Tax Regs.

The mere presence of a personal or recreational aspect, however, does not

necessarily preclude a profit motive. Id.

      Boneparte’s gambling involved elements of personal pleasure and

recreation. He testified that he traveled and “partied” with a friend in conjunction

with his gambling. This factor weighs against Boneparte.

      j.     Conclusion: Weighing the factors

      None of the factors weighs in favor of the finding of a profit motive, and all

relevant factors weigh against the finding of a profit motive. We conclude on a

preponderance of evidence that Boneparte did not engage in his gambling activity

for profit. This conclusion, combined with the conclusions in other portions of

this opinion, means that Boneparte cannot deduct his nonwagering expenses of

gambling. More specifically, for 2012:

      !      Boneparte’s gross income from gambling is $18,000. See supra p. 23.

      !      Boneparte is entitled to a section 165(d) deduction of $18,000. See

             infra part 2.
                                       - 40 -

[*40] !    Boneparte’s section 183(b)(1) deduction is $18,000, identical to his

           section 165(d) deduction.

     !     Therefore, his section 183(b)(2) deduction is limited to the gross

           income derived from gambling, $18,000, minus the section 183(b)(1)

           deduction, $18,000, which is zero.

     !     No further deduction for gambling expenses is allowed. See sec.

           183(a).

And for 2013:

     !     Boneparte’s gross income from gambling is $12,500. See supra pp.

           26-27.

     !     Boneparte is entitled to a section 165(d) deduction of $12,500. See

           supra pp. 26-27.

     !     Boneparte’s section 183(b)(1) deduction is $12,500, identical to his

           section 165(d) deduction.

     !     Therefore, his section 183(b)(2) deduction is limited to the gross

           income derived from gambling, $12,500, minus the section 183(b)(1)

           deduction, $12,500, which is zero.

     !     No further deduction for gambling expenses is allowed. See sec.

           183(a).
                                       - 41 -

[*41] 2.    Boneparte is entitled to an $18,000 wagering-loss deduction for
            2012.6

      A taxpayer who is not in the trade or business of gambling deducts losses

from wagering transactions as an itemized deduction, but only to the extent of

gains from wagering transactions. Sec. 165(d); sec. 1.165-10, Income Tax Regs.;

see also Norgaard v. Commissioner, 939 F.2d 874, 878 (9th Cir. 1991), aff’g in

part, rev’g in part on other grounds T.C. Memo. 1989-390; Briseno v.

Commissioner, T.C. Memo. 2009-67.

      On his 2012 tax return, Boneparte reported losses from wagering

transactions of $18,000 as an itemized deduction on his Schedule A and gains

from wagering transactions of $18,000 on line 21 of his Form 1040. The IRS’s

position is that Boneparte should include the $18,000 of gains in his gross income,

but that the itemized deduction should be only $12,839.

      Recall that the record contains statements from 14 casinos regarding

Boneparte’s wagering activity for the year 2012. We found that the statements

showed an aggregate loss from wagering activity for the year of $14,887. We

rejected the IRS’s interpretation of one of the statements, under which the


      6
       We need not determine the correctness of the itemized deduction that
Boneparte claimed for losses from wagering transactions for 2013 because the IRS
did not disallow the deduction for that year.
                                       - 42 -

[*42] aggregate losses would have been $12,839. This is how it arrived at its

position that the itemized deduction should be $12,839.

      In formulating its position that Boneparte’s itemized wagering-loss

deduction for 2012 was only $12,839, the IRS relied entirely on the statements

from the 14 casinos. The IRS does not allege that Boneparte gambled at casinos

other than those 14. Neither does Boneparte. We therefore accept as true the

proposition that the 14 casino statements reflect all of Boneparte’s wagering

activities in 2012. This proposition helps us determine the amount of Boneparte’s

losses from wagering transactions.

      Boneparte’s wagering transactions for the year fall into two groups: those

for which there was a gain and those for which there was a loss. As we explained

at the beginning of the opinion, a casual gambler’s gross income includes the

gains from wagering transactions for which there was a gain. This amount is also

the gain from wagering transactions within the meaning of section 165(d). The

parties have agreed that the correct inclusion in Boneparte’s gross income is

$18,000. This is the amount Boneparte reported on his return, and the IRS did not

adjust it. Thus, the parties have agreed that Boneparte’s gains from his wagering

transactions for which there were gains for 2012 equal $18,000. The 14 casino

statements include the amounts of both (1) gains from wagering transactions for
                                       - 43 -

[*43] which there was a gain and (2) losses from wagering transactions for which

there was a loss. Therefore the aggregate loss from all 14 statements, -$14,887,

equals the gains from wagering transactions for which there is a gain minus the

losses from wagering transactions for which there was a loss. It is not, as the IRS

assumes, just the losses from wagering transactions for which there was a loss.

      As explained above, two propositions are true: (1) the gains from wagering

transactions for which there was gain total $18,000, and (2) the gains from

wagering transactions for which there was a gain minus the losses from wagering

transactions for which there was a loss equal -$14,887. It mathematically follows

from these two propositions that the losses from wagering transactions for which

there is a loss equal -$32,887 (i.e., $18,000 ! $32,887 = -$14,887). Boneparte is

entitled to a section 165(d) deduction equal to this amount to the extent of gains

from wagering transactions. This gain is $18,000. Therefore his section 165(d)

deduction is $18,000.

      We hold that Boneparte is entitled to a Schedule A deduction of $18,000 for

wagering losses for the 2012 year.

3.    Is Boneparte entitled to a deduction of $3,592 for real-estate taxes for 2012?

      Boneparte claimed a deduction of $3,592 for real-estate taxes for the 2012

tax year. The IRS disallowed this deduction in the notice of deficiency for the
                                         - 44 -

[*44] 2012 tax year. On brief, the IRS contends that Boneparte failed to

substantiate these expenses. Boneparte did not address these expenses at trial or in

his opening posttrial brief. In his answering posttrial brief, Boneparte finally said

this about the expenses:

      Schedule a deduction for real estate taxes, $3,592. Superstorm Sandy
      destroyed a lot of my actual receipts as they became water-logged. I
      also informed Respondent that my younger sister married and moved
      from South Carolina to Arkansas. I paid her $900 a month for the
      mortgage and $1200 in property tax for six months while she
      relocated and found new employment. I dropped the real estate tax
      and will charge it as N.O.L. later.

We understand the above statement to be a concession by Boneparte that he is not

entitled to the deduction. Accordingly, we sustain the IRS’s determination that

Boneparte is not entitled to a deduction in any amount for real-estate taxes for the

2012 tax year.

4.    Is Boneparte liable for an addition to tax under section 6651(a)(1) for 2012?

      The IRS determined that Boneparte is liable for the section 6651(a)(1)

addition to tax for the 2012 tax year. Section 6651(a)(1) imposes an addition to

tax for failure to file a tax return by its filing deadline (determined by taking into

account any extensions of that deadline) unless the taxpayer can establish that the

failure to file is due to reasonable cause and not due to willful neglect. The

section 6651(a)(1) addition to tax is 5% of the amount required to be shown as tax
                                         - 45 -

[*45] on the return for each month the failure to file continues, not to exceed 25%

in the aggregate. Sec. 6651(a)(1), (b)(1). The IRS determined an addition to tax

corresponding to Boneparte’s return being more than one month late. Therefore it

determined that he is liable for an amount equal to 5% of the amount required to

be shown as tax for the failure to file the return by April 15, 2013, and another 5%

for the failure to file the return by May 15, 2013.

      The IRS bears the burden of production for additions to tax determined

under section 6651(a)(1). See sec. 7491(c); Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001). The IRS satisfies its burden by producing sufficient

evidence to establish that the taxpayer failed to timely file a required federal-

income-tax return. See Wheeler v. Commissioner, 127 T.C. 200, 207-208 (2006),

aff’d, 521 F.3d 1289 (10th Cir. 2008); Higbee v. Commissioner, 116 T.C. at 447.

Once the IRS has satisfied its burden of production, the taxpayer has the burden of

proving that the return was not late, or if it was filed late, that the lateness was due

to reasonable cause and not willful neglect. See Higbee v. Commissioner, 116

T.C. at 447.

      Boneparte’s tax return for 2012 was due on April 15, 2013. See sec.

6072(a). The IRS produced the envelope that Boneparte used to mail the return.

The date on the envelope was June 7, 2013. The IRS also produced the return
                                       - 46 -

[*46] itself from its files. The face of the return has an IRS received stamp of June

7, 2013. Boneparte did not testify as to when he filed the return. Boneparte

argues on brief that he had an incentive to file his 2012 return on time: He wanted

to obtain a tax refund. He also argues on brief that an IRS date stamp is

“unacceptable” proof of the date he mailed the return.

      We hold that the date on the return’s envelope and the IRS’s date stamp

satisfy the IRS’s burden of producing evidence that Boneparte mailed his return

late. And we find Boneparte has not proven the return was timely.7 We sustain

the addition to tax under section 6651(a)(1).

5.    Is Boneparte liable for an accuracy-related penalty under section 6662(a) for
      2012?

      The IRS determined that Boneparte is liable for the section 6662(a)

accuracy-related penalty for the 2012 tax year. Section 6662(a) imposes a 20%

penalty on any portion of an underpayment of tax that is attributable to any of the

causes listed in section 6662(b). These causes include “[a]ny substantial

      7
        We have no ready explanation for how the return could be mailed by
Boneparte on the same day it was received by the IRS. Boneparte mailed the
return from New Jersey. It arrived at an IRS office in Kansas City, Missouri. It is
unlikely that the return could be sent and received the same day. This suggests
some error in either the date on the envelope or the IRS’s date stamp. However,
this suggestion does not cause us to find that Boneparte’s return was filed on or
before May 15, 2013. This is what he has to prove to show that the IRS’s penalty
computation is incorrect.
                                         - 47 -

[*47] understatement of income tax” and “[n]egligence or disregard of rules or

regulations”. Sec. 6662(b)(1) and (2).

      In general, an understatement of income tax is the correct amount of tax

minus the tax actually shown on the return. Sec. 6662(d)(2)(A). An

understatement of income tax is substantial if (1) the understatement exceeds 10%

of the correct tax and (2) the understatement exceeds $5,000. Sec. 6662(d)(1)(A);

sec. 1.6662-4(b)(1), Income Tax Regs. An understatement is reduced, however,

by the portion attributable to the treatment of an item for which the taxpayer had

“substantial authority”. Sec. 6662(d)(2)(B)(i).

      Computations by the parties under Rule 155 will confirm whether there was

a substantial understatement of income tax on Boneparte’s 2012 return. Boneparte

does not argue he had “substantial authority” for any part of the understatement.

Nor are we aware any of substantial authority for any part of the understatement.

So no reduction will be made for the “substantial authority” exception.

      Regardless of whether Boneparte’s underpayment for the 2012 tax year is

due to a substantial understatement of income tax, we hold that it is due to

negligence. Negligence includes any failure to make a reasonable attempt to

comply with the tax laws. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

Negligence is strongly indicated where a taxpayer fails to make a reasonable
                                        - 48 -

[*48] attempt to determine the correctness of a deduction, credit, or exclusion that

would seem to a reasonable person to be “too good to be true”. Sec. 1.6662-

3(b)(1)(ii), Income Tax Regs. Negligence also includes a failure to maintain

accurate records or to substantiate items properly. Sec. 1.6662-3(b)(1), Income

Tax Regs. Boneparte was not, in our view, a professional gambler. Many factors

point to the fact that he was not one. Boneparte’s trips to Atlantic City were

therefore personal trips. The expenses of these trips were personal expenses. He

should have realized it was too good to be true that he could avoid taxation on his

Port Authority wages by making pleasure trips to Atlantic City. Furthermore, he

failed to provide any evidence to substantiate his real-estate-tax payments.

      Once the IRS has met its burden of producing evidence that a taxpayer is

liable for a penalty, the taxpayer bears the burden of proving that the penalty is

inappropriate because, for example, the taxpayer acted with reasonable cause and

in good faith. Sec. 6664(c)(1) (providing that the penalty under section 6662(a)

does not apply to any portion of the underpayment to the extent that the taxpayer

had reasonable cause for that portion of the underpayment, and acted in good faith

with respect to that portion); Higbee v. Commissioner, 116 T.C. at 447. The

existence of reasonable cause and good faith is determined on a case-by-case
                                        - 49 -

[*49] basis, taking into account all pertinent facts and circumstances. Sec. 1.6664-

4(b)(1), Income Tax Regs. The regulations provide the following guidance:

      Generally, the most important factor is the extent of the taxpayer’s
      effort to assess the taxpayer’s proper tax liability. Circumstances that
      may indicate reasonable cause and good faith include an honest
      misunderstanding of fact or law that is reasonable in light of all facts
      and circumstances, including the experience, knowledge, and
      education of the taxpayer.

Id. Boneparte does not assert that he had reasonable cause for the underpayment

or that he acted in good faith with respect the underpayment. He did not hire a

tax-return preparer to prepare his 2012 tax return. He testified that he made the

decision to file his returns as a professional gambler starting with the 2009 tax

year. However, he did not explain what steps he took to ascertain that this

reporting treatment was correct under the tax law. Nor is there evidence of how he

arrived at his decision to deduct real-estate taxes on the 2012 return. We conclude

that Boneparte did not have reasonable cause for the underpayment and did not act

in good faith with respect the underpayment.

      We hold that Boneparte is liable for the accuracy-related penalty under

section 6662(a) for 2012.
                                       - 50 -

[*50] In reaching our holdings, we have considered all arguments made, and, to

the extent not mentioned, we conclude that they are moot, irrelevant, or without

merit.

         To reflect the foregoing,


                                                Decision will be entered under

                                      Rule 155.
