                          T.C. Memo. 2008-146



                     UNITED STATES TAX COURT



         MICHAEL N. AND BARBARA J. MERKIN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 766-06.                   Filed June 5, 2008.



     Neil L. Prupis, for petitioners.

     Elizabeth S. Martini, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOLDBERG, Special Trial Judge:     Respondent determined a

deficiency of $21,150 in petitioners’ Federal income tax for 2003

and an accuracy-related penalty of $4,300 under section 6662(a).1


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the taxable year
in issue, and all Rule references are to the Tax Court Rules of
                                                   (continued...)
                                - 2 -

The issues for decision are whether petitioner husband was

engaged in the trade or business of gambling during 2003 and

whether petitioners are liable for an accuracy-related penalty

under section 6662(a).

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    At the time the petition

was filed, petitioners resided in New York, New York.

     During the taxable year in issue petitioner husband (Dr.

Merkin) was self-employed as a psychiatrist.    His medical

practice is located on Park Avenue in New York City.      Dr. Merkin

has been engaged in private practice as a psychiatrist since

1972.    Petitioner wife (Mrs. Merkin) is, according to

petitioners’ tax return, an investor.

     Petitioners’ primary residence is located on West 13th

Street in New York City.    Petitioners own a secondary residence

in Guilford, Connecticut.

     In 1999, when Dr. Merkin was 59 years old he began to ponder

new ways whereby he could augment his income in retirement.

Motivated by his preexisting interest in gambling and in

particular the card game of poker, Dr. Merkin began reading up on



     1
      (...continued)
Practice and Procedure.
                                - 3 -

betting games and attending card game conventions.    At these

conventions Dr. Merkin played poker and video slot machine games

and purchased literature and other materials concerning casino

games and odds-making.

       Dr. Merkin became particularly fascinated with video poker.

Unlike table poker, where a dealer deals a set of cards to a

player or group of players, in video poker a machine deals a hand

of five cards to a single player, and the player sees on the

machine’s screen--according to the cards he or she is dealt--the

odds and subsequent payout amounts for possible final card

combinations (such as a full house, straight suit, or flush suit

of cards).    During the latter half of 1999 Dr. Merkin decided to

play video poker exclusively because he believed that it was a

type of casino game where knowledge of mathematical

probabilities--a knowledge he honed into his system--could

improve his odds of winning video poker jackpots.

       Although Dr. Merkin frequented several casinos and gaming

establishments during the year in issue, he spent most of his

time playing video poker at the Mohegan Sun Casino (Mohegan Sun)

in Uncasvile, Connecticut.    Mohegan Sun is approximately 40 miles

from the petitioners’ secondary residence in Guilford,

Connecticut.

       Dr. Merkin had a definitive routine when gambling at Mohegan

Sun.    First, upon arrival at the casino Dr. Merkin would scout
                               - 4 -

the various video poker machines located throughout the facility

in order to find a machine that was paying out the highest

jackpot amounts according to bets placed.   Dr. Merkin would then

select a video poker machine to play by inserting a Mohegan Sun

“Player’s Club” card--similar to a credit card--into a slot on

the machine.   Dr. Merkin relied upon the card to record the

length of time that he played the machine and his betting

history.   The card would also record his winnings and losses.

When Dr. Merkin hit a jackpot on the machine, the card would

record the jackpot and freeze both his card activity and the

machine itself until a member of the Connecticut Board of Gaming

could inspect the machine for signs of illegal tampering and/or

software irregularities.

     Each time that Dr. Merkin would use his Player’s Club card

in a gaming machine he would accrue Player’s Club points.    These

points were awarded at the rate of one point per dollar spent and

according to the length of play.    Points were accruable and

could be traded in at the casino for food, beverages,

accommodations, travel, and other prizes.   The points had no cash

value and were not awarded in addition to winning a video poker

jackpot.

     Mohegan Sun issued Dr. Merkin a Form W-2G, Certain Gambling

Winnings, for 2003 reflecting gross winnings of $691,575.
                                - 5 -

Petitioners timely filed their 2003 income tax return.    They

reported total income of $228,157, consisting of the following

items:   (1) Wage income of $57,187; (2) taxable interest of $18;

(3) taxable State income tax refund of $537; and (4) business

income of $170,415.

     Petitioners attached two Schedules C, Profit or Loss From

Business, to their 2003 return.    The first pertained to Dr.

Merkin’s private medical practice and reported gross receipts of

$238,500 and deductions of $49,411 for a net Schedule C gain of

$189,089.   The second pertained to Dr. Merkin’s activity as a

professional gambler and reported gross gambling receipts of

$691,575 and claimed a deduction of $710,249 of gambling losses,

for a net Schedule C loss of $18,674.    Thus, after combining the

figures listed on both Schedule C forms, petitioners’ net

business income reported was $170,415.

     In arriving at their adjusted gross income petitioners

deducted $6,328 from their total income.    Petitioners claimed

itemized deductions of $82,120 and personal exemptions of

$10,736, resulting in taxable income of $128,973 and a total tax

of $37,719 after including the alternative minimum tax and self-

employment tax.

     On October 11, 2005, respondent issued petitioners a notice

of deficiency.    Respondent determined that Dr. Merkin was not

engaged in the trade or business of gambling during 2003 and
                               - 6 -

therefore could not deduct his gambling losses on petitioners’

Schedule C.   Instead, respondent determined that petitioners had

to report Dr. Merkin’s gambling winnings in total income and

could deduct the gambling losses on a Schedule A, Itemized

Deductions, but only to the extent of Dr. Merkin’s gambling

winnings.   On the basis of the foregoing, respondent determined

that the amount of tax required to be shown on petitioners’ 2003

return was $59,220.   Petitioners reported tax due of $37,719 on

their return, resulting in a deficiency of $21,501.   Respondent

also determined petitioners were liable for an accuracy-related

penalty under section 6662(a) of $4,300.

                              OPINION

Burden of Proof

     Taxpayers generally bear the burden of proving that the

Commissioner’s determinations are incorrect.   Rule 142(a).

However, section 7491(a) may in specific circumstances place the

burden on the Commissioner with regard to any factual issue

relating to the taxpayers’ liability for tax if the taxpayers

produce credible evidence with respect to that issue and meet the

requirements found in section 7491(a)(2).   The taxpayers bear the

burden of proving that they have met the requirements of section

7491(a)(2).   Miner v. Commissioner, T.C. Memo. 2003-39; Nichols

v. Commissioner, T.C. Memo. 2003-24, affd. 79 Fed. Appx. 282 (9th

Cir. 2003).   Although neither party has directly raised section
                               - 7 -

7491(a) as an issue, on our review of the entire record, and for

the reasons discussed infra, we conclude that petitioners have

neither complied with all substantiation requirements of the Code

nor maintained all required records.    See secs. 6001, 7491(a)(2).

Consequently, the burden of proof respecting factual issues

relevant to their liability for the deficiency in their tax

remains on them.

Tax Treatment of Gambling Losses

     Section 61(a) defines gross income to mean all income from

whatever source derived.   Gambling winnings are includable in

gross income.   Paul v. Commissioner, T.C. Memo. 1992-582.

     Section 162(a) allows deductions for all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.     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.   If his gambling activity did not constitute a

trade or business, his gambling losses to the extent of his
                                - 8 -

winnings would be deductible as an itemized deduction on

petitioners’ Schedule A, in arriving at taxable income.2    Sec.

63(a).

     Irrespective of whether the activity constituted a trade or

business, section 165(d) provides that “Losses from wagering

transactions shall be allowed only to the extent of the gains

from such transactions.”    See also sec. 1.165-10, Income Tax

Regs.

     Respondent determined that Dr. Merkin was not in the trade

or business of gambling during 2003 and thus could not claim his

gambling losses as a Schedule C deduction on petitioners’ 2003

return.    Petitioners argue that Dr. Merkin was in the trade or

business of gambling because he pursued the activity in good

faith, with regularity, and for the production of income.

     To be engaged in a trade or business within the meaning of

section 162(a), an individual taxpayer must be involved in the

activity with continuity, regularity, and with the primary

purpose of deriving a profit.    Commissioner v. Groetzinger, 480

U.S. 23, 35 (1987).    Whether the taxpayer is carrying on a trade

or business requires an examination of all of the facts in each

case.    Id. at 36.



     2
       The shift from Schedule C to Schedule A lowers the ceiling
imposed by sec. 68 on itemized deductions (other than the
deduction for the gambling loss itself). See Calvao v.
Commissioner, T.C. Memo. 2007-57 n.6.
                               - 9 -

     Although a reasonable expectation of a profit is not

required, the taxpayer’s profit objective must be actual and

honest.   Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982),

affd. without published opinion 702 F.2d 1205 (D.C. Cir. 1983);

sec. 1.183-2(a), Income Tax Regs.   Whether a taxpayer has an

actual and honest profit objective is a question of fact to be

answered from all of the relevant facts and circumstances.

Hastings v. Commissioner, T.C. Memo. 2002-310; sec. 1.183-2(a),

Income Tax Regs.

     The pertinent regulations set forth a nonexhaustive list of

factors that may be considered in deciding whether a profit

objective exists.   These factors include:   (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) the elements of personal pleasure or

recreation.   Golanty v. Commissioner, 72 T.C. 411, 426 (1979),

affd. without published opinion 647 F.2d 170 (9th Cir. 1981);

sec. 1.183-2(b), Income Tax Regs.   No single factor or group of
                              - 10 -

factors is determinative.   Golanty v. Commissioner, supra at 426.

A final determination is made only after a consideration of all

of the relevant facts and circumstances.

     Petitioners argue that we should hold that Dr. Merkin was

engaged in the trade or business of gambling in 2003 and

accordingly that petitioners are entitled to claim a loss

attributable to this activity on their 2003 Schedule C.    After

consideration of the facts contained in the record, and for the

reasons discussed infra, we disagree.

     Dr. Merkin did not carry on his gambling activity in a

businesslike manner.   See sec. 1.183-2(b)(1), Income Tax Regs.

He did not maintain any receipts, books, or records but instead

relied solely upon Mohegan Sun to track all of his playing time,

betting history, wins, and losses on his Player’s Club card.

Petitioners argue that it would have been too onerous for Dr.

Merkin to have kept receipts, books, or records of his time spent

at the casino and the amounts of his bets.   See sec. 6001

(pertaining to the requirement for a taxpayer to keep records).

Dr. Merkin also testified that he did not maintain such records

because he assumed that Mohegan Sun was doing that for him.    He

also admitted, however, that the Player’s Club card did not

always record his activity, since the record of hours spent

playing video poker shown on his Player’s Club statement for 2003

did not comport with his estimate of the actual amount of time he
                               - 11 -

spent playing video poker during the year in issue.    Although the

Court has acknowledged and accepted a taxpayer’s reliance on a

Player’s Club card statement as a record of his winnings and

losses, we have not accepted the argument that where a card

statement does not show all of the taxpayer’s activity (i.e., is

an incomplete statement), the taxpayer is thereby excused from

providing other evidence of his winnings and losses.   See

Hardwick v. Commissioner, T.C. Memo. 2007-359; Lutz v.

Commissioner, T.C. Memo. 2002-89.

     Petitioners were misguided to assume that Dr. Merkin’s

Players Club card would keep a complete business record of his

activities at a casino and that this record would absolve them of

the duty to maintain business records.   See sec. 6001.     It is the

taxpayer’s duty, and not that of the casino, to maintain such

records.   Sec. 6001.   In short, his lack of records and

accountability for his activities illustrates to us that Dr.

Merkin did not carry on his video poker playing in a businesslike

manner.

     To further illustrate this point, although Dr. Merkin

testified that he spent 47 out of 52 weekends during 2003 playing

video poker at Mohegan Sun for at least 24 hours per weekend (for

a total of approximately 1,128 hours), he did not provide any

credible evidence to corroborate this testimony.   In fact, the

only credible evidence in the record with respect to Dr. Merkin’s
                               - 12 -

time spent playing video poker in 2003 was a Player’s Club

statement generated by Mohegan Sun and provided by petitioners at

trial.    This statement shows that Dr. Merkin spent 19,140 minutes

or 319 hours (19,140/60) playing video poker at Mohegan Sun in

2003.    We do not believe that Dr. Merkin spent 1,128 hours at

Mohegan Sun solely on the basis of his testimony to that effect

and in the absence of any receipts or records aside from a

noncontemporaneous calendar of time spent at the casino that

petitioners produced in anticipation of trial.    Moreover, Dr.

Merkin admitted that it was a mistake on his part to have relied

on the Player’s Club card to record all of his time spent playing

video poker.    We note that if petitioners were as concerned with

the amount of Player’s Club points that Dr. Merkin was earning

from his playing as he represented in his argument, he would

likely have checked the balance of points and time played on his

Player’s Club card before the end of 2003.    Then, if a

discrepancy existed between the casino’s record and Dr. Merkin’s

estimate of hours spent playing video poker at the casino, he

could have resolved the issue and obtained an accurate accounting

of his time spent playing video poker at the casino during the

year in issue.    He failed to do this.

     We infer that Dr. Merkin’s testimony that he spent

approximately 1,128 hours playing video poker during 2003

represented petitioners’ attempt to equate the amount of time Dr.
                              - 13 -

Merkin spent practicing medicine with the amount of time he spent

playing video poker.   Dr. Merkin did not testify as to the amount

of time he spent engaged in his medical practice in 2003, and for

the aforementioned reasons we do not find his testimony and his

calendar of the time purportedly spent at Mohegan Sun in that

year credible.   Accordingly, we cannot make a well-informed

judgment as to how much time Dr. Merkin devoted to each of these

activities during the year in issue.

     Ultimately, and on the basis of the one source of credible

evidence before us--the Player’s Club statement--we believe that

Dr. Merkin spent 319 hours playing video poker at Mohegan Sun in

2003.   Despite Dr. Merkin’s playing time (whether it was 319 or

1,128 hours), he did not testify that he spent any time honing or

adjusting his system when it became clear to him that he was not

on track to make a profit playing video poker in 2003.   See sec.

1.183-2(b)(2) and (3), Income Tax Regs.   Dr. Merkin did testify

that he read video poker magazines and kept abreast of the

machines and their respective payout histories at the casino, but

he did not prove that he used this knowledge to adjust his system

in the light of his overall losses.    We view Dr. Merkin’s failure

to spend any time adjusting and/or improving his system as a

factor weighing against his gambling activity’s being a trade or

business.
                              - 14 -

     Although Dr. Merkin may have read video poker magazines and

spent time on the casino floor scouting various machines, there

is nothing in the record to validate petitioners’ claim that Dr.

Merkin is a renowned poker expert.     See sec. 1.183-2(b)(2),

Income Tax Regs.   Aside from his explanation of how the video

poker game machine works, Dr. Merkin offered no testimony as to

the specifics of his system for increasing the odds of winning

video poker jackpots.   In fact, Dr. Merkin admitted at trial that

he had recently quit playing video poker because his system

simply did not work.

     Petitioners maintain that Dr. Merkin played video poker with

an honest intent to make a profit and that he did in fact make a

profit, if not always through his gambling winnings, then through

the many Player’s Club points that he accrued while playing video

poker at Mohegan Sun.   See sec. 1.183-2(b)(7), Income Tax Regs.

     To be sure, petitioners argue at length that the added

element of the Player’s Club points distinguishes their case from

other cases involving gambling losses because the large number of

Player’s Club points that Dr. Merkin earned and redeemed in 2003

illustrates that his activity was not only entered into for

profit but was, in fact, profitable.     We disagree.

     Petitioners filed Schedules C for Dr. Merkin’s gambling

activities for all of the 4 taxable years preceding the year in

issue.   Petitioners reported a total of $105,326 in gambling
                                - 15 -

losses for those years and reported a gambling loss of $18,674

for 2003.   Despite those losses, Dr. Merkin maintains that his

activities were profitable because he redeemed hundreds of

thousands of his accrued Player’s Club points for items such as

airfare, travel, and automobiles throughout the years, including

2003.

     Petitioners have maintained throughout their case that Dr.

Merkin’s earning hundreds of thousands of Player’s Club points

was, in fact, profit to them and that the value of the points

should be included in the amount of profit generated by Dr.

Merkin’s gambling activities.    It is petitioners’ position that

if we include the value of these points as profit, we will see

not only that Dr. Merkin’s gambling activity was indeed

profitable, but also that Dr. Merkin continued to engage in the

gambling because of an actual profit objective as evidenced by

the value of the Player’s Club points.   We disagree.

     We fail to see how Dr. Merkin’s earning Player’s Club points

supports petitioners’ contention that his gambling activity was

engaged in with an actual and honest profit objective.    Dr.

Merkin’s Player’s Club points were based on his dollar amounts

bet and length of play.   While there is no accounting of the

points Dr. Merkin earned and redeemed for 2003 and there is

nothing in the record showing the items for which he redeemed the

points for 2003, such evidence would do nothing more than show
                              - 16 -

what “prizes” Dr. Merkin received in exchange for his total

wagering at Mohegan Sun in 2003.   That is, if petitioners

received airfare, accommodations, and/or trips from the Player’s

Club program, they did so because of the amount of money that Dr.

Merkin was spending at the casino.     The items he earned through

redemption of his Player’s Club points were items that he

essentially paid for with the amounts that he bet.    Put another

way, if petitioners were to have purchased all of the items they

received through the redemption of their Player’s Club points in

2003, it is highly improbable that the value of those items would

equal the amount of money wagered by Dr. Merkin in 2003.

     Moreover, and with respect to the items for which Dr. Merkin

redeemed his Player’s Club points in 2003, we note that

petitioners failed to report as income the value of any car,

airfare, or travel that they acquired from the casino in 2003.

In Libutti v. Commissioner, T.C. Memo. 1996-108, we held that the

value of such items awarded by a casino to a taxpayer-patron, if

included in his gross income, could be considered a gain from

wagering against which he was allowed to offset his wagering

losses.   However, if Dr. Merkin received any items of that type

in redemption of his Player’s Club points, we could not permit

him to have it both ways; that is, by taking the value of those

items into account to determine whether his gambling activity was

engaged in with the actual intent of making a profit while not
                              - 17 -

including the value of those items in income.   See id.; cf.

Portland Golf Club v. Commissioner, 497 U.S. 154, 168 (1990).

     Petitioners also argue that Dr. Merkin’s substantial income

from his medical practice should have no effect on our

determination with respect to petitioners’ profit objective.    See

Commissioner v. Groetzinger, 480 U.S. 23 (1987).    We disagree.

The facts in the present case differ from those in Groetzinger.

There, the Supreme Court noted that the taxpayer, following the

termination of his 20-year employment in February, spent the

balance of that year--and most of his time--engaged in parimutuel

betting and that the taxpayer looked to that activity and his

winnings from it as his livelihood.    To the contrary, Dr. Merkin

was self-employed as a psychiatrist with a longstanding practice

on Park Avenue in New York City.   Petitioners did not rely on Dr.

Merkin’s winnings to support themselves.   See sec. 1.183-2(b)(8),

Income Tax Regs.   Petitioners had ample disposable income as a

result of Dr. Merkin’s practice to cover the expenses associated

with two residences as well as Dr. Merkin’s spending while at

Mohegan Sun.

     Finally, petitioners have not persuaded us--despite Dr.

Merkin’s testimony about his system and the Player’s Club points-

-that Dr. Merkin, when he played video poker machines programmed

by the casino, had as his primary objective income or profit.      As

Dr. Merkin candidly admitted through his testimony regarding his
                                - 18 -

scouting the various machines, casinos are in the business of

generating revenues.     To be sure, Dr. Merkin’s scouting process

illustrated how casinos manipulate the computer gaming machines

to increase the odds that the house will usually prevail.       As a

result, his system--developed in hopes of beating video poker

machines--ultimately proved ineffective.     Dr. Merkin conceded

this reality when he admitted at trial that his system did not

work.

        Accordingly, in the light of section 1.183-2, Income Tax

Regs., and on the basis of our analysis of the facts of this

case, we hold that Dr. Merkin’s gambling activity in 2003 did not

constitute a trade or business.

Accuracy-Related Penalty Under Section 6662(a)

        Respondent determined that petitioners are liable for an

accuracy-related penalty under section 6662(a) for 2003 of

$4,300.

        Section 6662(a) imposes a penalty in the amount of 20

percent of the portion of the underpayment to which section 6662

applies.     As relevant to this case, the penalty applies to any

portion of the underpayment that is attributable to any

substantial understatement of income tax.     Sec. 6662(b)(2).

There is a “substantial understatement of income tax” if the

amount of the understatement exceeds the greater of 10 percent of
                                - 19 -

the tax required to be shown on the return or $5,000.       Sec.

6662(d)(1).

     Although the Commissioner bears the burden of production

with respect to the penalty, in this case, petitioners failed to

raise the penalty as an issue in their petition, at trial, or on

brief.   See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438,

446-447 (2001).     The issue is thereby deemed conceded.    See Rule

34(b)(4); Swain v. Commissioner, 118 T.C. 358 (2002).

     On the record before us, and for the reasons previously

discussed, we hold that Dr. Merkin’s gambling activity in 2003

did not rise to the level of a trade or business activity as

contemplated by section 162(a).     See also sec. 1.183-2, Income

Tax Regs.     Accordingly, and because petitioners have conceded

respondent’s application of the accuracy-related penalty under

section 6662(a), we find for respondent.

     To reflect our disposition of the issues,


                                            Decision will be entered

                                      for respondent.
