                         T.C. Memo. 2006-205



                       UNITED STATES TAX COURT



         TERRI L. AND AUSTIN W. HARTSOCK, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8950-05.                  Filed September 25, 2006.



     Stuart Levine, for petitioners.1

     Karen Lynne Baker, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined deficiencies in, and

accuracy-related penalties under section 6662(a)2 on, petition-


     1
      Petitioners filed their petition with the Court and ap-
peared at trial pro sese. On Feb. 14, 2006, after the trial in
this case, Stuart Levine entered his appearance.
     2
      All section references are to the Internal Revenue Code
                                                   (continued...)
                                 - 2 -

ers’ Federal income tax (tax), as follows:

                                           Accuracy-Related
         Year        Deficiency                 Penalty
         1999          $87,099                  $17,420
         2000          104,225                   20,845

     The issues remaining for decision are:

     (1) Are petitioners entitled for each of the years at issue

to deduct gambling losses in excess of the deduction allowed by

respondent for each such year?    We hold that they are not.

     (2) Are petitioners liable for each of the years at issue

for the accuracy-related penalty under section 6662(a)?       We hold

that they are.

                        FINDINGS OF FACT

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

     Petitioners, Terri L. Hartsock (Ms. Hartsock) and Austin W.

Hartsock (Mr. Hartsock), resided in Frederick, Maryland, at the

time they filed the petition.

     Around 1994, Mr. Hartsock incorporated his business known as

The Frederick Painting Company.    Since that time, he and Ms.

Hartsock have been employed by that company.

     During the years at issue, petitioners did not have a

mortgage loan with respect to their residence and therefore did

not have any mortgage loan expenses.     Nor did petitioners have


     2
      (...continued)
(Code) in effect for the years at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
                               - 3 -

very many other expenses during those years.

     During 1999 and 2000, petitioners made a number of trips to

Atlantic City, New Jersey (Atlantic City), where they, inter

alia, gambled at slot machines at various gambling establish-

ments, including Tropicana, Trump Taj Mahal, Resorts Atlantic

City, and Harrah’s.3   During 1999 and 2000, petitioners did not

maintain the records required by the Code to substantiate any

gambling losses that they incurred during each of those years.

     For 1999, Harrah’s issued to Mr. Hartsock at least three

substitute forms in lieu of Forms W-2G, Certain Gambling Winnings

(Harrah’s substitute 1999 Form W-2G),4 with respect to the fol-

lowing respective dates:   August 13 and 14 and September 4, 1999.

     Harrah’s substitute 1999 Form W-2G issued to Mr. Hartsock

with respect to August 13, 1999, showed, inter alia, the follow-

ing gross winnings of Mr. Hartsock from each of several slot

machines that he played at Harrah’s, the time of such gross

winnings from each such machine, and the minimum amount required

to be wagered in each such machine:




     3
      During 1999, Ms. Hartsock traveled with her parents, and
without Mr. Hartsock, to Atlantic City, where she gambled at at
least one gambling establishment.
     4
      The instructions for Form W-2G, Certain Gambling Winnings,
with respect to 1999 stated in pertinent part: “If the [gam-
bling] winnings (not reduced by the wager) from a * * * slot
machine are $1,200 or more, they are reportable gambling win-
nings.”
                              - 4 -

                                               Minimum Amount
 Gross Winnings   Time of Gross Winning    Required To Be Wagered
     $5,000              9:20 p.m.                   $25
        750              9:30 p.m.                    25
      5,000             10:30 p.m.                    25
      1,750              9:40 p.m.                    25
      3,000             12:00 a.m.                   100
    $15,500

     Harrah’s substitute 1999 Form W-2G issued to Mr. Hartsock

with respect to August 14, 1999, showed, inter alia, the follow-

ing gross winnings of Mr. Hartsock from each of several slot

machines that he played at Harrah’s, the time of such gross

winnings from each such machine, and the minimum amount required

to be wagered in each such machine:

                                               Minimum Amount
 Gross Winnings   Time of Gross Winnings   Required To Be Wagered
     $3,000             10:22 p.m.                  $100
      5,100             10:51 p.m.                    25
      2,000             10:55 p.m.                   100
      2,000             11:15 p.m.                   100
      2,000             12:20 a.m.                   100
     18,000             12:30 a.m.                   100
      2,000             12:50 a.m.                   100
      1,500              1:15 a.m.                   100
    $35,600

     Harrah’s substitute 1999 Form W-2G issued to Mr. Hartsock

with respect to September 4, 1999, showed, inter alia, the

following gross winnings of Mr. Hartsock from each of several

slot machines that he played at Harrah’s, the time of such gross

winnings from each such machine, and the minimum amount required

to be wagered in each such machine:
                              - 5 -

                                               Minimum Amount
 Gross Winnings   Time of Gross Winnings   Required To Be Wagered
      $5,100            10:07 p.m.                   $25
       2,875            11:30 p.m.                    25
       1,200            12:22 a.m.                    25
       4,000            12:55 a.m.                   100
      10,000            12:56 a.m.                   100
      10,000             1:25 a.m.                   100
       2,000             2:00 a.m.                   100
       4,000             2:45 a.m.                   100
       2,000             3:00 a.m.                   100
       2,000             3:20 a.m.                   100
       8,000             3:40 a.m.                   100
     $51,175

     On August 13, 1999, in exchange for cash, Mr. Hartsock

issued three checks totaling $13,000 payable to Marina Associ-

ates, a company that handled the casino credit for Harrah’s.      On

August 14, 1999, in exchange for cash, Mr. Hartsock issued three

checks totaling $12,000 payable to Marina Associates and one

$5,100 check payable to T.T.M.A., a company that handled the

casino credit for Trump Taj Mahal.    (We shall sometimes refer

collectively to the respective checks that Mr. Hartsock issued to

Marina Associates on August 13 and 14, 1999, and to T.T.M.A. on

August 14, 1999, as Mr. Hartsock’s checks.)    Shortly after Mr.

Hartsock issued Mr. Hartsock’s checks to Marina Associates and

T.T.M.A., those organizations presented such checks to Mr.

Hartsock’s bank, Frederick County National Bank, for payment from

funds in his bank account.
                                 - 6 -

     Petitioners timely filed Form 1040, U.S. Individual Income

Tax Return, for each of their taxable years 1999 and 2000 (peti-

tioners’ 1999 return and petitioners’ 2000 return, respectively).

     In petitioners’ 1999 return, petitioners reported the

following income:

                       Income                    Amount
                                                1
         Wages, salaries, tips, etc.             $92,461
         Taxable interest                          2,333
         Ordinary dividends                          701
         Capital gain or (loss)                   76,940
         Rental real estate, royalties,            9,463
           partnerships, S corporations,
           trusts, etc.
                                                2
         Other income                            230,825
                            Total income        $412,723
     1
       Of the $92,461 of total wages reported in petitioners’ 1999
return, The Frederick Painting Company paid $74,911.40 to Mr.
Hartsock and $17,550 to Ms. Hartsock.
     2
       The parties agree that the $230,825 of “Other income”
reported in petitioners’ 1999 return consisted solely of peti-
tioners’ gambling winnings.

     In petitioners’ 1999 return, petitioners claimed itemized

deductions totaling $245,250.     Included in those itemized deduc-

tions was a deduction for $230,825 of claimed gambling losses.

     In petitioners’ 2000 return, petitioners reported the

following income:
                                 - 7 -

                       Income                    Amount
                                                1
         Wages, salaries, tips, etc.             $93,582
         Taxable interest                            152
         Ordinary dividends                           30
                                                 2
         Capital gain or (loss)                   (3,000)
         Rental real estate, royalties,            9,736
           partnerships, S corporations,
           trusts, etc.
                                                3
         Other income                            293,750
                            Total income        $394,250
     1
       Of the $93,582 of total wages reported in petitioners’ 2000
return, The Frederick Painting Company paid $75,381.54 to Mr.
Hartsock and $18,200 to Ms. Hartsock.
     2
       In Schedule D, Capital Gains and Losses, petitioners re-
ported a net short-term capital loss of $283,646 and a net long-
term capital gain of $11.
     3
       The parties agree that the $293,750 of “Other income”
reported in petitioners’ 2000 return consisted solely of peti-
tioners’ gambling winnings.

     In petitioners’ 2000 return, petitioners claimed itemized

deductions totaling $309,580.     Included in those itemized deduc-

tions was a deduction for $293,022 of claimed gambling losses.

     Respondent issued to petitioners a notice of deficiency

(notice) for their taxable years 1999 and 2000.     In that notice,

respondent disallowed the gambling loss deductions of $230,825

and $293,022 that petitioners claimed in petitioners’ 1999 return

and petitioners’ 2000 return, respectively.    In the notice,

respondent also determined that petitioners are liable for each

of their taxable years 1999 and 2000 for the accuracy-related

penalty under section 6662(a) because of section 6662(b)(1).
                                 - 8 -

                                OPINION

Claimed Gambling Losses

     At trial, respondent conceded that petitioners incurred

gambling losses of $76,314 and $55,750 during 1999 and 2000,

respectively, and that they are entitled to deduct such losses

for those respective years.    We must decide whether petitioners

are entitled for each of the years at issue to deduct gambling

losses in excess of the deduction allowed by respondent for each

such year.

     Section 165(d) permits a taxpayer to deduct losses from

wagering transactions to the extent of the winnings from such

transactions.   The taxpayer bears the burden of proving entitle-

ment to such a deduction.     Schooler v. Commissioner, 68 T.C. 867,

869 (1977).   Moreover, deductions are a matter of legislative

grace, and the taxpayer bears the burden of proving entitlement

to any deduction claimed.     INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992).   A taxpayer is required to maintain records

sufficient to establish the amount of any deduction claimed.

Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

     It is petitioners’ position that the burden of proof with

respect to the claimed gambling loss deductions at issue has

shifted to respondent under section 7491(a).    That is because,

according to petitioners, they “introduced credible evidence that
                                - 9 -

they suffered extensive gambling losses in 1999”.5   It is respon-

dent’s position that the burden of proof has not shifted to

respondent under section 7491(a).

       The burden of proof shifts to the Commissioner of Internal

Revenue (Commissioner) with respect to the Commissioner’s deter-

mination of a deficiency if the taxpayer introduces credible

evidence with respect to any factual issue relevant to ascertain-

ing any such deficiency and complies with the requirements of

section 7491(a)(2), including the requirements, inter alia, that

(1) the taxpayer has complied with the requirements of the Code

to substantiate any item, and (2) the taxpayer has maintained all

records required by the Code.    See sec. 7491(a)(1), (2)(A) and

(B).

       On the record before us, we find that petitioners have not

introduced credible evidence within the meaning of section

7491(a) with respect to the respective amounts of their claimed

gambling losses for the years at issue and have not complied with

the requirements of section 7491(a)(2)(A) and (B).    On that

record, we find that the burden of proof has not shifted to



       5
      It is not clear whether petitioners are claiming that the
burden of proof has shifted to respondent under sec. 7491(a) with
respect to their claimed gambling loss deductions for both of
their taxable years 1999 and 2000, or only with respect to the
claimed gambling loss deduction for their taxable year 1999. In
any event, as discussed below, we hold that the burden of proof
has not shifted to respondent under sec. 7491(a) with respect to
either year at issue.
                             - 10 -

respondent under section 7491(a) with respect to the claimed

gambling loss deductions at issue.

     We turn now to whether petitioners are entitled for each of

the years at issue to a gambling loss deduction in excess of the

deduction allowed by respondent for each such year.6   To support

their position that they are entitled to such a greater deduction

for each year at issue, petitioners rely on:   The testimony of

Mr. Hartsock; the respective Harrah’s substitute 1999 Forms W-2G

with respect to August 13 and 14 and September 4, 1999; Mr.

Hartsock’s checks dated August 13, 1999, totaling $13,000 payable

to Marina Associates; Mr. Hartsock’s checks dated August 14,

1999, totaling $12,000 payable to Marina Associates; Mr.

Hartsock’s $5,100 check dated August 14, 1999, payable to

T.T.M.A., and certain documents (workpapers) that petitioners

prepared and that purport to show how petitioners estimated the

respective amounts of money that they gambled and lost in slot

machines at Harrah’s on each of those dates.

     Respondent counters that petitioners have failed to carry

their burden of showing that they are entitled for each of the

years at issue to a gambling loss deduction in excess of the

deduction allowed by respondent for each such year.    On the



     6
      Petitioners acknowledge, as they must, that they are enti-
tled for each of the years at issue to deduct gambling losses
only to the extent of their gambling winnings for each such year.
See sec. 165(d).
                              - 11 -

record before us, we agree with respondent.

     Petitioners’ focus at trial and on brief is on the gambling

losses that they contend they incurred during the years at issue

at Harrah’s.7   Mr. Hartsock testified that petitioners calculated

their claimed gambling losses at Harrah’s by using the minimum

amount required to be wagered in each slot machine that they

played at Harrah’s as shown on the respective Harrah’s substitute

Forms W-2G with respect to August 13 and 14 and September 4,

1999, the respective times of gambling winnings as shown on such

respective forms, and the respective amounts that they estimated

they would have been able to wager within a minute in each such

slot machine that they played at Harrah’s if they had played two

coins at one time.8   In support of Mr. Hartsock’s testimony,



     7
      According to petitioners, “The gambling losses allowed by
the Respondent for both years in question were those incurred at
all of the casinos that the Petitioners gambled in during those
years, except for Harrah’s.”
     8
      As we understand the way in which petitioners calculated
their claimed gambling losses at Harrah’s, petitioners multiplied
the number of minutes between gambling winnings at a $100 slot
machine or a $25 slot machine, as reflected on the respective
Harrah’s substitute Forms W-2G with respect to Aug. 13 and 14 and
Sept. 4, 1999, by the amount that they estimated they would have
been able to wager within a minute in such a $100 slot machine or
such a $25 slot machine if they had played two coins at one time.
Mr. Hartsock testified that he would have been able to wager
within a minute $1,200, “give or take $200”, in a $100 slot
machine and $300 in a $25 slot machine. Mr. Hartsock testified
that petitioners reduced the amount so calculated to reflect that
they would not have been constantly wagering in slot machines
that they were playing because they would have stopped wagering
to light up cigarettes, get drinks, or talk with others.
                              - 12 -

petitioners rely on, inter alia, certain workpapers that they

prepared and that purport to show how they calculated the gam-

bling losses that they contend they incurred at Harrah’s during

1999.

     We have serious reservations about the reliability of the

self-serving and uncorroborated workpapers on which petitioners

rely.9   We also have serious reservations about the reliability


     9
      For example, one of the workpapers that petitioners pre-
pared purports to show their estimate of the gambling losses that
they incurred at Harrah’s on Aug. 13 and 14, 1999. The total
gambling winnings shown on that workpaper for those dates are
different from the total gambling winnings shown (1) on the
respective Harrah’s substitute Forms W-2G with respect to those
dates and (2) on another workpaper that petitioners prepared and
that purports to show the total of petitioners’ gambling winnings
at Harrah’s on Aug. 13 and 14, 1999, as reflected on such respec-
tive forms with respect to Aug. 13 and 14, 1999, as well as other
gambling winnings that petitioners claim they had at Harrah’s on
such dates and that are not reflected on such respective forms.

     Moreover, one of the workpapers that petitioners prepared
purports to show their estimate of the gambling losses that they
incurred at Harrah’s on Sept. 4, 1999. The total gambling
winnings shown on that workpaper for that date are different from
the total gambling winnings shown on (1) Harrah’s substitute Form
W-2G with respect to Sept. 4, 1999, and (2) on another workpaper
that petitioners prepared and that purports to show the total of
petitioners’ gambling winnings at Harrah’s on Sept. 4, 1999, as
reflected on Harrah’s substitute Form W-2G with respect to that
date, as well as other gambling winnings that petitioners claim
they had at Harrah’s on such date and that are not reflected on
such form.

     Another example of the unreliability of petitioners’
workpapers is that one of those workpapers indicates that peti-
tioners estimated that Mr. Hartsock wagered in a $25 slot ma-
chine, and lost before any reduction for time spent not wagering,
$22,800 during what they computed to be a 19-minute period
between 10:22 p.m. and 10:51 p.m. on Aug. 14, 1999. However, the
                                                   (continued...)
                               - 13 -

of the methodology that petitioners contend they used, as re-

flected on such workpapers, to estimate the gambling losses that

they claim they incurred at Harrah’s on August 13 and 14 and

September 4, 1999.10   We are unwilling to rely on Mr. Hartsock’s

self-serving and uncorroborated testimony and the self-serving

and uncorroborated workpapers that petitioners prepared in order

to establish that they incurred gambling losses at Harrah’s on

certain dates during 1999.   Petitioners presented no evidence in


     9
      (...continued)
time interval between 10:22 p.m. and 10:51 p.m. is 29 minutes,
not 19 minutes. Moreover, Mr. Hartsock testified that he would
have been able to wager within a minute only $300 in a $25 slot
machine, or at most $5,700 in a 19-minute period and at most
$8,700 in a 29-minute period.

     An additional example of the unreliability of petitioners’
workpapers is that one of those workpapers indicates that peti-
tioners estimated that Mr. Hartsock wagered in a $100 slot
machine, and lost before any reduction for time spent not wager-
ing, $42,000 during what they computed to be a 35-minute period
between 1:35 a.m. and 2:00 a.m. on Sept. 5, 1999. However, the
time interval between 1:35 a.m. and 2:00 a.m. is 25 minutes, not
35 minutes.
     10
      For example, petitioners have failed to establish that
they gambled during each time interval between gambling winnings
shown on the respective Harrah’s substitute Forms W-2G with
respect to Aug. 13 and 14 and Sept. 4, 1999, at the same slot
machine from which they received gambling winnings at the end of
each such time interval, as shown on such forms. Nor have
petitioners persuaded us that they would have been able to wager
within a minute the respective amounts that they claim they
wagered in a $100 slot machine (i.e., $1,200) and a $25 slot
machine (i.e., $300). In addition, petitioners did not provide a
specific and acceptable explanation as to how they calculated the
respective amounts of time that they assert they did not spend
playing slot machines to smoke cigarettes, get drinks, and talk
with others, which time they assert they used to reduce their
claimed gambling losses at Harrah’s.
                              - 14 -

support of their claim that they incurred gambling losses at

Harrah’s during 2000.11

     Based upon our examination of the entire record before us,

we find that petitioners have failed to carry their burden of

establishing that they are entitled for each of the years at

issue to a gambling loss deduction in excess of the deduction

allowed by respondent for each such year.

Accuracy-Related Penalty

     Respondent determined that petitioners are liable for each

of the years at issue for the accuracy-related penalty under

section 6662(a) because of negligence or disregard of rules or

regulations under section 6662(b)(1).

     The term “negligence” in section 6662(b)(1) includes any

failure to make a reasonable attempt to comply with the Code.

Sec. 6662(c).   Negligence has also been defined as a failure to

do what a reasonable person would do under the circumstances.



     11
      Assuming arguendo that petitioners had carried their
burden of proof with respect to their claim that they had gam-
bling losses for each year at issue in excess of the gambling
losses allowed by respondent for each such year, on the record
before us, we find that petitioners have failed to provide
sufficient evidence on which the Court would be able to make an
estimate of the total amount of gambling losses sustained for
each such year. Cf. Cohan v. Commissioner, 39 F.2d 540, 543-544
(2d Cir. 1930). In this connection, we note that we find the
cases on which petitioners rely here and in which the Court
relied on Cohan to estimate the amount of gambling losses sus-
tained in each such case to be materially distinguishable from
the instant case and their reliance on those cases to be mis-
placed.
                              - 15 -

See Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),

affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C.

686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990).   The term

“disregard” includes any careless, reckless, or intentional

disregard.   Sec. 6662(c).

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.   Sec. 6664(c)(1).   The

determination whether the taxpayer acted with reasonable cause

and in good faith depends upon the pertinent facts and circum-

stances, including the taxpayer’s efforts to assess such tax-

payer’s proper tax liability, the knowledge and experience of the

taxpayer, and the reliance on the advice of a professional, such

as an accountant.   Sec. 1.6664-4(b)(1), Income Tax Regs.

     Respondent has the burden of production under section

7491(c) with respect to the accuracy-related penalty under

section 6662.   To meet that burden, respondent must come forward

with sufficient evidence indicating that it is appropriate to

impose that penalty.   Higbee v. Commissioner, 116 T.C. 438, 446

(2001).   Although respondent bears the burden of production with

respect to the accuracy-related penalty that respondent deter-

mined for petitioners’ taxable years 1999 and 2000, respondent

“need not introduce evidence regarding reasonable cause * * * or
                                - 16 -

similar provisions. * * * the taxpayer bears the burden of proof

with regard to those issues.”    Id.

     In the instant case, petitioners’ underpayment for each of

the years at issue is attributable solely to their claimed

gambling loss deduction for each such year.    Petitioners concede

that they did not keep the records required by the Code to

substantiate each such loss deduction.    Failure to keep adequate

records is evidence not only of negligence, but also of inten-

tional disregard of regulations.    See sec. 1.6662-3(b)(1) and

(2), Income Tax Regs.; see also Magnon v. Commissioner, 73 T.C.

980, 1008 (1980).   On the record before us, we find that respon-

dent has met respondent’s burden of production under section

7491(c).   On that record, we further find that petitioners have

failed to carry their burden of showing that they were not

negligent and did not disregard rules or regulations, or other-

wise did what a reasonable person would do, with respect to the

underpayment for each of the years at issue.

     On the record before us, we also find that petitioners have

failed to carry their burden of showing that there was reasonable

cause for, and that they acted in good faith with respect to, the

underpayment for each of the years at issue.12   See sec.


     12
      On the instant record, we also find that petitioners have
failed to carry their burden of showing that the respective
underpayments for the years at issue are attributable to their
reliance on a professional, such as an accountant. See sec.
                                                   (continued...)
                             - 17 -

6664(c)(1).

     Based upon our examination of the entire record before us,

we find that petitioners have failed to carry their burden of

establishing that they are not liable for each of the years at

issue for the accuracy-related penalty under section 6662(a).

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.

     To reflect the foregoing and the concessions of respondent,


                                   Decision will be entered under

                              Rule 155.




     12
      (...continued)
1.6664-4(b)(1), Income Tax Regs.
