                        T.C. Memo. 2007-57



                      UNITED STATES TAX COURT



                   JOSE CALVAO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7287-05.                 Filed March 8, 2007.



     Timothy J. Burke, for petitioner.

     Luanne S. Di Mauro, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a deficiency in

petitioner’s 2002 Federal income tax of $17,096 and an accuracy-

related penalty under section 6662(a) of $3,419.1   The issues for



     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended. All amounts are rounded
to the nearest dollar.
                               - 2 -

decision are whether petitioner was in the trade or business of

gambling during 2002, and whether petitioner is 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 he filed his

petition, petitioner resided in Tiverton, Rhode Island.

     Prior to 1993, petitioner was an operations manager for a

textile firm called Prim/Dritz Corporation.   In 1993, petitioner

started Caltex Corporation (Caltex), an S corporation.    Caltex is

a textile firm which sells embroidered T-shirts, caps, and other

similar products.

     Sometime before 1999, Caltex hired petitioner’s brother with

the goal that, once petitioner’s brother learned about the

textile business, petitioner could reduce his involvement in

Caltex.   In 1999, petitioner’s brother took over the day-to-day

operations of Caltex.

     During 2002, petitioner was the president and 100-percent

owner of Caltex and worked at Caltex 20 to 25 hours per week

providing “consulting services”.   In 2002, petitioner received a

salary of $42,000 and a distribution of income of $99,790 from

Caltex.
                              - 3 -

     During 2002, petitioner played the slot machines at several

casinos throughout the United States.2   Petitioner spent most of

his time at Foxwoods Resort and Casino in Connecticut, which was

approximately 100 miles from his home.   The casinos issued

petitioner Forms W-2G, Certain Gambling Winnings, for 2002,

reflecting gross winnings of $132,800.   Prior to filing his 2002

Federal income tax return, petitioner prepared a summary of his

gambling activity (the gambling summary).   The gambling summary

reflected that petitioner gambled on 24 separate occasions, won a

total of $132,800, and lost a total of $180,300.

     Petitioner timely filed his 2002 Federal income tax return.3

Petitioner reported the following sources of income: (1) Wage

income from Caltex of $42,000; (2) taxable interest of $7,676;

(3) ordinary dividends of $3,176; (4) taxable State income tax

refund of $3,224; and (5) income from rental real estate, S

corporations, and trusts of $109,403.4   On an attached Schedule

C, Profit or Loss From Business, petitioner reported that his



     2
        Petitioner occasionally played Carribean stud poker, but
the slot machine was his preferred game.
     3
        Petitioner’s return was prepared by Norman R. Beauregard
(Mr. Beauregard), who identified himself on the return as a
certified public accountant. There is nothing else in the record
regarding Mr. Beauregard’s experience or qualifications.
     4
        The income from rental real estate, S corporations, and
trusts included a total rental real estate loss of $6,047, a
passthrough of income from Caltex of $99,790, and trust income of
$15,660.
                                - 4 -

principal business or profession was professional gambling.

Petitioner reported gross receipts of $132,800, cost of goods

sold of $180,300, and deducted $3,150 in travel expenses, for a

net Schedule C loss of $50,650.    After deducting the Schedule C

loss and a net operating loss carryover of $1,106, petitioner

reported total income of $113,723.      Petitioner claimed itemized

deductions of $14,077 and a personal exemption of $3,000,

resulting in taxable income of $96,646 and total tax of $23,303.

     On March 21, 2005, respondent issued petitioner a notice of

deficiency.    Respondent determined petitioner was not engaged in

the trade or business of gambling during 2002 and therefore could

not deduct his gambling losses on Schedule C.     Instead,

respondent determined petitioner could deduct the gambling losses

as an itemized deduction, but only to the extent of his gambling

winnings.5    Based on the above, respondent determined the amount

of tax required to be shown on petitioner’s 2002 return was

$40,399, resulting in a deficiency of $17,096.     Respondent also

determined petitioner was liable for an accuracy-related penalty

under section 6662(a) of $3,419.

     In response to the notice of deficiency, petitioner filed

his petition with this Court on April 18, 2005.



     5
        Respondent also disallowed the claimed personal exemption
deduction because petitioner’s adjusted gross income exceeded the
allowable amount for such a deduction. Petitioner does not
dispute this determination.
                               - 5 -

                              OPINION

I.   Petitioner’s Gambling Activity

     Respondent determined petitioner was not in the trade or

business of gambling during 2002 and thus could not claim his

gambling losses as a Schedule C deduction.    Petitioner argues he

was in the trade or business of gambling because he pursued the

activity full time, in good faith, with regularity, and for the

production of income.6

     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 were engaged in

the trade or business of gambling, losses would be deductible

from gross income in arriving at the adjusted gross income.     See

sec. 62.   However, if the taxpayer were not in the trade or

business of gambling, his losses would be deductible as an

itemized deduction in arriving at taxable income.    See sec.

63(a).   Regardless of whether the gambling activity constituted a

trade or business, section 165(d) provides:    “Losses from

wagering transactions shall be allowed only to the extent of the



     6
        The resolution of this issue does not impact the amount
of the allowable gambling loss deduction. See sec. 165(d).
However, the resolution of this issue does impact the amount of
the deficiency. If the gambling loss deduction were shifted from
Schedule C to Schedule A, Itemized Deductions, it would increase
petitioner’s adjusted gross income, thus limiting under sec. 68
the extent to which itemized deductions other than the gambling
loss are allowable.
                                  - 6 -

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

Tax Regs.   Although petitioner deducted gambling losses exceeding

his gambling winnings by $50,650, petitioner does not dispute

that section 165(d) limits his gambling loss deduction to the

amount of his gambling winnings.

     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 income and 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

the facts in each case.      Id. at 36; Higgins v. Commissioner, 312

U.S. 212, 217 (1941).

     In Groetzinger, the Supreme Court addressed the issue of

whether a taxpayer’s gambling activity was a trade or business

within the meaning of section 162(a).      The taxpayer devoted 60 to

80 hours each week for 48 weeks to parimutuel wagering, primarily

on greyhound races.      Commissioner v. Groetzinger, supra at 24.

The taxpayer gambled at racetracks 6 days a week and spent a

substantial amount of time studying racing forms, programs, and

other materials.   Id.    While the taxpayer received $6,498 in

income from other sources during the year, the taxpayer had no

other profession or type of employment during the 48 weeks he

devoted to gambling.      Id. at 24-25.   The Supreme Court stated:
                               - 7 -

     to be engaged in a trade or business, the taxpayer must
     be involved in the activity with continuity and
     regularity and * * * the taxpayer’s primary purpose for
     engaging in the activity must be for income or profit.
     A sporadic activity, a hobby, or an amusement diversion
     does not qualify. * * *

                *    *     *   *       *   *   *

     we conclude that if one’s gambling activity is pursued
     full time, in good faith, and with regularity, to the
     production of income for a livelihood, and is not a
     mere hobby, it is a trade or business within the
     meaning of the statutes with which we are here
     concerned. * * *

Id. at 35-36.   The Supreme Court affirmed the judgment of the

Court of Appeals for the Seventh Circuit, finding the taxpayer

was engaged in the trade or business of gambling.   Id. at 36.

     Petitioner argues the facts of Groetzinger are similar to

the facts of this case, and, like the Supreme Court in

Groetzinger, we should find petitioner was engaged in the trade

or business of gambling.   After carefully considering the facts

in this case, we disagree.

     Petitioner argues, like the taxpayer in Groetzinger, he

spent a substantial amount of time preparing for his trips to the

casino and developed a strategy for his gambling:

     In 2002, the petitioner went to the casino with a plan.
     The petitioner would first talk to the casino hosts to
     find out which areas of the casino were heavily played
     and what slot machines were/were not hitting. Based
     upon the information, the petitioner then determined
     what slot machines he was going to play and how much
     money he would need.

     In 2002, the petitioner set a limit for his losses each
     day that he went to the casino. The petitioner also
                                - 8 -

     set a limit on his games/winnings such that he left the
     casino once he made a twenty (20%) percent return on
     his money.

Petitioner also argues that he bought a slot machine, spent a

significant amount of time studying how the “chips” and cycles of

slot machines worked, subscribed to a gambling magazine, and read

“probably about 20” books on playing the slot machines.

     Petitioner’s efforts and strategy are consistent with the

desire to win money playing the slot machines.      However, we find

petitioner’s desire to win money and his strategy for doing so is

also consistent with gambling purely for its entertainment or

recreational aspects.   The time petitioner spent and the strategy

he developed, by themselves, do not establish petitioner was

engaged in the trade or business of gambling.

     Petitioner testified he maintained daily records of his

gambling activity and argues on brief his record keeping is

indicative of a trade or business.      Petitioner did not provide

respondent with these records, nor did he introduce the records

into evidence.   Given the lack of evidence, we do not find that

petitioner maintained daily records of his gambling activity.

     Petitioner argues that he spent “approximately 2,206.5

hours” gambling at various casinos, “where he focused primarily

on slot machines such as the ‘Double Diamond’”, and that the

amount of time devoted to his gambling activity is indicative of

a trade or business.    Petitioner relies on a schedule of gambling
                               - 9 -

wins and losses to establish the hours spent gambling.    The

schedule of gambling wins and losses reflects petitioner’s

attempt to reconstruct the dates he gambled, the amount of money

won or lost, and the amount of time spent gambling each day.

However, the schedule was not provided to respondent until

January 4, 2006, and there is no evidence in the record

indicating when the schedule was prepared.    This evidence was not

contemporaneously maintained, and it is inaccurate and

unreliable.7   Petitioner did not provide his purported daily

records, nor did he provide other evidence corroborating the

amount of time he devoted to gambling during 2002.   Given the

lack of reliable evidence, we cannot determine how much time

petitioner devoted to gambling during 2002.

     Unlike the taxpayer in Groetzinger, petitioner spent

approximately 20 to 25 hours per week working for Caltex.

Additionally, petitioner’s livelihood did not depend on playing

the slot machines.   His primary income came from his salary of

$42,000 and the passthrough of income of $99,790 from Caltex, of

which he was president and 100-percent owner during 2002.    By


     7
         For example, the schedule of gambling wins and losses
indicates petitioner spent 18 days gambling during March 2002,
during which he won $9,700 and lost $27,900. However, the
gambling summary prepared by petitioner for use in filing his
2002 return indicates petitioner gambled on only 2 days during
March 2002, during which time he won $9,700 but lost $31,300.
Additionally, the Forms W-2G issued to petitioner for payouts
made during March 2002 indicate petitioner won only $8,100.
Similar discrepancies appear in other months.
                              - 10 -

themselves, these facts do not preclude petitioner from being

engaged in the trade or business of gambling.    However, such

factors were considered by the Supreme Court in Groetzinger and

are relevant to our determination.     See Commissioner v.

Groetzinger, 480 U.S. at 24-25, 35-36.    We find that these facts

weigh against petitioner’s being engaged in the trade or business

of gambling.   See Jones v. Commissioner, T.C. Memo. 1988-393.

      Taking into consideration all of the above, we find

petitioner was not engaged in the trade or business of gambling

in 2002.   Therefore, petitioner is not entitled to report his

gambling activity on Schedule C.   Instead, petitioner must claim

his gambling losses as an itemized deduction on Schedule A, as

determined by respondent.   We sustain respondent’s determination

that the amount of tax required to be shown on petitioner’s 2002

Federal income tax return was $40,399, resulting in a deficiency

of $17,096.

II.   Accuracy-Related Penalty Under Section 6662(a)

      Respondent determined petitioner is liable for an accuracy-

related penalty under section 6662(a) for 2002 of $3,419.

Petitioner argues he is not liable for an accuracy-related

penalty because he reasonably relied upon the advice of his

accountant.

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

percent of the portion of the underpayment to which section 6662
                                - 11 -

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

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

6662(d)(1).

       The Commissioner bears the burden of production with respect

to penalties.    Sec. 7491(c); Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001).     Once the burden of production is met, the

taxpayer must come forward with evidence sufficient to show that

the penalty does not apply.     Higbee v. Commissioner, supra at

447.

       The tax required to be shown on petitioner’s tax return was

$40,399.    Ten percent of that amount is less than $5,000.   Thus,

petitioner’s understatement is substantial if it exceeds $5,000.

Petitioner reported an income tax liability of $23,303, resulting

in an understatement of $17,096.     Respondent has satisfied his

burden of production by showing that petitioner’s understatement

of tax was substantial.

       The accuracy-related penalty is not imposed, however, with

respect to any portion of the understatement if the taxpayer can

establish he acted with reasonable cause and in good faith.      Sec.

6664(c)(1).     Reliance upon the advice of a professional may
                               - 12 -

demonstrate a taxpayer acted with reasonable cause and in good

faith.    Neonatology Associates, P.A. v. Commissioner, 115 T.C.

43, 98-99 (2000), affd. 299 F.2d 221 (3d Cir. 2002); Freytag v.

Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th

Cir. 1990), affd. 501 U.S. 868 (1991); see sec. 1.6664-4(c)(1),

Income Tax Regs.   However, a taxpayer’s reliance upon the advice

of a professional does not automatically constitute reasonable

cause.    Neonatology Associates v. Commissioner, supra at 98-99;

see sec. 1.6664-4(c)(1), Income Tax Regs.     For a taxpayer to

reasonably rely on the advice of a professional, the taxpayer

must show:   (1) The adviser was a competent professional who had

sufficient expertise to justify reliance; (2) the taxpayer

provided necessary and accurate information to the adviser; and

(3) the taxpayer actually relied in good faith on the adviser’s

judgment.    Neonatology Associates v. Commissioner, supra at 98-

99.

      Petitioner testified he relied on his accountant, Mr.

Beauregard, to prepare his return, and Mr. Beauregard had

prepared his returns since 1993 without incident.     However,

petitioner did not call Mr. Beauregard as a witness, nor did he

introduce evidence which would establish that Mr. Beauregard

possessed the requisite expertise.8     Because petitioner has not


      8
        Petitioner did not begin his gambling activity until
2002, and his underpayment of tax arose from claimed deductions
                                                   (continued...)
                               - 13 -

established that Mr. Beauregard was a competent professional who

had sufficient expertise to justify reliance, petitioner has not

shown that he acted with reasonable cause and in good faith.     See

sec. 6664(c)(1); Neonatology Associates v. Commissioner, supra at

98-99.   Therefore, we find petitioner is liable for an accuracy-

related penalty under section 6662(a) of $3,419.

III. Conclusion

     Petitioner was not engaged in the trade or business of

gambling in 2002.    For all of the foregoing reasons, we hold

petitioner is liable for a deficiency in his 2002 Federal income

tax of $17,096 and an accuracy-related penalty under section

6662(a) of $3,419.

     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

                                      for respondent.


     8
      (...continued)
for that activity. Mr. Beauregard’s preparation of petitioner’s
returns for 1993-2001 does not establish that Mr. Beauregard had
sufficient expertise regarding the tax treatment of petitioner’s
gambling activity. In fact, despite the clear requirement of
sec. 165(d) that gambling losses may be claimed only to the
extent of gambling winnings, petitioner claimed gambling losses
that exceeded his gambling winnings by $50,650. In addition, the
gambling losses were claimed as costs of goods sold. At the
least, this calls into question Mr. Beauregard’s expertise.
