                        T.C. Memo. 2007-359



                      UNITED STATES TAX COURT



          ROBERT K. AND CHERYL HARDWICK, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3189-06.                 Filed December 5, 2007.


          R disallowed a portion of Ps’ claimed gambling
     loss deduction for 2002, due to a lack of
     substantiation, and determined a tax deficiency.

          Held:   R’s tax deficiency determination is
     sustained.



     Mark E. Hoffman, for petitioners.

     Horace Crump, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   This case is before the Court on a petition

for a redetermination of a deficiency.    After concessions by
                               - 2 -

petitioners,1 the issue for decision is whether petitioners are

entitled to deduct gambling losses in excess of the $170,215 that

respondent allowed for their 2002 taxable year.2

                         FINDINGS OF FACT

     Some of the facts have been stipulated by the parties.    The

stipulations, with accompanying exhibits, are incorporated herein

by this reference.   At the time the petition was filed,

petitioners resided in Birmingham, Alabama.

     Robert K. Hardwick (Mr. Hardwick) is president and part

owner of Hardwick Company, Inc. (Hardwick Co.), which is a heavy

steel fabricating company.   Petitioners are recreational gamblers

and began playing slot machines regularly in 1997.   In 2002, they

made at least eight trips to Mississippi to play slot machines at

various casinos.   Mr. Hardwick normally played the high stakes

slots ($20 or $30 per pull).

     Petitioners had a line of credit at the casinos they visited

regularly in Tunica and Biloxi, Mississippi, of approximately



     1
      Petitioners concede that the $12,400 they won in 2003 at
the Pearl River Resort casino was not properly includable in
their taxable income for taxable year 2002. Petitioners concede
that the $26,500 that they won from the Beau Rivage Resorts,
Inc., casino in 2002 was properly includable in their 2002
taxable income. Petitioners concede that the net increase in
their taxable income for 2002 was $14,100.
     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
                               - 3 -

$30,000 to $35,000.   Petitioners would travel with $1,000 to

$4,000 in cash on each of their gambling trips, which they would

spend before they used markers against their lines of credit.

     When petitioners had spent all of their cash, they would

utilize markers, which are self-generated checks from the patron

to the casino representing the patron’s draws against a line of

credit with the casino.   The marker is paid to the patron in

either cash or casino chips.   Petitioners would obtain markers in

$2,000 or $2,500 increments.   Approximately 40 to 45 days after

obtaining a marker, the dollar amount of the marker would be

debited from petitioners’ Equity Line of Credit at Compass Bank

of Decatur, Alabama (line of credit).   In 2002, $50,500 in

markers was withdrawn from petitioners’ line of credit.   However,

that dollar amount does not include markers that petitioners paid

off with gambling winnings or other available cash before they

exited a casino.

     Mr. Hardwick kept a log of petitioners’ gambling winnings

and losses during 2002 that consisted of one, lined yellow, piece

of notebook paper containing his notations.3   The log also


     3
      The log, which appears to contain some mathematical errors,
including the last notation for 2001, which according to the
Court’s calculation should have been a $50,530 loss instead of a
$50,580 loss, provides the following notations pertinent to 2002
(the Court has numbered the log entries by line as follows in the
far left hand column for ease of reference):
                                                   (continued...)
                                     - 4 -

includes gambling winnings and losses from 2001 and the beginning

of 2003, as well as Mississippi and Louisiana State tax refunds

for 2002.       The log reflects Mr. Hardwick’s personal record,

prepared within 2 to 3 days of returning from each gambling trip,

of the net amount petitioners won or lost over a given gambling

weekend.    The computations are based on his comparison of the

amount of cash he remembered petitioners took to the casinos and

the amount they returned home with, reduced by the dollar amount

of any outstanding markers generated during the trip.       According

to Mr. Hardwick’s running tally of petitioners’ net gambling

winnings and losses, petitioners had a net loss in the amount of

$31,180 for 2002.4


       3
        (...continued)
[1]                      2001 ($50,580)
[2]    +19000
[3]    -18000
[4]    -25000       Feb 02 BILOXI FEB
[5]     76480       74580 [both numbers are crossed out]
[6]    - 1100       TUNICA APRIL
[7]    +14000       BILOXI MAY (MEMORIAL DAY)
[8]    + 8800       MS TAX REFUND [the number is crossed out]
[9]    + 2300       LA TAX REFUND [the number is crossed out]
[10]   -50580       50080 [both numbers are crossed out]
[11]   + 500
[12]   -26000       JULY BILOX
[13]   +40000       LABOR DAY 2002
[14]   -35580            -20000
[15]   -35000
[16]                     2002 ($31,180)
       4
      See supra note 3 log entry No. 16. Mr. Hardwick’s total
appears to be the result of mathematical errors. The Court
                                                  (continued...)
                               - 5 -

     Notably, there was at least one occasion where Mr. Hardwick

failed to include petitioners’ gambling winnings in his log.

Mr. Hardwick testified that he won $24,000 on Sunday, June 9,

2002, at the Grand Casino Tunica, yet his log does not include a

notation for this win.   Also, it appears that Mr. Hardwick may

have carried over to the 2002 taxable year a net $50,580 gambling

loss from 2001.5   Taking into account this possible carryover, it

appears, although the odds of winning on a casino’s slot machines

after a large number of plays is statistically improbable, that

based on Mr. Hardwick’s log, petitioners may have had net

gambling winnings for 2002.6


     4
      (...continued)
believes the numbers total $36,030 (based on a $50,530 loss for
2001 instead of the $50,580 as calculated by Mr. Hardwick). See
supra note 3. The record does not explain how petitioner got
from his apparent $35,580 total, shown as log entry No. 14, to
($31,180), the total for 2002 shown as log entry No. 16.
     5
      The fourth notation for 2002 is “76480” and/or “74580” (log
entry No. 5) which according to Mr. Hardwick’s testimony is a
“running total”. Although there is no indication that the
$76,480/$74,580 dollar amount is a net loss, it appears to be
consistent with the rest of the document. According to
Mr. Hardwick’s notations, his yellow notebook log sheet reflects
that petitioners had a net gambling loss of $50,580 for 2001 (see
log entry No. 1). Taking into account petitioners’ $19,000
winnings (log entry No. 2), $18,000 loss (log entry No. 3), and
$25,000 loss in Feb. 2002 (log entry No. 4), the $76,480/$74,580
“running total” incorporates petitioners’ $50,580 loss from 2001.
The next “running total” listed is “-50580” and/or “50080” (log
entry No. 10), which appears to be an approximate result after
taking into consideration a $1,100 loss (log entry No. 6),
winnings of $14,000 (log entry No. 7), and tax refunds of $8,800
and $2,300 (log entries No. 8 and No. 9).
     6
      The Court notes that according to Mr. Hardwick’s notations
                                                   (continued...)
                               - 6 -

     Petitioners received win-loss statements from the Grand

Casino Biloxi and the Grand Casino Tunica.    A win-loss statement

is generated from a Players’ Club card, which is a magnetically

encoded card that patrons of a casino may use when playing slot

machines.   The Players’ Club card enables the casino to track a

patron’s gambling activities by date and time, slot machine

winnings and losses, and may provide free “comped” room, drink,

and food for “high rollers”, or points that may be exchanged by

the patron for food, drink, or merchandise.   However, for at

least two of petitioners’ gambling trips, on March 2 and April 6

and 7, 2002, there are no win-loss statements for their Players’

Club cards.   In exchange for their patronage as established by

using Players’ Club cards, petitioners received free food in

casinos, free rooms at the casino hotels, and free room service

(except for gratuities).

     The Grand Casino Biloxi win-loss statement for Mr. Hardwick

reflects that he won $93,822, and lost $94,775, for a net loss of

$953 for 2002.   The Grand Casino Biloxi win-loss statement for

Cheryl Hardwick (Mrs. Hardwick) reflects that she had no winnings


     6
      (...continued)
that relate specifically to gambling winnings and losses for
2002, it appears that petitioners may, after removing the $50,580
loss from 2001 (log entry No. 1), have had net gambling winnings
of $3,400 [$19,000 (log entry No. 2) - $18,000 (log entry No. 3)
- $25,000 (log entry No. 4) - $1,100 (log entry No. 6) + $14,000
(log entry No. 7) + $500 (log entry No. 11) - $26,000 (log entry
No. 12) + $40,000 (log entry No. 13)], even without including any
portion of the $24,000 jackpot from the Grand Casino Tunica on
Sunday, June 9, 2002.
                               - 7 -

and had a net loss of $14,141 for 2002.   The Grand Casino Tunica

win-loss statement for Mr. Hardwick reflects that he won $21,320,

and lost $6,420, for net winnings of $14,900 for 2002.   Overall,

the win-loss statements reflect that petitioners had a net loss

of $194 for 2002 for gambling activity recorded by their Players’

Club cards.

     On their 2002 joint Form 1040, U.S. Individual Income Tax

Return, which was prepared by petitioners’ accountant, Ben

Shillaci, petitioners reported total gambling winnings of

$308,400.   Petitioners now concede that their total gambling

winnings for 2002 were actually $322,500.   See supra note 1.

Petitioners’ gambling winnings consisted of $26,500 from the Beau

Rivage Resort, Inc., $80,350 from the Grand Casino Tunica, and

$215,6507 from the Grand Casino Biloxi.   In addition, petitioners

had gambling winnings in excess of the amounts reported on Forms


     7
      The parties stipulated that petitioners had gambling
winnings of $215,650 from the Grand Casino Biloxi for 2002.
However, the 2002 Form W-2G, Certain Gambling Winnings, issued by
the Grand Casino Biloxi that was admitted into evidence as
exhibit 11-R, reflects that petitioners had $200,250 in gambling
winnings. It is possible that petitioners stipulated gambling
winnings from the Grand Casino Biloxi in excess of the amount
shown on the 2002 Form W-2G, and that the $215,650 stipulated
amount includes multiple jackpot winnings that were less than
$1,200 (and therefore not reflected on the Form W-2G).

     The $322,500 amount that petitioners concede is the total
amount of their gambling winnings for 2002 appears to be based on
the stipulated $215,650 amount, and not on the $200,250 amount
reflected on the Grand Casino Biloxi 2002 Form W-2G. It is
possible that the $322,500 amount reflects the net increase of
$14,100 in petitioners’ gambling winnings over the $308,400 they
reported on their 2002 joint Form 1040. See supra note 1.
                               - 8 -

W-2G issued by the casinos, as only jackpots in excess of $1,200

were reported on Forms W-2G in 2002.    Neither petitioners’ tax

records, nor petitioners, specifically recorded or otherwise

accounted for petitioners’ slot machine winnings below $1,200.

Petitioners claimed gambling losses of $308,400 on their 2002

joint Federal income tax return, the exact amount of their

reported gambling winnings.

     The notice of deficiency was issued to petitioners on

November 9, 2005, and reflected a deficiency of $58,945 for 2002.

Respondent disallowed $138,185 of petitioners’ claimed $308,400

gambling losses due to lack of substantiation.    Petitioners filed

with this Court a timely petition, and a trial was held on

November 3, 2006, in Birmingham, Alabama.8

                              OPINION

I.   Burden of Proof

     Deductions are a matter of legislative grace, and the

taxpayer must maintain adequate records to substantiate the

amounts of any deductions or credits claimed.    Sec. 6001;



     8
      At trial, and on brief, respondent objected to the expert
testimony of petitioner’s accountant as the proper procedure
required by Rule 143(f) and the pretrial order were not followed,
and to the admission into evidence of substantiation documents
that were prepared by the accountant and Mr. Hardwick in
anticipation of trial. The Court sustained the objection and did
not permit the accountant to testify as an expert, but allowed
various numerical summary documents that Mr. Hardwick and his
accountant had prepared to be introduced.
                                - 9 -

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec.

1.6001-1(a), Income Tax Regs.   As a general rule, the

Commissioner’s determination of a taxpayer’s liability in the

notice of deficiency is presumed correct, and the taxpayer bears

the burden of proving that the determination is improper.      See

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

However, pursuant to section 7491(a)(1), the burden of proof on

factual issues that affect the taxpayer’s tax liability may be

shifted to the Commissioner where the “taxpayer introduces

credible evidence with respect to * * * such [factual] issue”.

The burden will shift only if the taxpayer has, inter alia,

complied with substantiation requirements pursuant to the

Internal Revenue Code and “cooperated with reasonable requests by

the Secretary for witnesses, information, documents, meetings,

and interviews”.   Sec. 7491(a)(2).     Petitioners did not comply

with the substantiation requirements, and failed to present

credible evidence at trial.    Accordingly, the burden remains on

petitioners.

II.   Gambling

      Gross income includes all income from whatever source

derived, including gambling.    See sec. 61; McClanahan v. United

States, 292 F.2d 630, 631-632 (5th Cir. 1961).      In the case of a

taxpayer not engaged in the trade or business of gambling,

gambling losses are allowable as an itemized deduction, but only
                                - 10 -

to the extent of gains from such transactions.    See sec. 165(d);

McClanahan v. United States, supra at 632 n.1 (citing Winkler v.

United States, 230 F.2d 766 (1st Cir. 1956)).

     Taxpayers have the burden of showing that they are entitled

to a gambling loss deduction.    Norgaard v. Commissioner, 939 F.2d

874, 878 (9th Cir. 1991), affg. in part, revg. in part on another

ground T.C. Memo. 1989-390.   Generally, a claimed expense (other

than those subjected to heightened scrutiny under section 274)

may be deductible even where the taxpayer is unable to fully

substantiate it, if there is an evidentiary basis for doing so.

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930);

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985); Sanford v.

Commissioner, 50 T.C. 823, 827-828 (1968), affd. per curiam 412

F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax

Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).   In these instances,

the Court is permitted to make as close an approximation of the

allowable expense as it can, bearing heavily against the taxpayer

whose inexactitude is of his or her own making.    Cohan v.

Commissioner, supra at 544.

     Petitioners rely on Doffin v. Commissioner, T.C. Memo. 1991-

114, in claiming that the Court should estimate their gambling

losses pursuant to the rule of Cohan.    However, this Court has

declined to apply the rule of Cohan to gambling loss deduction

cases that differ factually from Doffin.    See Donovan v.
                               - 11 -

Commissioner, 359 F.2d 64 (1st Cir. 1966), affg. T.C. Memo. 1965-

247; Stein v. Commissioner, 322 F.2d 78, 83 (5th Cir. 1963),

affg. T.C. Memo. 1962-19; Schooler v. Commissioner, 68 T.C. 867,

871 (1977); Lutz v. Commissioner, T.C. Memo. 2002-89.

     In Doffin, the taxpayer had pull tab winnings of $46,240 and

$32,571 for 1986 and 1987, respectively.   The taxpayer did not

keep contemporaneous records of his daily winnings and losses and

did not retain any losing tickets to substantiate his losses.

The Commissioner allowed the taxpayer a deduction for gambling

losses in the amount of $494 for 1986, which was based on the $2

per pull tab cost of the taxpayer’s 247 winning pull tabs for

that year.   Pursuant to the rule of Cohan, the Court allowed the

taxpayer to deduct additional losses of $39,000 and $26,000 for

1986 and 1987, respectively.   The Court’s approximation of the

taxpayer’s gambling losses pursuant to the rule of Cohan was

based on the Court’s finding that it was highly improbable that

the taxpayer purchased only winning tickets, and that the

taxpayer’s lifestyle and financial position indicated no

accessions to wealth commensurate with the amount of net gambling

winnings determined by the Commissioner.   The taxpayer lived in a

mobile home, had little income and few assets, and even sold

assets and borrowed money during the years at issue to support

his gambling habit.
                                   - 12 -

       Unlike Doffin, this is not a case where the petitioners have

few assets and no income apart from gambling.       Mr. Hardwick is

president and part owner of Hardwick Co.       Petitioners reported

$391,546 in taxable income for 2002 aside from their $308,400

reported gambling winnings.9       Further, respondent has allowed

petitioners a $170,215 deduction for gambling losses for 2002

based on their submitted records, which is far more generous than

the $494 deduction the Commissioner allowed the taxpayer in

Doffin.      The Court notes that the losses reported by the casinos

as recorded on petitioners’ Players’ Club cards total $115,336.

       The records that petitioners presented at trial are

incomplete.       The win-loss statements issued by the Grand Casino

Biloxi and the Grand Casino Tunica do not include at least two

gambling trips that petitioners made to Mississippi on March 2

and April 6 and 7, 2002.      Mr. Hardwick’s log does not include at

least one substantial win by petitioners in the amount of

$24,000, and appears to carry over a net gambling loss from 2001

to 2002.       See supra note 4.   Additionally, the Forms W-2G issued

by the casinos do not include winnings under $1,200, which

winnings petitioners failed to keep track of and record on their

own.       Petitioners’ line of credit statements reflect that $50,500

in markers was debited in 2002.       However, the mere fact of


       9
      Petitioners reported total taxable income of $699,946 on
their 2002 Federal income tax return, of which $308,400 was their
reported gambling winnings.
                              - 13 -

borrowing, represented here by marker debit transactions, does

not substantiate actual losses of those borrowed funds on

gambling.   Schooler v. Commissioner, supra at 870.

     Overall, there does not appear to be a correlation between

the win-loss statements, petitioners’ Forms W-2G, Mr. Hardwick’s

log, and petitioners’ bank account statements.    Notably, the win-

loss statements reflect that petitioners had gambling winnings

totaling $115,142, while the Forms W-2G provide that petitioners

had total gambling winnings of $322,50010.   Petitioners have not

accounted for the $207,358 difference in gambling winnings

between the win-loss statements and Forms W-2G.   At trial,

Mr. Hardwick was unsure of petitioners’ total dollar amount of

gambling winnings or losses, explaining that he only kept track

of their net amount won or lost.

     Petitioners’ bank account statements reflect that

petitioners had large sums of money being deposited and withdrawn

on a monthly basis, and there does not appear to be a correlation

between petitioners’ monthly bank account balance and any

substantial gambling win or loss in 2002.    For example, according

to Mr. Hardwick’s log, petitioners lost $25,000 in February 2002,

yet their bank account balance increased by approximately $33,000

for the month of February.   This might reflect the 30 to 45 day



     10
      This amount is based on the parties’ stipulations.      See
supra note 7.
                              - 14 -

float delay in covering markers, but there was no credible

evidence explaining these discrepancies.

     The record provides no satisfactory basis for estimating

petitioners’ gambling losses in excess of the $170,215 allowed by

respondent.   See Stein v. Commissioner, supra.    There are too

many omissions and discrepancies among the documents petitioners

have presented as substantiation.   Consequently, the Court will

not apply the Cohan rule to estimate the amount of petitioners’

gambling losses.   Petitioners could have avoided this result by

keeping complete records of their gambling activities or perhaps

by simply using their Players’ Club cards to track their slot

machine play on each of their gambling trips.

     The Court has considered all of petitioners’ contentions,

arguments, requests, and statements.   To the extent not discussed

herein, the Court concludes that they are meritless, moot, or

irrelevant.

     To reflect the foregoing,

                                           Decision will be entered

                                    under Rule 155.
