                         T.C. Memo. 2010-247



                       UNITED STATES TAX COURT



             PHU M. AND YVONNE D. AU, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16366-09.              Filed November 10, 2010.



     Phu M. and Yvonne D. Au, pro sese.

     Anna A. Long, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:    Respondent determined a $5,783 deficiency in

petitioners’ Federal income tax for 2006 and a $1,156.60 penalty

under section 6662(a).   The deficiency and penalty resulted from

disallowance of gambling losses claimed to offset other income of

petitioners.   All section references are to the Internal Revenue

Code (Code) in effect for 2006.
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                           FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioners resided in California at the time the petition was

filed.

     On their jointly filed Form 1040, U.S. Individual Income Tax

Return, for 2006, petitioners reported adjusted gross income of

$83,041.   On Schedule A, Itemized Deductions, they deducted

gambling losses totaling $40,488 as “Other Miscellaneous

Deductions”.   Petitioners did not report any gambling winnings,

and they had no gambling winnings during 2006.

     Petitioners’ 2006 Federal tax return was prepared using H&R

Block’s software known as TaxCut.

                               OPINION

     Section 165(d) provides that “Losses from wagering

transactions shall be allowed only to the extent of the gains

from such transactions.”    Petitioners acknowledge that they had

no gains from their gambling activities during 2006.   Therefore

they are not entitled to deduct the losses that they claimed.

     Section 6662(a) and (b)(1) and (2) imposes a 20-percent

accuracy-related penalty on any underpayment of Federal income

tax attributable to a taxpayer’s negligence or disregard of rules

or regulations or substantial understatement of income tax.

Section 6662(c) defines negligence as including any failure to
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make a reasonable attempt to comply with the provisions of the

Code and defines disregard as any careless, reckless, or

intentional disregard.   Disregard of rules or regulations is

careless if the taxpayer does not exercise reasonable diligence

to determine the correctness of a return position that is

contrary to the rule or regulation.    Sec. 1.6662-3(b)(2), Income

Tax Regs.   An underpayment is substantial if the understatement

of tax exceeds the greater of 10 percent of the tax required to

be shown on the return or $5,000.   Sec. 6662(d)(1)(A).

Considering the erroneous nature of the deduction and the amount

of the resulting underpayment of tax, respondent has satisfied

the burden of producing evidence that the penalty is appropriate.

See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 448-449

(2001).

     An exception to the penalty under section 6662(a) applies in

cases where there was reasonable cause for any portion of the

underpayment and the taxpayer acted in good faith.   Sec.

6664(c)(1).   The determination of whether the taxpayer acted with

reasonable cause and in good faith depends on the pertinent facts

and circumstances, including the taxpayer’s efforts to assess

such taxpayer’s proper tax liability, the knowledge and the

experience of the taxpayer, and the reliance on the advice of a

professional, such as an accountant.   Sec. 1.6664-4(b)(1), Income
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Tax Regs.    Petitioners have the burden of showing reasonable

cause.    See Higbee v. Commissioner, supra at 446-447.

     Petitioners contend that they followed the instructions on

the tax preparation software that they used in preparing their

2006 tax return, asserting that the software was “approved by the

IRS”.    They indicate that they were unaware of the provisions of

the Code and that they did not consult any Internal Revenue

Service (IRS) publications or professional tax advisers before

claiming deductions equaling almost half of their reported income

in 2006.    The software instructions are not in the record, so we

cannot determine how the error occurred.    We doubt that the

instructions, if correctly followed, permitted a result contrary

to the express language of the Code.    Petitioners may have acted

in good faith but made a mistake.    In the absence of evidence of

a mistake in the instructions or a more thorough effort by

petitioners to determine their correct tax liability, we cannot

conclude that they have shown reasonable cause for the

underpayment of tax on their 2006 return.

     Petitioners ask the Court to consider correspondence

exchanged between them and various representatives of the IRS

before trial, in which an IRS representative offered to concede

the penalty.    Petitioners declined the concession, because they

also sought relief from the interest accruing on the underpayment

and to have the deficiency reduced.     In this proceeding, however,
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we have no jurisdiction over interest that has not been assessed.

See generally sec. 6404; Williams v. Commissioner, 131 T.C. 54,

55-56 (2008).    The correspondence between petitioners and the IRS

representatives, therefore, is not relevant to the issues that we

decide.

     Petitioners have also referred to their inability to pay the

amounts owing as a result of our rulings here.    Their claimed

financial hardship can be raised in a proceeding commenced under

section 6330 only if and when collection efforts are made and a

notice of determination sustaining collection efforts is sent to

them.   Ability to pay is also not relevant in this case.

     Finally, with the notice of trial, sent 5 months before the

trial date, and at the call of the calendar, petitioners, as pro

se taxpayers, were offered the opportunity to confer with

volunteer attorneys to discuss the case and to consider the

possibility of negotiated settlement, without charge to

petitioners.    They did not take advantage of the opportunities

when offered and sought delay to consult an attorney only after

the Court announced the impending resolution of the case against

them.   Thus they gave up the possibility of pretrial settlement,

with possible savings to themselves, and prolonged the period in

which interest is accruing.    The variety of services offered by

volunteer attorneys frequently results in negotiated settlements.

It is unfortunate when those who could benefit from the
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assistance offered by such attorneys do not take advantage of it.

After a case has been tried and the result stated, the

opportunity no longer exists.   To reflect the foregoing,


                                             Decision will be entered

                                        for respondent.
