Famuyiwa v. Commissioner

1991 T.C. Memo. 570, 62 T.C.M. 1265, 1991 Tax Ct. Memo LEXIS 618

• Court: United States Tax Court
• Decided: November 25, 1991
• Docket: Docket No. 4296-90
• Status: Unpublished

Opinion

IDOWU FAMUYIWA AND FLORENCE FAMUYIWA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Famuyiwa v. Commissioner

Docket No. 4296-90

United States Tax Court

T.C. Memo 1991-570; 1991 Tax Ct. Memo LEXIS 618; 62 T.C.M. (CCH) 1265; T.C.M. (RIA) 91570;

November 25, 1991, Filed

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Decisions will be entered under Rule 155.

Idowu Famuyiwa, pro se.

Alan S. Kline, for respondent.

BEGHE, Judge.

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BEGHE

MEMORANDUM FINDINGS OF FACT AND OPINION

Respondent determined deficiencies and additions to petitioners' Federal income taxes as follows:

Additions to Tax, secs.
Tax		6653(a)(1)/	6653(a)(2)/
Year	Deficiency	6651(a)(1)1	(a)(1)(A)	(a)(1)(B)	6661
1985	$ 19,084	$ 830	$ 966	*	$ 4,710
1986	91,754	--	4,588	*	22,939

Respondent and petitioner have resolved all Schedule C deduction issues for both tax years. The only issues left unresolved are: (1) The amount by which the gross gambling income of petitioner Idowu Famuyiwa (petitioner) exceeded his gambling losses for 1986; (2) whether petitioner underreported his taxable income for 1986 due to negligence or intentional disregard of rules or regulations, so as to be liable for an addition to tax under section 6653(a); (3) whether petitioner substantially understated his income tax for 1986, so as to be liable for an addition to tax under section 6661; and (4) whether petitioners are jointly liable for an addition to tax under section 6651(a)(1) for failing to file their 1985 return in timely fashion.

Some of the facts have been stipulated and are so found. We incorporate the stipulation of facts and attached exhibits.

Because petitioner filed his 1986 Federal income tax return "married filing separately," our decision with respect to that year binds only him, and not his ex-wife, petitioner Florence Famuyiwa. Our decision regarding 1985 applies to both petitioners.

FINDINGS OF FACT

Petitioners resided in Inglewood, California, when they filed their petition in this case.

On January 4, 1986, petitioner won $ 192,372 on two bets at a thoroughbred racetrack. He promptly deposited the proceeds in his checking account at Century Federal Savings and Loan Association. During the remainder of 1986, petitioner had no additional net gambling income and insubstantial or negative income from other sources.

Petitioner was a compulsive gambler during 1986. During January 1986 petitioner drew three checks totaling $ 120,055.60 on his checking account, and lost the major part of the proceeds of these checks gambling in Las Vegas, Nevada, where he played blackjack and craps and bet on horse races.

Subsequent to January 4, 1986, petitioner made a total of $ 172,470.05 in cash withdrawals, as set forth in the appendix. Many of the withdrawals occurred at or near racetracks or casinos. Petitioner continued to gamble several times a week, for the most part at Southern California racetracks, and took at least 2 additional trips to gamble in Las Vegas.

Petitioner spent part of the proceeds of his 1986 gambling winnings on the following items:

Truck	$ 8,400
Gifts	500
Repayment of outstanding loans	15,000
Unimproved real estate	3,000
Total	$ 26,900

Petitioner also invested $ 20,000 of his gambling winnings by opening an account with Prudential Bache, a securities broker. Petitioner had access to this account by obtaining cash advances against a Prudential Bache credit card. He lost no more than $ 10,000 of that amount in gambling. During 1986, petitioner had personal expenditures of $ 25,000 paid out of gambling winnings. Petitioner spent $ 13,692 of his gambling winnings on business expenditures (in addition to the truck) during 1986, which helped to fund petitioner's loss from the operation of his small contracting business.

In sum, at least $ 75,592 of the $ 192,372 petitioner won at the track on January 4, 1986, was not lost by gambling, so petitioner might have had as much as $ 116,780 of net gambling losses subsequent to his big winnings.

Petitioners' 1985 joint Federal income tax return was filed on May 1, 1986, more than 2 weeks late.

ULTIMATE FINDINGS OF FACT

Applying the rule of Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), we find that petitioner had gambling losses of $ 100,000 during the taxable year 1986, resulting in taxable income from gambling of $ 92,372.

We also find that petitioner has failed to sustain his burden of proof so that he is liable for the various additions to tax in amounts appropriate to the redetermined deficiencies arising from the parties' concessions and our finding of the amount of his gambling losses for 1986.

OPINION

Allowable Gambling Deductions

Section 165(d) provides for a deduction for losses from gambling transactions, to the extent of gains from such transactions. Respondent's determination disallowing petitioner's deduction is presumptively correct. Welch v. Helvering, 290 U.S. 111, 78 L. Ed. 212, 54 S. Ct. 8 (1933). Petitioner has the burden of establishing that he sustained the gambling losses respondent disallowed. Norgaard v. Commissioner, 939 F.2d 874 (9th Cir. 1991), affirming in part and reversing in part a Memorandum Opinion of this court; Schooler v. Commissioner, 68 T.C. 867, 869 (1977); Rule 142(a).

Section 6001 requires taxpayers to keep records adequate to substantiate their income and deductions. When a taxpayer fails to keep such records, but a court is convinced deductible expenditures were made, the court "should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making." Cohan v. Commissioner, supra at 544. In gambling cases, this Court has invoked the rule of Cohan only when it is convinced that petitioner incurred some gambling losses. See Drews v. Commissioner, 25 T.C. 1354 (1956); Doffin v. Commissioner, T.C. Memo 1991-114; Forman v. Commissioner, T.C. Memo 1988-64; Kalisch v. Commissioner, T.C. Memo 1986-541, affd. without published opinion 838 F.2d 461 (3rd Cir. 1987). We are convinced that petitioner suffered substantial gambling losses.

Respondent does not claim that petitioner had gambling income in 1986 in addition to his January 4 winnings. Thus, respondent does not argue for application of the principle that, when it is established that petitioner had unreported gambling income, petitioner must substantiate gambling losses greater than those additional winnings before being allowed any deduction against reported winnings. Schooler v. Commissioner, 68 T.C. 867, 869 (1977).

Respondent instead argues, in effect, that the Court has "no satisfactory basis for estimating the amount of petitioner's losses." Rivera v. Commissioner, T.C. Memo 1988-497. We disagree. Unlike the taxpayer in Rivera, petitioner gave credible testimony and did not doctor his records. Petitioner's credible testimony and documentary evidence provide a sufficient basis for decision. See, e.g., Drews v. Commissioner, supra; Doffin v. Commissioner, supra; Forman v. Commisioner, supra; Kalisch v. Commissioner, supra; Fiaschetti v. Commissioner, T.C. Memo 1967-33.

Petitioner claimed to have lost all $ 192,372 gambling during frequent trips to Nevada casinos and several thoroughbred racetracks. The net result, according to petitioner, is that he had no net gambling income in 1986, and thus owes no tax on his gambling winnings. Petitioner appeared to have backed away from that proposition by substantiating only $ 172,470.05 in cash transactions during 1986. We have concluded that at least $ 75,592 was not lost by petitioner in gambling transactions. Subtracting that amount from petitioner's gambling winnings yields $ 116,780 that could have been lost in gambling transactions.

Owing to the skimpy record, we have been forced to make certain assumptions in determining the allowable deduction. Petitioner's credible testimony and documentation were sufficient to show that a deduction is in order, but insufficient to show the precise amount of that deduction. Bearing heavily upon the taxpayer, we find that $ 100,000 is allowable as a deduction for gambling losses under section 165(d), leaving petitioner with net gambling income of $ 92,372 for the taxable year 1986.

Negligence

Respondent determined additions to petitioner's tax for 1986, asserting that petitioner was negligent in failing to keep records adequate to substantiate his gambling losses. Section 6653(a) provides that if any part of an underpayment is caused by negligence or disregard of rules or regulations, the underpaying taxpayer is liable for an addition to tax equal to 5 percent of the underpayment and 50 percent of the interest payable on the underpayment, as computed under section 6001. A taxpayer is "negligent" when he fails to do what a reasonable, prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985). Petitioner has the burden of proving that respondent's additions to tax for negligence were erroneous. Bixby v. Commissioner, 58 T.C. 757, 791 (1972).

Respondent has announced that "An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation will usually be acceptable evidence for substantiation of wagering winnings and losses." Rev. Proc. 77-29, 1977-2 C.B. 538. Petitioner had no record keeping system. Petitioner submitted no evidence nor made any argument that would explain why his method of substantiation was reasonable and the determination of respondent was erroneous. We therefore uphold respondent's determination that petitioner is liable for the addition to tax under section 6653(a), as applied to the deficiency resulting from our holding on the amount of his net gambling income for 1986.

Substantial Understatement

Section 6661 provides for an addition to tax if the taxpayer understates his income tax liability by the greater of 10 percent of his true tax liability or $ 5,000. We have already decided that petitioner understated his net gambling income for 1986. If the Rule 155 computation reveals that petitioner's understatement of his 1986 tax liability was substantial, we will sustain the resulting addition to tax under section 6661.

1985 Late Filing

Respondent determined that petitioners are jointly liable for an addition to tax for late filing of their 1985 return. Section 6651(a)(1) provides for an addition to tax when a taxpayer fails to file a timely return, unless the failure is due to reasonable cause and not due to willful neglect. The parties stipulated that petitioners' joint return was filed on May 1, 1986, more than 2 weeks late.

Petitioners claimed that they filed a request for an extension of time to file, but introduced no evidence on this point. Petitioner husband said that he provided respondent with a copy of their Form 4868, and urged the Court to verify independently that petitioners filed Form 4868 with the Fresno service center.

As we told petitioner at trial, the Court's role is to hear the evidence presented at trial, not to investigate claims on its own. We also warned petitioner that we were writing on a "clean slate" and that we would disregard any prior investigation by respondent. See Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). Despite these warnings, petitioner chose to rely on respondent to introduce evidence favorable to his case. While we understand that petitioner had inferior investigatory resources, we believe that it was not beyond his means to provide the court a photocopy of the extension form. Nor does the fact that during 1986 petitioner was in the grip of his gambling compulsion provide an excuse for the late filing of his 1985 return. Cf. Heber v. Commissioner, T.C. Memo 1989-85 ("vague testimony about being depressed and in a bad state of health" insufficient to overturn addition to tax for late filing); Faulkner v. Commissioner, T.C. Memo 1980-90 (illness of taxpayer's preparer insufficient to overturn addition to tax for late filing). Petitioners had the burden of proof and failed to carry it. Therefore, we uphold respondent's determination against petitioners for late filing under section 6651(a)(1) for the taxable year 1985.

To reflect concessions and our findings and conclusions.

Decision will be entered under Rule 155

APPENDIX

Schedule I
[Cashier's checks]
Payor	I.D. Number	Amount	Date
Century Federal	068-0008357	$  60,027.80	01-07-86
Century Federal	068-0008376	40,027.80	01-08-86
Century Federal	068-0008391	20,000.00	01-10-86
Century Federal	068-0008861	2,074.45	03-14-86
Century Federal	068-0008909	10,000.00	03-20-86
Century Federal	068-0009476	3,000.00	05-31-86
		$ 135,130.05
Schedule II
[Personal Checks Payable to Cash]
Payor	I.D. Number	Amount	Date
Century Federal	158	$  3,000.00	01-29-86
Century Federal	163	500.00	02-10-86
Century Federal	172	2,000.00	02-19-86
Century Federal	176	250.00	02-26-86
Century Federal	183	500.00	03-12-86
Century Federal	193	1,000.00	04-03-86
Century Federal	196	500.00	04-04-86
Century Federal	222	500.00	07-10-86
Century Federal	226	500.00	07-14-86
Century Federal	228	400.00	07-17-86
Century Federal	231	1,000.00	07-18-86
Century Federal	232	400.00	07-21-86
Century Federal	236	500.00	07-24-86
Century Federal	238	300.00	07-26-86
Century Federal	239	300.00	08-01-86
Century Federal	243	1,500.00	08-11-86
Century Federal	245	1,500.00	08-15-86
Century Federal	246	700.00	08-18-86
Century Federal	247	300.00	08-20-86
Century Federal	249	500.00	08-21-86
Century Federal	252	200.00	08-22-86
Century Federal	253	400.00	08-23-86
Century Federal	263	500.00	09-04-86
Century Federal	267	1,000.00	09-06-86
Century Federal	303	200.00	09-17-86
Century Federal	305	1,000.00	09-19-86
Century Federal	306	200.00	09-22-86
Century Federal	309	100.00	09-26-86
Century Federal	316	350.00	10-01-86
Century Federal	317	200.00	10-04-86
Century Federal	320	100.00	10-10-86
Century Federal	330	150.00	11-06-86
Century Federal	332	200.00	11-08-86
Century Federal	333	100.00	11-13-86
Century Federal	336	150.00	11-19-86
Century Federal	338	500.00	11-20-86
Century Federal	339	300.00	11-22-86
Century Federal	340	200.00	11-24-86
Century Federal	343	500.00	11-26-86
Century Federal	348	200.00	12-03-86
Century Federal	353	200.00	12-10-86
Century Federal	356	500.00	12-20-86
Century Federal	360	200.00	12-23-86
Century Federal	361	500.00	12-27-86
Century Federal	362	200.00	12-29-86
Century Federal	363	200.00	12-29-86
Century Federal	364	500.00	12-31-86
		$ 25,000.00
Schedule III
[Credit Card Cash Advances]
Payor	I.D. Number	Amount	Date
Union Bank	5794304	$  1,000.00	08-04-86
Comcheck	85358691	212.50	08-17-86
Comcheck Santa Anita		305.00	02-11-86
Comcheck Golden Gate		313.00	02-25-86
Comcheck Santa Anita		312.00	03-03-86
Comcheck Santa Anita		519.00	03-04-86
Comcheck Hollywood Park		208.00	06-09-86
Comcheck Santa Anita		519.00	02-11-86
Comcheck Los Alamitos		208.00	03-20-86
Comcheck Hollywood Park		208.00	05-16-86
Comcheck Hollywood Park		207.25	05-28-86
Comcheck Hollywood Park		108.00	05-30-86
Comcheck Hollywood Park		312.50	06-06-86
Comcheck Hollywood Park		108.00	06-09-86
Comcheck Hollywood Park		208.00	06-10-86
Comcheck Hollywood		312.50	08-12-86
Comcheck Hilton Las Vegas		110.00	08-28-86
Comcheck Santa Anita		208.00	10-20-86
Comcheck Hollywood		208.00	11-12-86
Comcheck Hollywood		108.00	11-18-86
Comcheck Hollywood		208.00	08-12-86
Comcheck Hollywood Park		83.00	11-18-86
Comcheck Bay Meadows		109.00	09-03-86
Comcheck Del Mar		211.50	08-05-86
Comcheck Comdata Network	85358691	313.75	08-17-?
Great American Savings	7457450	100.00	05-15-86
Great American Savings	003442	200.00	06-07-?
Great American Savings	004575	200.00	06-14-?
Great American Savings	017322	100.00	09-13-86
Great American Savings	003595	200.00	06-08-?
Great American Savings	017116	100.00	09-11-86
Great American Savings	001905	200.00	05-28-?
Great American Savings	004778	200.00	06-16-?
Great American Savings	029062	200.00	05-07-86
Great American Savings	004192	100.00	06-12-?
Great American Savings	001259	200.00	05-24-86
Great American Savings	002953	200.00	06-04-86
Great American Savings	029434	200.00	05-09-86
Great American Savings	029258	200.00	05-08-86
Great American Savings	029060	200.00	05-07-86
Great American Savings	016720	400.00	09-07-86
Great American Savings	016226	120.00	09-03-86
Great American Savings	004042	200.00	06-11-?
Bank of Commerce	003017	100.00	08-02-86
Crocker Bank	1530941	300.00	05-08-86
First Los Angeles Bank	0102	100.00	09-06-86
First Los Angeles Bank	0081	100.00	06-21-86
First Los Angeles Bank	0061	100.00	08-02-86
First Los Angeles Bank	0062	100.00	08-02-86
First Los Angeles Bank	0012	100.00	08-07-86
First Los Angeles Bank	0013	100.00	08-07-86
Banking Center Las Vegas	8647	200.00	08-16-86
Banking Center Las Vegas	8648	100.00	08-16-86
Banking Center Las Vegas	8889	200.00	08-17-86
Banking Center Las Vegas	8875	300.00	08-17-86
Banking Center Las Vegas	1767	200.00	08-16-86
Banking Center Las Vegas	8843	200.00	10-18-86
Banking Center Las Vegas	8858	200.00	10-18-86
		$ 12,340.00

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Footnotes

• 1. All section references are to the Internal Revenue Code as amended and in effect for the taxable years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.

• *. 50% of the interest computed on $ 18,838 for the taxable year 1985 and $ 91,754 for the taxable year 1986 at the time of assessment and/or payment of tax.