T.C. Memo. 2008-10



                       UNITED STATES TAX COURT



               FRANCIS M. GAGLIARDI, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23912-05.              Filed January 24, 2008.



     Eric D. Swenson and Allison D. Cato, for petitioner.

     Michael S. Hensley, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:   Respondent determined the following

deficiencies in, additions to, and penalties on petitioner’s

Federal income tax:
                                        - 2 -

                                      Additions to Tax                Penalty
Year           Deficiency     Sec. 6651(a)(1)   Sec. 6651(a)(2)      Sec. 6662

1999            $212,100             --                  --           $42,420
                                                         1
2000             370,017          $45,848                              36,679
2001             429,787             --                  --            85,957
       1
        The sec. 6651(a)(2) addition to tax is 0.5 percent of the
unpaid tax liability that will be added to the tax for each
month, or fraction thereof, of nonpayment, up to a maximum of 25
percent, based upon the liability shown on the sec. 6020(b)
return, or the final determined liability, if less.

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

       In the answer, respondent conceded the section 6651(a)(2)

addition to tax.            Additionally, respondent alleged that the

correct amounts of deficiencies in, additions to, and penalties

on petitioner’s Federal income tax are as follows:1

                                       Addition to Tax         Penalty
       Year           Deficiency       Sec. 6651(a)(1)        Sec. 6662

       1999            $207,244                --             $41,449
       2000             300,102             $44,899            60,020
       2001             429,487              69,908            85,897

       The issues for decision are:          (1) Whether petitioner

substantiated the amounts of his claimed gambling losses for

1999, 2000, and 2001; (2) whether petitioner is liable for

additions to tax pursuant to section 6651(a)(1) for 2000 and




           1
                Amounts are rounded to the nearest dollar.
                                 - 3 -

2001; and (3) whether petitioner is liable for penalties pursuant

to section 6662(a) for 1999, 2000, and 2001.

                           FINDINGS OF FACT

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

The stipulation of facts, the supplemental stipulation of facts,

and the attached exhibits are incorporated herein by this

reference.   At the time he filed the petition, Francis M.

Gagliardi (Mr. Gagliardi) resided in El Cajon, California.

Mr. Gagliardi’s Life Before 1991

     Mr. Gagliardi did not graduate from high school.      The last

year Mr. Gagliardi attended high school was 1979.

     After high school, Mr. Gagliardi was employed as a machine

operator by Buck Knives.    Following his work at Buck Knives, from

approximately 1984 to 1987 Mr. Gagliardi worked as a truck driver

for his brother Dan Gagliardi.

     In 1989, Mr. Gagliardi purchased an 18-wheel truck and

thereafter ran his own trucking business, called American

Redball, as a sole proprietorship.       Mr. Gagliardi’s duties for

American Redball included running the business and driving the

truck.   Mr. Gagliardi hauled materials for military defense shows

and trade shows.

     While operating American Redball, Mr. Gagliardi did not keep

a log of his income and expenses; instead he kept his receipts

for the preparation of his income tax returns.       Mr. Gagliardi
                                - 4 -

knew that he had to substantiate his claimed deductions related

to American Redball with receipts, and he provided his business

receipts to his tax return preparer.

     Eugene Hunner (Mr. Hunner) prepared Mr. Gagliardi’s tax

returns when Mr. Gagliardi owned American Redball.   Mr. Hunner

has a B.A. in accounting and is a certified public accountant.

He worked 5 years at a national accounting firm, is two courses

shy of his master’s in tax at the University of Southern

California, and has prepared tax returns for over 30 years.

Ninety percent of Mr. Hunner’s professional work is preparing tax

returns.    Mr. Hunner prepares between 120 and 160 returns per

year.

1991:   Mr. Gagliardi Wins the Lottery

     In 1991, Mr. Gagliardi won approximately $26,660,000 from

the California lottery (lottery proceeds).    Mr. Gagliardi elected

to receive payment of the lottery proceeds in 20 annual payments

of approximately $1,333,000 each (original annual lottery

payment).

     At the time he won the lottery proceeds, Mr. Gagliardi was

29 years old, was married, and had two children.   Since winning

the lottery proceeds, Mr. Gagliardi has not been employed.    After

winning the lottery proceeds, and before 1996, Mr. Gagliardi

purchased a new home and custom-built motorcycles and regularly

went on vacations.   With the exception of the above expenditures
                                   - 5 -

and other living costs, before 1996 Mr. Gagliardi generally saved

most of his lottery winnings.

1994:       Mr. Gagliardi and His Wife Divorce

     During 1994, Mr. Gagliardi and his wife divorced.        Pursuant

to the property settlement in the divorce decree, Mr. Gagliardi

and his ex-wife evenly split the original annual lottery payment.

Accordingly, after the divorce, Mr. Gagliardi’s gross annual

lottery payment was $666,500 (gross annual lottery payment).

     After Mr. Gagliardi divorced, his two children lived with

his ex-wife in Marin County, California.         Pursuant to the divorce

decree, he received visitation rights with his children.

Mr. Gagliardi’s Gambling From 1996 Through 1998

     In or around 1996, Mr. Gagliardi had a friend who was dying

of cancer.       In 1996, Mr. Gagliardi’s friend asked Mr. Gagliardi

to be his companion on a trip to one of the casinos owned and

operated by California Indian tribes in San Diego County (the

casinos).

     Mr. Gagliardi gambled infrequently before winning the

lottery.       After the trip with his friend, Mr. Gagliardi started

playing the slot machines at the casinos2 frequently and became a



        2
        Some of the casinos that Mr. Gagliardi gambled at
included Sycuan, Viejas, Barona, and Pala. Sycuan is
approximately 8 to 10 miles from Mr. Gagliardi’s house, Viejas is
approximately 20 miles from Mr. Gagliardi’s house, and Barona is
approximately 15 miles from Mr. Gagliardi’s house. He gambled
most frequently at Sycuan because it is the casino closest to his
house.
                                 - 6 -

“pathological gambler”.    Since becoming a pathological gambler,

Mr. Gagliardi has liquidated most of his investments and savings

to gamble.     Mr. Gagliardi gambled heavily during 1997 and 1998.

     Before winning the lottery proceeds, Mr. Gagliardi seldom

bought lottery tickets.    Since he began gambling at the casinos,

Mr. Gagliardi has bought lottery tickets outside of the casinos

every couple of days.

Mr. Gagliardi’s Gambling During 1999, 2000, and 2001

     Mr. Gagliardi spent most of his waking hours at the casinos.3

He had no outside interests, and generally if he was not at the

casinos he was at home.     A typical day for Mr. Gagliardi

generally consisted of waking up, showering, going to a 7-Eleven,

getting coffee, going to the casinos, gambling, returning home,

sleeping, waking up, and returning to the casino immediately

thereafter.4    Occasionally, Mr. Gagliardi spent up to 48 hours

continuously in the casinos before returning home.

     Mr. Gagliardi spent an average of 20 days per month at the

casinos (at least 209 days, 260 days, and 257 days during 1999,

2000, and 2001, respectively).     The following is a summary of the


     3
        During January, February, and March of 1999, Mr.
Gagliardi was admitted into Sober Living by the Sea for his
gambling disorder. However, Mr. Gagliardi sneaked out of the
facility to gamble.
     4
        On the day of trial, Mr. Gagliardi was gambling at one of
the casinos until 5 a.m. (trial started at approximately 9:30
a.m.) and in his testimony implied that he would return to the
casinos to gamble after the trial was over.
                              - 7 -

total numbers of documented days Mr. Gagliardi was at the

casinos:5

     Month                    1999         2000            2001

January                        13            26              24
February                        4            18              21
March                           8            22              24
April                          19            20              27
May                            16            24              19
June                           12            25              21
July                           22            22              15
August                         18            23              19
September                      25            22              23
October                        25            22              24
November                       26            11              20
December                       21            25              20
   Total                      209           260             257

     In addition to the documented days, which are supported by a

summary calendar of Mr. Gagliardi’s Forms W-2G, Certain Gambling

Winnings, “jackpot” winnings, winnings of $1,200 or more, and

cash withdrawals at various casinos (the gambling calendars),6

Mr. Gagliardi gambled at the casinos on days not reflected on the

gambling calendars (i.e., in addition to the 209, 260, and 257

documented days for 1999, 2000, and 2001, respectively).    Such



     5
        During January, February, and March of 1999, Mr.
Gagliardi was admitted into Sober Living by the Sea for his
gambling disorder. This accounts for the lower number of days
gambled during this period.
     6
        Petitioner attached gambling calendars as an appendix to
his opening brief. Attachments to a brief are not evidence. See
Rules 143(b), 151(e). The parties, however, stipulated the
gambling calendars, and the Court received them into evidence at
trial. Accordingly, we rely on the gambling calendars admitted
into evidence at trial and not the documents attached to
petitioner’s brief.
                               - 8 -

“undocumented days” generally were days in which (1) Mr.

Gagliardi had funds left over from the prior day to fund his

current day’s gambling, and/or (2) Mr. Gagliardi did not hit a

jackpot (no Form W-2G was issued to him by the casino).

     On those days when he was at the casinos, Mr. Gagliardi

spent 8 to 48 hours continuously in the casinos, averaging

approximately 10 hours per day.   While at the casinos, Mr.

Gagliardi exclusively wagered7 on slot machines, including a game

called “Wildfire”.   After Mr. Gagliardi put cash into a slot

machine, he never cashed out; he would always “play it off”.

While playing a slot machine, Mr. Gagliardi would place at a

minimum four or five bets per minute.   His average wager at a

slot machine at a minimum was $9.   A significant number of Mr.

Gagliardi’s wagers were $16 per slot machine spin, and some

wagers cost $100 or $200 per slot machine spin.

     The money that Mr. Gagliardi used to gamble at the casinos

came from (1) cash from his prior trips to the casinos,8 (2) an

automatic teller machine (ATM) at a 7-Eleven on his way to the

casinos, (3) an ATM inside the casinos, (4) checks written at the

casinos, (5) credit cards, and/or (6) any winnings from slot




     7
        For convenience, we use the terms “wagered”, “bet”,
“wager”, “betting”, “wagering”, etc. interchangeably.
     8
        The only time Mr. Gagliardi left a casino with any money
was when he won a jackpot.
                                - 9 -

machine play that day.9    On the rare occasions when he left the

casino with any money, Mr. Gagliardi would bring the money back

to the casino the following day, and he would then gamble with,

and eventually lose (either the next day or shortly thereafter),

that money.   On numerous days, Mr. Gagliardi would make multiple,

sporadic cash withdrawals, rather than large cash withdrawals, at

the casinos to fund his slot machine play.      He took the money out

in smaller sums, rather than large sums, because he did not plan

on losing as much money as he eventually withdrew.

     The following is a summary of the total numbers of

documented cash withdrawals Mr. Gagliardi made at the casinos:

     Month             1999              2000              2001
January                    33             47                30
February                    6             62                55
March                      12             77                47
April                      46             61                57
May                        46             65                34
June                       31             57                46
July                       64             35                27
August                     54             48                47
September                  67             49                57
October                    64             45                49
November                   68             13                36
December                   67             64                28
   Total                  558            623               513

In addition to these documented withdrawals at the casinos, which

are supported by the gambling calendars, Mr. Gagliardi withdrew

additional cash outside of the casinos’ premises and used it to



     9
        Mr. Gagliardi opined that he “could wallpaper my
bathrooms with just the ATM receipts for millions of dollars.”
                                   - 10 -

gamble at the casinos.       Mr. Gagliardi used the documented cash

withdrawals at the casinos for slot machine play and lost the

cash gambling at the casinos except for the amounts spent on a

few meals he purchased there.

     Mr. Gagliardi won jackpots ($1,200 or more) that were

reported on the Forms W-2G.10       When Mr. Gagliardi won a jackpot,

the slot machine he was playing would “lock up” (the slot machine

could not be wagered on) while a casino cashier would come to the

machine, get a ticket out of the machine, get a Form W-2G, get

Mr. Gagliardi’s signature, and give Mr. Gagliardi the jackpot in

cash.        The time from when the slot machine locked up until Mr.

Gagliardi could wager on that machine again could be anywhere

from 5 minutes to an hour.        When a slot machine locked up because

he won a jackpot, Mr. Gagliardi often would go to an ATM to

withdraw cash so that he could gamble on a different slot machine

until the casino cashier delivered the jackpot money.        The

casinos paid Mr. Gagliardi any jackpot winnings of $1,200 or more

in cash.        Often, Mr. Gagliardi lost $1,200 or more on a different

slot machine by the time the Form W-2G was prepared and he

received the jackpot money.        Mr. Gagliardi did not enjoy winning

jackpots because the machine locked up and he had to spend time




        10
        Mr. Gagliardi also won amounts of less than $1,200, the
amount that triggers the requirement for the casino to issue a
Form W-2G.
                                - 11 -

waiting for money to gamble (either from the casino or by having

to go get money from an ATM).

     Mr. Gagliardi did not get emotionally excited when he won at

the slot machines.   Mr. Gagliardi did not get excited when he won

jackpots of $1,200 or greater because the slot machine would

freeze or lock up until he was issued his slot machine winnings

and a Form W-2G by the casino.    Furthermore, Mr. Gagliardi knew

that eventually he would lose any winnings playing the slot

machines.

     Mr. Gagliardi lived with his girlfriend, Susan Serum (Ms.

Serum).   Ms. Serum went with Mr. Gagliardi to the casinos and

watched him gamble away his money.       While watching Mr. Gagliardi

gamble, Ms. Serum saw that he did not get excited and did not

enjoy playing the slot machines.    Initially, Ms. Serum and Mr.

Gagliardi would drive to the casinos together.      At some point,

Ms. Serum began to take her own car because the ride home from

the casinos was “no fun”.   When she rode with Mr. Gagliardi, she

stayed at the casinos with him until he left.      Often, Ms. Serum

would just follow Mr. Gagliardi around and watch him gamble.      In

or around 2003, Ms. Serum ended her relationship with Mr.

Gagliardi as he was never home because of his pathological

gambling disorder.   After she moved out of Mr. Gagliardi’s home,

he did not notice that she was gone until 2 or 3 days later.
                               - 12 -

     Mr. Gagliardi did not take any vacations during the years in

issue.11   Mr. Gagliardi did not have time for or live a lavish

lifestyle as his life was playing slot machines at the casinos.

Mr. Gagliardi had his home foreclosed upon on at least two

occasions because he was too preoccupied gambling to make the

necessary mortgage payments to the bank.

     Mr. Gagliardi’s children would fly down from Marin County

“every couple weeks” to stay with Mr. Gagliardi.    Mr. Gagliardi

continued to gamble, even for long periods, while his children

came to visit him.

Gambling Log and Mr. Gagliardi’s Gambling Records

     Mr. Gagliardi did not maintain a contemporaneous “gambling

diary” or a “gambling log” that reflected his winnings and losses

from gambling on the slot machines at the casinos.    Mr.

Hunner did not advise Mr. Gagliardi to maintain a contemporaneous

gambling log or diary.


      11
        At one point during the years in issue, however, Mr.
Gagliardi and Ms. Serum were going to go to Las Vegas, Nevada.
While driving to Las Vegas, Mr. Gagliardi told Ms. Serum that he
had to go to the bathroom and they could stop at one of the
casinos so he could use the bathroom. Ms. Serum objected, but
they stopped at one of the casinos approximately 90 miles from
San Diego. Mr. Gagliardi quickly lost $10,000. After losing the
$10,000, and without using the bathroom, Mr. Gagliardi got back
in the car and he and Ms. Serum drove home.

     On one Valentine’s Day, Mr. Gagliardi told Ms. Serum that he
rented a room at a five-star hotel for the weekend with the
Valentine’s Day package. Ms. Serum picked up Mr. Gagliardi, and
the next thing she knew he was driving towards San Diego to go to
one of the casinos to gamble.
                              - 13 -

      Mr. Gagliardi knew that all of the Forms W-2G issued by the

casinos would be reported to the Internal Revenue Service (IRS).

Occasionally the casinos made errors on the Forms W-2G issued to

Mr. Gagliardi.   When he noticed the errors, he would call the

casinos and they would correct these errors.

      Mr. Gagliardi retained all his receipts and records related

to his gambling winnings and losses, including but not limited

to:   ATM receipts, copies of checks cashed at the casinos, bank

and credit card statements reflecting withdrawals made at the

casinos, and Forms W-2G he received from the casinos.    Mr.

Gagliardi provided his tax return preparer (Mr. Hunner) with all

his receipts and records related to his gambling winnings and

losses for use in preparing Mr. Gagliardi’s income tax returns

for the years in issue.   This was the same method employed by Mr.

Gagliardi and Mr. Hunner when Mr. Gagliardi owned American

Redball (his trucking business), and Mr. Gagliardi provided the

similar records and receipts to Mr. Hunner.    Mr. Gagliardi

believed that the records he provided to Mr. Hunner substantiated

his expenses (i.e., gambling losses), just as with American

Redball.

Mr. Gagliardi’s Tax Returns and Respondent’s Determinations for
1999, 2000, and 2001

      Federal income tax of $186,621, $186,623, $183,431 (totaling

$556,675) was withheld from the gross annual lottery payments

made to Mr. Gagliardi during 1999, 2000, and 2001, respectively.
                                - 14 -

Additionally, child support of approximately $6,500 per month was

deducted from the gross annual lottery payments made to Mr.

Gagliardi during the years in issue.

     Mr. Hunner prepared Mr. Gagliardi’s Federal income tax

returns for 1997, 1998, and the years in issue.      Mr. Hunner used

the same method to prepare Mr. Gagliardi’s returns for 1997 and

1998 as he did for the years in issue.       Mr. Hunner never stated

to Mr. Gagliardi that the records Mr. Gagliardi gave to him were

inadequate to prepare his tax returns.

     After receiving voluminous documentation and records from

Mr. Gagliardi regarding his gambling during the years in issue,

Mr. Hunner was comfortable preparing Mr. Gagliardi’s returns for

the years in issue, especially with regard to the gambling loss

deductions claimed on the returns, given the nature and extent of

Mr. Gagliardi’s gambling.    Mr. Hunner believed that Mr.

Gagliardi’s gambling losses were greater than the amounts of

gambling loss deductions claimed on Mr. Gagliardi’s returns.           Mr.

Gagliardi reported the following amounts on his returns:

  Year    Casino Winnings   State Lottery Winnings     Casino Losses
  1999       $127,073             $666,500               ($502,433)
  2000       270,052               666,500                (802,921)
  2001       631,629               666,500              (1,170,140)

     In calculating the amounts of gambling loss deductions to

claim on Mr. Gagliardi’s returns, Mr. Hunner added all of Mr.

Gagliardi’s checks, charges, and withdrawals made at the casinos
                              - 15 -

to the sum of the amounts shown as income on the Forms W-2G that

Mr. Gagliardi received from the casinos.    Additionally, for 1999,

Mr. Hunner added $1,610 for losses from lottery scratchers.    Mr.

Hunner, to be conservative, did not include cash withdrawals Mr.

Gagliardi made outside the casinos (thousands of dollars)--e.g.,

at 7-Eleven--in calculating the amounts of Mr. Gagliardi’s

gambling losses.   Mr. Hunner calculated and reported the amounts

of Mr. Gagliardi’s gambling losses on Mr. Gagliardi’s returns for

the years in issue on the basis of the fact that Mr. Gagliardi

left the casinos with no money or if he left with money, he

returned the following day to the casino and lost it all.    All

gifts that Mr. Gagliardi made during the years in issue were

accounted for in determining the reasonableness of the amounts of

gambling losses claimed for the years in issue.

     In 1999, Mr. Gagliardi received a Federal income tax refund

of $153,669 for 1998.   In 2000, Mr. Gagliardi received a Federal

income tax refund of $104,655 for 1999.    Petitioner lost his 1998

and 1999 refunds gambling at the casinos.

     Mr. Gagliardi timely filed his Federal individual income tax

return for 1999.   In May 2003, Mr. Gagliardi submitted his 2000

and 2001 Forms 1040, U.S. Individual Income Tax Return (2000 and

2001 returns).   Mr. Gagliardi did not timely file his 2000 and

2001 returns because:   (1) He was entitled to a refund for each

year; (2) he thought if he did not file returns, then the refunds
                                - 16 -

would serve as a “forced savings account”; and (3) he did not

want the refunds for the years 2000 and 2001 because he thought

he would spend the tax refunds on gambling at the casinos.       Mr.

Gagliardi “wanted to save that money for later when I run out of

money.”

     Respondent determined that Mr. Gagliardi failed to report

$24,340, $270,052, and $4,521 of gambling income for 1999, 2000,

and 2001, respectively.    The parties agree that respondent’s

aforementioned determinations for 1999 and 2000 should be reduced

by $21,732 to $2,608 for 1999 and by $53,785 to $216,267 for

2000.    Petitioner did not contest, at trial or on brief,

respondent’s determination that he failed to report $4,521 of

gambling income for 2001.    We conclude that petitioner has

conceded or abandoned this item.    See Petzoldt v. Commissioner,

, 683 (1989); Money v. Commissioner, 

, 48

(1987).

        Respondent concedes that Mr. Gagliardi is entitled to

gambling loss deductions (i.e., that his casino losses exceeded

his casino winnings) of $2,181, $24,473, and $59,151 for 1999,

2000, and 2001, respectively.

                       ULTIMATE FINDINGS OF FACT

        Mr. Gagliardi gambled on slot machines and lost at the

casinos (1) all of the money listed as withdrawals on the

gambling calendars--$366,455, $509,719, and $499,729 for 1999,
                              - 17 -

2000, and 2001, respectively,12 (2) all of the jackpots that he

won (as shown on Forms W-2G) gambling, and (3) all gross gambling

winnings won at the casinos not reported on the Forms W-2G.       Mr.

Gagliardi’s gambling losses for each of the years in issue

exceeded the amounts of gambling losses respondent disallowed for

1999, 2000, and 2001.

                              OPINION

I.   Deficiencies

      A.   Applicable Law

      Section 165(a) provides the general rule that there shall be

allowed as a deduction any loss sustained during the taxable year

and not compensated by insurance or otherwise.     Section 165(d)

limits the loss deduction of section 165(a), providing:        “Losses

from wagering transactions shall be allowed only to the extent of

the gains from such transactions.”

      This is a substantiation case:    the issue is whether

petitioner has substantiated the amounts of his gambling losses

to the extent disallowed by respondent.     We note that the amount

of gambling losses petitioner claimed and respondent disallowed

does not exceed the amount of gambling income reported by

petitioner, conceded by petitioner, or determined by respondent

for 1999, 2000, or 2001, respectively.     Commissioner v.


      12
        The cash withdrawals reflected in the gambling calendars
do not include the service charge per withdrawal incurred by Mr.
Gagliardi.
                              - 18 -

Groetzinger, 

, 32 n.11 (1987) (characterizing a State

lottery as “public gambling” in a case treating gambling earnings

as ordinary income); United States v. Maginnis, 

,

1183 & n.6 (9th Cir. 2004) (taxpayer’s lottery winnings enter

into the section 165(d) calculation as wagering gains that

taxpayer’s gambling losses at the casinos can be applied to in

addition to taxpayer’s gambling winnings at the casinos).

     Our resolution of this dispute turns mainly on a

determination of the credibility of the evidence presented.     The

determination of the truth of a matter on the basis of the oral

and documentary evidence “epitomizes the ultimate task of a trier

of the facts--the distillation of truth from falsehood which is

the daily grist of judicial life.”     See Diaz v. Commissioner, 

, 564 (1972).   We “must be careful to avoid making the

courtroom a haven for the skillful liar or a quagmire in which

the honest litigant is swallowed up.    Truth itself is never in

doubt, but it often has an elusive quality which makes the search

for it fraught with difficulty.”     Id.; Hawkins v. Commissioner,

T.C. Memo. 1993-517, affd. without published opinion 

(6th Cir. 1995).

     We determine the credibility of each witness, weigh each

piece of evidence, draw appropriate inferences, and choose

between conflicting inferences.    See Neonatology Associates, P.A.

v. Commissioner, 

, 84 (2000), affd. 

(3d
                                - 19 -

Cir. 2002); see also Gallick v. Baltimore & O.R. Co., 

, 114-115 (1963); Boehm v. Commissioner, 

, 293

(1945); Wilmington Trust Co. v. Helvering, 

, 167-168

(1942).   We decide whether evidence is credible on the basis of

objective facts, the reasonableness of the testimony, and the

demeanor of the witness.     Quock Ting v. United States, 

, 420-421 (1891); Wood v. Commissioner, 

, 605 (9th

Cir. 1964), affg. 

(1964); Pinder v. United States,

, 124-125 (5th Cir. 1964); Concord Consumers Hous.

Coop. v. Commissioner, 

, 124 n.21 (1987).    We have

evaluated each witness’s testimony by observing his or her

candor, sincerity, and demeanor and by assigning weight to the

elicited testimony.   See Neonatology Associates, P.A. v.

at 84.

     If the taxpayer substantiates the deductions claimed, this

satisfies the taxpayer’s burden of proof under Rule 142.

Accordingly, section 7491(a), regarding the shifting of the

burden of proof with respect to the deficiencies in tax, is of

little importance because if the taxpayer fails to substantiate

an item, the burden of proof does not shift to the Commissioner.

Sec. 7491(a)(2)(A).

     B.   The Documentary Evidence

     Petitioner submitted documents entitled “1999 Summary of

Gaming Activities”, “2000 Summary of Gaming Activities”, and
                               - 20 -

“2001 Summary of Gaming Activities” which included:   (1)

Supporting exhibits evidencing Mr. Gagliardi’s Form W-2G jackpot

winnings, (2) supporting exhibits evidencing cash withdrawals

made by Mr. Gagliardi at various casinos, and (3) the gambling

calendars.13   The summaries of gaming activities list living

expenses of $331,341, $251,943, $210,334 for 1999, 2000, and

2001, respectively.14   The summaries of gaming activities were

prepared using original, contemporaneous records from 1999, 2000,

and 2001.

     Petitioner submitted as evidence his bank statements,

including various canceled checks, covering 1999, 2000, and 2001.

Cash withdrawals he made during the years at issue at the various

casinos were marked on the bank statements.   Also included were

checks he cashed at the various casinos.

     Petitioner submitted as evidence his credit card statements

for 1999, 2000, and 2001.   Cash withdrawals he made during the

years at issue at the various casinos via his credit cards were

marked on the credit card statements.


      13
        Mr. Hunner testified that the casinos are not
cooperative in providing records about players’ gambling, that
the casino personnel stated that they do not keep much
documentation regarding a player’s gambling, and that the casinos
do not retain the videos they shoot.
      14
        Additionally, during the years in issue, approximately
$145,000 from Mr. Gagliardi’s lottery proceeds, his Federal tax
refunds, and the proceeds from the sale of his investments were
available to Mr. Gagliardi to gamble with or use for living
expenses. See cashflow analysis, infra p. 21.
                                 - 21 -

     Mr. Gagliardi and his brother assisted Mr. Hunner in

preparing:   (1) The gambling calendars showing most of Mr.

Gagliardi’s gambling activities for 1999 through 2001, (2)

summaries of Mr. Gagliardi’s living expenses for 1999 through

2001, and (3) net worth analyses of Mr. Gagliardi for 1999

through 2001 (based on records from those years).              Mr. Gagliardi

reviewed the summaries of living expenses and net worth

statements to ensure they were complete and accurate.

     Mr. Gagliardi and his brother assisted Mr. Hunner in

preparing a cashflow analysis with supporting documents for each

line item, including a related summary of living expenses for Mr.

Gagliardi, for 1999, 2000, and 2001 using records from the

respective tax years (cashflow analysis).           The cashflow analysis

showed the following:

                             1999         2000          2001         Total
California lottery          $666,500    $666,500       $666,500    $1,999,500
Less: Federal income tax    (186,621)   (186,623)      (183,431)    (556,675)
                             479,879     479,877        483,069     1,442,825
Sale of America funds       160,014       330,000      191,198        681,212
Interest and dividends        1,420          688           639          2,747
Prior year Federal income   153,669       104,655       none          258,324
  tax refund                                          received
Form W-2G cash (casinos)    127,073       270,052      631,629      1,028,754
  Net cash available        922,055     1,185,272     1,306,535     3,413,862
Living expenses             (331,341)   (251,943)      (210,334)    (793,618)

Gambling losses claimed     (502,433)   (802,921)    (1,170,140)   (2,475,494)
Cash remaining               88,281       130,408      (73,939)      144,750
                                   - 22 -

     Mr. Hunner prepared net worth statements with supporting

documents for each line item for Mr. Gagliardi as of December 31,

1998 through 2001 (net worth statements).       The net worth

statements were prepared using records from 1998, 1999, 2000, and

2001.        The net worth statements reflect that Mr. Gagliardi did

not have any unaccounted-for increase in his net worth from

gambling activities for the years at issue.

     Respondent claims that the summaries of living expenses do

not include expenses Mr. Gagliardi incurred.       Respondent objected

to the documents listing petitioner’s living expenses, stating:

     This is a document that respondent would have no way of
     corroborating whether it’s true or not. We simply have
     to rely on the testimony of Mr. Gagliardi. Again, this
     is not the way the government can do business is [sic]
     simply relying on people’s words. * * * [T]here’s just
     absolutely no way I could know whether that was a
     complete list or an incomplete list, whether that was
     true or not true. I certainly wasn’t with Mr.
     Gagliardi during that time period.[15]


        15
              Ironically, the same could be said for a gambling log.

     Additionally, respondent’s counsel claimed that the
Government cannot shoulder the burden of doing a net worth
analysis in a case such as this. The Commissioner is not
required to use indirect methods of proof to establish the amount
of a gambler’s losses. The evidence the Commissioner wishes to
present and the expense and effort the Commissioner wishes to
spend on any given case lie with the Commissioner. We note,
however, that the Commissioner routinely uses the net worth
method to reconstruct income in unreported income cases. See
Holland v. United States, 

(1954).

     Furthermore, respondent’s counsel did not understand the
difference between games of skill and games of chance and could
not answer whether Rev. Proc. 77-29, 1977-2 C.B. 538 (the revenue
                                                   (continued...)
                              - 23 -

     We find petitioner’s summaries of living expenses to be

credible.   Respondent did not establish the amounts of any such

expenses that were not included in the summaries of living

expenses, and respondent failed to present evidence to rebut

petitioner’s summaries of living expenses.

     C.   No “Increased Deficiency”

     At trial and on brief, respondent alleges that Mr. Gagliardi

did not report all of his gambling winnings from the years in

issue (i.e., that he reported only the gambling winnings


(...continued)
 procedure), contains guidance aimed at games of chance, such as
 slot machines. But see Rev. Proc. 77-29, sec. 3.02, 1977-2 C.B.
 at 539. At trial respondent’s counsel had great difficulty
 explaining exactly what a “gambling log” is and what petitioner
 should have recorded in a gambling log. Respondent’s counsel
 stated that it was not realistic for someone to keep track of
 every bet and that the revenue procedure does not require
 taxpayers to keep track of every bet (i.e., the revenue procedure
 does not require a taxpayer to list how much he/she bet for each
 slot machine “pull”). Respondent’s counsel contended that to
 keep a log for slot machine play, per the revenue procedure, a
 taxpayer must know how much was wagered and how much was lost and
 record it contemporaneously. But see

that the revenue procedure provides that
“Verifiable documentation for gambling transactions includes but
is not limited to” Forms W-2G, wagering tickets, canceled checks,
credit records, and bank withdrawals--all of which are present
here.

C.B. at 538. Additionally, the revenue
procedure provides a method, keeping a gambling log, that the IRS
will consider as acceptable evidence for substantiation of
wagering winnings and losses.

contain the
exclusive method for substantiating gambling losses.

C.B. at 538 (“The purpose of this revenue procedure is to
provide guidelines to taxpayers concerning the treatment of
wagering gains and losses for Federal income tax purposes and the
related responsibility for maintaining adequate records in
support of winnings and losses.”).
                                 - 24 -

reflected on Forms W-2G).   Respondent did not determine in the

notice of deficiency, assert in the answer, or pursuant to Rule

41 move to amend the pleadings to assert that Mr. Gagliardi had

any unreported gambling winnings for the years in issue.

Generally, we will not consider issues that are raised for the

first time at trial or on brief.     See Foil v. Commissioner, 

, 418 (1989), affd. 

(5th Cir. 1990);

Markwardt v. Commissioner, 

, 997 (1975).

Accordingly, respondent’s proposed findings of fact regarding

whether Mr. Gagliardi underreported his gambling winnings in

amounts greater than those determined in the notice of deficiency

for the years in issue are specious.16

     D.   The Expert Witnesses

     Respondent also attempted to discredit the two expert

witnesses that testified at trial.

           1.   Dr. Suzanne Pike

     Dr. Suzanne Pike, a clinical psychologist with over 25

years’ experience who specializes and has extensive experience in

treating patients with gambling disorders (over 500 such

patients), testified as an expert witness on behalf of



     16
        To the extent that respondent’s briefs might be
construed as respondent’s arguing for an increased deficiency, we
will not consider such arguments even if they are raised in
respondent’s briefs. See Foil v. Commissioner, 

, 418
(1989), affd. 

(5th Cir. 1990); Markwardt v.
Commissioner, 

, 997 (1975).
                               - 25 -

petitioner.    Dr. Pike has been qualified to testify in both

Federal and local courts as an expert witness on pathological

gambling.   Dr. Pike is a member of the National Council on

Problem Gambling, the California Council on Problem Gambling, and

the American Psychological Association.

     Pursuant to a clinical interview and mental assessment of

Mr. Gagliardi, including the use of two widely accepted

assessment procedures (a.k.a. gambling screens) in the medical

field--the South Oaks Gambling Screen and the Diagnostic

Statistical Manual of Mental Disorders, Fourth Edition (DSM-IV)17

Pathological Gambler Criteria--Dr. Pike concluded that Mr.

Gagliardi suffered from a pathological gambling disorder during

the tax years at issue.   A pathological gambling disorder is a

type of impulse control disorder and mental illness, not an

“addiction”.   This disorder is accepted by the scientific

community and is in a category with kleptomania (the impulse to

steal stemming from emotional disturbance rather than economic

need) and trichotillomania (pulling hair).   Dr. Pike concluded

that Mr. Gagliardi suffered “from the almost delusional belief

that if he gambled long enough, he’d win everything back or break

even.”




     17
        The DSM-IV, published by the American Psychiatric
Association, is the “diagnostic bible” used for diagnosing any
and every mental illness.
                                 - 26 -

     Respondent attempted to discredit Dr. Pike by claiming her

definition of “gambler’s fallacy” was incorrect.    Respondent

relies on a definition of “gambler’s fallacy” he obtained from

Wikipedia.   Respondent did not call any witness, or expert

witness, to counter Dr. Pike’s conclusions.    Respondent’s

reliance on a definition of “gambler’s fallacy” found in

Wikipedia18 is not persuasive.    Dr. Pike and Mr. Nicely, a second

expert witness whose testimony and opinions are discussed in

greater detail infra, credibly explained that there is a

difference in the definition of “gambler’s fallacy” depending on

the field of study--e.g., psychology versus mathematics.      We find

Dr. Pike to be credible and rely on her expert opinion.19

     Dr. Pike corroborated Mr. Gagliardi’s and Ms. Serum’s

testimony that if Mr. Gagliardi walked out of the casinos with

money, he would return the next day or shortly thereafter and

lose it.   Dr. Pike stated that a pathological gambler, such as

Mr. Gagliardi, who walks away from a casino with money will, with




     18
        Although we conclude that the information respondent
obtained from Wikipedia was not wholly reliable and not
persuasive in the instant case, we make no findings regarding the
reliability, persuasiveness, or use of Wikipedia in general.
     19
        We note that Dr. Pike testified that, unlike
recreational and problem gamblers, pathological gamblers take the
“gambler’s fallacy” to a delusional level--they believe if they
gamble long enough, they will win back all their losses and even
more. Dr. Pike also opined that, unless treated for his illness,
Mr. Gagliardi will gamble until he dies or loses all his money.
                                - 27 -

an extremely high probability, go back to a casino the next day

with the money.

           2.   Mark Nicely

     Mark Nicely (Mr. Nicely), a casino gaming industry and math

expert with an expertise in math and slot machines, testified as

an expert witness on behalf of petitioner.    Mr. Nicely has a

bachelor’s degree from Rensselear Polytechnic Institute (which he

attended on a full academic scholarship) from the Honors Program

of the Electrical, Computer, and Systems Engineering Department.

He has taken postgraduate classes at Stanford University and the

University of California at Berkeley in software, software

technology, and math (including statistics, probability, and

financial analysis).    Before working in casino gaming, Mr. Nicely

had over 10 years’ experience as a computer software engineer and

in math and algorithm development.

     At the time of trial, Mr. Nicely had worked in the gaming

industry for 9 years.    He received direct training from the

director of slot operations at the Mirage in Las Vegas, Nevada.

Mr. Nicely was vice president of marketing and promotion, and led

the math department, at Silicon Gaming--a slot machine

manufacturer.     Mr. Nicely was responsible for the development of

games and gaming math, testing equipment, working with

regulators, and training employees on how to design games for

casinos.   After that, he was president and CEO of Wager Works and
                               - 28 -

later was executive vice president of marketing for Wynn

Properties.   For a time, Mr. Nicely offered consulting services

to gaming industry clients in six States and three foreign

countries.    At the time of trial, he was the director of gaming

and design at International Game Technology (IGT)--the largest

slot machine manufacturer in the world.

     Mr. Nicely knows and understands the gaming rules of

different jurisdictions.   He has extensive dealings with

regulators, slot floor operators, directors of slot operations,

and vice presidents of operations in order to understand from

them directly how the slot machines are working.   Mr. Nicely

works with various jurisdictional bodies including the Great

Britain Gaming Board, Alderney Gaming and Isle of Man, and

officials from Montana and other States.

     Mr. Nicely has worked on “class 3 slot machines”,20 “class 2

games”,21 online gaming, and table games.   He has access to casino

operations data and performs analyses to determine whether

various machines have been overpaying or underpaying gamblers.


     20
        “Class 3” slot machines are Nevada-style games where
every outcome is completely independent.
     21
        “Class 2” machines have a pull tab--like a “scratcher”--
or are bingo-like games. The outcomes on a class 2 machine are
all predetermined for pull tabs. Class 2 machines are analogous
to a standard deck of 52 cards--if the four aces are removed from
the deck, there is no chance of getting an ace on the next card.
This continues until “the deal completes” (the culmination of all
outcomes in a given set), and then it starts over again (like a
fresh deck of 52 cards).
                               - 29 -

Mr. Nicely used the same analyses and techniques in this case.

These analyses and techniques are used by all major slot machine

manufacturers.

     Mr. Nicely has no published articles because in his industry

anything worthy of publication is a trade secret.    There is a

code of silence with respect to sharing information--publishing

would amount to giving secrets away to the competition.     For

example, Mr. Nicely has solved a very difficult math problem

associated with a process called “gambler’s ruin”.    His

associates do not have this analytical technique at their

disposal, so they have to use simulators.   Mr. Nicely’s

analytical solution is very powerful, and he would never publish

it because it would be “spilling the beans” to his competitors.

     Mr. Nicely is required to gamble on slot machines for market

research.   It is very important for him to gamble for “real”

money so that he can feel the gambler’s emotions.    Accordingly,

he gambles with his own money and is not reimbursed for his

losses, which is industry policy, so that he feels what the

machine is like.   In every year that he has gambled on slot

machines as part of his job, he has lost money (net).

     Mr. Nicely credibly explained the simple five-step purely

mechanical formula he used to calculate the likelihood and extent

of Mr. Gagliardi’s gambling losses at slot machines during the

years in issue.    Mr. Nicely had no discretion when calculating
                              - 30 -

the results using the aforementioned formula.     We find the

methodology and assumptions made by Mr. Nicely to calculate the

likelihood and extent of Mr. Gagliardi’s gambling losses at slot

machines during the years in issue to be reasonable.

     Mr. Nicely opined on the basis of the extent of Mr.

Gagliardi’s gambling activity that (1) Mr. Gagliardi’s breaking

even from slot machine play was astronomically unlikely

(substantially greater than 1 in 1 trillion);22 and (2) the

estimated net losses from slot machine play for the tax years

1999, 2000, and 2001 were most likely approximately $637,000,

$678,000, and $507,000, respectively, with an error range of plus

or minus $65,000, $72,000, and $83,000, respectively.

     Mr. Nicely’s estimate of Mr. Gagliardi’s total net losses

from slot machine play for the years at issue, $1,822,000 (with

an error range of a maximum net loss of $2,042,00 and a minimum

net loss of $1,602,000), is consistent and greater than Mr.

Gagliardi’s total claimed net gambling losses from slot machine

play for the tax years at issue ($1,446,740).23    Additionally, the


     22
        Mr. Nicely explained that “7.5G” equals 1 in 13
trillion. (Sigma (G) is also designated by “Z” and called a “Z
score” or “Z factor”.) His calculations revealed that the
possibility of Mr. Gagliardi’s breaking even was “19G” which is
infinitesimal (it is so small that the amount technically is
incalculable and assigning a number to it is not practical).
     23
        Petitioner reported casino winnings of $127,073,
$270,052, and $631,629 in 1999, 2000, and 2001, respectively.
See supra p. 14. Petitioner reported casino losses of $502,433,
                                                   (continued...)
                              - 31 -

net gambling losses from slot machine play Mr. Gagliardi claimed

for 1999 and 2000 were significantly lower than the amount

calculated by Mr. Nicely, and the amount claimed for 2001 was

within the error range calculated by Mr. Nicely.

     Respondent attempted to discredit Mr. Nicely by questioning

the formula Mr. Nicely used and Mr. Nicely’s assumptions24 by

which he determined, in his expert opinion, that there was only

an infinitesimal probability that Mr. Gagliardi won money (i.e.,

net) gambling on slot machines during the years in issue.



     23
      (...continued)
$802,921, and $1,170,140 in 1999, 2000, and 2001, respectively.
See supra p. 14. Accordingly, Mr. Gagliardi’s net losses from
gambling at the casinos on slot machines totaled $1,446,740
($375,360, $532,869, and $538,511 for 1999, 2000, and 2001,
respectively). This, however, does not include the $666,500 of
State lottery winnings petitioner received each year during the
years in issue. Commissioner v. Groetzinger, 

, 32
n.11 (1987) (characterizing a State lottery as “public gambling”
in a case treating gambling earnings as ordinary income); United
States v. Maginnis, 

, 1183 & n.6 (9th Cir. 2004)
(taxpayer’s lottery winnings enter into the sec. 165(d)
calculation as wagering gains that taxpayer’s gambling losses at
the casinos can be applied to in addition to taxpayer’s gambling
winnings at the casinos); see supra p. 14.
      24
        For example, respondent took issue with the fact that
Mr. Nicely assumed that Mr. Gagliardi played on average 7 hours
per day on days Mr. Gagliardi gambled. We found that on days
when he was at the casinos, Mr. Gagliardi spent at a minimum an
average of 10 hours per day at the casinos. Accordingly, Mr.
Nicely’s assumptions were conservative and reasonable. Using a
lower number resulted in a greater likelihood that Mr. Gagliardi
won money (i.e., net) gambling on slot machines--i.e., if Mr.
Nicely had used 10 hours per day the figure he would have come up
with would have made it even more improbable that Mr. Gagliardi
won money (i.e., net) gambling on slot machines during the years
in issue.
                                - 32 -

Respondent did not call any witness, or expert witness, to

counter Mr. Nicely’s conclusions.    We find Mr. Nicely to be

credible and rely on his expert opinion.

     Mr. Nicely credibly explained why he used the figures for

return to player (RTP) set forth in his report.    Mr. Nicely

stated that the machines petitioner played are “class 2

electronic pull tab machines” which have an RTP of between 55 and

90 percent.   The operating manual for such machines states that

the default setting is 80 percent RTP.

     We conclude that Mr. Nicely’s “best case scenario” of 90

percent RTP (the figure normally used in the gaming industry) for

Mr. Gagliardi’s expected wins or losses was reasonable, given his

research,25 his expert opinion that the casinos at which Mr.



     25
        Mr. Nicely never worked for any of the casinos where Mr.
Gagliardi gambled. The casinos are under no obligation to
publish their RTP. Mr. Nicely researched the expected RTP at the
casinos in such publications as the Wall Street Journal (70
percent RTP); the Sacramento Bee (90 percent RTP), which quoted
Bill Eadington (the director of Study for Center of Gambling and
Commercial Gaming at the University of Nevada Reno); and the
Orange County Register (90 percent RTP). These news articles all
were about RTP at California Indian Nation casinos.

     Industry contacts of Mr.   Nicely thought the casinos’ RTP was
in the low 80 percent range.    Mr. Nicely also testified that
Washington State promotes its   Indian Nation gaming as having the
best RTP in the United States   and lists the RTP as between 70
percent and 90 percent.

     Mr. Nicely also explained that on some slot machines a
player can win a certain payout only if the player gambles the
maximum amount--known as “buy a bet”, “buy a pay”, or “buy a
bonus”. The maximum expected RTP is obtained only by playing the
maximum bet on this type of machine.
                              - 33 -

Gagliardi played reportedly had less than 90 percent RTP on their

slot machines and the amount of RTP from the casinos varied, and

that the maximum RTP on the “class 2” slot machines Mr. Gagliardi

played was 90 percent.   Furthermore, on the basis of Mr. Nicely’s

report and testimony, we find that it is more likely that Mr.

Gagliardi’s expected wins or losses were accurately reflected by

either the 83 percent or 70 percent RTP figures Mr. Nicely used

rather than the 90 percent RTP calculation.

     Respondent attempted to discredit Mr. Nicely by claiming

that Mr. Nicely incorrectly calculated that Mr. Gagliardi played

slot machines at a frequency of six times per minute, which was

more often than Mr. Gagliardi actually played.   Mr. Gagliardi

played the slot machines at the casinos at a frequency of at

least four to five times per minute during the years in issue.

In his expert report, Mr. Nicely used a figure of 250 bets per

hour for his calculations.   This amounts to approximately 4.17

bets per minute (250 divided by 60).   Accordingly, we find that

Mr. Nicely used a conservative, and reasonable, number of bets in

his calculations to determine that there was only an

infinitesimal chance that Mr. Gagliardi won money (i.e., net)

gambling on slot machines during the years in issue.

     Furthermore, Mr. Nicely testified that regardless of his

calculations and methodology for determining Mr. Gagliardi’s

gambling losses, if Mr. Gagliardi spent all of his slot machine
                                - 34 -

winnings and cash withdrawals at the casinos on slot machine

play, the best methodology to accurately determine Mr.

Gagliardi’s gambling losses for the years in issue would be to

determine the total amount of money wagered on slot machine play.

This methodology is substantially similar to the method Mr.

Hunner used to compute Mr. Gagliardi’s gambling losses.

     E.     Lay Witness Testimonial Evidence

     Mr. Hunner credibly testified that on the unique facts in

this case the methodology for determining and reporting gambling

losses was accurate.

     Ms. Serum corroborated the amount of time Mr. Gagliardi

spent gambling at the casino slot machines during the years in

issue.    Ms. Serum corroborated that Mr. Gagliardi did not live a

lavish lifestyle during the years in issue.

     F.     Conclusion

     At trial, respondent argued:     “When all of the facts of this

case are presented, only one thing is going to be certain--that

Mr. Gagliardi wants the Court to believe that his claimed losses

* * * were incurred because he says so.”26     (Emphasis added.)   We

disagree.    The voluminous contemporaneous and other documentary

evidence, the corroborating testimonial evidence of an eyewitness


     26
        Mr. Nicely stated that because Mr. Gagliardi gambled at
Indian Nation casinos, which are less uniform than casinos
elsewhere, it is uncertain whether using a Players’ Club card on
a “class 2 machine”, or at an Indian Nation casino, could track
all of a player’s gambling.
                              - 35 -

to petitioner’s gambling and daily activities during the years in

issue and of petitioner’s return preparer, and the testimonial

evidence of two experts in addition to petitioner’s testimony

substantiate and establish that petitioner incurred the

disallowed gambling losses.

     We conclude that petitioner substantiated the amount of

disallowed gambling deductions in issue (i.e., in excess of the

amount respondent conceded--see supra pp. 16-17).   Accordingly,

we do not sustain respondent’s disallowance of the gambling loss

deductions Mr. Gagliardi claimed for 1999, 2000, and 2001.     See

also Jackson v. Commissioner, T.C. Memo. 2007-373 (“At trial,

respondent conceded that petitioner had presented sufficient

documentation to substantiate $127,165 in gambling losses”; “This

documentation consisted of casino ATM receipts, canceled checks

made payable to casinos, carbon copies of checks made payable to

casinos, and credit card statements stating that cash was

advanced at the casinos.”).   But see, e.g., Hardwick v.

Commissioner, T.C. Memo. 2007-359 (distinguishable from the case

at bar because gambling losses disallowed because evidence was

inadequate to substantiate the claimed losses); Lutz v.

Commissioner, T.C. Memo. 2002-89 (same).
                               - 36 -

II.   Addition to Tax and Penalty

      Petitioner conceded underreporting certain amounts of

gambling income for 1999, 2000, 2001.     See supra p. 16; see also

Petzoldt v. Commissioner, 

; Money v. Commissioner,

.    Even though we “upheld” the gambling loss

deductions Mr. Gagliardi claimed for 1999, 2000, and 2001--i.e.,

did not sustain respondent’s disallowance of the loss deductions

and concluded that petitioner substantiated the amounts of the

loss deductions respondent disallowed, on account of this

additional unreported income we must decide whether petitioner is

liable for additions to tax pursuant to section 6651(a)(1) for

2000 and 2001 and whether petitioner is liable for penalties

pursuant to section 6662(a) for 1999, 2000, and 2001.

      A.   Burden of Production:   Section 7491(c)

      Section 7491(c) provides that the Commissioner will bear the

burden of production with respect to the liability of any

individual for additions to tax and penalties.       “The

Commissioner’s burden of production under section 7491(c) is to

produce evidence that it is appropriate to impose the relevant

penalty, addition to tax, or additional amount”.       Swain v.

Commissioner, 

, 363 (2002); see also Higbee v.

Commissioner, 

, 446 (2001).     The Commissioner,

however, does not have the obligation to introduce evidence
                                - 37 -

regarding reasonable cause or substantial authority.     Higbee v.

at 446-447.

     B.   Section 6651(a)(1)

     Respondent asserts that petitioner is liable for the

addition to tax pursuant to section 6651(a)(1) for 2000 and 2001.

Section 6651(a)(1) imposes an addition to tax for failure to file

a return on the date prescribed (determined with regard to any

extension of time for filing), unless such failure is due to

reasonable cause and not due to willful neglect.     Section

6651(a)(1) imposes a charge, for each month or fraction thereof

that a return is late, equal to 5 percent of the amount of tax

that should have been shown on the return, subject to a maximum

charge of 25 percent.    The taxpayer must show that he/she

exercised business care and prudence but nevertheless was unable

to file the return within the specified time.     See United States

v. Boyle, 

, 245 (1985); sec. 301.6651-1(c)(1),

Proced. & Admin. Regs.    Willful neglect means a conscious,

intentional failure, or reckless indifference.     United States v.

Boyle, supra at 245.     Generally, factors that constitute

“reasonable cause” include unavoidable postal delays, death or

serious illness of the taxpayer or a member of his immediate

family, or reliance on the mistaken legal opinion of a competent

tax adviser, lawyer, or accountant that it was not necessary to
                              - 38 -

file a return.   McMahan v. Commissioner, 

, 369 (2d

Cir. 1997), affg. T.C. Memo. 1995-547.

     Petitioner admitted that he did not timely file his tax

returns for 2000 and 2001.   Accordingly, respondent has met his

burden of production for the section 6651(a)(1) addition to tax

for 2000.   Respondent, however, bears the burden of proof for the

section 6651(a)(1) addition to tax for 2001 as he raised this

issue for the first time in the answer.   See Rule 142(a)(1);

Sanderling, Inc. v. Commissioner, 

, 756-760 (1976),

affd. in part and revd. in part on other grounds 

(3d

Cir. 1978); Snyder v. Commissioner, T.C. Memo. 2006-92; Paleveda

v. Commissioner, T.C. Memo. 1997-416, affd. without published

opinion 

(11th Cir. 1999).   Our resolution of this

issue, however, does not depend on who bears the burden of proof.

See Snyder v. 

; see also Bhattacharyya v.

Commissioner, T.C. Memo. 2007-19 n.19.

     Petitioner admitted that he did not timely file his returns

for 2000 and 2001.   Petitioner timely filed his returns for the

immediately previous years (1998 and 1999).   Petitioner knew his

returns for 2000 and 2001 were due on April 15 of the following

years.   Petitioner did not exercise business care and prudence in

not timely filing his returns for 2000 and 2001.   See United

States v. Boyle, supra at 245.   Accordingly, petitioner is liable

for the section 6651(a)(1) addition to tax for 2000 and 2001.
                                 - 39 -

     C.   Section 6662

     Respondent argues that petitioner is liable for the section

6662 penalty for 1999, 2000, and 2001.     Pursuant to section

6662(a), a taxpayer may be liable for a penalty of 20 percent on

the portion of an underpayment of tax due to negligence or

disregard of rules or regulations or a substantial understatement

of income tax.   Sec. 6662(b).    An “understatement” is the

difference between the amount of tax required to be shown on the

return and the amount of tax actually shown on the return.       Sec.

6662(d)(2)(A).   A “substantial understatement” exists if the

understatement exceeds the greater of (1) 10 percent of the tax

required to be shown on the return for a taxable year or (2)

$5,000.   See sec. 6662(d)(1)(A).

     The accuracy-related penalty is not imposed with respect to

any portion of the underpayment as to which the taxpayer acted

with reasonable cause and in good faith.     Sec. 6664(c)(1).    The

decision as to whether the taxpayer acted with reasonable cause

and in good faith depends upon all the pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.    Relevant

factors include the taxpayer’s efforts to assess his proper tax

liability, including the taxpayer’s reasonable and good faith

reliance on the advice of a professional.     See

       Regardless of whether respondent satisfied his burden of

production,27 the record establishes that petitioner reasonably

and in good faith relied on his return preparer.    Petitioner

fully disclosed the facts and provided documents supporting his

gambling income (and losses) to his return preparer.

Consequently, we conclude that petitioner had reasonable cause

and acted in good faith as to any underpayment for 1999, 2000,

and 2001.    Accordingly, we hold that petitioner is not liable for

the penalty pursuant to section 6662(a).

III.    Conclusion

       In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we find them to be irrelevant or without merit.

On account of the parties’ concessions at trial and on brief,

Rule 155 computations will be necessary.




       27
        Pursuant to the parties’ concessions, our findings, and
our conclusions, it is unclear at this time whether there is a
substantial understatement.

     We note that respondent bears the burden of proof for the
increased amount of the sec. 6662 penalty for 2000 that he raised
for the first time in the answer. See Rule 142(a)(1);
Sanderling, Inc. v. Commissioner, 

, 756-760 (1976),
affd. in part and revd. in part on other grounds 

(3d
Cir. 1978); Snyder v. Commissioner, T.C. Memo. 2006-92; Paleveda
v. Commissioner, T.C. Memo. 1997-416, affd. without published
opinion 

(11th Cir. 1999). Our resolution of this
issue, however, does not depend on who bears the burden of proof.
See Snyder v. 

.
                        - 41 -

To reflect the foregoing,


                                  Decision will be entered

                             under Rule 155.