Kyle R. Lavorante v. Commissioner of Revenue (November 7, 2012)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


KYLE R. LAVORANTE		  v.	 	COMMISSIONER OF REVENUE

							 		   
Docket No. C310306 					Promulgated:
  						November 7, 2012

							   
	This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the Commissioner of Revenue (the "Commissioner" or the "appellee"), to abate income taxes assessed against Kyle R. Lavorante ("Mr. Lavorante" or the "appellant") for tax years 2006, 2007 and 2008 ("tax years at issue"). 
	Commissioner Scharaffa heard this appeal and was joined by Chairman Hammond and Commissioners Rose, Mulhern, and Chmielinski in a decision for the appellee.  
These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.    

Kyle R. Lavorante, pro se, for the appellant.  	
Andrew M. Zaikis, Esq. and Arthur M. Zontini, Esq. for the appellee.  





FINDINGS OF FACT AND REPORT

	On the basis of the exhibits and testimony offered into evidence at the hearing of this appeal, the Appellate Tax Board (the "Board") made the following findings of fact.  
	The appellant timely filed Massachusetts Resident Income Tax Returns, Forms 1, for tax years 2006, 2007 and 2008 (the "tax years at issue").  For each of the tax years at issue, Mr. Lavorante claimed the status of a professional gambler and deducted his wagering losses as business expenses.  Following an audit of the appellant's tax returns for the tax years at issue, the Commissioner determined that the appellant failed to prove that his gambling activities rose to the level of a trade or business and, therefore, his Schedule C business deductions were disallowed.  On January 25, 2010, the Commissioner issued a Notice of Intention to Assess ("NIA I"), notifying the appellant of her intent to assess additional taxes, exclusive of interest and penalties, in the amounts of $20,936 for 2006, $13,656 for 2007, and $5,895 for 2008.  On March 13, 2010, the Commissioner sent to the appellant a Notice of Assessment ("NOA I"), assessing the additional taxes proposed on NIA I, plus interest and penalties, for the tax years at issue.
	On March 23, 2010, the appellant filed Applications for Abatement with the Commissioner, contesting the Commissioner's assessments for the tax years at issue.  By Notice of Abatement Determination dated August 25, 2010, the Commissioner notified the appellant that the abatement applications for the tax years at issue were denied.
	The Commissioner issued a second NIA dated August 16, 2010 ("NIA II"), proposing to assess additional tax for tax year 2006 in the amount of $488.20, exclusive of interest and penalties, based on information received from the Internal Revenue Service ("IRS").  On October 1, 2010, the Commissioner issued a second NOA ("NOA II") to the appellant assessing the additional tax for tax year 2006 proposed on NIA II, plus interest and penalties.  The appellant timely filed an appeal with the Board on October 28, 2010.  Based on these facts, the Board found that it had jurisdiction to hear and decide this appeal.     
	At all material times, Mr. Lavorante resided at 131 East Belcher Road in Foxborough.  Mr. Lavorante was employed as a laborer in the cement business until 2006, when he broke his hand in an accident unrelated to his employment.  He testified that he had been an occasional gambler for the twenty years preceding the accident and that after his unemployment benefits expired in 2006, he "tried making a living betting on horses."  Mr. Lavorante further testified that during the tax years at issue, he went to the Plainridge Racecourse at least five days a week, where he typically sat in a room by himself and "studied hard."  However, he was not specific about what his studies entailed or the time he devoted to gambling on any given occasion.  
	Mr. Lavorante did not maintain a separate bank account or financial records for his alleged trade or business of gambling.  Instead, he testified that he recorded winnings only if he "came home with more" money than he started with and that he jotted down his winnings and losses in a notebook, which he had discarded.  He also testified that during the tax years at issue he was engaged in simulcast betting from his home.  However, Mr. Lavorante failed to offer any specifics as to the frequency and length of time spent on this activity.      
	In support of his claimed deductions, the appellant offered into evidence a self-prepared computer printout for each of the tax years at issue, which included his name on the first page and a running list of the days of the year with corresponding dollar amounts.  Neither Mr. Lavorante, nor the documents themselves, provided any explanation of the dollar amount entries indicating whether they were wagers, winnings or losses.  Further, the documents failed to provide the name and address of the gambling establishments where the presumed gambling activities occurred.  
	The appellant also submitted copies of his "W2G Individual Recap" statements prepared by Plainridge Racecourse, which listed only his winnings in excess of $600 for each of the tax years at issue, and a copy of his phone-betting account statement, which listed the total amounts of deposits, winnings and wagers for all tax years.  Neither of these documents, however, provided any detailed information as to the frequency of the appellant's gambling activities, his gambling winnings of $600 or less, or his wagering losses.  
	Mr. Lavorante returned to his prior full-time employment as a laborer in the concrete business in 2009. There is no evidence that he continued his gambling activities or claimed to be in the trade or business of gambling after the tax years at issue.	On the basis of these findings, the Board further found and ruled that the appellant failed to prove that he was engaged in the trade or business of gambling.  The appellant did not provide detailed information concerning the frequency and duration of his gambling activities or the amount of his wagering losses; rather, he offered only incomplete, vague, and largely unsubstantiated evidence of his gambling activities during the tax years at issue.  Instead of an accurate journal of his gambling activity listing the names and addresses of the establishments where the appellant gambled, the dates and specific types of his wagers, and the amounts won or lost, he offered unexplained and largely unsubstantiated summaries.  Neither the appellant's testimony nor the documents he submitted provided credible, persuasive, and detailed evidence of his gambling activities during the tax years at issue.
Accordingly, the Board found and ruled that the appellant failed to establish that he was in the trade or business of gambling and, therefore, he was not entitled to deduct his wagering losses from the amount of his winnings.  Accordingly, the Board issued a decision for the appellee in this appeal.     

OPINION
For Massachusetts income tax purposes, "[r]esidents shall be taxed on their taxable income."  G.L. c. 62, § 4.  The starting point for determining Massachusetts taxable income is Massachusetts gross income, which is "federal gross income" with certain modifications not relevant to this appeal.  G.L. c. 62, § 2(a).  Federal gross income includes income "from whatever source derived," and thus includes gambling income.  See Internal Revenue Code ("Code") § 61; Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23 (1987).  Thus, gambling winnings are included in Massachusetts gross income.  Id.; see also Jones v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2011-854, 881; Technical Information Release ("TIR") 79-6; Department Directive ("DD") 86-24 and DD 03-3.
In the present appeal, the appellant claimed deductions for his gambling losses.  Massachusetts adopts the deductions allowed in Code § 62, with certain modifications not relevant to this appeal.  See  G.L. c. 62, § 2(d)(1).  Code § 62(a)(1) provides for "deductions allowed by this chapter (other than by part VII of this subchapter) [namely, Code §§ 161 through 199] which are attributable to a trade or business carried on by the taxpayer."  In particular, Code § 162(a) allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business."  As a deduction allowed under Code § 62(a)(1), the trade or business deduction is in turn allowed to arrive at Massachusetts Part B adjusted gross income under G.L. c. 62, § 2(d)(1).  Accordingly, a Massachusetts taxpayer may deduct all ordinary and necessary expenses paid or incurred in carrying on the trade or business of gambling, including wagering losses subject to the limitation of Code § 165(d) discussed below.
In contrast to federal law, Massachusetts has not adopted Code § 212, which allows a deduction for ordinary and necessary expenses paid or incurred for the production or collection of income, even though not connected with a trade or business.  Code § 212 is found at part VII of subchapter B, which is explicitly excluded from the deductions allowed under Code § 62(a)(1) and, therefore, not deductible for Massachusetts purposes under G.L. c. 62, § 2(d)(1).  Accordingly, a Massachusetts taxpayer may deduct only gambling expenses that constitute ordinary and necessary expenses in the conduct of the trade or business of gambling.  See Jones, Mass. ATB Findings of Fact and Reports 2011 at 883; see also DiCarlo v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1989-119.
In addition, Code § 165(d) specifically allows the deduction of wagering losses but only to the extent of gains from wagering transactions.  However, the gambling loss deduction for Massachusetts purposes is subject to the basic restriction of G.L. c. 62, § 2(d)(1) and Code § 62(a)(1) that such losses are deductible only if they are incurred in a trade or business.  
Therefore, taxpayers may deduct gambling losses only if: (1) the taxpayer demonstrates that he or she is in the "trade or business" of gambling; (2) the expenses constitute ordinary and necessary expenses in the conduct of the trade or business of gambling; and (3) gambling losses do not exceed gains from gambling.  Jones, Mass. ATB Findings of Fact and Reports 2011 at 883; see also Leite v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2006-842, 848; DiCarlo, Mass. ATB Findings of Fact and Reports 1989 at 124-25.  
In the present appeal, the taxpayer has claimed deductions for his gambling losses which do not exceed his gambling winnings.  The parties do not dispute that gambling losses would be "ordinary and necessary" expenses in a gambling trade or business.  Accordingly, the only issue in dispute is whether the appellant was engaged in the trade or business of gambling.
The United States Supreme Court ruled in Groetzinger that a taxpayer is engaged in the trade or business of gambling:  "if one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and it is not a mere hobby." Groetzinger, 480 U.S. at 35. For Massachusetts tax purposes, the Commissioner has promulgated DD 03-3, which provides a list of factors which are "not exclusive" but are intended to "provide illustrative guidance" in determining whether a taxpayer meets the criteria to qualify as being engaged in the trade or business of gambling.  These factors are as follows:
gambling activities are entered into and carried on in good faith for the purpose of making a profit; 
gambling activities are carried on with regularity;
gambling activities are pursued on a full-time basis, or to the fullest extent possible if taxpayer is engaged in another trade or business or has employment elsewhere;
gambling activities are solely for the taxpayer's own account and taxpayer does not function as a bookmaker;
taxpayer maintains adequate records, including accounting of daily wagers, winnings and losses (see I.R.S. Rev. Proc. 77-29);
the extent and nature of taxpayer's activities which further the development of a gambling enterprise; and
taxpayer claims deductions associated with the conduct of a trade or business for gambling-related expenses.
As indicated above, the adequate records requirement in DD 03-3 references Revenue Procedure 77-29, promulgated by the IRS ("I.R.S. Rev. Proc. 77-29").  In its description of adequate records, I.R.S. Rev. Proc. 77-29 provides in relevant part:
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. In general, the diary should contain at least the following information: 

1) Date and type of specific wager or wagering activity;
2) Name of gambling establishment;
3) Address or location of gambling establishment;
4) Name(s) of other person(s) (if any) present with taxpayer at gambling establishment; and
5) Amount(s) won or lost.
Like the factors set forth in DD 03-3, those in I.R.S. Rev. Proc. 77-29 are not intended to be exclusive, but rather are meant as guidelines for taxpayers.  
Resolution of the issue of whether a taxpayer is engaged in the trade or business of gambling "requires an examination of the facts in each case."  Groetzinger, 480 U.S. at 37.  The taxpayer in Groetzinger engaged in pari-mutuel betting on dog races on a full-time basis, going to the track 6 days a week and spending 60-80 hours per week on "gambling-related endeavors."  480 U.S. at 24.  The taxpayer also "kept a detailed accounting of his wagers and every day noted his winnings and losses in a record book."  Id. at 25.  On the basis of these facts, the Court found and ruled that the taxpayer was engaged in the trade or business of gambling.  Id. at 36. 
In DiCarlo, the taxpayer decided to "pursue pari-mutuel betting and gambling at dog tracks as [his] livelihood for the foreseeable future."  Mass. ATB Findings of Fact and Reports 1989 at 121. He averaged eight to ten hours a day, 7 days a week, on his gambling activities.  Id.  Moreover, the taxpayer offered into evidence "summaries of his daily totals bet, winnings, and net gains and losses."  Id. at 122.  Based on the evidence presented, the Board ruled that the taxpayer's gambling activities qualified as a trade or business.  Id. at 123.  
In Menard v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1990-222, the taxpayer was engaged in betting on greyhound dog races.  He devoted many hours to studying the dogs, watching and analyzing three replays of each race, and also attending "schooling races."  Id. at 238.  The taxpayer also kept detailed, contemporaneous logs of his nightly wagers and winnings and kept orderly account of his tickets and "maintained extensive, detailed, business-like records."  Id.  Based on these facts, the Board found and ruled that the taxpayer "pursued his gambling activities at the track of his choice to the fullest extent possible each day, in good faith, and with regularity and, therefore, his gambling activities constituted a trade or business.  Id. at 238-39.
More recently, in Jones, the Board found that the taxpayer spent between 60 and 80 hours per week on gambling activities.  Mass. ATB Findings of Fact and Reports 2011 at 870.  The Board further found that the taxpayer maintained voluminous records, including personal calendars detailing his gambling activities; race track programs, with his losing ticket stubs from the day attached to the program together with a notation of the date, number of tickets and total amount of wagers; "tax organizers" that list his income and expenses and the information from the Forms W-2G; and the appellant's "tax books" for each year.  Id. at 889-90.  On the basis of the evidence of record, the Board ruled that the taxpayer was engaged in the trade or business of gambling. Id. at 893.
Conversely, in Leite v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2006-842, the taxpayer operated a bread delivery business and also gambled on slot machines during the tax year at issue.  The taxpayer testified that he devoted considerable time reading books and talking with other gamblers.  However, the taxpayer did not elaborate on how much time he devoted to studying and researching his gaming pursuits or the amount of time he devoted to gaming.  Id. at 844.  Moreover, the taxpayer failed to maintain separate books for his alleged gaming business.  The only record of his gambling activities "consisted of a few hand-written pages of entries on ledger paper."  Id. at 846.  Thus, the Board found that Mr. Leite's playing the slot machines was "more plausible a hobby given .  .  . the shoddiness of his record-keeping."  Id. at 852.
In the present appeal, the Board found that the appellant failed to provide detailed information concerning the frequency and duration of his gambling activities or the amount of his wagering losses; rather, he offered only incomplete, vague, and largely unsubstantiated evidence of his gambling activities during the tax years at issue.  Instead of an accurate journal of his gambling activity listing the names and addresses of the establishments where the appellant gambled, the dates and specific types of his wagers, and the amounts won or lost, he offered unexplained and unsubstantiated summaries.  Neither the appellant's testimony nor the documents that he submitted provided credible, persuasive evidence of his gambling activities during the tax years at issue.

Accordingly, the Board found and ruled that the appellant failed to prove that he was in the trade or business of gambling and, therefore, he was not entitled to deduct his wagering losses from the amount of his winnings.  On this basis, the Board issued a decision for the appellee in this appeal.   


                             THE APPELLATE TAX BOARD 


             
				   By: ________________________________
					  Thomas W. Hammond, Jr., Chairman


A true copy:

Attest: _________________________
	      Clerk of the Board

ATB 2012-1149