4
the amount of $740; (2) office expenses and supplies totaling
$37; (3) mileage allotment for travel to the casinos in the
amount of $340; (4) meals at the casinos in the amount of $144;
and (5) losses in the amount of $46,592. Petitioners also
attached a Form 8275 to their return, wherein they disclosed the
nature and extent of their gambling activities in great detail.
On September 2, 1992, after their 1990 Federal income tax
return was selected for examination, petitioners met with Mr.
Lynn Peterson, an Appeals Officer of the Internal Revenue Service
(IRS), to discuss their case. In a letter dated June 17, 1993,
Mr. Peterson stated in pertinent part:
You and I discussed you and your wife's approach to slot
machine playing and I told you that I accepted that you were
in a trade or business. I still accept that you are in a
trade or business. * * *
* * * Absent any other provision of the Internal Revenue
Code, section 162 of the Code would allow you to take the
net loss from your trade or business of slot machine player
and offset income from other sources.
* * * * * *
[However,] [t]he problem is Internal Revenue Code section
165(d). This section reads as follows:
(d) Wagering Losses.--Losses from wagering transactions
shall be allowed only to the extent of the gains from
such transactions. * * *
* * * If you wish a report to accept the adjustments, please
call or write by 7/15/93. If I do not hear from you at all,
then I will have to send you the report, called a statutory
notice of deficiency, that will allow you to take the issues
to the Tax Court.
In the notice of deficiency dated September 24, 1993,
respondent determined that petitioners were not entitled to
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