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Thirdly, from the testimony of the IRS revenue agent and
from petitioners’ trial memorandum it appears that, during the
years in issue, petitioners went to Atlantic City, New Jersey,
“about 4-5 times a year”, and that they gambled while in Atlantic
City. Petitioners did not report gambling winnings and did not
deduct gambling losses. Since 1934, the Federal tax laws have
required that nonbusiness gamblers--petitioners strenuously
insist that they are not in the business of being gamblers--must
report their winnings “above the line” and may deduct their
losses only “below the line”. See discussion in Gajewski v.
Commissioner, 84 T.C. at 982-983. This bifurcation of gambling
winnings, and losses for nonbusiness gamblers has been mandated
even when it is clear that the taxpayers’ losses exceed their
winnings and they are not entitled to itemize their deductions--
in effect, taxing the nonbusiness taxpayers on their gross
winnings. See Johnston v. Commissioner, 25 T.C. 106 (1955).
Thus, petitioners’ acknowledgment that they did some nonbusiness
gambling in each of the years in issue is another basis for the
IRS revenue agent’s belief that petitioners may have some
unreported income that may be reconstructed by the bank deposits
method.
Accordingly, we conclude that respondent was justified in
using the bank deposits method to reconstruct petitioners’
income.
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