Preben Norgaard Sandra C. Norgaard v. Commissioner Internal Revenue Service

Petitioners Preben Norgaard and Sandra Norgaard reported gambling winnings on their 1983 tax return. They also declared offsetting gambling losses on their tax return for that year. The Internal Revenue Service (“I.R.S.”) audited and disallowed the loss deductions. A deficiency notice for the tax owed was mailed to the Nor-gaards, as well as for a fraud penalty, and a penalty for substantial understatement of income tax due. The taxpayers contested the imposition of the deficiency and penalties in the tax court. The tax court held that the Norgaards had failed to substantiate the losses, that they were negligent, and liable for the penalty for substantial understatement. The Norgaards appealed. We affirm the tax due determination, but reverse the penalty assessments.

FACTUAL AND PROCEDURAL BACKGROUND

Preben and Sandra Norgaard, at all relevant times, lived in San Diego, California. Preben was employed by his father as a residential property manager in San Diego at the Mission Hills Apartments. The Nor-gaards reported this income for 1983 in the amount of $15,790. Mr. Norgaard did not have a personal checking account, but paid personal expenses with checks drawn on the Mission…