Lori Lamb and husband Gary used Gary’s construction business, Gary Lamb Construction, accounts as pocket money for gambling. Being Oklahomans, they patronized the Kickapoo Casino. When the run of play turned against them, Lori and Gary used the Gary Lamb Construction ATM cards to keep them in the game.

 Should be a taxable distribution, right?

Maybe not, and in Lori’s and Gary’s case definitely not. See Lori R. Lamb, 2013 T. C. Memo. 155, filed 6/20/13. Gary’s case is consolidated with Lori’s, so you’ll find them under one caption, Judge Marvel having drawn both this happy couple and their attorney, the redoubtable Freddie, star of my blogpost “How Not To Do It”, 11/20/12.

Freddie’s up to his old tricks, not handing over documents, trying to smuggle in evidence he never told opposing counsel about, and claiming since a paralegal from IRS asked him for documents he didn’t have to produce them, because he had to answer only to another attorney. Freddie’s a real peach.

But Freddie wins one piece of the case.

Judge Marvel: “Although petitioners both testified that they regularly withdrew cash from the business bank accounts for personal gambling purposes, respondent has failed to show that these withdrawals constituted taxable income to them. Respondent [IRS] failed to introduce any evidence regarding the financial status of Gary Lamb Construction or whether Gary Lamb Construction earned any taxable business income during the year in issue. More importantly, respondent failed to introduce any evidence to show that the withdrawals represented taxable income to petitioners during the year in issue, rather than, for example, a nontaxable return of capital or a loan repayment. Accordingly, we are unable to find that petitioners received additional unreported taxable income attributable to their cash withdrawals from the business bank accounts during the year in issue.” 2013 T. C. Memo. 155, at p. 17.

IRS had burden of proof since IRS wild-carded in the deemed distribution argument post-deficiency.

So Freddie gets his clients a Rule 155 for the rest, although it doesn’t look too good for his clients.