Today the Tax Court looked at the case of a "pathological gambler." This isn't a problem gambler. As the Court noted,
"A pathological gambling disorder is a type of impulse control disorder and mental illness, not an “addiction”. This disorder is accepted by the scientific community and is in a category with kleptomania (the impulse to steal stemming from emotional disturbance rather than economic need) and trichotillomania (pulling hair). Dr. Pike concluded that Mr. Gagliardi suffered “from the almost delusional belief that if he gambled long enough, he’d win everything back or break even.”"
The IRS claimed that this pathological gambler didn't have any back-up to claim his gambling losses from 1999-2001. The taxpayer disagreed. Which side did the Court believe?
The preferred method of keeping a record of gambling wins and losses is through a gambling log. The gambler in question, Mr. Gagliardi, didn't do that. He had won the lottery in the early 1990s and began, in the late 1990s, to use the proceeds to gamble on slot machines at local Indian casinos. He didn't keep a log; however, he did keep all of his W-2Gs (issued when he won a jackpot of $1200 or more) and his ATM receipts. Mr. Gagliardi testified during the trial Mr. Gagliardi opined that he “could wallpaper my
bathrooms with just the ATM receipts for millions of dollars.” His ex-girlfriend also testified to his gambling.
But this wasn't good enough for the IRS. They didn't believe Mr. Gagliardi, and believed that the
only method to substantiate losses was through a gambling log. The Court noted that this isn't the case.
"At trial respondent’s counsel had great difficulty explaining exactly what a “gambling log” is and what petitioner should have recorded in a gambling log. Respondent’s counsel stated that it was not realistic for someone to keep track of every bet and that the revenue procedure does not require taxpayers to keep track of every bet (i.e., the revenue procedure does not require a taxpayer to list how much he/she bet for each slot machine “pull”). Respondent’s counsel contended that to keep a log for slot machine play, per the revenue procedure, a taxpayer must know how much was wagered and how much was lost and record it contemporaneously. But see id.
"We also note that the revenue procedure provides that “Verifiable documentation for gambling transactions includes but is not limited to” Forms W-2G, wagering tickets, canceled checks, credit records, and bank withdrawals--all of which are present here. Id. sec. 3, 1977-2 C.B. at 538. Additionally, the revenue procedure provides a method, keeping a gambling log, that the IRS will consider as acceptable evidence for substantiation of wagering winnings and losses. Id. It does not contain the exclusive method for substantiating gambling losses. Id. sec. 1, 1977-2 C.B. at 538 (“The purpose of this revenue procedure is to provide guidelines to taxpayers concerning the treatment of wagering gains and losses for Federal income tax purposes and the related responsibility for maintaining adequate records in support of winnings and losses.”)."
Mr. Gagliardi also had two expert witnesses who testified on his behalf. Dr. Suzanne Pike (noted above) testified that Mr. Gagliardi was a pathological gambler, and as the Court noted, "Dr. Pike stated that a pathological gambler, such as Mr. Gagliardi, who walks away from a casino with money will, with an extremely high probability, go back to a casino the next day with the money." In fact, the outlook for Mr. Gagliardi is bleak if he continues gambling. The Court stated in a footnote,
"We note that Dr. Pike testified that, unlike recreational and problem gamblers, pathological gamblers take the “gambler’s fallacy” to a delusional level--they believe if they gamble long enough, they will win back all their losses and even more. Dr. Pike also opined that, unless treated for his illness, Mr. Gagliardi will gamble until he dies or loses all his money."
Also testifying for Mr. Gagliardi was Mark Nicely, a casino gaming expert who currently works at International Game Technology, a leading manufacturer of slot machines. Mr. Nicely testified that at the Class 2 machines that Mr. Gagliardi gambled, his chance of
breaking even was worse than one in one trillion. At the casinos Mr. Gagliardi gambled the 'payback' on slot machines is probably worse than 90 percent (likely either 83% or 70%).
The IRS had no counter to the testimony which showed fairly conclusively that Mr. Gagliardi gambled and lost. His gambling losses were upheld.
There are two other important points to this case. First, Mr. Gagliardi had to go to Tax Court, hire two attorneys, have expert testimony, and then he won his case. Had he kept a gambling log it's likely he wouldn't have needed to go through the effort. And second, the IRS has a lot of problems dealing with gamblers. Most of the personnel within the IRS doesn't have experience with gambling, and even an IRS attorney had trouble explaining an IRS-suggested procedure on gambling (a gambling log).
Case: Gagliardi v. Commissioner, T.C. Memo 2008-10