TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, January 27, 2008

Tax Court Accepts Doctor's Expert Testimony That Taxpayer Was "Pathological Gambler" in Face of IRS Objection Based on Wikipedia

The Tax Court last week found that a taxpayer had adequately substantiated $2.5 million in casino gambling losses over a three-year period.  Gagliardi v. Commissioner, T.C. Memo. 2008-10 (1/24/08).  The case is remarkable both for the sad picture it paints of a person addicted to gambling as well as for the Tax Court's acceptance of expert testimony that the taxpayer was a "pathological gambler," which the Service attempted to disprove via Wikipedia:

Mr. Gagliardi did not graduate from high school. ...  In 1989, Mr. Gagliardi purchased an 18-wheel truck and thereafter ran his own trucking business, called American Redball, as a sole proprietorship. ...

In 1991, Mr. Gagliardi won approximately $26,660,000 from the California lottery. Mr. Gagliardi elected to receive payment of the lottery proceeds in 20 annual payments of approximately $1,333,000 each ... At the time he won the lottery proceeds, Mr. Gagliardi was 29 years old, was married, and had two children. Since winning the lottery proceeds, Mr. Gagliardi has not been employed. ...

During 1994, Mr. Gagliardi and his wife divorced. Pursuant to the property settlement in the divorce decree, Mr. Gagliardi and his ex-wife evenly split the original annual lottery payment. Accordingly, after the divorce, Mr. Gagliardi's gross annual lottery payment was $666,500. After Mr. Gagliardi divorced, his two children lived with his ex-wife in Marin County, California. ...

In or around 1996, Mr. Gagliardi had a friend who was dying of cancer. In 1996, Mr. Gagliardi's friend asked Mr. Gagliardi to be his companion on a trip to one of the casinos owned and operated by California Indian tribes in San Diego County. Mr. Gagliardi gambled infrequently before winning the lottery. After the trip with his friend, Mr. Gagliardi started playing the slot machines at the casinos frequently and became a "pathological gambler". Since becoming a pathological gambler, Mr. Gagliardi has liquidated most of his investments and savings to gamble. ...

Mr. Gagliardi spent most of his waking hours at the casinos. He had no outside interests, and generally if he was not at the casinos he was at home. A typical day for Mr. Gagliardi generally consisted of waking up, showering, going to a 7-Eleven, getting coffee, going to the casinos, gambling, returning home, sleeping, waking up, and returning to the casino immediately thereafter. [Fn.4:  On the day of trial, Mr. Gagliardi was gambling at one of the casinos until 5 a.m. (trial started at approximately 9:30 a.m.) and in his testimony implied that he would return to the casinos to gamble after the trial was over.] Occasionally, Mr. Gagliardi spent up to 48 hours continuously in the casinos before returning home. Mr. Gagliardi spent an average of 20 days per month at the casinos (at least 209 days, 260 days, and 257 days during 1999, 2000, and 2001, respectively).

On those days when he was at the casinos, Mr. Gagliardi spent 8 to 48 hours continuously in the casinos, averaging approximately 10 hours per day. While at the casinos, Mr. Gagliardi exclusively wagered on slot machines, including a game called "Wildfire". After Mr. Gagliardi put cash into a slot machine, he never cashed out; he would always "play it off". While playing a slot machine, Mr. Gagliardi would place at a minimum four or five bets per minute. His average wager at a slot machine at a minimum was $9. A significant number of Mr. Gagliardi's wagers were $16 per slot machine spin, and some wagers cost $100 or $200 per slot machine spin.

The money that Mr. Gagliardi used to gamble at the casinos came from (1) cash from his prior trips to the casinos, (2) an automatic teller machine (ATM) at a 7-Eleven on his way to the casinos, (3) an ATM inside the casinos, (4) checks written at the casinos, (5) credit cards, and/or (6) any winnings from slot machine play that day.  [Fn.9: Mr. Gagliardi opined that he "could wallpaper my bathrooms with just the ATM receipts for millions of dollars."]  On the rare occasions when he left the casino with any money, Mr. Gagliardi would bring the money back to the casino the following day, and he would then gamble with, and eventually lose (either the next day or shortly thereafter), that money. On numerous days, Mr. Gagliardi would make multiple, sporadic cash withdrawals, rather than large cash withdrawals, at the casinos to fund his slot machine play. He took the money out in smaller sums, rather than large sums, because he did not plan on losing as much money as he eventually withdrew. ...

Mr. Gagliardi won jackpots ($1,200 or more) that were reported on the Forms W-2G.10 When Mr. Gagliardi won a jackpot, the slot machine he was playing would "lock up" (the slot machine could not be wagered on) while a casino cashier would come to the machine, get a ticket out of the machine, get a Form W-2G, get Mr. Gagliardi's signature, and give Mr. Gagliardi the jackpot in cash. The time from when the slot machine locked up until Mr. Gagliardi could wager on that machine again could be anywhere from 5 minutes to an hour. When a slot machine locked up because he won a jackpot, Mr. Gagliardi often would go to an ATM to withdraw cash so that he could gamble on a different slot machine until the casino cashier delivered the jackpot money. The casinos paid Mr. Gagliardi any jackpot winnings of $1,200 or more in cash. Often, Mr. Gagliardi lost $1,200 or more on a different slot machine by the time the Form W-2G was prepared and he received the jackpot money. Mr. Gagliardi did not enjoy winning jackpots because the machine locked up and he had to spend time waiting for money to gamble (either from the casino or by having to go get money from an ATM). ...

Mr. Gagliardi did not take any vacations during the years in issue. [Fn.11:  At one point during the years in issue, however, Mr. Gagliardi and Ms. Serum were going to go to Las Vegas, Nevada. While driving to Las Vegas, Mr. Gagliardi told Ms. Serum that he had to go to the bathroom and they could stop at one of the casinos so he could use the bathroom. Ms. Serum objected, but they stopped at one of the casinos approximately 90 miles from San Diego. Mr. Gagliardi quickly lost $10,000. After losing the $10,000, and without using the bathroom, Mr. Gagliardi got back in the car and he and Ms. Serum drove home.] Mr. Gagliardi did not have time for or live a lavish lifestyle as his life was playing slot machines at the casinos. Mr. Gagliardi had his home foreclosed upon on at least two occasions because he was too preoccupied gambling to make the necessary mortgage payments to the bank. Mr. Gagliardi's children would fly down from Marin County "every couple weeks" to stay with Mr. Gagliardi. Mr. Gagliardi continued to gamble, even for long periods, while his children came to visit him. ...

The Tax Court accepted expert testimony that Mr. Gagliardi was a "pathological gambler," which the Service attempted to disprove via Wikipedia:

Pursuant to a clinical interview and mental assessment of Mr. Gagliardi, including the use of two widely accepted assessment procedures ... Dr. Pike concluded that Mr. Gagliardi suffered from a pathological gambling disorder during the tax years at issue. ... 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."

Respondent attempted to discredit Dr. Pike by claiming her definition of "gambler's fallacy" was incorrect. Respondent relies on a definition of "gambler's fallacy" he obtained from Wikipedia. Respondent did not call any witness, or expert witness, to counter Dr. Pike's conclusions. Respondent's reliance on a definition of "gambler's fallacy" found in Wikipedia [Fn.18:  Although we conclude that the information respondent obtained from Wikipedia was not wholly reliable and not persuasive in the instant case, we make no findings regarding the reliability, persuasiveness, or use of Wikipedia in general.] is not persuasive. Dr. Pike and Mr. Nicely, a second expert witness whose testimony and opinions are discussed in greater detail infra, credibly explained that there is a difference in the definition of "gambler's fallacy" depending on the field of study -- e.g., psychology versus mathematics. We find Dr. Pike to be credible and rely on her expert opinion.

The Tax Court concluded that Mr. Gagliardi had adequately substantiated $2.5 million in casino gambling losses over the three-year period:

The voluminous contemporaneous and other documentary evidence, the corroborating testimonial evidence of an eyewitness to petitioner's gambling and daily activities during the years in issue and of petitioner's return preparer, and the testimonial evidence of two experts in addition to petitioner's testimony substantiate and establish that petitioner incurred the disallowed gambling losses.

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