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SLOTS LOSER WINS IN TAX COURT

January 25, 2008

Francis Gagliardi had a quiet life, working for awhile as a machine operator and a truck triver. He was married and had two children. Then at age 29, his life took a tragic turn. He won $26 million in the California lottery.

The Tax Court told his sad tale yesterday. Mr. Gagliardi got divorced and started hanging out at the casinos:

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. Occasionally, Mr. Gagliardi spent up to 48 hours continuously in the casinos before returning home.

Long story short, Mr. Gagliardi squandered his money at the slots, and the IRS came calling. They said that he owed over $ 1 million in taxes on gambling winnings.

The tax law provides gamblers with two difficult problems. First, gambling winnings are not directly offset by gambling losses. You have to report the winnings as "above the line" income, while taking the losses as itemized deductions. Second, the casinos helpfully document your jackpots, but they don't create such a nice paper trail for your losses. Gamblers often have trouble documenting their losses, even though it is a near mathematical certainty that a frequent slots gambler will lose more than he wins.

Through a combination of analysis of his financial records and using expert witnesses, Mr. Gagliardi convinced the Tax Court that he did, in fact, lose more than he won. One expert testified:

Mr. Nicely opined on the basis of the extent of Mr. Gagliardi's gambling activity that (1) Mr. Gagliardi's breaking even from slot machine play was astronomically unlikely (substantially greater than 1 in 1 trillion); and (2) the estimated net losses from slot machine play for the tax years 1999, 2000, and 2001 were most likely approximately $637,000, $678,000, and $507,000, respectively, with an error range of plus or minus $65,000, $72,000, and $83,000, respectively.

No wonder casinos provide rooms for their good customers.

Tax Blogger and poker maven Russ Fox comments wisely:

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.

Of course, had he stayed away from the slots entirely, he would even still have his money. It's a story that makes me nostalgic for the time when Iowa had slot machines in every convenience store. If Touchplay hadn't been repealed, foks like Mr. Gagliardi would never have to leave the convenience store, saving gasoline and fighting global warming.

Video lottery terminal conveniently placed alongside ATM in liquor store

Cite: Gagliardi, T.C. Memo 2008-10.

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