In 1991, Mr. Gagliardi's life took a tragic turn in an unexpected way: Mr. Gagliardi won approximately $27 million in the California lottery. The winning of the lottery, however, began a sad tale. As the result of winning the lottery and suddenly having the wherewithal to gamble, Mr. Gagliardi became a compulsive gambler, which resulted in Mr. Gagliardi using his lottery winnings to play the slot machines on a nearly full time basis at nearby San Diego County Indian Casinos.
Mr. Gagliardi claimed on his tax returns that he lost his lottery winnings on gambling. The IRS disagreed. The IRS's firm line position was to disallow all the claimed losses because Mr. Gagliardi failed to keep a contemporaneous gambler's log which was, according to IRS, required under a long standing Revenue Procedure.
Ultimately, through the use of expert witnesses, including a clinical psychologist who testified that Mr. Gagliardi was suffering from a pathological gambling disorder, and a mathematician, who testified that the odds of breaking even based on Mr. Gagliardi's amount of play was 1 in 1 trillion, Mr. Swenson and Ms. Cato were successfully able to substantiate 100% of the amount of claimed gambling losses.
This is one of the first cases, if not the first of its kind, where the Tax Court has allowed a taxpayer all, rather than a portion, of his or her claimed gambling losses. Historically, the Tax Court (as well as the IRS) has looked at gamblers with disfavor. The estimated tax savings, including tax years not before the court, is in the multiple millions of dollars.