If a taxpayer cannot deduct gambling losses given the restrictions on gambling losses, can they deduct them as casualty losses instead? What if the gambling loss are attributable to prescription medications known to cause compulsive gambling? The court addresses this in Mancini v. Commissioner, T.C. Memo. 2019-16.
Facts & Procedural History
The taxpayer diagnosed with Parkinson’s disease. His doctor proscribed a drug that was known to cause compulsive behaviors. This caused the taxpayer to begin gambling, which resulted in large gambling losses.
The taxpayer did not really gamble before taking the medication. The taxpayer stopped gambling once he stopped taking the medication.
The taxpayer prepared his own tax returns for the tax years at issue. The returns reported large casualty losses for losses sustained to his investment portfolio. The losses were attributable to the taxpayer’s gambling.
The IRS disallowed the losses on audit, which ended with the current court case.
Deducting Gambling Losses
Gambling losses are generally deductible for tax purposes. However, gambling losses are typically limited to gambling income. This requires the taxpayer to keep detailed records to establish the amount of the loss.
Those who qualify as professional gamblers are not subject to this limitation. They can deduct their gambling losses in excess of their gambling income. To be a gambling professional, the taxpayer has to prove that they pursued gambling full time, in good faith, and with regularity, for the production of income for a livelihood, and that their gambling is not a mere hobby, it is a trade or business.
In the present case, the taxpayer did not keep records of his gambling losses. Also, it appears that his activity did not rise to the level of a trade or business that would qualify him as a professional gambler.
Instead of calming a gambling loss, the taxpayer claimed the loss as a casualty loss.
The Casualty Loss Rules
The law allows a deduction for losses sustained as a result of a casualty. Most casualty losses involve thefts or damage resulting from natural disasters, such as storms, etc.
But the Code goes further and allows casualty losses for an “other casualty.” What is an “other casualty?” The Code does not define the phrase. The courts have concluded that it is a loss arising from something “sudden, unexpected, or unusual.”
The taxpayers gambling losses would seem to fit this bill. Before taking the medication he was prescribed, he did not gamble. After he took the medication, he did. And the court agreed that his loss stemmed from the gambling. This would seem to be sudden, unexpected and unusual.
Physical Damage Requirement
The IRS argued that casualty losses require physical damage and that there was no physical damage in this case. The taxpayer countered by noting that the Code does not say that physical damage is required.
The court considered the prior case law. This included a case where a flood damaged personal property in a bank basement, but did not damage the building itself. The taxpayer argued that the perception of the flood risk diminished the value of the building, which entitled the bank to take a tax loss. The court disallowed the loss in that case given the absence of any physical damage.
The court noted that casualty losses may be allowable for losses resulting in bank failures, which would not have a physical damage. A theft loss is also a type of casualty loss where a tax deduction is available despite the absence of physical damage.
Considering these points, the court concludes that physical damage is required. Thus, the taxpayer was not able to deduct his gambling losses as a casualty loss.
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