The Tax Court found that a taxpayer could not deduct excessive gambling losses as a casualty deduction, even though they were related to the side effects of a prescription drug that caused him to lose the ability to control his impulses. Although the court found that the compulsive gambling was most likely a side effect of the medication, it determined that the gambling losses did not result in any physical damage and were not sudden, so they did not qualify as a "casualty."
Facts: Marc Mancini was diagnosed with Parkinson's disease in 2004. He began taking a small dose of a prescription medication to help him control his movements. The medicine significantly improved his symptoms, and, over time, the medication's dosage was increased. In 2008, Mancini's behavior began to include compulsive cleanliness, falling asleep suddenly while driving, having suicidal thoughts, and gambling compulsively. While Mancini had gambled occasionally in the past, he had always done so for only small amounts. His compulsive gambling over the next two years drained all his bank accounts and almost all his retirement savings. In 2009, he began selling his real estate holdings for less than fair market value and used the proceeds to pay gambling debts that he had accumulated. In 2010, Mancini's family members explained to his doctor that he had gambled away nearly all of his savings. The doctor took Mancini off of the medication, and his compulsive behaviors stopped.
The medication Mancini had been taking is designed to activate the dopamine receptors in the brain, which helps Parkinson's patients control their movements but can also lead to impulse control disorders (ICDs). These ICDs make the individuals unable to control their behavior even when there are negative consequences. Compulsive gambling is one of the most common ICDs among patients taking the medication. The incidence of ICDs is related to the dosage, with the side effects occurring once the dosage reaches a certain level. The effects can become worse when the dosage remains at or above that level. Once the patient discontinues using the medicine, the ICDs tend to disappear. While the medication did not always come with warnings about ICDs, it now specifically warns that it can cause compulsive gambling. Many users of the drug have sued because of the side effects. Mancini joined a lawsuit in December 2010, but his case was dismissed because it was not filed within the statute of limitation in the state of California.
Mancini filed tax returns for 2008 and 2009 with the help of a tax preparer. These returns showed his gambling winnings and deducted gambling losses to the extent of his winnings for each year. He claimed no casualty loss in either year. For 2010, Mancini prepared his own tax return, which also reported gambling winnings and deducted gambling losses to the extent of winnings. In addition, he claimed a casualty loss of $603,000 for his investment portfolio and home. In 2012, Mancini filed amended returns for 2008 and 2009, claiming a casualty loss in 2008 of $1 million and in 2009 of $1.8 million. Upon audit, the IRS disallowed the original casualty loss deduction on the 2010 tax return and assessed Mancini a 20% Sec. 6662(a) penalty for negligence or disregard of rules, substantial understatement of income tax, or substantial-valuation misstatement. Mancini later amended his 2010 tax return to increase his casualty loss to $678,000 and to deduct the excess casualty losses from his amended 2008 and 2009 returns. The IRS did not accept or process the amended 2010 return.
Issues: The issues before the Tax Court were whether the medicine caused Mancini's compulsive gambling, whether those losses were deductible as casualty losses, whether Mancini properly substantiated the losses, and whether a Sec. 6662(a) penalty applied.
The taxpayer used expert testimony from a board-certified psychiatrist to describe the side effects of the Parkinson's medication and identify it as the cause of the compulsive gambling.
Sec. 165 states that taxpayers can deduct nonbusiness losses that "arise from fire, storm, shipwreck, or other casualty, or from theft" to the extent they exceed $100 and 10% of adjusted gross income. However, "other casualty" is not defined by the Code or regulations. The courts have interpreted "other casualty" as a loss that arises from something "sudden, unexpected, or unusual." Mancini claimed that his gambling losses qualified as an "other casualty" because the ICD arose suddenly once his dosage of the medicine reached a certain level, it was unexpected, and it was unusual. The IRS argued that the gambling losses did not qualify as an "other casualty" and that a casualty loss can be deducted only when there is physical damage to the taxpayer's property. Mancini countered that IRS Publication 547, Casualties, Disasters, and Thefts, suggests that physical damage might not be required for a casualty loss.
The IRS asserted that, under Sec. 6662(a), Mancini was liable for a 20% penalty for an understatement that was substantial or due to negligence or disregard of rules and regulations. Mancini argued that he had substantial authority to support his return position and should not have to pay the penalty.
Holding: The Tax Court found that Mancini's compulsive gambling was likely a side effect of the medication, based on the expert evidence provided by Mancini and the IRS's failure to provide any contrary evidence. Nonetheless, it held that his gambling losses were not deductible. However, it did hold that Mancini was not liable for the substantial-understatement penalty because it was not properly approved by the IRS.
The Tax Court found that the losses were not deductible under Sec. 165. The court noted that decades of case law have held that physical damage to property is required for a casualty loss under Sec. 165 and that Mancini did not suffer any physical damage from the gambling losses, so he was not entitled to a loss. Further, the Tax Court concluded that a three-year-long casualty would not be "sudden," and so the gambling losses would not qualify as a casualty loss under Sec. 165 for this reason as well.
The court further found that the losses were not deductible because they were not substantiated. Mancini produced very few records of his gambling activity, and the records produced did not show losses of nearly as much as he claimed on his tax returns. Thus, the Tax Court found that Mancini had not shown that he actually suffered the losses he claimed on his return. Therefore, even if his losses were the result of a casualty, they would not be deductible.
While the Tax Court disagreed with Mancini's argument about having substantial authority for his return position, it determined that he was not responsible for the penalty. The IRS must also show that the penalty determination was approved in writing by the immediate supervisor of the person making the determination. Because the IRS did not present this evidence, the Tax Court did not uphold the penalty.
- Mancini, T.C. Memo. 2019-16
— By Beth Howard, CPA, Ph.D., associate professor of accounting at Tennessee Technological University in Cookeville, Tenn.