Notes on Frank Gagliardiís Federal Tax Court Hearing



Why I was called to testify
I testified at the Frank Gagliardiís Federal Tax Court hearing on address two questions regarding Mr. Gagliardiís reported amount of electronic gaming machine play over the years in question:
1. How does Gagliardiís described level of play relate to his actual bank & ATM records?
2. If Mr. Gagliardi played for as long and as large as testified, what are the odds that Mr. Gagliardi achieved an overall gambling profit in any of the years?


What I testified
To provide answers on the above two topic, I performed a straight-forward, industry standard, confidence interval analysis based upon the frequency, bet amount and game types that Mr. Gagliardi reported to play, plus some researched and documented conservative assumptions regarding the Return to Player (RTP) of the gaming devices.

The analysis indicated that the level of play that Mr. Gagliardiís reported was consistent with the ATM withdrawal records provided at the hearing. In other words, if Mr. Gagliardi actually played as much as he stated in his testimony, the amounts of his actual ATM withdrawals over the years in question were within the range of loss that such play would be expected to produce within a 95% confidence level.

The analysis also showed that the odds of Mr. Gagliardi achieving an overall profit for his reported amount of gambling, including his sizeable W2-G winnings, were astronomically unlikely.


What it means
One person who talked to me about the court ruling suggested that it would make it nearly much harder for the IRS to collect on future W2-G winnings. I have a different take. (Please remember that I am not an attorney and my opinion on this is no more valid than any other lay-person.) The IRS requires documentation of gambling losses that one wants to use to offset gambling winnings. The traditional method is for the player to maintain a gambling log and keep corroborating receipts, such as is described at: http://www.wwwebtax.com/deductions_miscellaneous/gambling_losses.htm

Mr. Gagliardi did not maintain such a log but he did keep extensive records of his ATM withdrawals, credit card cash advances, and checks all cashed at the casino. Mr. Gagliardi had to pay a CPA to sort, review, audit and create a report on these records. He also had to incur the cost and stress of a hearing to establish his corroborating evidence, (which included eye-witness testimony and a gaming mathematician analysis to back up his assertion of how much he played and loss). It would have been so much easier for Mr. Gagliardi if he maintained a gambling log or had at least made regular use of a player tracking card in order to avail himself of a detailed gambling report from the casinos.


Correcting the record
In some published trial summaries, by background was incorrectly reported. As I said in court, the core of my slot game design & operations training was provided by Andrew Pascal, who was CEO of Silicon Gaming when I joined the industry. Andrew learned the black arts and traditions of slot games from his experience running the slot floor at the Mirage. After selling Silicon Gaming to IGT, Andrew was the founder, CEO and Chairman of the Board of WagerWorks. Subsequent to WagerWorks, Mr. Pascal helped launch the Wynn Resorts family of casinos including the Wynn Resort Casinos in Las Vegas and Macau, and the Encore Resort Casinos in Las Vegas and Macau, and was the President and CEO of Wynn Las Vegas until 2011, when he left to start up PLAYSTUDIOS who created the innovative social-gaming casino, My Vegas casino found on Facebook as well as on Android and iTunes apps.

Unfortunately, some publications mistakenly ascribed Andrew Pascalís extremely impressive experience to me. I am merely a student of this industry giant.


Personal reaction
Mr. Gagliardiís lead attorney, Eric Swenson, did a remarkable job. He was extremely well prepared for the hearing and along with his co-counsel, was fantastic at presenting and managing the case in court. It was an honor to work with such talented, intelligent professionals.

It was quite upsetting listening to Mr. Gagliardi's story in court. I had never met a problem gambler before and I felt tremendous sadness for Mr. Gagliardi's plight. When I found out about the favorable ruling, I was very happy for Mr. Gagliardi. It seemed the right and fair decision. However, I was very saddened to subsequently find out that Mr. Gagliardi has not been able to overcome his gambling addiction, as described in this front page San Diego Tribune Article.