So often we practitioners hear how flat, dull, stale, and maybe even unprofitable is the tax practice. But taxation covers every part of everyone’s life. Today we see a specialist in the economics of gambling with the Runyonesque moniker of Mark C. Nicely, coming to the aid of now-reformed compulsive gambler John M. Coleman, 2020 T. C. Memo. 146, filed 10/22/20.

John was a 71-year old licensed insurance agent who retired from the DC Department of Insurance, Securities and Banking. His wife of 47 (count ’em, 47) years also worked, but isn’t in on this. John neither filed, estimated nor paid for the year at issue, but IRS ultimately bought the numbers John had put on the 1040 he offered after Exam got through.

Except IRS claimed John had $350K in undeclared gambling winnings. From almost exclusively playing the slots. I do hope and trust my readers are sufficiently worldly-wise to know that not only horseplayers (as apostrophized by Runyon), but all gamblers, die broke. Especially the slotniks. Casinos are not charities. They make money by paying off below the true mathematical odds. The take-out from the parimutuels is no different from the slot payout, or that of any table game.

John has two certified hotshots from a major law firm doing a pro bono gig and thinking outside the Bockius (sorry, guys). So they put John, his wife and his adult daughter on the stand, who tell how John’s compulsion caused the tax sale of their house, the turnoff of the electricity therein for nonpayment, and the shutdown of his cellphone.

Said wife did buy him a computer, but he fails the Section 274 documentation test for business use (he does have a small insurance hustle going).

But the pro bonos find Nicely, who saves the day, besting two (count ’em, two) IRS attempts to disqualify him as an expert.

“The Court also heard testimony from Mark C. Nicely, whom we recognized as an expert in mathematics, the casino gaming industry, and casino gaming equipment, particularly slot machines.

“Mr. Nicely has a bachelor’s degree from Rensselear Polytechnic Institute, where he concentrated in electrical, computer, and systems engineering. He has taken postgraduate classes at Stanford University and the University of California (Berkeley) in software, software technology, and mathematics (including statistics, probability, and financial analysis). Before working in casino gaming, Mr. Nicely had more than ten years’ experience as a computer software engineer specializing in algorithm development. At the time of trial Mr. Nicely had worked in the gaming industry for 20 years. He has been recognized as an expert witness in more than a dozen litigated cases involving gambling. In Gagliardi v. Commissioner, T.C. Memo. 2008-10, 95 T.C.M. (CCH) 1044, 1052 (2008), we recognized Mr. Nicely as a gaming industry expert with expertise in mathematics and slot machines.” 2020 T. C. Memo. 146, at pp. 10-11.

Mr Nicely does the statistics, but Judge Lauber checks out all John’s accounts, and finds he blew his way through a $150K nontaxable PI payout, the $71K he made from insurance dealings, and his retirement account, gambling in DE and MD. Casino gambling is illegal in the Stateless City.

“Mr. Nicely explained that, if a player gambles long enough and does not win any prizes that are exceptionally large relative to the size of the wager, it would be virtually impossible for that player to have annual net gambling winnings. The Maryland and Delaware casinos at which petitioner gambled configured their slot machines so that the average ‘return to player’ percentages ranged from 87% to 95%. By statute the average ‘return to player’ percentage could not exceed 95% without written permission from each State lottery. Mr. Nicely opined that the odds against petitioner’s having enjoyed even $1 of net gambling profit, for the entirety of [year at issue], were at least 140 million to 1.” 2020 T. C. Memo. 146, at pp. 11-12. (Citations omitted).

Even the States conspire to make sure gamblers die broke. But IRS goes down fighting.

“Respondent seeks to portray Mr. Nicely’s conclusions as implausible by extrapolating his results to future years, urging that petitioner could not have sustained annual net gambling losses of $151,690 indefinitely. But Mr. Nicely’s conclusions were based on the frequency of petitioner’s gambling during [year at issue] and the amounts of money he gambled. Petitioner credibly testified that his gambling varied from year to year depending chiefly on how much cash he had available. In [year at issue] he received an insurance settlement of $150,000, and he appears to have lost almost all that money gambling. Because petitioner’s income during [year at issue] was unusually large–the one-time insurance settlement was almost 200% of his regular income for [year at issue]–his gambling losses in [year at issue] were unusually large. The broader point of Mr. Nicely’s report is that, in a game with odds that disfavor the gambler, the law of large numbers means that a gambler who plays long enough is virtually guaranteed to have net losses. And there is no doubt that petitioner played long enough.” 2020 T. C. Memo. 146, at pp. 18-19. (Footnote omitted, but see infra, as high-priced pro bonos say).

“Respondent advances a complex argument in an effort to show that Mr. Nicely, an expert in statistics, improperly computed standard deviation. Because respondent offered no expert testimony to counter Mr. Nicely’s report, we decline to consider this argument. Standard deviation was an important element of Mr. Nicely’s calculations in Gagliardi, and we found his report there persuasive.” 2020 T. C. Memo, 146, at p. 19, footnote 6.

Take Damon Runyon’s advice about his character Nicely Nicely Jones: don’t bet against Nicely.