We have two things in common with the petitioner in Mancini v. Commissioner of Internal Revenue, No 16975-13, 2019 Tax Ct. Memo LEXIS 16 (U.S. Tax Ct. Mar. 4, 2019). First, we both will be filing our 2018 tax returns in about a month from now, unless of course Mr. Mancini is more on top of things than we are and has already filed. Second, neither of us will be deducting our net gambling losses, but for different reasons. For our part, we don’t have any gambling losses of which to speak. For Mr. Mancini, he will not be deducting net gambling losses for 2018 or any other year because the Tax Court has ruled that his gambling losses are not a “casualty loss” that would be fully deductible under the U.S. Tax Code.
Yes, you read that correctly. We are blogging about a tax case, which might amuse our tax attorney colleagues, but may leave our faithful readers in the drug and medical device world scratching their heads. There is, however, a compelling tie in: The petitioner in Mancini was trying to deduct his gambling losses as a “casualty loss” under the Tax Code because they alleged resulted from compulsive gambling caused by his treatment with Parkinson’s disease medication.
Although the Tax Court rejected the petitioner’s attempt to recharacterize his gambling losses, impulse control disorders such as compulsive gambling, compulsive shopping, and hypersexuality are diagnosable conditions that are more common than you might think. Be that as it may, the petitioner rolled snake eyes. He was diagnosed with Parkinson’s disease and was treated with increasing doses of Pramipexole, a dopamine agonist used to treat the condition. While on a relatively high dose, the petitioner started gambling more and more, resulting in substantial losses. When his wife and daughter eventually intervened, his neurologist discontinued the medication, and his gambling diminished, except to a “limited extent.” Id. at **2-**3. He later tried to deduct his losses, but rather than limit his gambling loss deductions to his gambling winnings, he called them “casualty losses” and tried to deduct them in their entirety.
A casualty loss is a non-business loss that arises “from fire, storm, shipwreck, or other casualty, or from theft.” You know, like when a tree falls on your house during a storm. The petitioner claimed that his gambling losses were an “other casualty” because his compulsive gambling “manifested abruptly once his dosage reached a certain level, it was unexpected . . . , and it was unusual, even for Pramipexole takers.” Id. at **18.
The Tax Court ultimately rejected the deduction, but in the part of the order that we find most noteworthy, the Court ruled (1) that Pramipexole was capable of causing compulsive gambling and (2) that it had actually caused compulsive gambling in the petitioner. The Tax Court discussed these concepts in terms of “framework evidence” and “diagnostic evidence, but we know them more commonly as “general causation” and “specific causation.”
Whatever you call them, the Tax Court’s ruling was based on the slimmest of scientific evidence. On general causation, the Tax Court relied on the plaintiff’s expert, whose “knowledge comes from reading published studies—he even directly cited one during his testimony.” Id. at **12. Significantly, the government did not offer contrary evidence, leaving the expert’s opinion on that Pramipexole could cause impulse control disorders essentially uncontested in a forum where the etiology of alleged drug side effects is rarely, if ever, considered. If the government had dug into the published studies, we expect it would have found a considerably more nuanced situation, but the Tax Court will never know.
On specific causation, the same expert drew his conclusion from the petitioner’s medical records, which showed that his compulsive gambling occurred while he was on his peak dose. Id. at **14-**15. We know this as “challenge and de-challenge,” where the onset of a complication coincides with the beginning of therapy and the complication abates when therapy is discontinued. The problem with drawing causation opinions from “challenge and de-challenge” is that it relies solely on temporal correlation and ignores other potential causes and/or risk factors. Did the petitioner have more free time and access to gambling? Did he experience a “big win” or a “near miss,” both well known risk factors for compulsive gambling? Did the court take into account his family’s intervention, which can have a powerful impact on gambling behavior? It appears other potential causes were neither raised nor considered, which causes us to question the Tax Court’s finding of a causal relationship.
In the end, the petitioner lost his deduction because he did not suffer a “casualty loss,” regardless of the cause of his compulsive gambling. For one thing, there was no physical damage to property, which is required under “sixty-odd years of caselaw.” Id. at **18-**21. Further, the losses were not “sudden” or “immediate,” like a tree falling on your house. As the Court put it, “These losses were necessarily the result of dozens or hundreds of individual gambling sessions and probably thousands of separate wagers.” Id. at **23.
The upshot is that the Tax Court’s questionable conclusion on causation wound up being superfluous. One footnote is that the petitioner did try to sue the drug manufacturer in a product liability lawsuit, but was found to be time barred. Id. at **5. Perhaps his tax strategy was his fallback position, and we don’t blame him for trying to manage his tax burden within the limits of the law. I guess that makes three things we have in common.