Groetzinger v. C.I.R.

• Decision Date: 21 August 1985
• Docket Number: No. 84-2507,84-2507
• Parties: -5683, 54 USLW 2136, 85-2 USTC P 9622 Robert P. GROETZINGER, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 269

771 F.2d 269

56 A.F.T.R.2d 85-5683, 54 USLW 2136, 85-2

USTC P 9622

Robert P. GROETZINGER, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 84-2507.

United States Court of Appeals, Seventh Circuit.

Argued April 11, 1985.

Decided Aug. 21, 1985.

Bruce R. Ellisen, Asst. Atty. Gen., Tax Div., Washington, D.C., for respondent-appellant.

Carroll Baymiller, Baymiller, Christison & Radley, Peoria, Ill., for petitioner-appellee.

Before CUMMINGS, Chief Judge, FLAUM, Circuit Judge, and PECK, Senior Circuit Judge. ^*

CUMMINGS, Chief Judge.

The sole issue presented in this appeal is whether the Tax Court erred in holding that the taxpayer's gambling activities constituted a "trade or business" for purposes of Section 62(1) of the Internal Revenue Code, 26 U.S.C. Sec. 62(1). The Commissioner asserts that the taxpayer's failure to hold himself out to others as offering goods or services precludes characterization of his activities as a trade or business. We disagree and affirm the Tax Court decision.

I

The significance of the Tax Court's holding that the activities of the taxpayer, Robert P. Groetzinger, constituted a trade or business is that it allows Groetzinger to deduct gambling losses from gross income in arriving at adjusted gross income, ¹ and prevents the losses from constituting "items of tax preference" for the purposes of the minimum tax as it existed in 1978. See 26 U.S.C. Secs. 56, 57 (1976). ² The taxpayer brought this action seeking a redetermination of a deficiency asserted by the Commissioner of Internal Revenue in his federal income taxes for the taxable year 1978 in the amount of $2,521.89. On May 24, 1984, the Tax Court determined that there was no deficiency and entered judgment for the taxpayer. The opinion of the Tax Court is reported at 82 T.C. 793 (1984). Fifteen members of the Tax Court agreed with Judge Drennen's majority opinion, one concurred and two dissented.

We briefly summarize the relevant facts. Since the January 1978 termination of his employment with a private company, the taxpayer has devoted virtually all of his working time to pari-mutuel wagering on dog races. He has no other profession or employment and his only sources of income apart from his gambling winnings are interest, dividends and sales of investments (amounting to $6,498 in 1978). During the 1978 tax year in question Groetzinger went to the track six days a week, normally from 1:00 p.m. to 11:30 p.m., and spent substantial amounts of time preparing to make wagers for his own account. The Tax Court found that he devoted sixty to eighty hours per week to these activities; the taxpayer never placed bets for others or sold tips.

In 1978 Groetzinger bet $72,032, and won back $70,000, resulting in a net loss from gambling of $2,032. On his Federal income tax form, the taxpayer did not deduct the $2,032 loss from gambling in arriving at "adjusted gross income" nor did he claim any itemized deductions, but instead listed that amount as a net loss from gambling on his Supplemental Income Schedule (Schedule E) of his Form 1040. In the notice of deficiency, the Commissioner determined that Groetzinger's $70,000 of gambling winnings constituted income and that his $70,000 of deductible gambling losses constituted itemized deductions, ³ thus subjecting the taxpayer to a $2,141.89 minimum tax (App. 9a). See supra note 2.

II

The determination of what constitutes a "trade or business" under the various provisions of the Internal Revenue Code has proven to be most difficult and troublesome over the years. Although the term appears frequently in numerous provisions of the Code ⁴ it has not been defined by either the Code or the Treasury regulations, nor has any authoritative judicial definition of the terms evolved. B. BITTKER, 1 TAXATION OF INCOME ESTATES AND GIFTS p 20.1.2 (1981). We limit our inquiry to determining whether Groetzinger's activities constituted a trade or business under Sections 62 and 162 of the Code, since the precise meaning or connotation of the term appears to vary depending upon the provision in which it is used. See Steffens v. Commissioner, 707 F.2d 478, 482 (11th Cir.1983); 4A MERTENS LAW OF FEDERAL INCOME TAXATION Sec. 25.08 (1979). Although the specific issue in this case is the application of Sec. 62(1) (supra note 1), the Commissioner concedes that the meaning of the term "trade or business" is the same under Secs. 62(1) and 162(a) ⁵ and that the cases considering Sec. 162 are relevant here since both Sections involve the deductibility of expenses incurred in carrying on a trade or business (Br. 10).

The Tax Court in Gentile v. Commissioner, 65 T.C. 1, 2 (1975), held, in circumstances similar to this case, that a full-time gambler wagering for his own account was not engaged in a "trade or business" (under 26 U.S.C. Secs. 162, 1402(c)), because he "neither provided nor held himself out as a provider of any goods or services to any other person." The Tax Court subsequently reversed itself, again in a case involving nearly identical facts, and rejected the proposition that the offering of goods or services to others was an absolute prerequisite to characterization of activities as a "trade or business" under Sec. 62(1). Ditunno v. Commissioner, 80 T.C. 362, 371 (1983); to the same effect see Meredith v. Commissioner, 49 T.C.M. 318 (1984). The Eleventh Circuit has adopted the Tax Court's position in Ditunno by affirming the Tax Court on the basis of its Memorandum of Findings of Fact and Opinion in Nipper v. Commissioner, 47 T.C.M. 136 (1983). Nipper v. Commissioner, 746 F.2d 813 (11th Cir.1984) (per curiam ) (unpublished order). The Tax Court's position has been overruled, however, in two circuits by opinion in appeals from the Tax Court. See Estate of Cull v. Commissioner, 746 F.2d 1148 (6th Cir.1984), certiorari denied, --- U.S. ----, 105 S.Ct. 2701, 86 L.Ed.2d 717; Gajewski v. Commissioner, 723 F.2d 1062 (2d Cir.1983), certiorari denied, --- U.S. ----, 105 S.Ct. 88, 83 L.Ed.2d 35. The Third Circuit has affirmed a district court case also rejecting Ditunno. See Noto v. United States, 598 F.Supp. 440 (D.N.J.1984), affirmed without explanation by unreported judgment order, 770 F.2d 1073, (3d Cir.1985).

III

In the present case the full Tax Court reconsidered its ruling in Ditunno in light of the Gajewski decision and reasserted the correctness of its position with only four dissenters. Thus the real issue before us is whether the "goods and services" test should be an absolute prerequisite to a finding that a taxpayer engaged in a "trade or business" under Sec. 62(1).

Unfortunately neither judicial precedent nor the relevant statutory language of Secs. 62(1) and 162(a) provides a clear basis for resolving this issue. The "goods and services" requirement first appeared in a solo concurrence of Justice Frankfurter in Deputy v. DuPont, where the Justice stated that the carrying on of a trade or business "involves holding oneself out to others as engaged in the selling of goods or services." 308 U.S. 488, 499, 60 S.Ct. 363, 369, 84 L.Ed. 416. One year later when the Court squarely faced the "trade or business" issue and had an opportunity to employ the test to dispose of the taxpayer's claim, it failed to adopt the Frankfurter definition. Higgins v. Commissioner, 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. 783. In Higgins the Court rejected the argument that a trade or business "embraces everything about which a person can be employed" and simply ruled that the determination of whether the activities of a taxpayer are "carrying on a business" requires an examination of the facts of each case and that the definition excludes management of one's own securities. 312 U.S. at 217-218, 61 S.Ct. at 477-478. Subsequent Supreme Court cases dealing with the "trade or business" issue also failed to mention the Frankfurter test. See City Bank Farmers Trust Co. v. Helvering, 313 U.S. 121, 61 S.Ct. 896, 85 L.Ed. 1227; United States v. Pyne, 313 U.S. 127, 61 S.Ct. 893, 85 L.Ed. 1231. Although numerous courts have recanted the Frankfurter language in attempting to summarize considerations relevant to the "trade or business" determination (see cases cited in Gajewski, 723 F.2d at 1066), only one case expressly applied the test to hold that a taxpayer was not engaged in a trade or business (apart from the gambling cases beginning with Gentile in 1975). The Supreme Court reversed that case, see Snow v. Commissioner, 416 U.S. 500, 94 S.Ct. 1876, 40 L.Ed.2d 336, reversing 482 F.2d 1029 (6th Cir.1973), ruling that the "goods and services" test was not relevant to the meaning of "trade or business" as used in 26 U.S.C. Sec. 174 since that section was "enacted in 1954 to dilute some of the [more restrictive] conception of ordinary and necessary business expenses under Sec. 162(a) * * * adumbrated by Mr. Justice Frankfurter in a concurring opinion in Deputy v. DuPont." We agree with the Tax Court that this reference by the Supreme Court does not constitute an implicit approval of the goods and services test. 82 T.C. at 798 n. 17.

Nor do the 1982 Amendments to the minimum tax provisions, which, inter alia, exempt wagering losses from the alternative minimum tax by allowing the deduction of wagering losses from the minimum tax base, provide any guidance. See 26 U.S.C. Sec. 55(e)(1)(A). The exclusion of wagering losses was added in conference without explanation in the legislative history. See the Tax and Fiscal Responsibility Act of 1982, Pub.L. 97-248, Title II, sec. 201(a), 96 Stat. 411, 414; H.R.REP.NO. 760, 97th Cong., 2d Sess. 473-477 (1982), U.S.Code Cong. & Admin.News 1982, pp. 781, 1190. Since the statutory change preceded the Ditunno case, it is probably best interpreted as a reaction to the perceived inequalities caused by prior caselaw's refusal to recognize full-time gamblers as conducting a trade or business, see, e.g., Gentile, supra, and cannot fairly be read as...