Baxter v. United States

• Decision Date: 11 March 1986
• Docket Number: Civ. No. R-84-463 BRT.
• Citation: 633 F. Supp. 912
• Parties: William E. BAXTER, Jr. and Julia W. Baxter, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Nevada

633 F. Supp. 912

William E. BAXTER, Jr. and Julia W. Baxter, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. No. R-84-463 BRT.

United States District Court, D. Nevada.

March 11, 1986.

Virgil H. Wedge, Reno, Nev., and Bryant R. Burton, Los Angeles, Cal., for plaintiffs.

Lamond R. Mills, U.S. Atty., Reno, Nev., and Michael P. Haney, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for defendant.

ORDER GRANTING SUMMARY JUDGMENT

BRUCE R. THOMPSON, District Judge.

Plaintiffs William and Julia Baxter brought this action for a refund of Federal income taxes assessed and collected for calendar years 1978, 1979, 1980 and 1981. This Court has jurisdiction to decide this case pursuant to 28 U.S.C. § 1346(a)(1). The parties now cross move for summary judgment.

The parties do not dispute the underlying facts. Plaintiff William Baxter is a professional gambler. He has been gambling since age 14 and has never had any other occupation. During the years at issue, poker was Baxter's primary gambling activity. Baxter devoted a substantial amount of time to his gambling activities. Baxter was sometimes involved in a game which extended over three consecutive days. The majority of the games in which Baxter played were held in the open on casino floors and required a $10,000 cash stake to enter the game. Baxter is an extremely skillful poker player. He won the World Series of Poker Championship in 1975, 1978, and 1982. He won the Super Bowl of Poker Championship in 1981 and 1982.

Baxter's poker skills are also demonstrated by the substantial income he earned through his gambling activities. Baxter's reported income for the four years at issue exceeded $1.2 million. The money which Mr. Baxter employed in his gaming activities was his own; he had no partners or sponsors. He did not receive any compensation for appearances, interviews or other engagements with respect to his status as a professional gambler.

I.

The threshold issue facing this Court is whether Baxter's gaming activities constitute a trade or business within the intendment of the Internal Revenue Code. If his gaming activities do not constitute a trade or business, then the Commissioner properly denied Baxter's claims for refunds. If his gaming activities constitute a trade or business, then Baxter has met an initial prerequisite to the application of the maximum tax on personal service under I.R.C. § 1348 to Mr. Baxter's net Schedule C gaming income.

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 it has not been defined by either the Code or the Treasury regulations nor has any authoritative judicial definition of the terms evolved.

Groetzinger v. Commissioner, 771 F.2d 269, 271 (7th Cir.1985) (footnote omitted).

Despite the difficulty in determining whether a taxpayer is engaged in a trade or business, courts have developed two tests. They are the "goods and services" test and the "facts and circumstances" test. The "goods and services" test originated in Deputy v. du Pont, 308 U.S. 488, 499, 60 S.Ct. 363, 369, 84 L.Ed. 416 (1940). In Deputy, Justice Frankfurter stated in a solo concurring opinion that the carrying on of a trade or business "involves holding oneself out to others as engaged in the selling of goods or services." Id. The "facts and circumstances" test originated in Higgins v. Commissioners, 312 U.S. 212, 217, 61 S.Ct. 475, 477, 85 L.Ed. 783 (1941). The Higgins court stated that "to determine whether the activities of a taxpayer are `carrying on a business' requires an examination of the facts in each case." Id. At oral argument on these motions, the Government argued that the so-called "goods and services" test is merely one facet of the Higgins' "facts and circumstances" test. Essentially, the Government contends that the "goods and services" test is an absolute prerequisite to a finding that Baxter engaged in a "trade or business." The Court rejects this contention for a variety of reasons.

First, the Government fails to cite any binding authority for such a contention. Initially, the Court notes that Justice Frankfurter's concurrence in Deputy carries little precedential value. The majority opinion in Deputy did not even address whether the taxpayer was in a trade or business. Deputy, 308 U.S. at 489, 60 S.Ct. at 364. In addition, when the Supreme Court decided Higgins, several different and conflicting interpretations of the words "carrying on a trade or business" existed. See Dittuno v. Commissioner, 80 T.C. 362, 367-68 (1983).

The Higgins court initially noted that a 1911 Supreme Court definition of business articulated in Flint v. Stone Tracy Company, 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed. 389 was not controlling because that case answered a different inquiry under a different statute. Higgins, 312 U.S. at 217, 61 S.Ct. at 477. The Higgins court then ignored Justice Frankfurter's goods and services test and stated that a determination whether a taxpayer's activities constitute a trade or business requires an examination of the facts. Id.

Subsequent Supreme Court cases faced with the "trade or business" issue reiterated the Higgins test and failed to mention the goods and services test. See City Bank Farmers Trust Co. v. Commissioner, 313 U.S. 121, 61 S.Ct. 896, 85 L.Ed. 1227 (1941); United States v. Pyne, 313 U.S. 127, 61 S.Ct. 893, 85 L.Ed. 1231 (1941). In fact, in 1963, when the Supreme Court again addressed this issue, the court followed Higgins and held that investing for long-term gain does not qualify for trade or business status. Whipple v. Commissioner, 373 U.S. 193, 83 S.Ct. 1168, 10 L.Ed.2d 288 (1963). Although the court cited Deputy approvingly, it did not mention the goods and services requirement.

The Government erroneously argues that the Supreme Court implicitly approved the goods and services test in Snow v. Commissioner, 416 U.S. 500, 94 S.Ct. 1876, 40 L.Ed.2d 336 (1974). The Snow court stated: Section 174 was enacted in 1954 to dilute some of the conception of "ordinary and necessary" business expenses under § 162(a) (then § 23(a)(1) of the Internal Revenue Code of 1939) adumbrated by Mr. Justice Frankfurter in a concurring opinion in Deputy v. du Pont, 308 U.S. 488, 499 60 S.Ct. 363, 369, 84 L.Ed. 416 (1940), where he said that the section in question (old § 23(a)) "involves holding one's self out to others as engaged in the selling of goods or services." The words "trade or business" appear, however, in about 60 different sections of the 1954 Act. Those other sections are not helpful here because Congress wrote into § 174(a)(1) "in connection with", and § 162(a) is more narrowly written than is § 174, allowing "a deduction" of "ordinary and necessary expenses paid or incurred ... in carrying on any trade or business." That and other sections are not helpful here.

Id. at 502-03, 94 S.Ct. at 1877-78 (footnote omitted).

As the Tax Court in Groetzinger v. Commissioner correctly noted,

we do not think that a fair reading of that opinion Snow suggests that the Court intended by its reference to Justice Frankfurter's remarks to do more than compare the relatively liberal allowance provisions of sec. 174 (allowing current deductions for certain research or experimental expenditures "in connection with" a trade or business) with the generally more restrictive requirements of sec. 162 (expenses allowed only "in carrying on" a trade or business).

Groetzinger v. Commissioner, 82 T.C. 793, 798 n. 17; see also Groetzinger v. Commissioner, 771 F.2d at 272; Ditunno, 80 T.C. at 370. Thus, no Supreme Court decision has adopted Justice Frankfurter's goods and services test.

The Government also points out that the Ninth Circuit once relied upon Justice Frankfurter's concurrence in Deputy and applied the goods and services test. See Daily Journal Co. v. Commissioner, 135 F.2d 687, 688 (9th Cir.1943). This 1943 decision, however, no longer appears to be controlling precedent. In subsequent cases dealing with the trade or business issue, the Ninth Circuit failed to apply the goods and services test or to refer to either Deputy or Daily. See Purvis v. Commissioner, 530 F.2d 1332 (9th Cir.1976); Wineberg v. Commissioner, 326 F.2d 157 (9th Cir.1964); United States v. Keeler, 308 F.2d 424 (9th Cir.1962). Accordingly, this Court is not persuaded that either Supreme Court or Ninth Circuit precedent hold that the goods and services test is an absolute prerequisite to a finding that a taxpayer is engaged in a trade or business.

Second, the Ninth Circuit implicitly rejected the Government's contention that the "goods and services" test is an absolute prerequisite to a finding that a taxpayer engaged in a trade or business. See Purvis, 530 F.2d 1332. In Purvis, a taxpayer appealed a Tax Court decision that his securities-transaction activities were insufficient to constitute his engagement in a trade or business. The Purvis court followed Higgins and stated that taxpayers whose securities-related activities benefit from short-term savings in the market are traders and, therefore, qualify for trade or business status. Investors who seek long-term profits, however, do not qualify for such status. In determining whether a taxpayer should be considered a trader or an investor, the Purvis court approved the Tax Court's test formulated in Liang v. Commissioner, 23 T.C. 1040, 1043 (1955). This test examines the frequency, extent, and regularity of the taxpayer's securities transactions as well as his intent to derive profit from relatively short-term turnovers.

By admitting that a securities trader could be engaged in a trade or business if his activities were sufficiently frequent, extensive, and regular, the Purvis court implicitly rejected the goods and services test because a securities trader does not truly...