Bruno v. Department of Treasury

• Decision Date: 16 April 1987
• Docket Number: Docket No. 87152
• Citation: 403 N.W.2d 519,157 Mich.App. 122
• Parties: Michael D. BRUNO, Plaintiff-Appellee, v. DEPARTMENT OF TREASURY, Defendant-Appellant. 157 Mich.App. 122, 403 N.W.2d 519
• Court: Court of Appeal of Michigan — District of US

Page 519

403 N.W.2d 519

Michael D. BRUNO, Plaintiff-Appellee, v. DEPARTMENT OF TREASURY, Defendant-Appellant.

Docket No. 87152.

157 Mich.App. 122, 403 N.W.2d 519

Court of Appeals of Michigan.

Submitted June 18, 1986.

Decided Jan. 6, 1987.

Released for Publication April 16, 1987.

[157 MICHAPP 123] Burton H. Schwartz, P.C. by Burton H. Schwartz and Merton E. Simons, Farmington Hills, for plaintiff-appellee.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Richard R. Roesch and Russell E. Prins, Asst. Attys. Gen., for defendant-appellant.

Before SHEPHERD, P.J., and J.H. GILLIS and MacKENZIE, JJ.

PER CURIAM.

This case involves an appeal as of [157 MICHAPP 124] right from a Court of Claims grant of judgment under MCR 2.116(I)(2) to plaintiff for $6,892, which represents plaintiff's claimed tax overpayment as reported on his 1983 Michigan Individual Income Tax Return (form MI-1040). Defendant, by contrast, claimed that plaintiff owed a 1983 income tax deficiency of $18,430 and had moved for summary disposition under MCR 2.116(C)(8) and (10). Defendant's motion was denied. We affirm.

The facts are not disputed. Plaintiff is a professional gambler who for several years has earned his income primarily from horse-racing wagering. During years 1979 through 1983, plaintiff incurred substantial gambling losses as well as winnings. On his federal income tax returns for each year, plaintiff reported his losses as business losses (a so-called "above the line" deduction) and accordingly subtracted them from his gross income in computing his adjusted gross income. Plaintiff then reported the federal adjusted gross income figure in his Michigan return (Michigan income taxes are normally based on the taxpayer's adjusted gross income figure reported on the federal return) and calculated his state income tax liability therefrom. The Internal Revenue Service has never challenged plaintiff's characterization of his gambling losses as business losses. It should be noted that under the Internal Revenue Code, individuals may take as a "below the line" deduction (i.e., a deduction made after the computation of adjusted gross income) wagering losses to the extent of gains. 26 U.S.C. Sec. 165(d). Only "above the line" deductions such as plaintiff's business loss deductions affect Michigan income taxes, however, since it is these deductions which determine adjusted gross income.

Using the above-described tax computation method, plaintiff claimed a refund on his Michigan income taxes for the years 1979 through 1983. In [157 MICHAPP 125] 1981, defendant notified plaintiff that it was denying the refund for years 1979 and 1980 because plaintiff's gambling losses were not business losses and thus were not deductible in arriving at his adjusted gross income. This contention was based on 26 U.S.C. Sec. 62(1), which defines trade and business deductions as deductions "which are attributable to the trade or business carried on by the taxpayer...."

In 1982, the Tax Tribunal entered a judgment denying plaintiff's claim of refund for 1980. In concluding that plaintiff's wagering activities were not a "trade or business" within 26 U.S.C. Sec. 62(1), the Tax Tribunal relied on Gentile v. Comm'r, 65 T.C. 1 (1975), Higgins v. Comm'r, 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. 783 (1941), reh. den. 312 U.S. 714, 61 S.Ct. 728, 85 L.Ed. 1145 (1941), and Deputy v. DuPont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416 (1940), and applied the so-called "goods and services" test, which asks whether the taxpayer held himself out as offering any goods or services to others.

On July 27, 1983, the Tax Tribunal vacated the 1982 judgment. Now relying on Ditunno v. Comm'r, 80 T.C. 362 (1983), the Tax Tribunal concluded that a broader "facts and circumstances" test should be applied in ascertaining whether a person engages in a "trade or business" for purposes of the business loss deduction. Since the facts of Ditunno were virtually identical to plaintiff's gambling activity and the Ditunno court held that the taxpayer's gambling activity was a "trade or business," the Tax Tribunal concluded that plaintiff was also engaged in a "trade or business," allowing plaintiff to claim his gambling losses as business deductions and receive his claimed refunds for the years 1979 through 1982.

In 1983, plaintiff's wagering produced winnings of $388,445 and losses of $383,166. In January, [157 MICHAPP 126] 1984, plaintiff filed his 1983 MI-1040 consistent with the Tax Tribunal's July 27, 1983, opinion and claimed a refund of $6,892, which is the primary subject of this appeal. Defendant mailed plaintiff notice that his refund, as well as all refunds involving professional gamblers, were being held in abeyance. This was because a recent decision of the Second Circuit Court of Appeals, Gajewski v. Comm'r of Internal Revenue, 723 F.2d 1062 (CA 2, 1983), cert. den., 469 U.S. 818, 105 S.Ct. 88, 83 L.Ed.2d 35 (1984), had rejected the "facts and circumstances" test and a similar case, Estate of Cull v. Comm'r of Internal Revenue, 746 F.2d 1148 (CA 6, 1984), cert. den., 472 U.S. 1007, 105 S.Ct. 2701, 86 L.Ed.2d 717 (1985), was pending in the Sixth Circuit Court of Appeals.

On September 27, 1984, plaintiff commenced the instant action in the Court of Claims, asserting that, since the IRS had not chosen to delay paying refunds to professional gamblers for tax year 1983, defendant likewise should not delay. Approximately one month later Cull was decided. The Cull court, relying on Justice Frankfurter's concurring opinion in Deputy v. DuPont, supra, held that the "goods and services" test was the minimum standard for establishing a taxpayer's involvement in a "trade or business" and was clearly in accord with those cases setting forth a broader "facts and circumstances" test. The taxpayer in Cull was an habitual race track better as well as an employee of various race tracks. The Cull court found that the taxpayer was not engaged in a "trade or business" within the meaning of 26 U.S.C. Sec. 62(1).

Defendant, relying on Cull, filed a motion for summary disposition under MCR 2.116(C)(8) and (10), claiming that Cull was on point with this case. The Court of Claims denied summary disposition to defendant and granted judgment to plaintiff[157 MICHAPP 127] under MCR 2.116(I)(2), ruling that Cull could not be retroactively applied to plaintiff's 1983 claim of refund.

On appeal, defendant asserts that the trial court erred in refusing to apply the "goods and services" test of Cull to the instant case. Plaintiff, on the other hand, argues that the "goods and services" test is not controlling here, and that the "facts and circumstances" test set forth in Ditunno applies. There is at present a split of authority among the various circuits as to which test should be used to determine whether a professional gambler is engaged in a "trade or business" within the meaning of the business loss deduction statute, 26 U.S.C. Sec. 62(1). Compare Cull, supra, and Gajewski, supra, with Groetzinger v. Comm'r of Internal Revenue, 771 F.2d 269 (CA 7, 1985), and Nipper v. Comm'r of Internal Revenue, 47 TCM (CCH) 136 (1983), aff'd in an unpublished per curiam order, 746 F.2d 813 (CA 11, 1984). The issue is now before the United States Supreme Court. Groetzinger, supra, cert. gtd. --- U.S. ----, 106 S.Ct. 1456, 89 L.Ed.2d 714 (1986).

We are satisfied that it is unnecessary to decide whether the Cull or the Ditunno standard applies in this case. Assuming that the Ditunno standard is dispositive, we would affirm the decision of the trial court as reaching the right result for the wrong reason. See, e.g., Warren v. Howlett, 148 Mich.App. 417, 426, 383 N.W.2d 636 (1986). Assuming that the Cull standard controls, we agree with the well-reasoned opinion of the trial court:

"Cull was decided in October, 1984, ten months after the close of the tax period here at issue. Consider what must have been plaintiff's, an individual taxpayer's, reasonable understanding of his tax liability prior to the Cull ruling. During 1983, there was considerable uncertainty as to the circumstances under which full-time gambling could [157 MICHAPP 128] be considered a trade or business. Conflicting judicial decisions and rendered Sec. 62 of the Internal Revenue Code, incorporated by reference in the Michigan Income Tax Act, MCLA 206.2; MSA 7.557(102) ambiguous. Yet the weight of recent authority in 1983 favored a determination that plaintiff was engaged in a trade or business. Ditunno v Commissioner, 80 TC 362 (1983), Nipper v Commissioner, 47 TCM 136 (1983), Cull v Commissioner, 45 TCM 691 (1983).

"Moreover, in May, 1982, plaintiff had received a letter from the IRS district director, informing him that his 1980 federal income tax return, claiming his gambling losses as...