Commissioner of Internal Revenue v. Groetzinger, 85-1226

• Citation: 480 U.S. 23,107 S.Ct. 980,94 L.Ed.2d 25
• Decision Date: 24 February 1987
• Docket Number: No. 85-1226,85-1226
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner v. Robert P. GROETZINGER
• Court: United States Supreme Court

480 U.S. 23

107 S.Ct. 980

94 L.Ed.2d 25

COMMISSIONER OF INTERNAL REVENUE, Petitioner

v Robert P. GROETZINGER.

No. 85-1226.

Argued Dec. 8, 1986.

Decided Feb. 24, 1987.

Syllabus

For most of 1978, respondent devoted 60 to 80 hours per week to parimutuel wagering on dog races with a view to earning a living from such activity, had no other employment, and gambled solely for his own account. His efforts generated gross winnings of $70,000 on bets of $72,032, for a net gambling loss for the year of $2,032. Although he reported this loss on his 1978 tax return, he did not utilize it in computing his adjusted gross income or claim it as a deduction. Upon audit, the Commissioner of Internal Revenue determined that, under the Internal Revenue Code of 1954 (Code) as it existed in 1978, respondent was subject to a minimum tax because part of the gambling loss deduction to which he was entitled was an "ite[m] of tax preference." Under the Code, such items could be lessened by certain deductions that were "attributable to a trade or business carried on by the taxpayer." In redetermining respondent's tax deficiency, the Tax Court held that he was in the "trade or business" of gambling, so that no part of his gambling losses was an item of tax preference subjecting him to a minimum tax for 1978. The Court of Appeals affirmed.

Held: A full-time gambler who makes wagers solely for his own account is engaged in a "trade or business" within the meaning of Code §§ 162(a) and 62(1). Pp.27-36

771 F.2d 269 (CA7 1985), affirmed.

BLACKMUN, J., delivered the opinion of the Court, in which BRENNAN, MARSHALL, POWELL, STEVENS, and O'CONNOR, JJ., joined. WHITE, J., filed a dissenting opinion, in which REHNQUIST, C.J., and SCALIA, J., joined, post, p. ---.

Albert G. Lauber, Jr., Washington, D.C., for petitioner.

Carroll Baymiller, Peoria, Ill., for respondent.

Justice BLACKMUN delivered the opinion of the Court.

The issue in this case is whether a full-time gambler who makes wagers solely for his own account is engaged in a "trade or business," within the meaning of §§ 162(a) and 62(1) of the Internal Revenue Code of 1954, as amended, 26 U.S.C. §§ 162(a) and 62(1) (1976 ed. and Supp. V).¹ The tax year with which we here are concerned is the calendar year 1978; technically, then, we look to the Code as it read at that time.

I

There is no dispute as to the facts. The critical ones are stipulated. See App. 9. Respondent Robert P. Groetzinger had worked for 20 years in sales and market research for an Illinois manufacturer when his position was terminated in February 1978. During the remainder of that year, respondent busied himself with parimutuel wagering, primarily on greyhound races. He gambled at tracks in Florida and Colorado. He went to the track 6 days a week for 48 weeks in 1978. He spent a substantial amount of time studying racing forms, programs, and other materials. He devoted from 60 to 80 hours each week to these gambling-related endeavors. He never placed bets on behalf of any other person, or sold tips, or collected commissions for placing bets, or functioned as a bookmaker. He gambled solely for his own account. He had no other profession or type of employment.² Respondent kept a detailed accounting of his wagers and every day noted his winnings and losses in a record book. In 1978, he had gross winnings of $70,000, but he bet $72,032; he thus realized a net gambling loss for the year of $2,032.

Respondent received $6,498 in income from other sources in 1978. This came from interest, dividends, capital gains, and salary earned before his job was terminated.

On the federal income tax return he filed for the calendar year 1978 respondent reported as income only the $6,498 realized from nongambling sources. He did not report any gambling winnings or deduct any gambling losses.³ He did not itemize deductions. Instead, he computed his tax liability from the tax tables.

Upon audit, the Commissioner of Internal Revenue determined that respondent's $70,000 in gambling winnings were to be included in his gross income and that, pursuant to § 165(d) of the Code, 26 U.S.C. § 165(d), a deduction was to be allowed for his gambling losses to the extent of these gambling gains. But the Commissioner further determined that, under the law as it was in 1978, a portion of respondent's $70,000 gambling-loss deduction was an item of tax preference and operated to subject him to the minimum tax under § 56(a) of the Code, 26 U.S.C. § 56(a) (1976 ed.). At that time, under statutory provisions in effect from 1976 until 1982, "items of tax preference" were lessened by certain deductions, but not by deductions not "attributable to a trade or business carried on by the taxpayer." § 57(a)(1) and (b)(1)(A), and § 62(1), 26 U.S.C. § 57(a)(1) and (b)(1)(A), and § 62(1) (1976 ed. and Supp. I).⁴ These determinations by the Commissioner produced a § 56(a) minimum tax of $2,142 and, with certain other adjustments not now in dispute, resulted in a total asserted tax deficiency of $2,522 for respondent for 1978.

Respondent sought redetermination of the deficiency in the United States Tax Court. That court, in a reviewed decision, with only two judges dissenting, held that respondent was in the trade or business of gambling, and that, as a consequence, no part of his gambling losses constituted an item of tax preference in determining any minimum tax for 1978. 82 T.C. 793 (1984). In so ruling, the court adhered to its earlier court-reviewed decision in Ditunno v. Commissioner, 80 T.C. 362 (1983). The court in Ditunno, id., at 371, had overruled Gentile v. Commissioner, 65 T.C. 1 (1975), a case where it had rejected the Commissioner's contention (contrary to his position here) that a full-time gambler was in a trade or business and therefore was subject to self-employment tax.

The United States Court of Appeals for the Seventh Circuit affirmed. 771 F.2d 269 (1985). Because of a conflict on the issue among Courts of Appeals,⁵ we granted certiorari. 475 U.S. 1080, 106 S.Ct. 1456, 89 L.Ed.2d 714 (1986).

II

The phrase "trade or business" has been in § 162(a) and in that section's predecessors for many years. Indeed, the phrase is common in the Code, for it appears in over 50 sections and 800 subsections and in hundreds of places in proposed and final income tax regulations. The slightly longer phrases, "carrying on a trade or business" and "engaging in a trade or business," themselves are used no less than 60 times in the Code. The concept thus has a well-known and almost constant presence on our tax-law terrain. Despite this, the Code has never contained a definition of the words "trade or business" for general application, and no regulation has been issued expounding its meaning for all purposes.⁶ Neither has a broadly applicable authoritative judicial definition emerged.⁷ Our task in this case is to ascertain the meaning of the phrase as it appears in the sections of the Code with which we are here concerned.⁸

In one of its early tax cases, Flint v. Stone Tracy Co., 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed. 389 (1911), the Court was concerned with the Corporation Tax imposed by § 38 of the Tariff Act of 1909, ch. 6, 36 Stat. 112-117, and the status of being engaged in business. It said: " 'Business' is a very comprehensive term and embraces everything about which a person can be employed." 220 U.S., at 171, 31 S.Ct., at 357. It embraced the Bouvier Dictionary definition: "That which occupies the time, attention and labor of men for the purpose of a livelihood or profit." Ibid. See also Helvering v. Horst, 311 U.S. 112, 118, 61 S.Ct. 144, 147, 85 L.Ed. 75 (1940). And Justice Frankfurter has observed that "we assume that Congress uses common words in their popular meaning, as used in the common speech of men." Frankfurter, Some Reflections on the Reading of Statutes, 47 Colum.L.Rev. 527, 536 (1947).

With these general comments as significant background, we turn to pertinent cases decided here. Snyder v. Commissioner, 295 U.S. 134, 55 S.Ct. 737, 79 L.Ed. 1351 (1935), had to do with margin trading and capital gains, and held, in that context, that an investor, seeking merely to increase his holdings, was not engaged in a trade or business. Justice Brandeis, in his opinion for the Court, noted that the Board of Tax Appeals theretofore had ruled that a taxpayer who devoted the major portion of his time to transactions on the stock exchange for the purpose of making a livelihood could treat losses incurred as having been sustained in the course of a trade or business. He went on to observe that no facts were adduced in Snyder to show that the taxpayer "might properly be characterized as a 'trader on an exchange who makes a living in buying and selling securities.' " Id., at 139, 27 S.Ct., at 739. These observations, thus, are dicta, but, by their use, the Court appears to have drawn a distinction between an active trader and an investor.

In Deputy v. Du Pont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416 (1940), the Court was concerned with what were "ordinary and necessary" expenses of a taxpayer's trade or business, within the meaning of § 23(a) of the Revenue Act of 1928, 45 Stat. 799. In ascertaining whether carrying charges on short sales of stock were deductible as ordinary and necessary expenses of the taxpayer's business, the Court assumed that the activities of the taxpayer in conserving and enhancing his estate constituted a trade or business, but nevertheless disallowed the claimed deductions because they were not "ordinary" or "necessary." 308 U.S., at 493-497, 60 S.Ct., at 366-368. Justice Frankfurter, in a concurring opinion joined by Justice Reed, did not join the majority. He took the position that whether the taxpayer's activities constituted a trade or business was "open for determination," id., at 499, 60 S.Ct., at 369, and observed:

" '. . . carrying on any trade or business,' within the contemplation of § 23(a), involves holding one's...