DI Operating Co. v. United States, Civ. No. 313-315.
| Decision Date | 04 January 1965 |
| Docket Number | Civ. No. 313-315. |
| Citation | 239 F. Supp. 78 |
| Parties | D. I. OPERATING CO., a Nevada corporation, Plaintiff, and United Resort Hotels, Inc., a Delaware corporation, as successor to United Hotels Corporation, a dissolved Delaware corporation, as successor to Wilbur Clark's Desert Inn Co., a dissolved Nevada corporation, Plaintiff, and Desert Inn Operating Company, a Nevada corporation, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — District of Nevada |
J. A. Donnelley, San Diego, Cal., for all plaintiffs.
John W. Bonner, U. S. Atty., Robert S. Linnell, Chief Asst. U. S. Atty., Las Vegas, Nev., Jerome Fink, Burton A. Schwalb, Department of Justice, Washington, D. C., for defendant.
This is an action by a taxpayer to recover excise taxes, plus interest, paid under protest. These three cases were consolidated and tried to the Court. The three corporate plaintiffs, herein called the "Desert Inn", seek to recover One Hundred Sixty-three Thousand Three Hundred Ten and 87/100 Dollars ($163,310.87), plus interest, in wagering taxes paid under protest for the period April, 1953, through April, 1959.
The following facts are not in dispute: Beginning in 1953, and continuing to date, the Desert Inn has sponsored, with the approval of the Professional Golfers Association, an annual Tournament of Champions in Las Vegas. Each year, during the period in question, 1953-1959, a calcutta pool was conducted by the Desert Inn. On the evening prior to the beginning of the golf tournament, the name of each participating professional golfer was offered for bid by an auctioneer to a private group of persons invited to attend a dinner and the auction in the Painted Desert Room of the Desert Inn Hotel. Ninety per cent of all sums received from successful bidders were paid into the pool and distributed after the tournament to the winners of the pool. The remaining ten per cent was contributed to the Damon Runyon Memorial Fund for cancer research. The Desert Inn retained no percentage of the sums received and made no charge for operating the pool.
The total gross receipts paid into the calcutta pool by successful bidders were as follows:
"1953 $ 93,250
1954 137,850
1955 202,500
1956 129,000
1957 265,650
1958 266,000
1959 380,000"
The Desert Inn had guaranteed the Runyon Cancer Fund a minimum of $35,000 annually. In each year, except 1959, ten per cent of the pool was less than $35,000, and the Desert Inn, in each of those years, made up the difference out of pocket.
In all of the years involved, both the calcutta pool and the Tournament of Champions were operated at a loss and these losses were claimed and allowed as expenses by the Desert Inn on its income tax returns.
26 U.S.C. § 4401 (Internal Revenue Code of 1954) imposes an excise tax of ten per cent on wagers.
26 U.S.C. § 4421(1) (B) defines a wager as follows:
"The term `wager' means * * * any wager placed in a wagering pool with respect to a sports event or a contest, if such pool is conducted for profit." (Italics added)
The years 1953 and 1954 are governed by the Internal Revenue Code of 1939, and the years from and after 1955 are governed by the 1954 Code. See 26 U.S.C. § 7851(a) (4) of the 1954 Code.
In the Internal Revenue Code of 1939, Section 3285 (26 U.S.C. 1952 ed.) also imposed a ten per cent excise tax on wagers and defines the term "wager" in words identical with Section 4421 of the 1954 Code:
"The term `wager' means * * * any wager placed in a wagering pool with respect to a sports event or contest, if such pool is conducted for profit." (Italics added)
Under Section 4421 of the 1954 Code, the Treasury promulgated Regulation Section 44.4421-1 (26 CFR 44.4421-1).
Section 44.4421-1(a) (2) reads as follows:
Section 44.4421-1(c) (4) reads:
For the years 1953 and 1954, there was no similar Treasury regulation, but the Government urges that for those years, the language of Regulation 44.4421-1 (c) (4) constitutes a correct interpretation of the words "conducted for profit" as found in the statutes.
It has been stipulated that the calcutta pool constituted a wagering pool and the amounts paid into the pool by the successful bidders constituted wagers within the meaning of the pertinent sections of the Internal Revenue Codes of 1939 and 1954. The only issue is whether or not the tax applies and this turns on the question of whether or not the calcutta pool was conducted for profit.
The Government contends that the tax of ten per cent upon the gross amount paid into the pool by the successful bidders was lawfully collected, arguing that the Desert Inn profited both directly and indirectly from the calcutta pool.
The Desert Inn's position is that there was no direct profit since the pool always operated at a loss, but the Desert Inn concedes that in conducting the pool, it expected to benefit indirectly by increased public patronage of its hotel, restaurants, bars and casino.
The evidence establishes not only that there was no direct profit, but that there was a loss in each year of the pool's operation.
The Government's arguments that the Desert Inn received direct financial benefits are so untenable as to be unworthy of comment, save one. The Government argues that there was a direct financial benefit from the operation of the pool because the ten per cent of the gross receipts and other expenses of the operation of the pool were entered in the corporate books as business and promotional expenses and claimed as deductions for income tax purposes. This is tantamount to an admission that the pool was operated at a loss. In any event, to the extent that such a loss is a benefit income tax wise, it could only be an indirect and not a direct benefit or profit to the Desert Inn.
The Court finds, therefore, that the Desert Inn did not realize any direct benefit or profit from the pool, but actually sustained financial losses in the years 1953-1959.
On the other hand, the Court finds that although the pool was operated at a loss during the period in question, the Desert Inn did operate the pool with the expectancy of profit in the form of increased public patronage within the meaning of Regulation Section 44.4421-1(c) (4).
There is only one, but most important, question to be resolved, and that is, whether or not Regulation Section 44.4421-1(c) (4) is valid. If valid, the Government is entitled to judgment. If invalid, the Desert Inn must prevail.
This question is one of first impression.
A wager placed in a wagering pool is taxable if the pool was conducted for profit. What was the intent of Congress? Was it intended to tax wagering pools:
On the other hand, is a wagering pool conducted for profit when it is a trade stimulator, where its purpose is to promote other business activities of the operator, although one hundred per cent of the sums wagered are paid out?
Obviously, the Desert Inn would not have conducted the calcutta pool had it not anticipated some indirect financial benefit. The evidence reflects that the Desert Inn management willingly took a loss on the pool, as well as on the Tournament of Champions of which it was a part, with the expectation that its other business activities, such as its hotel, restaurants, bars and casino would benefit. The pool was not operated for charity.
In 1951, Congress added to the Internal Revenue Code of 1939 Section 3285.1
The same wagering tax was carried forward in the Revenue Act of 1954.2
The Court takes judicial notice that Congress passed the Wagering Tax Act not only to raise revenue, but also to aid law enforcement in attempting to surpress wide-spread, nation-wide, illegal gambling activities being carried on in violation of the criminal laws of the several States.
Senate Report No. 781, 82nd Congress, First Session 1951-1952, U.S.Code Congressional and Administrative News 1951, pp. 2090, 2091, as quoted from in Plaintiffs' Opening Brief, is significant:
It was the intent of Congress to attempt to solve a national social problem, as well as to raise revenue. It was against profits earned from the business of conducting sport books, lotteries, numbers and policy games, as well as wagering pools that Congress took aim.
A careful reading of the Wagering Tax Act leads this Court to the conclusion that Congress never intended to tax wagering pools conducted...
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