Ditunno v. Comm'r of Internal Revenue , Docket No. 13880-81.

Citation80 T.C. 362
Decision Date07 February 1983
Docket NumberDocket No. 13880-81.
PartiesANTHONY J. DITUNNO, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Held, based on the facts and circumstances in the record, taxpayer, a full-time gambler, was in the trade or business of gambling. Higgins v. Commissioner, 312 U.S. 212 (1941), followed, and Gentile v. Commissioner, 65 T.C. 1 (1975), overruled. Held, further, taxpayer's gambling losses were not items of tax preference for purposes of computing the minimum tax under sec. 56 or sec. 55, I.R.C. 1954. Anthony J. Ditunno, pro se.

Kristine A. Roth, for the respondent.

SHIELDS , Judge:

Respondent determined the following deficiencies in petitioner's Federal income taxes:

+--------------------+
                ¦Year  ¦Deficiency   ¦
                +------+-------------¦
                ¦      ¦             ¦
                +------+-------------¦
                ¦1977  ¦$1,992.60    ¦
                +------+-------------¦
                ¦1978  ¦2,364.60     ¦
                +------+-------------¦
                ¦1979  ¦787.90       ¦
                +--------------------+
                

Due to concessions, the sole issue for decision is whether petitioner's gambling losses are properly characterized as deductions from gross income under section 62(1)1 or as itemized deductions under section 63. Resolution of this issue determines whether petitioner is subject to the minimum tax on items of tax preference under section 56 for his 1977 and 1978 taxable years, and whether he is subject to the alternative minimum tax under section 55 for his 1979 taxable year.

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation and exhibits attached thereto are incorporated herein by this reference.

Petitioner Anthony J. Ditunno resided in Girard, Ohio, at the time he filed his petition in this case.

Petitioner is a full-time gambler. He has no other profession or type of employment. During the years in issue, he gambled only on horse races at the Waterford Race Track in Newell, W. Va. At the time of trial, he had gambled regularly for about 4 or 5 years.

Petitioner went to the race track 6 days a week, year round. He left for the track at 10 o'clock each morning. He arrived at the track before the races started at 1 o'clock. The races normally lasted from 1 o'clock until 4:30 o'clock. Petitioner remained at the track until the races were completed.

Petitioner studied racing forms to decide on which races to bet. He did not bet on every race. Instead, he bet mostly on the “doubles” and “trifecta” races.

Petitioner never placed bets on behalf of any other person during the years in issue. He did not sell tips to other gamblers. He never collected commissions for placing bets. He was not a bookmaker.

Other than his winnings from gambling, petitioner had no income during the years 1977 through 1979 except interest of $102.59 in 1979. Each year he reported gambling winnings of approximately $60,000. Each year he also deducted on Schedule C, gambling losses almost equal to his winnings. For 1977, 1978, and 1979, his taxable income was $3,662, $7,254.60, and $6,230.59, respectively.

OPINION

Section 56, which was effective during 1977 and 1978, and section 55, which was effective during 1979,2 imposed minimum taxes based on so-called “items of tax preference.” If an individual did not have any items of tax preference, he or she was not subject to the minimum tax.

During the years in issue, items of tax preference were defined in section 57(b)(1).3 Section 57(b)(1) treated many of the deductions allowable under the Internal Revenue Code as items of tax preference.4 However, it did not include the deductions allowable under section 62 in computing adjusted gross income.

Section 62 defines “adjusted gross income” as gross income minus certain deductions. The deductions from gross income which are relevant to this case are the trade and business deductions specified in section 62(1) as follows:

(1) TRADE AND BUSINESS DEDUCTIONS .—-The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.

A taxpayer whose only deductions were those allowable under section 62 was not subject to the minimum tax of section 56 or 55.5

Petitioner contends that his gambling losses were deductions from gross income, allowable in computing adjusted gross income. In particular, petitioner asserts that his gambling losses were trade or business deductions, qualifying as deductions from gross income under section 62(1). Accordingly, petitioner argues that his gambling losses were not items of tax preference for purposes of computing the minimum tax.

Respondent contends that petitioner was not in the trade or business of gambling. As a result, he argues that petitioner's gambling loss deductions did not qualify under section 62 as deductions from gross income allowable in computing adjusted gross income. Instead, he maintains that petitioner's gambling loss deductions constituted items of tax preference. Thus, respondent asserts that petitioner was subject to the minimum tax during the years in issue.

Judicial Construction of Section 162

Respondent determined that petitioner was not in the trade or business of gambling based upon this Court's decision in Gentile v. Commissioner, 65 T.C. 1 (1975). The taxpayer in Gentile depended solely upon his gambling winnings to support a family of five. He claimed that he was not in the trade or business of gambling for purposes of the self-employment tax, section 1401. 6 We agreed with petitioner.

We defined carrying on a trade or business to be “that which ‘involves holding one's self out to others as engaged in the selling of goods or services.’ In this definition, we adopted language used by Justice Frankfurter in his concurrence in Deputy v. du Pont, 308 U.S. 488, 499 (1940). We found that when the taxpayer in Gentile made his bets, he did not hold himself out as offering either goods or services. Therefore, we concluded that he was not in the trade or business of gambling.

Upon reconsideration, we find that the Gentile test, which focuses on the provision of goods and services, is overly restrictive. The proper test of whether an individual is carrying on a trade or business requires an examination of all the facts involved in each case.7 Higgins v. Commissioner, 312 U.S. 212 (1941); United States v. Pyne, 313 U.S. 127 (1941); City Bank Farmers Trust Co. v. Helvering, 313 U.S. 121 (1941). Although the Court in these cases specifically interpreted section 23(a) of the 1939 Code,8 the predecessor of section 162, that interpretation also applies to the words “trade or business” as used in section 62. Section 62 was derived from section 22(n), which was added to the Code in 1944.9 Section 22(n) explicitly defined trade or business deductions as “the deductions allowed by section 23 which are attributable to a trade or business carried on by the taxpayer.” (Emphasis added.) Thus, the judicial construction of section 23(a) “trade or business” deductions also applies to section 62.

When the Supreme Court decided the leading case of Higgins v. Commissioner, supra, several different judicial interpretations of the words “carrying on a trade or business” existed.10 The Third Circuit, in Du Pont v. Deputy, 103 F.2d 257 (3d Cir. 1939), had looked to the dictionary for a definition and concluded that “business” meant “that which busies or engages time, attention or labor as a principal serious concern or interest; any particular occupation * * * for livelihood or gain.” Although the Supreme Court reversed this Third Circuit judgment in Deputy v. du Pont, 308 U.S. 488 (1940), before deciding Higgins, it did so without considering the meaning of trade or business.11

The Sixth Circuit, in Kales v. Commissioner, 101 F.2d 35 (6th Cir. 1937), relied on the case of Flint v. Stone Tracy Co., 220 U.S. 107, 171 (1911). In Flint, the Supreme Court defined business to be a very comprehensive term, embracing everything about which a person could be employed, and as that which occupied time, attention, and labor for the purpose of livelihood or profit.

Finally, the Second Circuit, in Higgins v. Commissioner, 111 F.2d 795, 796-797 (2d Cir. 1940), stated that the popular meaning of trade or business controlled its statutory meaning. After examining the facts before it, the Second Circuit gave a negative definition of carrying on a trade or business: “By the common speech of men, a person who does nothing beyond looking after his own investments and receiving the income from them is not conducting a trade or business.” The Circuit Court then concluded that the taxpayer, Mr. Higgins, was not in a trade or business, and asserted that this result was “in line with the concurring opinion of Mr. Justice Frankfurter in Deputy v. du Pont.”

The Supreme Court, in Higgins, examined the meaning of “carrying on a trade or business” not only against a backdrop of differing interpretations by the Circuit Courts, but also in light of the diverse arguments advanced by the Government and the taxpayer. The Government urged the Court to hold that “mere personal investment activities never constitute carrying on a trade or business.” The taxpayer, Mr. Higgins, urged that “elements of continuity, constant repetition, regularity and extent” controlled.

Despite this background, the Supreme Court, in Higgins, spent little time discussing the myriad existing interpretations of “carrying on a trade or business.” It noted that the Flint test, supra, was not controlling precedent because that case answered a different inquiry under a different statute, the Corporation Tax Act of 1909. Then, the Court succinctly set forth a facts and circumstances test as follows:

To determine whether the activities of a taxpayer are “carrying on a business” requires an examination of the facts in each case. * * * The Bureau of Internal Revenue has this duty of determining...

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