Groetzinger v. Comm'r of Internal Revenue

Citation82 T.C. 793,82 T.C. No. 61
Decision Date24 May 1984
Docket NumberDocket No. 2028–82.
PartiesROBERT P. GROETZINGER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Held: Based on all the relevant facts in the record, taxpayer, a full time gambler for his own account, was in the trade or business of gambling.

Held, Further, taxpayer's gambling losses, to the extent of his gambling gains at least, were not items of tax preference for purposes of computing the minimum tax under section 56, I.R.C., in effect for 1978. Robert P. Groetzinger, pro se.

James Gehres, for the respondent.

DRENNEN, Judge:

Respondent determined a deficiency of $2,521.89 in petitioner's Federal income tax for the year 1978. The issue for decision is whether petitioner was in the trade or business of gambling during 1978. Resolution of this issue determines whether petitioner is subject to the minimum tax on items of tax preference under section 56.1

FINDINGS OF FACT

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

Petitioner Robert P. Groetzinger resided in Peoria, Illinois at the time he filed his petition in this case. Petitioner timely filed an individual income tax return for his 1978 taxable year.

Prior to February, 1978, petitioner was employed in Peoria by Gerstenslager Co., a manufacturer of trucks and mobile libraries. He had worked there for about twenty years in sales and market research.

In February of 1978, petitioner's position with Gerstenslager Co. was terminated. Since then, he has been a full-time gambler, devoting virtually all his time to pari-mutuel wagering on dog races. Since losing his job, petitioner has had no profession or employment other than gambling. Aside from his gambling winnings, petitioner's only source of income has been interest, dividends, and sales of investments.

During 1978, petitioner devoted virtually all of his time to pari-mutuel wagering on dog races at tracks in Florida and Colorado.2 He also attended several horse races. He went to the track six days a week, and attended 326 separate performances. On some days, he attended both matinee and evening performances.

Petitioner typically arrived at the race track at about 1:00 p.m. and departed about 11:30 p.m. When not at the track, he spent a substantial amount of time studying racing forms, programs and other materials in order to determine what bets to place. He did not bet on every race, and often modified his betting strategy at the track, based on the “odds” for a particular race. Petitioner devoted from 60 to 80 hours per week to these endeavors.3

Petitioner never placed bets on behalf of others, sold tips to other bettors, or collected commissions for placing bets. He gambled solely for his own account.

Petitioner kept detailed records of his wagering. At the end of each day, or sometimes after each performance, he recorded his net winnings or net losses in a journal.

In 1978 petitioner bet a total of $72,032. His total winnings were $70,000. His net loss from his gambling in 1978 was $2,032. Petitioner received income from other sources totalling $6,498.4

On his Federal income tax return, petitioner reported as income only the $6,498 he received from non-gambling sources. He did not deduct the $2,032 net loss from gambling in arriving at “adjusted gross income” on line 31 of his Form 1040. However, he did report the gambling loss on Schedule E of his Form 1040, entitled “Supplemental Income Schedule.” Petitioner claimed no itemized deductions, but rather computed his tax liability from the tax tables, which allowed him a $2,200 “zero bracket amount.”

In his notice of deficiency, respondent determined that petitioner's $70,000 of gambling winnings constitute additional income, and that $70,000 of petitioner's gambling losses,5 while deductible to the extent of petitioner's gambling winnings, constitute itemized deductions (deductions from adjusted gross income). The effect of this determination was to subject petitioner to the minimum tax on “items of tax preference” under section 56. Respondent computed a minimum tax in the amount of $2,141.89, resulting in the deficiency herein.6

OPINION

The sole issue presented for decision is whether petitioner's gambling activities constitute a “trade or business” within the meaning of section 62(1). If so, his gambling losses are deductible from gross income in arriving at adjusted gross income,7 and as such do not constitute “items of tax preference” for the purposes of the minimum tax imposed by section 56.8 It is not disputed that petitioner during 1978 was engaged full-time in pari-mutuel wagering on dog races, had no other employment during that period, gambled solely for his own account, and devoted an extraordinary amount of time and effort to his gambling with a view to earning a living from such activity. In Ditunno v. Commissioner, 80 T.C. 362 (1983), appeal dismissed, 6th Cir., Sept. 15, 1983, we held on nearly identical facts that such a full-time gambler was in the trade or business of gambling, so that his losses were not items of tax preference for the purposes of computing the minimum tax.9 In Ditunno, we rejected the proposition that to be engaged in a trade or business, one must hold himself out to others as offering goods or services.10 Rather, after thoroughly reviewing the extensive case law in this area, we concluded: “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.” Ditunno v. Commissioner, supra at 366–367.

Factually this case is fundamentally indistinguishable from Ditunno and an examination of all the facts in this case leads us to conclude that during 1978 petitioner was also in the trade or business of gambling. However, the United States Court of Appeals for the Second Circuit recently rejected the position we adopted in Ditunno. In Gajewski v. Commissioner, 723 F.2d 1062 (2nd Cir. 1983), revg. and remanding a Memorandum Opinion of this Court, the Court held that in order to be engaged in a trade or business, “a taxpayer must, as a minimum, have held himself out to others as offering goods or services.” Thus, the Court found a full-time gambler, whose extensive pari-mutuel wagering on jai-alai provided his only income, not to be engaged in a trade or business because he gambled solely for his own account and did not hold himself out to others as offering goods or services.

We must decide in this case whether to adhere to our court-reviewed decision in Ditunno or modify our position in accordance with the Second Circuit's ruling in Gajewski.11 We note in passing that this is unlikely to be the last word on this issue, as appeals are pending in two other similar cases.12 With all due respect to the Second Circuit, whose opinion we have considered thoroughly, we are not persuaded that the case law justifies a departure from the position we announced so recently in Ditunno. 13

Our reasons for rejecting the “goods or services” test are explained thoroughly in our opinion in Ditunno, and we see no need to repeat that discussion here. However, in light of the decision in Gajewski, we feel compelled to examine several points raised by the Second Circuit and articulate the reasoning that leads us to a different conclusion. In addition, we think it is appropriate at this juncture to discuss more thoroughly certain cases involving active traders of securities, which we find to be strong support for our position.

The crux of the issue is whether a passage in Justice Frankfurter's concurring opinion in Deputy v. du Pont, 308 U.S. U.S. 488, 499 (1940), in which he described a trade or business as “holding one's self out to others as engaged in the selling of goods and services,” should be regarded as establishing an absolute requirement that must be satisfied in order for a taxpayer to e engaged in a trade or business.14 In answering this question in the affirmative, the Second Circuit accorded little weight to the Supreme Court's decision in Higgins v. Commissioner, 312 U.S. 212 (1941), in which the Court said “To determine whether the activities of a taxpayer are ‘carrying on a business' requires an examination of the facts in each case.” The Second Circuit did not attempt to reconcile its adoption of the “goods or services” test with Higgins and other contemporaneous decisions of the Court involving the trade or business issue.

In Deputy v. du Pont, supra, the case in which Justice Frankfurter's concurring opinion appeared, the majority did not even address the question of whether a trade or business existed.15 However, only one year later, when squarely faced with the meaning of “trade or business,” the Court ignored the “goods or services” requirement proposed by Justice Frankfurter and announced the more general factual approach quoted above. Higgins v. Commissioner, supra at 217. In Higgins, the Court was faced with various lower court interpretations of the meaning of “trade or business,” in addition to Justice Frankfurter's “goods or services” test, but apparently found none of them to be adequate.16 See Ditunno v. Commissioner, supra at 367–368. Shortly thereafter the Supreme Court reiterated the overall factual approach in United States v. Pyne, 313 U.S. 127 (1941), and City Bank Farmers Trust Co. v. Helvering, 313 U.S. 121 (1941), and did not mention the “goods or services” test.

Our rejection of the “goods or services” requirement in Ditunno followed from our conclusion that, given this judicial context, Higgins is properly viewed as the controlling Supreme Court precedent on the trade or business issue. See Ditunno v. Commissioner, supra at 366–369. In Higgins the Court was faced with the task of defining the contours of the “trade or business” concept in the face of varying interpretations by the lower courts. In announcing a review of all the...

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    ...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 Ditun......
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