MARYLAND JOCKEY CLUB v. United States

• Decision Date: 20 October 1953
• Docket Number: Civ. No. 5966.
• Citation: 118 F. Supp. 349
• Parties: MARYLAND JOCKEY CLUB OF BALTIMORE CITY v. UNITED STATES.
• Court: U.S. District Court — District of Maryland

118 F. Supp. 349

MARYLAND JOCKEY CLUB OF BALTIMORE CITY v. UNITED STATES.

Civ. No. 5966.

United States District Court, D. Maryland.

October 20, 1953.

Semmes, Bowen & Semmes, Richard W. Case and Lawrence Perin, Baltimore, Md., for plaintiff.

Bernard J. Flynn, U. S. Atty., and Paul C. Wolman, Jr., Asst. U. S. Atty., Baltimore, Md., for United States.

WILLIAM C. COLEMAN, Chief Judge.

The question presented for decision is: did the $75,608.66 which was received by the plaintiff on November 29, 1948, from the Maryland State Racing Commission as a reimbursement of the cost of rebuilding plaintiff's racing strip at Pimlico Race Course, Baltimore, constitute income subject to federal income tax?

In its income tax return for the fiscal year ending November 30, 1948, plaintiff included this sum as gross income representing "withdrawal from Maryland Racing Commission Fund", but subsequently asserted that this was an error and thereupon filed a claim for refund of tax resulting therefrom in the amount of $28,731.29, and interest, which the Commissioner rejected. The present suit is for refund of this tax so assessed.

The payment in question to the plaintiff was made pursuant to two Acts of the Maryland Legislature, only the parts pertinent to the present issue being quoted. The first is Section 11 of Chapter 3, Laws of Maryland, Extraordinary Session, 1946, as follows: "Said Racing Commission (Maryland Racing Commission) shall have full power to prescribe rules, regulations and conditions under which all horse races shall be conducted within the State of Maryland. Said Commission may make rules governing, restricting or regulating betting on such races and may fix, regulate and condition the rate of charge by the licensee for admission, or for the performance of any service, or for the sale of any article on the premises of such licensee, and may regulate the size of the purse, stake or reward to be offered for the conduct of such races. Each licensee may deduct and retain for its own account one-half (½) of the breakage computed to the 10¢ and 6% of the mutuel pool, including any deduction required by the Commission as its agent pursuant to the provisions of Section 11A of this Article but exclusive of the 4% State tax imposed by Section 13 of this Article. All contracts and agreements for the payment of money and all salaries, fees and compensation paid by any person or persons, association or corporation licensed as hereinbefore provided, and all proposed extensions, additions, or improvements to the buildings, stables, improvements or tracks upon property owned or leased by such licensee shall be subject to the approval of the Commission. * * *."

The second is section 11A of Chapter 502, Laws of Maryland, 1947, the pertinent parts of which are as follows: "For the calendar year 1947 and for each year thereafter, each licensee shall, as the agent of the Racing Commission, deduct one-half of one per centum of the total amount of money wagered on all races during each and every meeting and remit such deduction to the Commission. All such deductions shall be held in and comprise a fund to be known as the `Racing Fund,' and shall be deposited by the Commission in one or more banks or trust companies in the State. The members of the Commission shall have no personal liability for loss to such Fund by reason of the failure or insolvency or other fault of any depository if they shall use ordinary care in the selection of the depository. The Commission shall require any depository to secure by collateral any deposit therein comprising a part or all of the Fund.

"The amount of the Racing Fund on hand at any time, representing the deductions made by any particular licensee from the mutual pool, previously collected by such licensee, as agent of the Commission, may, with the prior written and express permission of the Commission, upon such terms and conditions as it may prescribe, be expended by that particular licensee for any substantial alterations, additions, changes, improvements, or repairs to or upon the property owned or leased by such licensee, and by it used for the conduct of racing. In determining whether to permit the use of any of the Racing Fund, the Commission shall give due consideration to whether its expenditure in each instance will promote the safety, convenience and comfort of the racing public and of horse owners and, generally, whether it will tend towards the improvement of racing in the State. If the deductions, herein provided for, made by any licensee for any calendar year, as agent of the Commission, shall neither have been spent nor binding commitments have been entered into for their expenditure, with the approval of the Commission, within three (3) years from the last day of the year of collection, the unspent portion of such year's deduction shall revert to the State as part of its general funds, and shall be paid over promptly by the Commission to the Comptroller. * * *"

Both of these enactments, with some later amendments, are presently codified as Sections 11 and 12 of Article 78B of the Annotated Code of Maryland, 1951. These enactments followed a series of resolutions passed by the Racing Commission which, in turn, were based upon two main circumstances: (1) the Commission felt it desirable to inquire particularly into just how the various tracks in Maryland were spending the funds that had been allotted to them; and (2) the tracks, in turn, wanted greater allowances. It is not necessary to give the full, chronological history of the action taken by the Racing Commission leading up to the establishment of the Racing Fund referred to in the second of the two enactments just quoted. Suffice it to quote merely the following resolution of the Maryland Racing Commission, passed on April 29, 1944, as follows: "Be it resolved that the Commission's Resolution of July 5, 1938, authorizing a 1% additional take by the four major Racing Associations, be, and the same are hereby rescinded.

"Be it resolved that, effective April 12, and thereafter, the four Mile Racing Associations of Maryland be, and they are hereby authorized to take an additional ½% of the mutuel pool, provided that said additional amount be used towards the payment of the increase in the average daily purse over and above the amount of the average daily purses paid by each of said tracks, respectively, in 1937. The allowance of this ½% additional take and its application to the payment of purse increases shall be subject to change or repeal by the Commission at any time, but shall continue in effect until further order of the Commission.

"Be it resolved that, effective as of April 12, 1944, and thereafter, until the further order of the Commission, each of the four Mile Racing Associations, at any meet which they shall respectively hold, shall as agents, collect for the Maryland Racing Commission an additional ½% of the mutuel pool, and shall deposit such additional ½% daily as agents, to the order of the Maryland Racing Commission, in such depository or depositories as may, from time to time, be designated by the Commission.

"Be it further resolved that, the ½% additional take so collected by the tracks as agents for the Commission, shall be held by the Maryland Racing Commission until the 1945 Regular Session of the General Assembly of Maryland shall authorize the disposition under the supervision of the Maryland Racing Commission, of said funds so collected."

As a result of this action by the Racing Commission, the General Assembly of Maryland in 1945 enacted legislation consonant therewith which, with amendments, became the enactments which we have heretofore quoted. See Laws of Maryland 1945, Chapter 961, Sections 11 and 11A. By this legislation, 90 per cent of the money obtained by the tracks from betting was required to be held for the benefit of those who placed the bets; 5½ per cent of it was to go to the tracks; and four per cent as tax payable to the Racing Commission—a total of 99½ per cent. The balance of one-half per cent is the amount required to be deposited in the Racing Fund to the order of the Racing Commission.

As a result of damage caused by heavy rains to the racing strip at the Pimlico Course, plaintiff determined that it would be necessary to make capital expenditures to rebuild the strip. On July 28, 1948, plaintiff so notified the Maryland Racing Commission, and on August 31, 1948, the President and Secretary of the plaintiff appeared before the Commission, and the latter's minutes show that the request of the plaintiff to rebuild the strip at an estimated cost of $70,000 was approved, "payment to be made from the Racing Fund after the work has been completed and bills have been presented to the Commission and approved." The work was completed before the end of the plaintiff's fiscal year (November 30, 1948), and before that time plaintiff received from the Maryland Racing Commission a check for $75,608.66 as reimbursement for its expenditures for the work, pursuant to bills, invoices and receipts showing plaintiff's payment of same, all of which had been submitted to the Commission. This reimbursement to plaintiff was made by the Commission out of funds which had been deducted from money wagered at Pimlico and remitted by the plaintiff to the Commission, and which the Commission deposited in the Racing Fund as required by law, as hereinbefore set forth.

This was the first payment that had ever been made to plaintiff as reimbursement out of any funds that it had deducted from money wagered at Pimlico and had deposited in the Racing Fund. The expenses of rebuilding the racing strip were capitalized on plaintiff's books in the fiscal year ending November 30, 1948; they were added to plaintiff's base for depreciation on its capital assets, and plaintiff claimed, and was allowed depreciation for federal and state income tax purposes on its fixed assets in the fiscal year ended November 30,...