Meredith v. Commissioner
| Decision Date | 18 December 1984 |
| Docket Number | Docket No. 29146-82. |
| Citation | 1984 TC Memo 651,49 TCM (CCH) 318 |
| Parties | Donald L. Meredith and Mary Lou Meredith v. Commissioner. |
| Court | U.S. Tax Court |
Michael J. Abramovitz, 210 University Blvd., Denver, Colo., for the petitioners. Byron Calderon, for the respondent.
Memorandum Findings of Fact and Opinion
SWIFT, Judge: In a statutory notice dated September 14, 1982, respondent determined deficiencies of $10,895.00 for 1978 and $15,447.00 for 1979 in petitioners' Federal income tax liabilities. By way of an amendment to answer filed with the Court on August 17, 1984, respondent asserted increased deficiencies which bring the total deficiencies determined to $18,330.00 for 1978 and $20,154.00 for 1979. The issues for decision are: (1) whether petitioner, Donald L. Meredith, was engaged in the trade or business of gambling during 1978 and 1979, and (2) whether petitioners are entitled to deduct, under section 162(a),1 certain travel, lodging and other miscellaneous expenses.2
Some of the facts are stipulated and are so found.
Petitioners Donald L. Meredith and Mary Lou Meredith resided in Northglenn, Colorado, at the time their petition was filed. Although Mary Lou Meredith participated in the gambling activities described herein to a limited extent, subsequent references to "petitioner" refer to Donald L. Meredith.
Petitioners timely filed joint Federal income tax returns for the years 1978 and 1979. They subsequently filed a timely joint amended Federal income tax return, Form 1040X, with respect to the year 1978. Pursuant to a valid agreement executed by petitioners' representative and by respondent, the period in which to assess additional tax with respect to the year 1978 was extended until December 31, 1982, in accordance with the provisions of section 6501(c)(4).
During the years in issue, petitioner was a full-time gambler. He had no other outside employment, and except for the closing down of his candy business (which business incurred an overall loss of $2,122 for the year 1978 and which business only involved a few hours of work each week during the first few months of 1978), petitioner engaged in no business and received no income from sources other than gambling in 1978 and 1979. During the years in issue he placed bets primarily on greyhound races within the Colorado racing circuit. In addition, he would sometimes bet on horse races at a nearby horse racing track and would, on less frequent occasions, play poker and bet on the outcome of selected sporting events.
On the Colorado dog racing circuit, the greyhound races are scheduled so that they are held in a particular city (such as Colorado Springs, Colorado, or Loveland, Colorado) for several months and then move on to another city in Colorado. All of the races held in one city are referred to as a "meet", and one meet typically lasts ten weeks. During a meet in a particular city, races are held six nights per week with additional matinee and "schooling" races. All of the races held on a single day are referred to as a "program." Each program normally consists of twelve or thirteen races, and lasts approximately four hours.
In 1978 and 1979, petitioner attended all of the approximately 60 programs held at each of the five dog racing tracks which were operated in Colorado, with the exception of the track operated in Pueblo, Colorado. Petitioner estimated that he only attended five or six programs at the Pueblo meets in 1978 and 1979.
In addition to time at the racetrack, petitioner would spend approximately seven or eight hours per day during the first three weeks of a meet studying racing forms and other information that was available pertaining to the greyhounds scheduled to race in the meet in that city. During the remaining seven weeks of a meet, petitioner would reduce the time he spent studying the greyhounds to one or two hours each day there was a program. Petitioner would always drive to the race track at which races were being held from his home in Northglenn, Colorado, and return home following the completion of each program.
Our calculations (based on the above facts) indicate that petitioner went to the greyhound races approximately 245 days each year, attended at least 245 racing programs, observed and had the opportunity to place wagers on approximately 2,940 separate races and, in fact, did place numereous wagers on many if not most of those races.
The total time petitioner spent each year at the races was approximately 980 hours. Time spent each year studying the greyhounds' racing records was approximately 672 hours. Thus, between study time and race track time, petitioner spent an estimated 41 forty-hour work weeks in 1978 and 1979 engaged in his betting activities.
Petitioner generally preferred to bet within the "quinella" and "trifecta" pools. In order to share in the winnings of the "quinella" pool, the bettor must correctly select the first two dogs to finish, in any order. In order to share in the winnings of the "trifecta" pool, the top three finishers must be selected in the correct order. Sometimes petitioner would bet in the "twin quinella" pool, in which the successful bettor would have to choose the top two finishers in two consecutive races in order to win. Petitioner's strategy generally was to pick a favorite or "key" dog and then to bet most of the other dogs in combination with the favorite dog.
Petitioner would normally bet only with his own money. Occasionally, however, he would allow certain friends, as an accommodation to them, to put up some of their money for petitioner to use in placing bets, in return for which the friends would receive a corresponding percentage of the profits or losses realized from all bets made by petitioner on all races of the program that day. In such circumstances, petitioner always determined how to make the bets. He did not sell tips or other information to other bettors, nor was he a bookmaker. Some of the bets, although not a high percentage, were made by Mary Lou Meredith, the wife of Donald, and also a petitioner in this case. On occasion, she would also sign the required receipt for winnings received.
Throughout the years in issue, petitioner kept records of his gambling transactions in the following manner. Upon arriving home from the track each day, petitioner would record separately the net results for each gambling activity (namely, dogs, horses, sports and/or poker) that he engaged in on that particular day.3 For example, his records reflect an entry for January 3, 1979 as follows: "Dogs + 4,207." Thus, petitioner's records do not enable him to determine what the gross winnings were each day, what the total amount spent on wagers was each day, nor the results of any one race. Only the net "plus" or "minus" for each day for a given activity can be determined. Petitioner's records indicate that for 1978, he realized a net total of $314,449.70 in "winnings" on "winning" days, and a net total of $269,659.00 in "losses" on "loss" days, for a net gain for the year of $44,790.70. In 1979 (which was the only year from 1973 through 1980 for which petitioner had an overall loss), the records indicate net "winnings" of $294,611.80 on "winning" days and net "losses" of $310,933.00 on "loss" days, for a net loss for the year of $16,321.20.
On their joint Federal income tax returns, petitioners deducted $5,050.00 in 1978 and $3,959.00 in 1979 for automobile expenses in connection with the gambling activities, which deductions are in dispute herein. Also disputed are deductions of $474 for travel and $88 in lodging for 1978 (representing the costs of a trip to Las Vegas), as well as a miscellaneous deduction of $300 in 1978 for programs, seats and forms.
OpinionThe first issue for decision is whether petitioner was engaged in the trade or business of gambling during the years 1978 and 1979. Petitioner claims that he was engaged in the business of gambling and therefore that his gambling losses do not trigger the minimum tax under section 56 for 1978 and the alternative minimum tax under section 55 for 1979 because gambling losses do not fall within the definition of tax preference items.4 Respondent contends that petitioner's activities did not constitute a trade or business on the grounds that gambling for one's own account does not constitute a trade or business.
In Ditunno v. Commissioner Dec. 39,888, 80 T.C. 362 (1983), we held that a taxpayer who devoted an extraordinary amount of time to wagering on dog races with the intent of earning a living from such activity and who had no other employment during the year was engaged in the trade or business of gambling even though he gambled solely for his own account. In so holding, we expressly overruled Gentile v. Commissioner Dec. 33,446, 65 T.C. 1 (1975), in which we had followed the proposition that in order to be engaged in a trade or business, one must hold one's self out to others as offering goods or services. That proposition or test had its origin in Justice Frankfurter's concurring opinion in Deputy v. duPont 40-1 USTC ¶ 9161, 308 U.S. 488 (1940). Relying primarily upon Higgins v. Commissioner 41-1 USTC ¶ 9233, 312 U.S. 212 (1941), we substituted a "facts and circumstances" approach, under which the elements of continuity, regularity and extent of a taxpayer's activities will control.
Subsequent to our Ditunno opinion, both the Second Circuit in Gajewski v. Commissioner 84-1 USTC ¶ 9116, 723 F. 2d 1062 (2d Cir. 1983) and the Sixth Circuit in Estate of Cull v. Commissioner 84-1 USTC ¶ 9878, 746 F. 2d 1148 (6th Cir. 1984), rejected our "facts and circumstances" standard and held that the legal standard of "holding one's self out to others as engaged in the selling of goods and services" must be satisfied in determining whether one is engaged in a trade or business. The Sixth Circuit, in Estate of Cull, supra, attempted to explain the harmony between...
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