United States v. Hall
| Decision Date | 27 July 1962 |
| Docket Number | No. 6835,6836.,6835 |
| Citation | 307 F.2d 238 |
| Parties | UNITED STATES of America, Appellant, v. G. E. HALL and Christine B. Hall, Appellees. G. E. HALL and Christine B. Hall, Cross-Appellants, v. UNITED STATES of America, Cross-Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Michael A. Mulroney, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and David O. Walter, Attys., Dept. of Justice, and B. Andrew Potter, U. S. Atty., on the brief), for appellant and cross-appellee.
Gus Rinehart, Oklahoma City, Okl. (Butler, Rinehart & Morrison, Oklahoma City, Okl., on the brief), for appellees and cross-appellants.
Before PHILLIPS, PICKETT and LEWIS, Circuit Judges.
This case explores the personal income tax incidents that occur when a gambling debt is eliminated as between winner and loser by transfer from the loser to the winner of property having a value less than the amount of the debt. The general problem is further complicated by certain refinements appearing in the factual background. The suit arose in the United States District Court for the Western District of Oklahoma as a claim for refund of income taxes for the year 1950 and resulted in a judgment favoring the taxpayer Hall1 in the amount of $54,220.32. The judgment included a set-off against the claim of taxpayer for $1,014.74.
Both the government and the taxpayer have appealed. The government contends that the judgment is erroneously based in law upon a finding of fact made by the jury that the taxpayer and the winner, one Binion, had agreed upon the amount of the gambling debt as being $150,000. The taxpayer by cross-appeal asserts error in the allowance of a set-off based upon a determination of income resulting from the elimination of the $150,000 debt by the transfer by taxpayer to Binion of cattle having a base worth of $148,110.
In 1947, the taxpayer Hall incurred through the medium of dice and race bets a substantial gambling debt at the Las Vegas Club in Las Vegas, Nevada.2 The exact amount of the debt was not determined at the trial and the rather sketchy evidence touching the amount mentioned varying sums from a high of $478,000 to a low of $145,000. Binion, a member of the syndicate who owned and operated the Las Vegas Club, had apparently vouched for taxpayer's credit and took over the debt by paying into Las Vegas Club dice and bet pools a sum indicated to be $225,000 in cash.3 Taxpayer, in addition to other substantial business interests, owned a cattle ranch in Arizona. Binion, in addition to his professional gambling interests, owned a cattle ranch in Montana. Taxpayer ran his own cattle upon both ranches in 1948 and 1949 and in 1950 transferred to Binion a one-half interest in both herds in complete satisfaction of the entire gambling debt. The jury found that prior to the transfer taxpayer and Binion orally agreed that the amount of the gambling debt was $150,000 and that the transfer intended to, and did, create a bona fide partnership.
In 1950 some of the cattle were sold and taxpayer reported one-half the gain derived from such sales as income. The Commissioner included the entire amount of gain on the cattle sold in taxpayer's income for that year. This suit for refund resulted.
The government's present position4 is that taxpayer realized gain or income in an amount equal to the difference between his basis in one-half the herd and the portion of the debt discharged or canceled by the transfer of the cattle to Binion. Since the judgment below fully recognizes a gain to the taxpayer by the elimination of his gambling debt through the transfer of cattle to Binion, the government's claim of error is limited to complaint as to the determination of the amount of the debt to which the theory is applied. The trial court used the sum of $150,000, the amount found by the jury to be the figure agreed upon by taxpayer and Binion as representing the debt due. The government contends that the actual amount of the gambling debt is the proper base of the debt. The taxpayer by cross-appeal urges error in the judgment to the extent a set-off was allowed for taxable gain realized by the elimination of an agreed gambling debt of $150,000 through transfer of property having a base worth of $148,110. Says the taxpayer:
In broad approach, the general statutory,5 regulatory6 and interpretive7 rules applicable to ordinary business transactions give comfort to the government's present position. An actual enrichment resulting to a solvent debtor by reduction or cancellation of an undisputed claim of indebtedness carries with it an incident of taxable gain. See 2 Mertens Law of Federal Income Taxation, sec. 11.19 to 11.30.
And we are in accord with the government's contention that the impact of the tax laws cannot be varied by the arbitrary agreement of taxpayers as to the existence of a fact. The amount of taxpayer's gambling credit loss here, if it has significance for tax purposes, cannot be conclusively determined by the agreement of the parties.8 Such agreement would be, of course, competent evidence of the debt but would not be a bar to other evidence upon the subject. The amount of such debt is a fact capable of proof as any other fact. It follows that the judgment below, based as it is upon a finding of fact that the amount of the gambling debt was agreed by the parties to such debt to be $150,000, is faulty.
It does not follow that a judgment based upon the actual amount of the gambling debt is proper. The general rules relied upon by the government as having application to gain realized from cancellation of debt, sound as such rules may be in the ordinary course of business affairs, are but artificial theory when applied to the facts of the case at bar. The tax statutes are practical, not pure theory, United States v. General Shoe Corp., 6 Cir., 282 F.2d 9, 12, and the revenue needs of the nation are not dependent upon artifice in the determination of income.
Congress has recognized that gain and loss from gambling requires special treatment within the tax structure and has provided that gain shall be treated as income and that loss can be used only as an offset against gain in the same year. 26 U.S.C.A. §§ 22, 23(h). A gambling loss is a hard reality but a gambling debt,9 being unenforceable in every state, has but slight potential and does not meet the requirements of debt necessary to justify the mechanical operation of general rules of tax law relating to cancellation of debt. It is only by the operation of the most artificial of standards that a gain based upon cancellation of debt can be created from the transaction consummated by the transfer of cattle from taxpayer to Binion. The cold fact is that taxpayer suffered a substantial loss from gambling, the amount of which was determined by the transfer.
Courts need not apply mechanical standards which smother the reality of a particular transaction. Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 46 S.Ct. 449, 70 L.Ed. 886. The Sixth Circuit in a recent case remarkably similar in principle to the case at bar had occasion to consider the Kerbaugh-Empire Co. case and subsequent authorities and concluded, as do we, that the film of technicality should not be allowed to support a colorable profit. In Bradford v. Commissioner, 6 Cir., 233 F.2d 935, Judge Stewart, now Mr. Justice Stewart, stated:
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Flamingo Resort, Inc. v. United States
...Palace case, there is only one reported federal case that has dealt directly with any tax effect of a gambling debt. United States v. Hall, 307 F.2d 238 (10th Cir. 1962), involved the settlement of a gambling debt incurred in a Las Vegas casino. The taxpayer had borrowed large sums of money......
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...and that agreeing with respondent in this case would result in taxing petitioner on his losses. Petitioner relies on United States v. Hall, 307 F.2d 238 (10th Cir. 1962), as establishing a rule that the cancellation of indebtedness doctrine is not applicable to the settlement of a gambling ......
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...See sec. 1.1017-1(b)(5), Income Tax Regs. Presumably under this approach either gain or loss could be realized. See United States v. Hall, 307 F.2d 238, 242 (10th Cir. 1962). See also Bialock v. Commissioner, 35 T.C. 649, 660 (1961). The more difficult area concerns indebtedness incurred to......
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