Appeal from the United States Tax Court.
Before CUMMINGS, Chief Judge, FLAUM, Circuit Judge, and PECK, Senior Circuit Judge.*fn*
The sole issue in this appeal is whether the Tax Court erred in holding that the taxpayer's gambling activities constituted a "trade or business" for purposes of Section 62(1) of the Internal Revenue Code, 26 U.S.C. § 62(1). The Commissioner asserts that the taxpayer's failure to hold himself out to others as offering foods or services precludes characterization of his activities as a trade or business. We disagree and affirm the Tax Court decision.
The significance of the Tax Court's holding that the activities of the taxpayer, Robert P. Groetzinger, constituted a trade or business is that it allows Groetzinger to deduct gambling losses from gross income in arriving at adjusted gross income,*fn1 and prevents the losses from constituting "items of tax preference" for the purposes of the minimum tax as it existed in 1978. See 26 U.S.C. §§ 56, 57 (1976).*fn2 The taxpayer brought this action seeking a redetermination of a deficiency asserted by the Commissioner of Internal Revenue in his federal income taxes for the taxable year 1978 in the amount of $2,521.89. On May 24, 1984, the Tax Court determined that there was no deficiency and entered judgment for the taxpayer. The opinion of the Tax Court is reported at 82 T.C. 793 (1984). Fifteen members of the Tax Court agreed with Judge Drennen's majority opinion, one concurred and two dissented.
We briefly summarize the relevant facts. since the January 1978 termination of his employment with a private company, the taxpayer has devoted virtually all of his working time to pari-mutuel wagering on dog races. He had no other profession or employment and his only sources of income apart from his gambling winnings are interest, dividends and sales of investments (amounting to $6,498 in 1978). During the 1978 tax year in question Groetzinger went to the track six days a week, normally from 1:00 p.m. to 11:30 p.m., and spent substantial amounts of time preparing to make wagers for his own account. The Tax Court found that he devoted sixty to eighty hours per week to these activities; the taxpayer never placed bets for others or sold tips.
In 1978 Groetzinger bet $72,032, and won back $70,000, resulting in a net loss from gambling of $2,032. On his Federal income tax form, the taxpayer did not deduct the $2,032 loss from gambling in arriving at "adjusted gross income" nor did he claim any itemized deductions, but instead listed that amount as a net loss from gambling on his Supplemental Income Schedule (Schedule E) of his From 1040. In the notice of deficiency, the Commissioner determined that Groetzinger's $70,000 of gambling winnings constituted income and that his $70,000 of deductible gambling losses constituted itemized deductions,*fn3 thus subjecting the taxpayer to a $2,141.89 minimum tax (App. 9a). See supra note 2.
The determination of what constitutes a "trade or business" under the various provisions of the Internal Revenue Code has proven to be most difficult and troublesome over the years. Although the term appears frequently in numerous provisions of the Code*fn4 it has not been defined by either the Code or the Treasury regulations, nor has any authoritative judicial definition of the terms evolved. B. BITTKER, 1 TAXATION OF INCOME ESTATES AND GIFTS P20.1.2 (1981). We limit our inquiry to determining whether Groetzinger's activities constituted a trade or business under Sections 62 and 162 of the Code, since the precise meaning or connotation of the term appears to vary depending upon the provision in which it is used. See Steffens v. Commissioner, 707 F.2d 478, 482 (11th Cir. 1983); 4A MERTENS LAW OF FEDERAL INCOME TAXATION § 25.08 (1979). Although the specific issue in this case is the application of § 62(1) (supra note 1), the Commissioner concedes that the meaning of the term "trade or business" is the same under §§ 62(1) and 162(a)*fn5 and that the cases considering § 162 are relevant here since both Sections involve the deductibility of expenses incurred in carrying on a trade or business (Br. 10).
The Tax Court in Gentile v. Commissioner, 65 T.C. 1, 2 (1975), held, in circumstances similar to this case, that a full-time gambler wagering for his own account was not engaged in a "trade or business" (under 26 U.S.C. §§ 162, 1402(c)), because he "neither provided nor held himself out as a provider of any goods or services to any other person." The Tax Court subsequently reversed itself, again in a case involving nearly identical facts, and rejected the proposition that the offering of goods or services to others was an absolute prerequisite to characterization of activities as a "trade or business" under § 62(1). Ditunno v. Commissioner, 80 T.C. 362, 371 (1983); to the same effect see Meredith v. Commissioner, T.C. Memo 1984-651, 49 T.C.M. (CCH) 318 (1984). The Eleventh Circuit has adopted the Tax Court's position in Ditunno by affirming the Tax Court on the basis of its Memorandum of Findings of Fact and Opinion in Nipper v. Commissioner, 746 F.2d 813 (11th Cir. 1984) (per curiam) (unpublished order). The Tax Court's position has been overruled, however, in two circuits by opinion in appeal from the Tax Court. See Estate of Cull v. Commissioner, 746 F.2d 1148 (6th Cir. 1984), certiorari denied, 472 U.S.1007, 105 S. Ct. 2701, 86 L. Ed. 2d 717 ; Gajewski v. Commissioner, 723 F.2d 1062 (2d Cir. 1983), certiorari denied, 469 U.S. 818, 105 S. Ct. 88, 83 L. Ed. 2d 35 . The Third Circuit has affirmed a district court case also rejecting Ditunno. See Noto v. United States, 598 F. Supp. 440 (D.N.J. 1984), affirmed without explanation by unreported judgment order, No. 84-5704 (3d Cir. May 21, 1985).
In the present case the full Tax Court reconsidered its ruling in Ditunno in light of the Gajewski decision and reasserted the correctness of its position with only four dissenters. Thus the real issue before us is whether the "goods and services" test should be an absolute prerequisite to a finding that a taxpayer engaged in a "trade or business" under § 62(1).
Unfortunately neither judicial precedent nor the relevant statutory language of §§ 62(1) and 162(a) provides a clear basis for resolving this issue. The "goods and services" requirement first appeared in a solo concurrence of Justice Frankfurter in Deputy v. DuPont, where the Justice stated that the carrying on of a trade or business "involves holding oneself out to others as engaged in the selling of goods or services." 308 U.S. 488, 499, 60 S. Ct. 363, 84 L. Ed. 416. One year later when the Court squarely faced the "trade or business" issue and had an opportunity to employ the test to dispose of the taxpayer's claim, it failed to adopt the Frankfurter definition. Higgins v. Commissioner, 312 U.S. 212, 85 L. Ed. 783, 61 S. Ct. 475 . In Higgins the Court rejected the argument that a trade or business "embraces everything about which a person can be employed" and simply ruled that the determination of whether the activities of a taxpayer are "carrying on a business" requires an examination of the facts of each case and that the definition excludes management of one's own securities. 312 U.S. at 217-218. Subsequent Supreme Court cases dealing with the "trade or business" issue also failed to mention the Frankfurter test. See City Bank Farmers Trust Co. v. Helvering, 313 U.S. 121, 85 L. Ed. 1227, 61 S. Ct. 896 ; United States v. Pyne, 313 U.S. 127, 85 L. Ed. 1231, 61 S. Ct. 893 . Although numerous courts have recanted the Frankfurter language in attempting to summarize considerations relevant to the "trade or business" determination (see cases cited in Gajewski, 723 F.2d at 1066), only one case expressly applied the test to hold that a taxpayer was not engaged in a trade or business (apart from the gambling cases beginning with Gentile in 1975). The Supreme Court reversed that case, see Snow v. Commissioner, 416 U.S. 500, 94 S. Ct. 1876, 40 L. Ed. 2d 336 reversing 482 F.2d 1029 (6th Cir. 1973), ruling that the "goods and ...