Respondents Brief — Gajewski v. Commissioner

Office - Supreme Court, U.S.

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No. 83-1715 |

ALEXANVE - STEVAS

In the Supreme Court of the United States

OCTOBER TERM, 1984

RICHARD GAJEWSKI, PETITIONER

V.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE SECOND CIRCUIT

MEMORANDUM FOR THE RESPONDENT IN OPPOSITION

Rex E. LEE

Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 633-2217

BEST AVAILABLE COPY ©

TABLE OF AUTHORITIES

Cases:

Page

Bessenyey v. Commissioner, 379 F.2d 252,

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Deputy v. du Pont, 308 U.S. 488 ............ 2,4

Ditunno v. Commissioner, 80 T.C.

Pn ca hee NENT Se CAREW Cees ees 2, 3, 4, 6

Estate of Cull v. Commissioner, 45 T.C.M.

(CCH) 691, appeal pending No. 83-1601

I See cera sa dh ki ya dik 4 ceawe 3

Gentile v. Commissioner, 65 T.C. 1 .........55. 2

Groetzinger v. Commissioner, 82 T.C.

PG Cee SU I I eee ccc cas ceccscsacens 3

Higgins v. Commissioner, 312 U.S.

Dat Shaka @iaiwie SRGbaei ae Ub bens eee Aan

Moller vy. United States, 721 F.2d 810,

cert. denied, No. 83-1485 (June 18, 1984) .... 6,7

Nipper v. Commissioner, 47 T.C.M.

(CCH) 136, appeal pending, No. 84-3067

CE ei che aie ekbeenenda keke neecees 3

Snow v. Commissioner, 416 U.S. 500 -.......... 5

Stanton v. Commissioner, 399 F.2d 326 ........ 4

Statutes:

Internal Revenue Code of 1954 (26 U.S.C. (&

1976 ed.)):

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Tax Equity and Fiscal Responsibility Act

of 1982, Pub. L. No. 97-248, § 201(a),

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Inu the Supreme Court of the Hnited States

OCTOBER TERM, 1984

No. 83-1715

RICHARD GAJEWSKI, PETITIONER

V.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE SECOND CIRCUIT

MEMORANDUM FOR THE RESPONDENT IN OPPOSITION

Petitioner challenges the court of appeals’ holding that

his gambling activities did not constitute a “trade or busi-

ness” for purposes of the minimum tax on tax preferences.

The decision below is correct. Petitioner does not allege

(nor is there) a conflict among the circuits on the question

presented. There is no basis for review by this Court.

1. Petitioner was a full-time gambler during 1976-1977.

His only source of income was pari-mutuel wagering on

jai-alai (Pet. App. 609). He bet solely for his own account

and did not act as a bookmaker or hold himself out in any

way as offering goods or services to others (ibid.). He

incurred gambling losses equal to or in excess of his gam-

bling winnings in both years (id. at 610).

Section 56 of the Internal Revenue Code, as it existed

during the tax years at issue, imposed a minimum tax on

persons whose “items of tax preference” exceeded certain

(1)

2

amounts (26 U.S.C. (1976 ed.) 56(a)). Section 57(a)(1)

defined “items of tax preference” to include “excess item-

ized deductions” (26 U.S.C. (1976 ed.) 57(a)(1)). Gambling

losses are generally itemized deductions. Under Section

57(b)(1)(A), however, “excess itemized deductions” for

minimum tax purposes were defined to exclude “deductions

allowable in arriving at adjusted gross income” (26 U.S.C.

(1976 ed.) 57(b)(1)(A)). Section 62(1) provides that deduc-

tions allowable in arriving at adjusted gross income — often

called “above the line” deductions — include deductions

“attributable to a trade or business carried on by the tax-

payer” (26 U.S.C. (1976 ed.) 62(1)).

The Commissioner determined that petitioner was not

engaged in the “trade or business” of gambling and hence

that his gambling losses were not deductions of the sort

described in Section 62(1). In so concluding, the Commis-

sioner relied on Gentile v. Commissioner, 65 T.C. 1 (1975),

which held that a taxpayer who gambles solely for his own

account is not in a “trade or business” because he does not

hold himself out to others “ ‘as engaged in the selling of

goods or services’ ” (65 T.C. at 5, quoting Deputy v. du

Pont, 308 U.S. 488, 499 (1940) (Frankfurter, J., concur-

ring)). Based on this conclusion, the Commissioner deter-

mined that some of petitioner’s gambling losses represented

“excess itemized deductions,” that those excess deductions

were “items of tax preference,” and that petitioner was

therefore liable for minimum tax.

Petitioner sought redetermination of the resulting defi-

ciency in the Tax Court. While his petition was pending, the

Tax Court overruled Gentile in Ditunno v. Commissioner,

80 T.C. 362 (1983). In Ditunno, the majority! noted that,

under Higgins v. Commissioner, 312 U.S. 212 (1941),

'Judge Tannenwald, the author of Gentile, dissented in Ditunno,

joined by three other judges (80 T.C. at 372-377).

3

“(t]he proper test of whether an individual is carrying on a

trade or business requires an examination of all the facts

involved in each case” (80 T.C. at 366-367 (emphasis omit-

ted)). Under this “facts and circumstances test,” the

Ditunno court concluded, the “failure to provide or offer

goods and services [should] not [be] sufficient by itself to

find that a taxpayer is not carrying on a trade or business”

(80 T.C. at 370 (footnote omitted)). This reasoning was

based largely on a series of cases which, like Higgins, had

involved investors in securities and which had ascertained

those taxpayers’ trade-or-business status by inquiring

whether they were “traders” rather than mere “investors,”

without specifically inquiring whether they offered goods or

services (80 T.C. at 370-371). Applying this “facts and cir-

cumstances test,” the Tax Court in Ditunno held that a

full-time gambler is engaged in a “trade or business” for

minimum tax purposes by virtue of the frequency and regu-

larity of his activities (80 T.C. at 371-372), and the Tax

Court similarly concluded that “Ditunno control[led]” its

decision here (45 T.C.M. (CCH) 967, 968 (1983)). It accord-

ingly held that pe’ itioner’s gambling losses were not “items

of tax preference” subject to minimum tax.?

The Second Circuit unanimously reversed. The words

“trade or business,” it observed, are “commonly viewed as

meaning a ccmmercial activity in which a person seeks to

?Because of a procedural problem, the Commissioner was precluded

from appealing the Tax Court’s decision in Ditunno. The Commis-

sioner has appealed two subsequent Tax Court decisions that followed

Ditunno, both of which present the same question as Ditunno and this

case, viz., the liability of a gambler for minimum tax. Estate of Cull v.

Commissioner, 45 T.C.M. (CCH) 691 (1983), appeal pending, No.

83-1601 (6th Cir. 1983); Nipper v. Commissioner, 47 T.C.M. (CCH)

136 (1983), appeal pending. No. 84-3067 (11th Cir. 1984). Neither case

has yet been argued. In Groetzinger v. Commissioner, 82 T.C. No. 61

(May 24, 1984), the Tax Court declined to depart from the position it

took in Ditunno, notwithstanding its reversal by the Second Circuit in

this case. Appeal in Groetzinger would lie to the Seventh Circuit.

4

earn a livelihood by furnishing goods or services to others

for a price” (Pet. App. 616). It noted that the courts of

appeals, as well as the Tax Court before Ditunno, have

typically regarded the offer of goods or services as a prere-

quisite to being in a “trade or business” for tax purposes (id.

at 613-615). And it concluded that this requirement not only

describes “the universal characteristic of a business man or

trader in a free enterprise society,” but also offers a standard

that is “administratively workable and fair to taxpayers”

(id. at 616, 617). Because petitioner “gambled only for his

own account and did not operate a bookmaking service or

place wagers for others,” he was not engaged in a “trade or

business” and his gambling losses were thus items of tax

preference subject to minimum tax (id. at 617).

2. The decision below is correct. The phrase “trade or

business,” while appearing frequently in the Internal

Revenue Code,? is defined neither in the Code nor in the

regulations, and the courts have thus been left to develop its

meaning on a case-by-case basis. The courts have identified

several requirements that a taxpayer must meet to be

engaged in a “trade or business” for tax purposes, including

the requirement that his activities be regular and continu-

ous (e.g., Stanton v. Commissioner, 399 F.2d 326 (Sth Cir.

1968)) and that they be undertaken to make a profit (e.g.,

Bessenyey v. Commissioner, 379 F.2d 252 (2d Cir.), cert.

cenied, 389 U.S. 931 (1967)). Still another requirement

— that the taxpayer hold himself out to others as offering

goods or services — “finds its genesis,” as the court below

put it (Pet. App. 613), in Justice Frankfurter’s concurring

opinion in Deputy v. du Pont, 308 U.S. 488, 499 (1940).

Since then, this so-called “goods or services” requirement

3E.g., 1.R.C. §§ 62(1) (adjustments to gross income), 162 (trade or

business expenses), 174 (research expenses), 280A(c)(1) (home-office

deductions).

5

has received general acceptance in the lower courts (see Pet.

App. 615 (citing cases)).

Although this Court has never had occasion explicitly to

address the “goods or services” requirement, the Court

implicitly approved that formula in Snow v. Commis-

sioner, 416 U.S. 500 (1974). The question there was the

proper construction of Section 174(a)(1), which allows a

deduction for research expenses incurred “in connection

with [a] trade or business.” The Court held that the “goods

or services” requirement did not apply to Section 174(a)(1),

contrasting it in that respect with Section 162(a), which

allows a deduction for expenses incurred “in carrying on

any trade or business.” The Court noted that Section 162(a)

is “more narrowly written” than Section 174(a)(1) — since it

uses the words “in carrying on” rather than “in connection

with” — and remarked (416 U.S. at 502-503):

Section 174 was enacted * * * to dilute some of the

conception of “ordinary and necessary” business ex-

penses under § 162(a) * * * adumbrated by Mr. Justice

Frankfurter in a concurring opinion in Deputy v.

Du Pont, * * * where he said that the section in ques-

tion * * * “involves holding one’s self out to others as

engaged in the selling of goods or services.”

This case concerns Section 62(1), which, like Section 162(a),

requires “carrying on” a trade or business. The “goods or

services” requirement was thus properly applied here as a

threshold test for determining whether petitioner was so

engaged.

3. Contrary to petitioner’s contention (Pet. 5-11), the

decision below does not conflict with this Court’s decision

in Higgins v. Commissioner, 312 U.S. 212 (1941), nor does

it reject what petitioner describes (Pet. 7) as the Higgins

“facts and circumstances test.” The question there was

whether expenses incurred by an investor in managing a

6

large securities portfolio were deductible as trade-or-

business expenses under the predecessor of Section 162(a).

This Court held that they were not, reasoning that personal

portfolio-management is not a “trade or business” regard-

less of the extent of a taxpayer’s wealth or the amount of

time expended (312 U.S at 218). The Court did note in

Higgins (id. at 217) that “[t]o determine whether the activi-

ties of a taxpayer are ‘carrying on a business’ requires an

examination of the facts in each case.” But the court of

appeals here did examine the facts of this case, holding that

petitioner was not in a “trade or business” because he bet

solely for his own account and did not offer services to

others.

As we noted recently in Moller v. United States, 721

F.2d 810 (Fed. Cir. 1983), cert. denied, No. 83-1485 (June

18, 1984), the so-called “facts and circumstances test” that

petitioner and other taxpayers have sought to derive from

Higgins is not really a test at all, for it embodies no substan-

tive legal standard (Br. in Opp. 12).4 “Once the facts and

circumstances are ascertained,” the court noted correctly

below (Pet. App. 616), “there remains the problem of decid-

ing upon a fair and reasonable standard for determining

whether the taxpayer is engaged in a trade or business.”

Nothing in Higgins forecloses the “goods or services”

requirement, or any of the other requirements developed by

the lower courts, as elements of that standard.

4A copy of our brief in Moller is being sent to petitioner’s counsel.

‘There is no merit to the suggestion, advanced by the Tax Court in

Ditunno (80 T.C. at 370-371), that the “goods or services” requirement

is inconsistent with cases which have ascertained the trade-or-business

status of securities investors by inquiring whether they are “traders.”

The “trader versus investor” test grew out of this Court’s analysis in

Higgins, and its particular formulation probably owes to the fact that

Higgins involved an investor in securities. It is consistent with the

“goods or services” requirement because, as noted below (Pet. App. 617

7

4. Petitioner does not allege, nor is there, a conflict

among the circuits on the question presented. Indeed, the

Second Circuit below is the first court of appeals to consider

the question whether gambling losses are “items of tax

preference” for purposes of the minimum tax. As noted

above (see page 3 note 2, supra), appeals raising this ques-

tion are now pending in several other circuits. It will be time

enough for this Court to consider the issue when and if a

conflict develops.®

It is therefore respectfuily submitted that the petition for

a writ of certiorari should be denied.

Rex E. LEE

Solicitor General

JULY 1984

n.8), a securities trader holds himself out to others as offering “goods,”

i.e., stocks and bonds. The Court recently denied certiorariin Moller v.

United States, No. 83-1485 (June 18, 1984), despite the taxpayers’

protestations that cases employing the “goods or services” test conflict

with those employing the “trader versus investor” test.

6Although the question whether a gambler is engaged in a “trade or

business” may arise in other contexts — e.g., the deductibility of travel

(1.R.C. § 274(a)) or home-office (I1.R.C. § 280A(c)(1)) expenses — the

narrow question presented here has been resolved legislatively for years

beginning after 1982. For those years, gambling losses deductible under

Section 165(d) are specifically excluded from the minimum tax base.

See I.R.C. § 55(b)(1)(B) and (e)(1)(A) (as amended by Tax Equity and

Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, § 201(a), 96 Stat.

411).

DOJ-1984-07