Opposition Brief — Cull v. Commissioner

3)

No. 84-1310.

In the Supreme Court of the Hui

OcTOBER TERM, 1984

EsTATE OF DAN B. CULL, ET AL., PETITIONERS

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE SIXTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPY)SITION

Rex E. Lee

Solicitor General

GLENN L, ARCHER, JR.

Assistant Attorney General

ALBERT G. LAUBER, JR.

Assistant ‘© the Solicitor

General

JONATHAN S. COHEN

Bruce R. ELLISEN

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

QUESTION PRESENTED

Whether the decedent’s gambling activities constituted a

“trade or business carried on by [him]” (26 U.S.C. (1976 ed.)

62(1)) for purposes of the minimum tax on tax preferences

formerly imposed by 26 U.S.C. (1976 ed.) 56 and 57.

(I)

TABLE OF: CONTENTS

Page

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SEE CEE ESD ace Ge rp ne ee |

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TABLE OF AUTHORITIES

Cases:

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

i ww ecccaceeeeses 5

City Bank Farmers Trust Co. v. Commissioner,

i Se a eck enka eheabseeseses 7

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

/Mtunno v. Commissioner, 80 T.C. 362 ....... 3,4

Gajewski v. Commissioner, 723 F.2d

1062, cert. denied, No. 83-1715 (Oct. 1,

BS RGR WAGR Ria Seek ebb a veccene 4, 5, 8,9

Gentile v. Commissioner, 65 T.C. 1 .......... ee

Groetzinger v. Commissioner, 82 T.C. 793,

appeal pending, No. 84-2507 (7th Cir.) ........ 9

Grosswald v. Schweiker, 653 F.2d 58 .......... 6

Higgins v. Commissioner, 312 U.S.

ee ee eee ac ak beens « 3, 6, 7,8

Hornaday v. Commissioner, 81 T.C. 830 ....... 6

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

cert. denied, No. 83-1485 (June 18, 1984) .... 7,8

(IIT)

IV

Cases—Continued:

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

(CCH) 136, aff'd mem., 746 F.2d

GE KbGR Ane eeKARRnSeenEes eKb Se eecnccecce 8,9

Noto v. United States, 598 F. Supp.

440, appeal pending, No. 84-5704 (3d

Ed eecbehonhdbiabednete denekech0séanceee S)

Snow v. Commissioner, 416 U.S. 500 ........ 5,6

Stanton v. Commissioner, 399 F.2d 326 ........ 5

Steffens v. Commissioner, 707 F.2d 478 ........ 6

United States v. Pyne, 313 U.S. 127 ............ 7

Statutes:

Internal Revenue Code of 1954 (26 U.S.C.):

SE eo hanesennsewekie ste 2

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§$ S7(b) 1A) (Supp. I 1977) ............... 2

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PT? di hebehen veces bose ewoneeeueues 2

it rinnnds bkbedwh esha ktbetbheeeteteses 4

Dt ti cencesdéusunckekesesseneteen 5, 6

DC rehb eke dhcekskeeeeeie aheupe ee 2,9

ST Mea wine's 4 Nb4G dbs bbeeen de oN sRONNS 4

CR ti ten veteensnaaeetoddnees 5

I ee ek ee eek een oe 4

Tax Equity and Fiscal Responsibility Act of

1982, Pub. L. No. 97-248, Tit. II, $ 201(a),

96 Stat. 411 (codified at 26 U.S.C. 55(b)(1)(B)

SE Aiked caus skcnaunwndeacesesces 9

In the Supreme Court of the Hnited States

OcTOBER TERM, 1984

No. 84-1310

ESTATE OF DAN B. CULL, ET AL., PETITIONERS

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE SIXTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1-8) is

reported at 746 F.2d 1148. The memorandum of the Tax

Court (Pet. App. 10-16) is reported at 45 T.C.M. (CCH)

691.

JURISDICTION

The judgment of the court of appeals was entered on

October 23, 1984 (Pet. App. 9). The petition for a writ of

certiorari was filed on January 21, 1985. The jurisdiction of

this Court is invoked under 28 U.S.C. 1254(1).

STATEMENT

1. During 1977, Dan B. Cull, now deceased,’ was

employed full time as a pari-mutuel clerk at various race

tracks in northern Ohio (Pet. App. 12). He earned wages

‘Petitioners are the decedent’s surviving spouse, with whom he filed a

joint federal income tax return for 1977, and the executor of his estate.

(1)

2

aggregating about $21,000 from those jobs (ibid.). He was

also a habitual gambler. He devoted substantial time and

energy to his race track gambling and placed wagers almost

daily (ibid.). He bet solely for his own account and did not

place bets on behalf of others or quote odds on any race (id.

at 12-13). He incurred gambling losses in excess of his

gambling winnings in 1977 (id. at 13).

Section 56(a) of the Internal Revenue Code, as it existed

in 1977, imposed a minimum tax on persons whose “items

of tax preference” exceeded certain amounts (26 U.S.C.

(1976 ed.) 56(a)). Section 57(a)(1) defined “items of tax

preference” to include “adjusted itemized deductions” (26

U.S.C. (Supp. I 1977) 57(a)(1)). Gambling losses (to the

extent of gambling gains) are generally itemized deduc-

tions. 26 U.S.C. 63(f), 165(d). Uneer Section 57(b)(1)(A),

however, “adjusted itemized deductions” for minimum tax

purposes were defined to exclude “deductions allowable in

arriving at adjusted gross income” (26 U.S.C. (Supp. I 1977)

57(b)(1)(A)). Section 62(1) in turn provided that the latter

sort of deductions —- often called “above the line” deduc-

tions — include deductions “attributable to a trade or busi-

ness carried on by the taxpayer” (26 U.S.C. (1976 ed.)

62(1)).

The Commissioner determined that the decedent was not

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

that his gambling losses were not deductions of the type

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

sioner cited 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 the decedent's gambling losses were

3

“adjusted itemized deductions,” that those deductions were

“items of tax preference,” and the decedent was therefore

liable for minimum tax.

Petitioners sought redetermination of the resulting defi-

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

the Tax Court overruled Gentile in Ditunno v. Commis-

sioner, 80 T.C. 362 (1983), a case, like Gentile, involving the

trade-or-business status of a full-time gambler. In Ditunno,

the majority’ noted that, under Higgins v. Commissioner,

312 U.S. 212 (1941), “[t}he proper test of whether an indi-

vidual is carrying on a trade or business requires an exami-

nation of all the facts involved in each case” (80 T.C. at

366-367 (emphasis omitted)). Under this “facts and circum-

stances test,” the Ditunno court reasoned, the “failure to

provide or offer goods and services [should] not [be] suffi-

cient by itself to find that a taxpayer is not carrying on a

trade or business” (80 T.C. at 370 (footnote omitted)). The

Ditunno Court accordingly concluded that the gambler’s

failure to offer goods or services to others was not disposi-

tive, and that he was engaged in a “trade or business” for

minimum tax purposes by virtue of the frequency and regu-

larity of his gambling activities (80 T.C. at 371-372).

In the instant case, the Tax Court found that the decedent

was “an ‘active’ gambler” who “devoted substantial time

and energy to his gambling activities” (Pet. App. 15-16).

Following its reasoning in Ditunno, the court accordingly

held that, besides being in the trade or business of a pari-

mutuel clerk, the decedent was also “in the separate trade or

business of gambling” (Pet. App. 16). His gambling losses

thus were not “items of tax preference” subject ic minimum

tax (ibid.).

?Judge Tannenwald, the author of Gentile, dissented, joined by three

other judges (80 T.C. at 372-377). The Commissioner was precluded

from appealing the adverse decision in Ditunno because of a procedural

problem.

4

The Sixth Circuit unanimously reversed (Pet. App. 1-8).

It noted that the courts of appeals (like the Tax Court

before Ditunno) have typically regarded the offer of goods

Or services as a prerequisite to being in a “trade or business”

for tax purposes (Pet. App. 6, 8 (citing cases)). And it agreed

with the view expressed by the Second Circuit in Gajewski

v. Commissioner, 723 F.2d 1062, 1066-1067 (1983), cert.

denied, No. 83-1715 (Oct. 1, 1984) — a case involving the

trade-or-business status of a full-time gambler — that the

goods-or-services requirement is an appropriate “minimum

standard for determining whether a taxpayer is engaged in a

trade or business” (Pet. App. 8). Since the decedent in the

instant case gambled only for his own account and offered

no goods or services to others, the court of appeals held that

his gambling activities did not amount to a “trade or busi-

ness” and that his gambling losses were thus items of tax

preference subject to minimum tax (ibid.).

ARGUMENT

The decision below is correct. Although it conflicts with

an unpublished decision of the Eleventh Circuit, the law in

the courts of appeals is not sufficiently developed, and the

question presented is not sufficiently important, to warrant

review by this Court at this time.

1. The court of appeals correctly held that the decedent

was not engaged in a “trade or business” because he did not

offer goods or services to others. 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

7Eg., L.R.C. $8 62(1) (adjustments to gross income), 162 (trade-or-

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

5

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

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

—that the taxpayer hold himself out to others as offering

goods or services — finds its genesis in Justice Frankfurter’s

concurring opinion in Deputy v. du Pont, 308 U.S. 488,

499 (1940). Since then, the goods-or-services requirement

has received general acceptance in the lower courts. The

Second Circuit observed in Gajewski that the words “trade

or business” are “commonly viewed as meaning a commer-

cial activity in which a person seeks to earn a livelihood by

furnishing goods or services to others for a price” (723 F.2d

at 1065-1066 (citing cases)). And the goods-or-services

requirement, the court concluded, not only describes “the

universal characteristic of a businessman or trader in a free

enterprise society,” but also offers a standard that is “admi-

nistratively workable and fair to taxpayers” (id. at 1066-

1067).

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 | 74(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

6

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.

DuPont, * * * 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 the decedent was so

engaged.‘

2. Contrary to petitioners’ contention (Pet. 7-10), 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 petitioners describe (Pet. 8) as the Higgins

“facts and circumstances test.” The question there was

whether expenses incurred by an investor in managing a

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

‘There is no merit to petitioners’ suggestion (Pet. 14-15) that the

Commissioner has taken inconsistent positions about the goods-or-

services requirement. In Steffens v. Commissioner, 707 F.2d 478 (11th

Cir. 1983), and Hornaday v. Commissioner, 81 T.C. 830 (1983), the

IRS successfully argued that a consultant was engaged in a “trade or

business,” and hence was liable for self-employment tax, even though he

offered consulting services to only one corporation (707 F.2d at 481-

482; 81 T.C. at 833). The Commissioner in those cases did not argue that

the goods-or-services requirement could be dispensed with, but that it

could be satisfied by the taxpayer’s holding himself out as offering

services to just one “other.” Accord, e.g., Grosswald v. Schweiker, 653

F.2d 58 (2d Cir. 1981).

7

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

the decedent 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

petitioners and other taxpayers have sought to derive from

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

tive legal standard (83-1485 Br. in Opp. at 12).° “It is not

enough,” the court below noted correctly, “to say that

whether a person is engaged in a trade or business is a

question of facts or circumstances. The crucial question is

what facts and circumstances are necessary to [that] deter-

mination” (Pet. App. 6-7 (emphasis in original)). Nothing in

Higgins forecloses the goods-or-services requirement, or

any of the other requirements developed by the lower

courts, as relevant legal criteria to guide the trier of fact in

answering that question.®

3. There is likewise no merit to petitioners’ suggestion

(Pet. 10-14) that the lower courts are in need of guidance on

what constitutes a “trade or business” for tax purposes

5A copy of our brief in Moller is being sent to petitioners’ counsel.

*For similar reasons, petitioners err in contending (Pet. 8-9) that the

decision below conflicts with United States v. Pyne, 313 U.S. 127

(1941), and City Bank Farmers Trust Co. v. Commissioner, 313 U.S.

121 (1941). Those cases, like Higgins, involved investment activities,

and the Court disposed of them on the basis of Higgins (313 U.S. at 126;

313 U.S. at 131).

8

generally. In determining whether a particular taxpayer is

engaged in a “trade or business,” the courts have naturally

given different weight to different factors depending on the

particular situation involved. in the case of securities inves-

tors, for example, the courts, drawing on Higgins, have

focused especially on whether the taxpayer is a “trader” as

opposed to a mere “investor.” See, e.g., Moller v. United

States, 721 F.2d 810 (Fed. Cir. 1983), cert. denied, No.

83-1485 (June 18, 1984). But as the court below (Pet. App.

7) and other courts (e.g., Gajewski, 723 F.2d at 1067 & n.8)

have observed, and as we explained in our brief in Moller

(83-1485 Br. in Opp. at 9-12), these approaches are not

inconsistent with one another. They reflect reasoned re-

sponses to varied factual situations.

4. The decision below is in accord with Gajewski v.

Commissioner, 723 F.2d 1062 (2d Cir. 1983), cert. denied,

No. 83-1715 (Oct. 1, 1984), the only other published appel-

late decision addressing the question presented here. As

petitioners note (Pet. 3-4), the judgment below arguably

conflicts with that of the Eleventh Circuit in Nipper v.

Commissioner, 47 T.C.M. (CCH) 136 (1983), aff'd mem.,

746 F.2d 813 (1984) (Table), an unpublished order issued

after the denial of certiorari in Gajewski and before the

Sixth Circuit’s decision here.’ In Nipper, .«e Tax Court

held that a full-time gambler was engaged in carrying on a

trade or business for purposes of the minimum tax on tax

preferences, and the Eleventh Circuit affirmed on the basis

of the Tax Court’s memorandum decision. Nipper v.

Commissioner, No. 84-3067 (Oct. 11, 1984).

7’The petitioner in Gajewski sought rehearing of the denial of certio-

rari, alleging a conflict with Nipper, but rehearing was denied (No.

83-1715 (Nov. 26, 1984)). The facts involved in the instant case differ

somewhat from those involved in Nipper and Gajewski, since the tax-

payer in those cases was a full-time gambler with no other source of

income, whereas the decedent here was employed full-time as a pari-

mutuel clerk, and gambled only in his spare moments (Pet. App. 2-3).

9

In our view, there is no need for this Court to consider the

question presented at this time. Absent a published appel-

late opinion disagreeing with Gajewski and the decision

below, the case law in this area is not sufficiently developed

to warrant this Court’s review. The question presented here

is now pending in two other circuits,*® and it will be time

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

court of appeals renders a published opinion in a taxpayer-

gambler’s favor.

The importance of the question presented, moreover, has

been diminished by subsequent congressional enactment.

In 1982, Congress revised the minimum tax law and explic-

itly provided that gambling losses deductible under Section

165(d) are to excluded from the minimum tax base. Tax

Equity and Fiscal Responsibility Act of 1982, Pub. L. No.

97-248, Tit. II, $ 201(a), 96 Stat. 411 (currently codified in

I.R.C. $ 55(b)(1)(B) and (e)(1)(A)). Thus, the narrow ques-

tion presented here has been resolved legislatively for years

beginning after 1982. Although the question whether a

gambler is engaged in a “trade or business” continues to be

relevant in other tax contexts — e.g., the deductibility of

travel or home-office expenses — the revenue impact in

those areas is limited, a factor (among others) that led us not

to seek certiorari in Nipper.

8A district court decision in favor of the Commissioner is on appeal to

the Third Circuit in Noto v. United States, 598 F. Supp. 440 (D.N.J.

1984), appeal pending, No. 84-5704 (argued May 17, 1985), and a Tax

Court decision in favor of a taxpayer-gambler is on appeal to the

Seventh Circuit in Groetzinger v. Commissioner, 82 T.C. 793 (1984),

appeal pending, No. 84-2507 (argued Apr. 11, 1985).

10

CONCLUSION

The petition for a writ of certiorari should be denied.

Rex E. LEE

Solicitor General

GLENN L. ARCHER, JR.

Assistant Attorney General

ALBERT G. LAUBER, JR.

Assistant to the Solicitor

General

JONATHAN S. COHEN

Bruce R. ELLISEN

Attorneys

May 1985

‘DOJ-1985-05