# Opposition Brief — Cull v. Commissioner

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1985
- **Citation:** 472 U.S. 1007

## Text

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
SEN GRUEO Vaden s dthdensicscdeveess l
ret cee Cee kn k5 dss she eb cdeesaene l
SEE CEE ESD ace Ge rp ne ee |
DT See caRACUECCRAR GUESS SECGd AE cov OSeR ees 4
a ck ia eee 10

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
I, EEUU ca waccccccucaticncs 2
§$ S7(b) 1A) (Supp. I 1977) ............... 2
nn 4) oak Chbccenccaaaeed 2. 4,6
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385017_2412%3A3. Public record. Not legal advice.