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September 21, 1984

Louis Noto and Ann Noto, Plaintiffs
United States, Defendant

Lacey, District Judge.

The opinion of the court was delivered by: LACEY

LACEY, District Judge:

 There is only one issue left to be decided in this action: *fn1" whether the gambling activities of plaintiff Louis Noto *fn2" during 1978 constitute a "trade or business" within the meaning of Sections 62(1) and 162(a) of the Internal Revenue Code (the Code), 26 U.S.C. §§ 62(1) and 162(a). *fn3" Plaintiff says that they do and seeks to have his 1978 gambling losses treated as "above the line" deductions, deductible from gross income in arriving at adjusted gross income under Section 62(1). The Government maintains that the losses are not attributable to a trade or business, but are "items of tax preference," as the term is defined by Section 57(a)(1), and subject to minimum tax imposed by Section 56(a)(3). *fn4" The facts have been stipulated.

 During 1978, Louis Noto devoted approximately 60% of his waking time to his gambling activities. His exclusive domain was horse racing. On a daily basis, he went to one of several race tracks to study the horses and the track, review the racing programs, confer with horse owners and trainers, and place wagers on the races. He also videotaped races broadcast on television so that he could study the races even more closely. He recorded much of this data and used it in his self-devised system of handicapping to determine which wagers presented the most favorable odds. *fn5" At no time, however, did he accept bets on behalf of others or offer any consulting services to others or in any way hold himself out to others as providing a service. He bet solely for his own account, and, as a result of his efforts, he won over $97,000 at the tracks that year. Unfortunately, he lost more than he won, so on his 1978 tax return he deducted the losses to the extent of his gambling winnings, as is permitted under Section 165.

 Upon auditing the 1978 return, the IRS determined that, while the gambling loss deduction was properly taken, it was an "item of tax preference" and was subject to minimum tax under Section 56(a)(3). The IRS assessed a deficiency of $2,763, which was collected by reducing the amount of plaintiff's tax refund for 1982. Plaintiff filed a claim for the refund of the $2,763 on the ground that his gambling losses were "attributable to a trade or business carried on by the taxpayer" and, therefore, not within the definition of "items of tax preference" set forth in Section 57. This lawsuit was filed when the IRS denied the refund claim.

 The term "trade or business" is not defined by either the Code or the Treasury Regulations. This responsibility has been left to the courts, and, not unexpectedly, there now exists a divergence of opinion as to what standard a court should employ in determining whether a taxpayer's activities constitute a trade or business.

 One camp espouses what is known as the "facts and circumstances" test, derived from the Supreme Court decision in Higgins v. Commissioner, 312 U.S. 212, 85 L. Ed. 783, 61 S. Ct. 475 (1941), where Justice Reed wrote, "to determine whether the activities of a taxpayer are 'carrying on a business' requires an examination of the facts in each case." 312 U.S. at 217. This test finds support in the United States Tax Court cases of Ditunno v. Commissioner, 80 T.C. 362 (1983) and Groetzinger v. Commissioner, 82 T.C. 793 (1984). While no single factor is controlling under this standard, consideration is generally given to the frequency and substantiality of the activities or transactions, as well as whether there is a genuine profit motive. See, e.g., Ditunno, 80 T.C. at 367. This is the theory urged upon the court by the plaintiff.

 The test advanced by the Government is known as the "goods or services" test and has its origin in the concurring opinion of Justice Frankfurter in Deputy v. du Pont, 308 U.S. 488, 84 L. Ed. 416, 60 S. Ct. 363 (1940), where he stated, "'. . . carrying on any trade or business, ' within the contemplation of § 23(a) [the statutory predecessor to Section 162], involves holding one's self out to others as engaged in the selling of goods or services." 308 U.S. at 499. The Government argues that, while the court must necessarily examine all the facts and circumstances of a taxpayer's activities, it must first find that the taxpayer holds himself out to others as providing goods or services before it can conclude that his activities constitute a trade or business. This standard was recently applied by the Second Circuit Court of Appeals in Gajewski v. Commissioner, 723 F.2d 1062 (2d Cir. 1983), where it held that a full-time bookmaker was not engaged in a trade or business because he gambled solely for his own account. 723 F.2d at 1067. The court criticized the Tax Court's adoption of the "facts and circumstances" approach as a rule of law:

The "facts and circumstances" approach does not describe a standard at all; it is instead a predicate for application of a legal test. One must first find the relevant "facts and circumstances" in every case before applying the proper standard to those facts. To describe "facts and circumstances" as a test is therefore to adopt a misnomer; the phrase amounts to a non-test. Once the facts and circumstances are ascertained there remains the problem of deciding upon a fair and reasonable standard for determining whether the taxpayer is engaged in a trade or business.

 723 F.2d at 1066-67.

 On the basis of the stipulated facts, it is clear that if the duPont/Gajewski "goods or services" test is applied here, then judgment must be entered in favor of the Government, for there is no dispute that plaintiff never held himself out to others as providing any sort of goods or services. My task is to divine the law in this circuit. *fn6"

 The first time the Third Circuit faced the question after the Supreme Court decisions of Deputy v. du Pont and Higgins was in Helvering v. Wilmington Trust Company, 124 F.2d 156 (3d Cir. 1941), *fn7" where it was called upon to determine whether a taxpayer's personal investment activity in the stock market was a trade or business. The court expressed its preference for the "goods or services" formulation, reasoning that "if carrying on a trade or business were taken to mean any activity for profit the deduction would be broader than intended." 124 F.2d at 158-59. The court considered the Supreme Court's opinion in Higgins and determined that the "facts and circumstances" approach did "not necessarily detract from the weight of Mr. Justice Frankfurter's conception [in du Pont ]." The court reasoned that the Supreme Court's finding in Higgins that the taxpayer was not engaged in a trade or business under a "facts and circumstances" approach was not inconsistent with the earlier opinion of Justice Frankfurter in du Pont requiring that taxpayer hold himself out to others as providing goods or services.

 The question came up again in Commissioner v. Stokes' Estate, 200 F.2d 637 (3d Cir. 1953), where the court affirmed the Tax Court's finding that the taxpayer's activities in purchasing and exploiting patents constituted a "trade or business." 200 F.2d at 638. Although the sales transactions were largely between corporations in which the taxpayer held an interest, the court viewed the activities in locating, developing, and exploiting patents as involving "much more than the mere investment of funds in and management of corporations." Id. With respect to the frequency and substantiality of the activity, the court stated:

It was quite clearly a personal activity in which a major portion of the [taxpayer's] lifetime[,] thought and energy was enlisted and in which he engaged continuously ...

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