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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

Memorandum Opinion

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 and regularly throughout his business career.

 Id. at 638-39. The court applied the Higgins "facts and circumstances" *fn8" standard and concluded that the activities constituted a "trade or business." Id. at 639.

 In McDowell v. Ribicoff, 292 F.2d 174, 178 (3d Cir. 1961), cert. denied, 368 U.S. 919, 7 L. Ed. 2d 135, 82 S. Ct. 240 (1961), the court applied the "goods or services" formulation in finding that a casual fiduciary's investment activities in the management of the decedent's estate did not amount to a trade or business. The court stated:


The phrase "trade or business" must refer not merely to Acts [sic] egaged in for profit, but to extensive activity over a substantial period of time during which the Taxpayer holds himself out as selling goods or services. [Emphasis added].

 292 F.2d at 178.

 The latest Third Circuit case on this subject is Commissioner v. Moffat, 373 F.2d 844 (3d Cir. 1967), where the court had to decide whether the taxpayer's activities in owning and leasing coal lands to a corporation constituted a trade or business. Without distinguishing or even citing to its earlier decision in McDowell v. Ribicoff, supra, the court stated the "facts and circumstances" formulation of Higgins and proceeded to examine the frequency and substantiality of the taxpayer's activities. Finding that the "taxpayer spent seventy-five per cent of his time on the coal lands" and that he "devoted most of his time to the business of leasing and operating coal properties," the court concluded that he was in a trade or business. 373 F.2d at 847.

  Plaintiff argues that Moffat is inconsistent with and therefore overrules McDowell. He bases his argument on the absence in Moffat of any mention of a requirement that the taxpayer hold himself out to others as providing goods or services. He also infers, from the court's citation to Higgins, that it chose the "facts and circumstances" test over the "goods or services" test.

 I give little weight to these contentions because I do not regard the two approaches as mutually exclusive. Common sense compels a district court to examine all the facts and circumstances of each case. Whether the taxpayer holds himself out to others as providing goods or services is just one of the facts or circumstances to be considered. Thus, the court's reference to "facts and circumstances" in Moffat should not be taken as a renunciation of its earlier statement in McDowell.

 Moreover, I do not regard the court's failure in Moffat to discuss the "goods or services" requirement as significant because there is no dispute that the taxpayer was rendering services to others by leasing coal properties to third parties. Hence, the court's holding in Moffat is not inconsistent with the "goods or services" approach espoused in McDowell.

 I conclude that McDowell v. Ribicoff, supra, is the controlling law. *fn9" In order to establish that he is in a trade or business, plaintiff would have to prove, at a minimum, that he "holds himself out as selling goods or services." Supra, 292 F.2d at 178. Since plaintiff has stipulated that he wagered solely for his own account, his gambling activity did not, as a matter of law, constitute a trade or business. Accordingly, judgment will be entered in favor of the Government.

 [EDITOR'S NOTE: The following court-provided text does not appear at this cite in 598 F. Supp.]


 Upon consideration of the arguments raised by the parties in their trail briefs and in reliance on the Stipulation of facts that was submitted by the Court by the parties for the final disposition of the action, and after reviewing the supporting materials of record,


 (1) whereas this action was submitted to the Court without a jury for final disposition, this Court hereby adopts the Stipulation of facts that was filed by the parties as the Court's Findings of Facts pursuant to Fed. R. Civ. P. 52; and it is further ordered that

 (2) Judgment is hereby entered in favor of the Defendant. Costs are to be assessed and awarded to the Defendant.

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