COMMISSIONER OF INTERNAL REVENUE, PETITIONER V. ROBERT P.
GROETZINGER

   No. 85-1226

   In the Supreme Court of the United States

   October Term, 1985

   The Solicitor General, on behalf of the Commission of Internal
Revenue, petitions for a writ of certiorari to review the judgment of
the United States Court of Appeals for the Seventh Circuit in this
case.

   Petition for a Writ of Certiorari to the United States Court of
Appeals for the Seventh Circuit

            TABLE OF CONTENTS
   Opinions below
   Jurisdiction
   Statutes involved
   Questions presented
   Statement
   Reasons for granting the petition
   Conclusion
   Appendix A
   Appendix B
   Appendix C
   Appendix D

                            OPINIONS BELOW

   The opinion of the court of appeals (App., infra, 1a-20a) is
reported at 771 F.2d 269.  The opinion of the Tax Court (App., infra,
21a-37a) is reported at 82 T.C. 793.

                             JURISDICTION

   The judgment of the court of appeals (App., infra, 38a) was entered
on August 21, 1985.  On November 9, 1985, Justice Stevens extended the
time within which to petition for a writ of certiorari to and
including January 18, 1986.  The jurisdiction of this Court is invoked
under 28 U.S.C. 1254(1).

                           STATUTES INVOLVED

   The relevant portions of Sections 56, 57, 62, 162 and 165 of the
Internal Revenue Code of 1954 (26 U.S.C. (1976 ed. & Supp. I 1977)),
as in effect for the tax year at issue, are set out in a statutory
appendix (App., infra, 39a-41a).

                          QUESTION PRESENTED

   Whether a full-time gambler who wagers solely for his own account,
and who thus does not hold himself out as offering goods or services
to others, is engaged in a "trade or business" for federal income tax
purposes.

                               STATEMENT

   1. Since February 1978 respondent has been engaged full time in
pari-mutuel wagering on dog races.  He has had no other profession or
employment during this period (App., infra, 22a).  Apart from his
gambling winnings, his only source of income has been interest,
dividends and proceeds from the sale of investments (id. at 4a, 23a).
Respondent had previously been employed by a truck manufacturer in
Peoria, Illinois (id. at 22a).  He had done market research there for
20 years, until his job was terminated (ibid.).

   During 1978, the tax year in issue, respondent devoted about half
his waking hours to gambling at tracks in Florida and Colorado (App.,
infra, 22a).  He went to the track six days a week.  When not at the
track, he spent much of his time studying racing forms, racing
programs, and other materials in order to decide what bets to place.
He devoted 60 to 80 hours a week to these various gambling endeavors
(ibid.).  He never placed bets on behalf of others, sold tips to other
bettors, or collected commissions for placing bets.  He gambled solely
for his own account (id. at 23a).

   In 1978, respondent had gambling winnings of $70,000 and gambling
losses of $72,032, for a net gambling loss of $2,032 (App., infra,
23a).  He received income from other sources in the amount of $6,498,
representing interest, dividends, capital gains, and salary earned
before losing his job (ibid.).  On his 1978 federal income tax return,
respondent reported as income only the $6,498 received from
non-gambling sources.  He did not report any gambling income, nor did
he deduct any gambling losses (ibid.).

   On audit, the Commissioner determined that respondent's $70,000 of
gambling winnings had to be included in his gross income, and that a
deduction should be allowed for his gambling losses to the extent of
his gambling gains.  See 26 U.S.C. 165(d).  The Commissioner further
determined that a portion of respondent's gambling-loss deduction was
an "item of tax preference" subject to minimum tax.  See 26 U.S.C.
(1976 ed.) 56(a).  Under the law as it stood in 1978, "items of tax
preference" were defined to include certain itemized deductions, but
to exclude deductions "attributable to a trade or business carried on
by the taxpayer." See 26 U.S.C. (1976 ed. & Supp. I 1977) 57(a)(1) and
(b)(1)(A), 62(1).  The Commissioner determined that respondent's
gambling activities during 1978 did not constitute a "trade or
business," and hence that a portion of his gambling losses were
"adjusted itemized deductions" subject to minimum tax.  See 26 U.S.C.
(Supp. I 1977) 57(a)(1).  In so concluding, the Commissioner relied on
the fact that respondent wagered solely for his onw account and thus
did not hold himself out to others "as engaged in the selling of goods
or services." Deputy v. du Pont, 308 U.S. 488, 499 (1940)
(Frankfurter, J., concurring).  Based on this conclusion, the
Commissioner determined that respondent was liable for minimum tax of
$2,142, resulting in a total tax deficiency (reflecting ancillary
adjustments) of $2,522 (App., infra, 24a).

   2. Respondent sought redetermination of the deficiency in the Tax
Court.  That court rejected the Commissioner's contention that, "to be
engaged in a trade or business, one must hold himself out to others as
offering goods or services." App., infra, 25a (footnote omitted).  The
Tax Court held, rather, that the proper inquiry "requires a broader
examination of all the facts involved in each case" in order to
ascertain whether the taxpayer's profit-seeking endeavors are
"sufficiently regular, frequent, active and substantial to constitute
a trade or business" (id. at 37a).  The court noted that respondent
during 1978 was engaged "full-time in pari-mutuel wagering on dog
races, had no other employment during that period, * * * and devoted
an extraordinary amount of time and effort to his gambling with a view
to earning a living from such activity" (id. at 24a-25a).  The Tax
Court concluded that respondent was thus engaged in the "trade or
business" of gambling, that his gambling losses were "attributable to
a trade or business carried on by (him)," and that his gambling-loss
deduction was not an "item of tax preference" subject to minimum tax.
Id. at 24a & nn. 7 and 8 (quoting 26 U.S.C. (1976 ed.) 56(a), 62(1)).

   The court of appeals affirmed (App., infra, 1a-20a).  It observed
that "(t)he determination of what constitutes a 'trade or business'
under * * * the Internal Revenue Code has proven to be most difficult
and troublesome over the years," and it noted that "neither judicial
precedent nor the relevant statutory language * * * provides a clear
basis for resolving this issue" (id. at 5a, 8a).  The court decided
that "the term 'trade or business' * * * should be construed broadly,"
and it agreed with the Tax Court that the offering of goods or
services should not be "an absolute prerequisite to a finding that a
taxpayer (is) engaged in a 'trade or business'" (id. at 7a, 13a).  The
court stated that "the inquiry should concentrate on whether certain
activities of a taxpayer can fairly be characterized as a livelihood,
occupation or means of earning a living," and it held that
respondent's gambling activities constituted a "trade or business" by
this standard (id. at 13a).  The court noted (id. at 7a) that its
holding conflicted with decisions of the Second, Third and Sixth
Circuits, each of which has held, on substantially identical facts,
that a full-time gambler who wagers solely for his own account is not
engaged in a "trade or business" for tax purposes because he does not
offer goods or services to others.  See Gajewski v. Commissioner, 723
F.2d 1062 (2d Cir. 1983), cert. denied, No. 83-1715 (Oct. 1, 1984);
Noto v. United States 598 F. Supp. 440 (D. N.J. 1984), aff'd mem., 770
F.2d 1073 (3d Cir. 1985) (Table);  Estate of Cull v. Commissioner, 746
F.2d 1148 (6th Cir. 1984), cert. denied, No. 84-1310 (June 10, 1985).

                   REASONS FOR GRANTING THE PETITION

   The question whether a taxpayer must hold himself out as offering
goods or services to others in order to be deemed engaged in a "trade
or business" for tax purposes has arisen most frequently in cases
involving gamblers and investors in securities.  The courts of appeals
have struggled unsuccessfully with this question for many years, and
they are now squarely in conflict upon it.  We are frank to admit that
the revenue impact of this question is extremely difficult to gauge,
and that its importance has been diminished, for years after 1982, by
amendments to the minimum-tax provisions that furnish the context of
the present case.  The issue continues to arise under numerous other
sections of the Internal Revenue Code, however, and the disarray in
the lower courts has reached the point where it is impossible for the
Commissioner to administer the tax laws in a consistent manner
nationwide.

   1. The question whether a full-time gambler is engaged in a "trade
or business" was first litigated in the context of the
"self-employment tax." See 26 U.S.C. 1401 et seq.  That tax, which is
the analogue for self-employed persons of the Social Security tax paid
by those employed by others, is imposed on the net earnings "derived
by an individual from any trade or business carried on by (him)" (26
U.S.C. 1402(a)).  The Commissioner in the early 1970s took the
position that full-time gamblers were engaged in a "trade or business"
by virtue of the regularity of their profit-seeking endeavors, and
hence that they were liable for self-employment tax.

   In Gentile v. Commissioner, 65 T.C. 1 (1975), the Tax Court
rejected the Commissioner's position.  Speaking through Judge
Tannenwald, the court found no merit in an "expansive reading of the
term 'trade or business,'" concluding that those words connote
something more than "an individual's everyday efforts to earn a
living, characterized by continuity, regularity, and profit motive"
(65 T.C. at 3, 4).  Rather, the court accepted the taxpayer's
"oft-cited definition of carrying on a trade or business as that which
'involves holding one's self out to others as engaged in the selling
of goods or services.'" Id. at 5 (quoting Deputy v. du Pont, 308 U.S.
at 499 (Frankfurter, J., concurring)).  Under that definition, the Tax
Court held (65 T.C. at 6), a gambler who wagered solely for his own
account could not properly be held liable for self-employment tax:

         Upon stepping up to the betting window, (the taxpayer) was
      not holding himself out as offering any goods or services to
      anyone.  (His) use of his own resources to wager and his
      dedicated studies of the activities on which he wagered are akin
      to the management and investment of one's own estate and the
      study of market reports in order to do so more knowledgeably.

Noting that personal investment activities are "clearly not within the
bounds of a trade or business" (65 T.C. at 6, citing Higgins v.
Commissioner, 312 U.S. 212, 218 (1941)), the Tax Court ruled that
personal gambling activities are similarly outside that term's scope.

   The Commissioner acquiesced in Gentile, announcing that he would
thenceforth follow the Tax Court's decision that a gambler who wagers
solely for his own account is not engaged in a "trade or business."
1980-2 C.B. 1, 4 n.39.  This taxpayer victory, however, threatened to
turn pyrrhic when Congress amended the Code in 1976 to include "excess
itemized deductions" among the "items of tax preference" subject to
minimum tax.  Tax Reform Act of 1976, Pub. L. No. 94-455, Tit. III,
Section 301(c)(1)(A), 90 Stat. 1550 (amending 26 U.S.C. 57(a)(1)).
Since gambling losses would be "itemized deductions" if gambling were
not a "trade or business," a gambler's assessment of the costs and
benefits of being in a "trade or business" for tax purposes became
somewhat complicated.

   Consistently with his acquiescence in Gentile, the Commissioner
after 1980 took the position that a full-time gambler was not engaged
in a "trade or business" and hence that his gambling losses could
generate liability for minimum tax.  The Tax Court, in a reviewed
decision, then proceeded to overrule Gentile in Ditunno v.
Commissioner, 80 T.C. 362, 371 (1983).  The Ditunno court concluded
that the goods-or-services requirement adopted in Gentile was "overly
restrictive" and that "(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 and
footnote omitted)).  The taxpayer there, while "us(ing) his own money
to gamble solely on his own account," was nevertheless "an active
gambler (who) devot(ed) his full time to gambling activities" (id. at
372).  The regularity, continuity and extensiveness of those
activities in the majority's view established a "trade or business"
and thus immunized the gambler from minimum tax (id. at 371-372).
Judge Tannenwald, the author of Gentile, dissented in an opinion
joined by three other judges.  He contended that the majority had
"allowed their hearts to prevail over their minds in order to
alleviate the arguably inequitable application of the minimum tax to
full-time gamblers" (id. at 372).

   The Commissioner was prevented from appealing Ditunno because it
was a "small tax case." See 26 U.S.C. 7463(a) and (b).  The
Commissioner has regularly appealed subsequent Tax Court decisions
adhering to Ditunno, however, and these appeals have produced a
conflict among the circuits.  In Gajewski v. Commissioner, 723 F.2d
1062 (1983), rev'g 45 T.C.M. (CCH) 967 (1983), cert. denied, No.
83-1715 (Oct. 1, 1984), the Second Circuit reversed the Tax Court and
held that a gambler who wagers solely for his own account is not
engaged in a "trade or business." The words "trade or business," the
court observed, are "commonly viewed as meaning a commercial activity
in which a person seeks to earn a livelihood by furnishing goods or
services to others for a price" (723 F.2d at 1066).  It concluded that
the goods-or-services requirement not only describes "the universal
characteristic of a businessman or trader in a free enterprise
society," but also offers a standard that is "administratively
workable and fair to taxpayers" (id. at 1066-1067).  Because the
taxpayer there "gambled only for his own account and did not operate a
bookmaking service or place wagers for others," the Second Circuit
held that he was not engaged in a "trade or business" and that his
gambling losses were items of tax preference" subject to minimum tax
(id. at 1067).  The Sixth Circuit reached the same result on
substantially the same facts in Estate of Cull v. Commissioner, 746
F.2d 1148 (1984), rev'g 45 T.C.M. (CCH) 691 (1983), cert. denied, No.
84-1310 (June 10, 1985).  It agreed with the Second Circuit that the
offer of goods or services is an appropriate "minimum standard for
determining whether a taxpayer is engaged in a trade or business," and
it held that a full-time gambler who wagers solely for his own account
is not so engaged (746 F.2d at 1152 (citing 723 F.2d at 1066)).
Accord, Noto v. United States, 598 F. Supp. 440 (D. N.J. 1984), aff'd
mem., 770 F.2d 1073 (3d Cir. 1985) (Table).

   The Eleventh Circuit, on the other hand, has affirmed a Tax Court
decision adhering to Ditunno on facts substantially identical to those
here.  Nipper v. Commissioner, 47 T.C.M. (CCH) 136 (1983), aff'd mem.,
746 F.2d 813 (1984) (Table).  We declined to seek certiorari in
Nipper, owing in part to the fact that the Eleventh Circuit did not
write an opinion.  We subsequently opposed the taxpayer's petition in
Estate of Cull, acknowledging the Eleventh Circuit's conflicting
judgment but concluding that "the case law in this area (was) not
sufficiently developed to warrant this Court's review." 84-1310 Br. in
Opp. at 8-9.  We noted that the question of a full-time gambler's
trade-or-business status was then pending before the Seventh Circuit
in the instant case, and we suggested that "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" (84-1310 Br. in
Opp. at 9 & n.8).

   The Seventh Circuit in the instant case has brought about the
condition to which we referred.  The circuits are thus squarely in
conflict.  This case presents an appropriate vehicle by which the
conflict may be resolved.

   2. On the merits, we think that the competing arguments are fairly
evenly matched, but that the balance tips against the decision below.
There is certainly some intuitive appeal to the Seventh Circuit's
construction of the phrase "trade or business" to mean "a person's
occupation, livelihood or means of earning a living" (App., infra,
11a).  On the other hand, common sense is not affronted by the Second
Circuit's stance either, since the term "trade or business" is
"commonly viewed as meaning a commercial activity in which a person
seeks to earn a livelihood by furnishing goods or services to others
for a price" (Gajewski, 723 F.2d at 1066).  The goods-or-services
test, of course, cannot furnish a comprehensive definition of a "trade
or business" for tax purposes, since that term also requires a
taxpayer to engage in commercial activity with regularity and with the
intent to earn a profit.  However, as one component of the overall
inquiry, the goods-or-services requirement does seem to offer an
appropriate minimum standard that embodies the distinction between a
"trade or business" and other activities (such as investment
activities) engaged in for profit.  As the Second Circuit has observed
(id. at 1065-1066), the goods-or-services test, first articulated in
Justice Frankfurter's concurring opinion in Deputy v. du Pont, 308
U.S. at 499, has an impressive pedigree, and it had received
widespread acceptance by courts before Ditunno was decided.  And while
this Court has not explicitly endorsed that test, the Court approved
it by implication in Snow v. Commissioner, 416 U.S. 500, 502-503
(1974).  See Gajewski, 723 F.2d at 1065;  Estate of Cull, 746 F.2d at
1152;  Ditunno, 80 T.C. at 374 & nn. 4, 5 (Tannenwald, C.J.,
dissenting).

   The Seventh Circuit's expansive reading of "trade or business" to
mean a person's "occupation" or "means of earning a living" also seems
at odds with the established rule that a taxpayer's management of his
investments cannot be a "trade or business," however extensive and
continuous those activities might be.  In Higgins v. Commissioner, 111
F.2d 795 (1940), aff'd, 312 U.S. 212 (1941), the Second Circuit had
held that an investor's management of his $10 million securities
portfolio was not a "trade or business," reasoning that, "(b)y the
common speech of men, a person who does nothing beyond looking after
his own investments and receiving the income from them is not
conducting a trade or business" (111 F.2d at 796).  This Court
unanimously affirmed, noting that the result would be the same "(n)o
matter how large the estate or how continuous or extended the work
required" (312 U.S. at 218).  This Court rejected the taxpayer's
argument that the "extent, continuity, variety and regularity" of his
investment activities should be dispositive (id. at 216).  In
rejecting that argument, the Court explicitly distinguished an earlier
decision that had defined "business" as "'a very comprehensive term
(that) embraces everything about which a person can be employed'" (id.
at 217, quoting and distinguishing Flint v. Stone Tracy Co., 220 U.S.
107, 171 (1911)).  Applying Higgins, the lower courts have repeatedly
held that personal portfolio management is not a "trade or business,"
even where a taxpayer devotes his full time to such endeavors and
derives all his income from his investments.  E.g., Moller v. United
States, 721 F.2d 810 (Fed. Cir. 1983), cert. denied, No. 83-1485 (June
18, 1984).

   The decision below seems inconsistent with this well-settled rule.
Securities management may be called the "occupation" of a full-time
investor no less than gambling is the "occupation" of a full-time
gambler.  See App., infra, 11a.  In deeming gamblers to be in a "trade
or business," moreover, the court of appeals held dispositive the very
factors -- "the continuity, repetition and extensiveness of (the)
activities and * * * the good faith intent of the taxpayer to make a
profit" (id. at 13a) -- that this Court in Higgins found insufficient
to indicate a "trade or business." See 312 U.S. at 216, 218.  The
court of appeals sought to reconcile its holding with Higgins by
emphasizing what it called "the 'personal' nature of investment
activities" (App., infra, 14a (quoting Higgins, 312 U.S. at 218)).
But we fail to see how playing the horses (or playing the dogs) is any
less "personal" than playing the stock market, provided that the
taxpayer in each event is playing solely for his own account.  /1/

   3. The tax issue that gave rise to the instant litigation --
whether gambling losses may generate liability for minimum tax -- has
been resolved legislatively for years after 1982.  Congress amended
the Code in 1982 to provide explicitly that gambling-loss deductions
are to be excluded from the minimum-tax base.  See Tax Equity and
Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, Tit. II,
Section 201(a), 96 Stat. 411, 414 (codified at 26 U.S.C. 55(b)(1)(B)
and (e)(1)(A)).  /2/

   The question whether a full-time gambler is engaged in a "trade or
business," however, continues to arise in a variety of
frequently-recurring tax contexts.  Because of the way the minimum tax
worked in 1978, incorporating a cross-reference to Section 62(1), the
narrow statutory question presented here is whether gambling losses
are "attributable to a trade or business carried on by the taxpayer"
for purposes of determining his "adjusted gross income" under Section
62(1).  See 26 U.S.C. (Supp. I 1977) 57(a)(1) and (b)(1)(A).  The
question whether gambling losses are deductibel in determining
adjusted gross income -- that is, whether they are trade-or-business
("above the line") or itemized ("below the line") deductions --
continues to affect a variety of computations on an individual's tax
return, such as calculation of the floor beneath his deductions for
medical expenses (26 U.S.C. 213(a)) and casualty losses (26 U.S.C.
165(h)(2)).

   As the court of appeals noted, moreover, the term "trade or
business" appears in some 60 different sections of the Internal
Revenue Code.  See App., infra, 5a-6a n.4.  The question whether a
full-time gambler is engaged in a "trade or business" is thus relevant
in a variety of tax contexts apart from Section 62(1), e.g., in
determining the deductibility of a gambler's home-office expenses (26
U.S.C. 280A(c)(1) ) and in determining his liability for
self-employment tax (26 U.S.C. 1401, 1402(a)).

   It is virtually impossible for the IRS to estimate the net revenue
impact of the question presented.  As the history of litigation in
this area shows, being in a "trade or business" may help or hurt a
particular taxpayer depending on the facts of his particular case --
depending, for example, on whether he has "net earnings" from gambling
on which self-employment tax might be due (26 U.S.C. 1402(a)).
Although the revenue impact is thus unpredictable, the question is
important in a practical, day-to-day administrative sense, because it
affects some of the most basic calculations people make in filling out
their tax returns.

   The Commissioner does not have the option to bring litigation
concerning this question to an end simply by abandoning his current
position.  As we have shown, either of the two alternative positions
that the Commissioner might take (and, historically, at different
times has taken) will prove advantageous to some gamblers, and
disadvantageous to others, depending on their particular facts.
Litigation concerning this question, therefore, will necessarily
continue until the existing conflict among the circuits is resolved.
Given the manifold and diverse tax consequences that hinge on whether
a taxpayer is engaged in a "trade or business," the disarray in the
lower courts now prevents administration of the tax laws in a sensible
and consistent manner nationwide.

                              CONCLUSION

   The petition for a writ of certiorari should be granted.

   Respectfully submitted.

   CHARLES FRIED

      Solicitor General

   ROGER M. OLSEN

      Acting Assistant Attorney General

   ALBERT G. LAUBER, JR.

      Assistant to the Solicitor General

   JONATHAN S. COHEN

   BRUCE R. ELLISEN

      Attorneys

   JANUARY 1986

   /1/ Courts applying Higgins in the portfolio-management context
have generally distinguished between passive "investors" and active
"traders," holding that the latter may qualify for "trade or business"
treatment while the former may not.  See App., infra, 13a-16a
(discussing cases);  Moller v. United States, 721 F.2d at 813.  Some
courts have sought to reconcile this dichotomy with the
goods-or-services test by reasoning that, "(a)lthough the occupation
of (a) professional investor who invests for his own account may be
similar in some respects to that of a professional gambler, the former
does offer goods to others in the sense that he buys and sells
securities" (Gajewski, 723 F.2d at 1067 n.8).

   /2/ This exclusion was accomplished by providing that "alternative
minimum taxable income" should be reduced by "alternative tax itemized
deductions" (26 U.S.C. 55(b)(1)(B)), and by defining "alternative tax
itemized deductions" to include deductions for losses described in
Section 165(d), that is, "(l)osses from wagering transactions * * * to
the extent of the gains from such transactions." See 26 U.S.C.
55(e)(1)(A), cross-referring to 26 U.S.C. 165(d).  The amendments
respecting gambling losses were added in conference, and the
Conference Report does not explain the reason for their addition to
the bill.  See H.R. Conf. Rep. 97-760, 97th Cong., 2d Sess. 475
(1982).

   APPENDIX