Court Opinion

ID: 4484984
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:17:05.880396+00
Date Added: 2024-06-11T07:58:25.846527
License: Public Domain

Tannenwald, Chief Judge, dissenting: I respectfully dissent from the action of my colleagues in the majority, who, I suggest, have allowed their hearts to prevail over their minds in order to alleviate the arguably inequitable application of the minimum tax to full-time gamblers like petitioner. The action of the majority will wreak havoc on the concept of trade or business which, although not defined in either the Internal Revenue Code or the regulations, has, of necessity, developed over time through the judicial process. In overruling Gentile v. Commissioner, 65 T.C. 1 (1975),1 and rejecting the well-established guideline that to carry on a trade or business one must generally "[hold] one’s self 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)), the majority ignores both the nature of the facts-and-circumstances test and a long-accumulated body of case law. At the risk of being charged with self-anointment, I disagree with the majority’s conclusion that Gentile should be overruled. In so concluding, the majority cavalierly, and I believe incorrectly, relegates to the ash can the standard articulated by Justice Frankfurter in his concurring opinion in Deputy v. du Pont, supra. Admittedly, the Supreme Court, itself, has accorded that opinion confusing treatment. See Helvering v. Wilmington Trust Co., 124 F.2d 156, 158-159 (3d Cir. 1941), revd. on other grounds 316 U.S. 164 (1942). But the fact of the matter is that the holding-out test has been repeatedly emphasized by the courts as an essential ingredient of carrying on a trade or business. Snow v. Commissioner, 416 U.S. 500, 502-503 (1979); Grosswald v. Schweiker, 653 F.2d 58, 59-60 (2d Cir. 1981); McDowell v. Ribicoff, 292 F.2d 174, 176-177 (3d Cir. 1961); Green v. Commissioner, 74 T.C. 1229, 1235 (1980); Gestrich v. Commissioner, 74 T.C. 525, 529 (1980), affd. without published opinion 681 F.2d 805 (3d Cir. 1982); Barnett v. Commissioner, 69 T.C. 609, 613 (1978); Gentile v. Commissioner, supra; Barrett v. Commissioner, 58 T.C. 284, 290 (1972);2 Fischer v. Commissioner, 50 T.C. 164, 171 (1968).3 To be sure, that ingredient was not referred to by the Supreme Court in Higgins v. Commissioner, 312 U.S. 212 (1941). The foundation of the Supreme Court’s decision, however, was that the trial court had found as a fact that the taxpayer was not engaged in a trade or business in the context of the test of "sufficient extent, continuity, variety and regularity” (see 312 U.S. at 216) and that such finding should not be disturbed. Such being the case, there was no need for the Supreme Court to advert to the holding-out test. The same analysis is applicable to the Supreme Court’s disposition of United States v. Pyne, 313 U.S. 127 (1941), and City Bank Farmers Trust Co. v. Helvering, 313 U.S. 121 (1941).4 Nor do I believe that Snow v. Commissioner, supra, can be readily dismissed. It is true that, in that case, the Supreme Court used Justice Frankfurter’s holding-out language only for comparative purposes. But the fact of the matter is that the Court found it necessary to select a standard for comparing section 162 with section 174 and, in so doing, selected Justice Frankfurter’s holding-out test.5 If this does not constitute approval, I do not know what does. The majority states on page 370 that courts have "shown that failure to provide or offer goods and services is not sufficient by itself to find that a taxpayer is not carrying on a trade or business.” I know of no case (and my research has not produced any) where a taxpayer did not deal with third parties, i.e., hold himself out, and was nevertheless found to be carrying on a trade or business. The cases relied upon by the majority to support its statement are simply not in point. They all involved issues relating to tax treatment of dealers, traders, and investors in securities.6 It is important to realize that in such situations (which include the situations involved in Higgins, Pyne, and City Bank (see pp. 373-374 supra)) there are dealings with third parties — the principal issue is whether those dealings rise to the level of entitling the taxpayer to qualify as a dealer as against a trader or investor in securities. See Wilson v. United States, 179 Ct. Cl. 725, 743-746, 376 F.2d 280, 291-293 (1967); Kemon v. Commissioner, 16 T.C. 1026 (1951). As I see it, the proper view of existing case law, which was applied by this Court in Gentile v. Commissioner, supra, is that holding oneself out is an essential but not necessarily sufficient ingredient of carrying on a trade or business. Indeed, I believe that the opinions of the Supreme Court in Higgins, Pyne, and City Bank confirm this view. I would therefore hold that petitioner herein is not carrying on a trade or business. I now turn to the question of the applicability of the minimum tax to petitioner in light of this conclusion. For petitioner to avoid minimum tax liability in the instant case, his gambling losses must be deductible either as trade or business deductions under section 62(1) or otherwise as deductions netted against gambling winnings before determining adjusted gross income. For the reasons previously given, I am convinced that these losses do not meet the test of above-the-line deductibility under section 62(1).7 For reasons given below, I would also reject the netting approach. I have examined the extensive legislative history of the minimum tax provisions, which have been amended on numerous occasions since they were first enacted in 1969, and have found nothing to indicate that Congress intended to depart from the apparent treatment of gambling losses as deductions from gross income to arrive at adjusted gross income where a trade or business was involved, and as itemized deductions from adjusted gross income where a trade or business was not involved.8 Indeed, in the very recently enacted Tax Equity and Fiscal Responsibility Act of 1982, Congress specifically provided without comment that gambling losses couid be taken as a deduction from "adjusted gross income” for purposes of the minimum tax (Pub. L. 97-248, sec. 201(a), 96 Stat. 324, 414; H. Rept. 97-760 (Conf.) 475 (1982). Such legislative action confirms the rejection of the "netting” approach in terms of statutory construction. See note 12 infra. Nor can I find any basis for imposing a judicial gloss on the applicable statutory provisions in order to adopt petitioner’s "netting” approach. Prior to 1934, when there was no specific provision governing the deductibility of gambling losses, the Board of Tax Appeals adopted the "netting” approach. Thus, in McKenna v. Commissioner, 1 B.T.A. 326 (1925), a professional gambler’s, i.e., bookmaker’s, gross income, as defined in section 213(a) of the Revenue Act of 1918, was limited to the aggregate of his receipts less disbursements to bettors, or his "actual” gain. Netting was extended to calculating the casual gambler’s gross income in Frey, Executor v. Commissioner, 1 B.T.A. 338 (1925). In 1934, Congress enacted the provision which later became the present section 165(d): "Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.” Since that time, the courts have, with the exception of Winkler v. United States, 230 F.2d 766 (1st Cir. 1956), consistently rejected the "netting” approach and treated gambling winnings as gross income and gambling losses as itemized deductions, subject to the statutory limitation that such losses could not exceed such winnings. E.g., McClanahan v. United States, 292 F.2d 630, 631-632 (5th Cir. 1961); Winkler v. United States, supra at 775-776; Johnston v. Commissioner, 25 T.C. 106 (1955).9  Petitioner, herein, has not raised any constitutional arguments but relies solely on his position that he was carrying on a trade or business which entitled him to deduct his gambling losses (up to the amount of his winnings) from gross income in arriving at adjusted gross income for purposes of the minimum tax. It appears, therefore, that this case is not an appropriate one for dealing with the constitutional questions raised by the First Circuit’s opinion in Winkler v. United States, supra. I observe, however, that, in that case, the taxpayer was a bookmaker and clearly satisfied the holding-out test. As such, and in view of the regularity and continuity of his activities, he was carrying on a trade or business and it was in this context that the First Circuit considered the taxpayer a "professional gambler” and analyzed the constitutional implications involved in gambling activities.10 Having concluded, as I have, that petitioner was not engaged in a trade or business, I also conclude that he does not fit the categorization of a professional gambler.11 It seems clear that there is no constitutional barrier to according different treatment — at least where deductions or credits are concerned — to taxpayers who are engaged in a trade or business and those who are not. High Plains Agricultural Credit Corp. v. Commissioner, 63 T.C. 118, 127 (1974). To the extent that Frey, Executor v. Commissioner, supra, implies that a taxpayer who is not a professional gambler, i.e., a gambler carrying on a trade or business, should be entitled to net his losses in determining adjusted gross income, I would no longer follow it. In sum, although the application of the minimum tax to petitioner appears harsh, I believe that Gentile represents sound law and that the applicable statutory provision is clear, with the result that respondent should prevail herein.12  Sterrett, Chabot, and Cohen, JJ., agree with this dissenting opinion.  The potential for havoc is increased by the fact that respondent has acquiesced in Gentile. See 1980-2 C.B. 1-2, and particularly n. 39.   It is significant that, in criticizing this Court’s decision in Barrett (see Grosswald v. Schweiker, 653 F.2d 58, 60-61 (2d Cir. 1981)), the Second Circuit Court of Appeals emphasized the holding-out test and merely disagreed with us that the test should not be applied where only one third party was involved.   See also Steffens v. Commissioner, T.C. Memo. 1981-637; Syracuse v. Commissioner, T.C. Memo. 1981-340; Curran v. Commissioner, T.C. Memo. 1970-160.   It should also be noted that the majority in Deputy v. du Pont, 308 U.S. 488 (1940), found it unnecessary to discuss the holding-out test because it assumed that the taxpayer was engaged in a trade or business. See 308 U.S. at 493. Indeed, it was this very assumption that sparked Justice Frankfurter’s concurring opinion.   The majority’s quotation from Snow conveniently omits the following pertinent language, which immediately precedes the language in the majority opinion: "Section 174 was enacted in 1954 to dilute some of the conception of "ordinary and necessary” business expenses under §162(a) (then §23(a)(l) of the Internal Revenue Code of 1939) adumbrated by Mr. Justice Frankfurter in a concurring opinion in Deputy v. Du Pont, 308 U.S. 488, 499 (1940), where he said that the section in question (old §23(a)) 'involves holding one’s self out to others as engaged in the selling of goods or services’ [Snow v. Commissioner, 416 U.S. 500, 502-503. Emphasis added.]”   In two of the four cases directly relied upon by the majority (Main Line Distributors and Liang), the taxpayer was, in fact, found not to be carrying on a trade or business. In one (Wiesler), the respondent conceded the issue and this Court specifically stated that, in light of this fact, it did not have to reach the holding-out question (see Wiesler v. Commissioner, 6 T.C. 1148, 1154 (1946), affd. 161 F.2d 997 (6th Cir. 1947)). Only in Moller was the taxpayer found to be carrying on a trade or business without reference to the holding-out test, but I observe that, in point of fact, the taxpayer’s selling activities involved extensive dealings with third parties. Snyder v. Commissioner, 295 U.S. 134 (1935), also cited by the majority, is simply not in point and, in any event, preceded the Supreme Court’s decision in Higgins.   Sec. 62(1) provides as follows: For purposes of this subtitle, the term "adjusted gross income” means, in the case of an individual, gross income minus the following deductions: (1) Trade and Business Deductions. — The deductions allowed by this chapter * * * which are attributable to a trade or business carried on by the taxpayer * * *   See generally Joint Committee Explanation, 1976-3 C.B. (Vol. 2) 1, 118, in which it is stated that "Medical and casualty deductions are excluded from this preference item because they are limited to expenses that are beyond the control of the taxpayer.”   See also Heidelberg v. Commissioner, T.C. Memo. 1977-133; Carter v. Commissioner, T.C. Memo. 1976-23.   See also Pedone v. United States, 138 Ct. Cl. 233, 151 F. Supp. 288, 291 (1957); Sullinger v. Commissioner, 11 T.C. 1076 (1948).   Moreover, the record herein is silent as to petitioner’s commitment to losses which the First Circuit considered of critical importance. See Winkler v. United States, 230 F.2d 766, 774 (1st Cir. 1956).   Had Congress intended gambling losses to be deductible in determining tax-preference items, either it would have said so in 1976, as it did in 1982, or it would have made the 1982 change effective for prior years. See Buttke v. Commissioner, 72 T.C. 677, 680-681 (1979), affd. per curiam 625 F.2d 202 (8th Cir. 1980).