Court Opinion

ID: 9444979
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:17:21.190053+00
Date Added: 2024-06-11T17:30:05.116312
License: Public Domain

WOODBURY, Circuit Judge
(dissenting).
While I agree with Judge MAGRU-DER in his analysis of the power of Congress to require reporting of financial transactions, we are not here directly dealing with that question, for Congress has in § 51(a) equated reporting requirements with its definition of “gross income” in § 22(a). This in turn brings us directly to the income taxing power of Congress, because it is well accepted that Congress in general intended “gross income” to be co-extensive with the word “income” in the 16th Amendment. See Rutkin v. United States, 1952, 343 U.S. 130, 139, 72 S.Ct. 571, 96 L.Ed. 833. We are required, it is true, to answer the constitutional question only because Congress utilized a constitutional limitation in defining words in a statute. But this does not alter the fact that to reach a proper result in the present case we must interpret the Constitution.
It is thus necessary to make three inquiries: 1. What, in general, is the outside limit of Congress’ power to tax gains from sales under the 16th Amendment? 2. Did Congress intend in this class of cases to go to that outside limit ? 3. What is the outside limit as applied in this particular case?
■ . When an individual sells a piece of property, there is no question but that generally speaking it is beyond the power of Congress under the 16th Amendment to tax his total receipts without diminution for the cost of the property to him. This is because the only “income” to him is his gain, not the total selling price. However, there is clearly no constitutional requirement that he be permitted to exclude from his gain on one sale any losses that he may have from other unrelated sales. The exclusion of such losses is a matter of legislative grace. Thus, in general the “gross *779income” from sales of any person during a year is his total gains on all profitable sales without exclusion of losses on unprofitable sales. And this is the outside limit of 16th Amendment “income.”
But does that outside limit apply in all cases? The answer is in the negative if Regulation 118, § 39.22(a)-5 is correct. That Regulation defines “gross income” of merchandizing businesses as containing a built-in exclusion of losses from losing sales. This effect is reached by the acceptance of the “cost-of-goods-sold” method of accounting over an annual period: total receipts less cost-of-goods-sold equal gross income. If there were any unprofitable sales whatever “gross income” is thus less than if it were defined as total gain on all profitable sales. That § 39.22(a)-5 is a correct interpretation of § 22(a) is indicated by long-time acquiescence thereto by Congress and a consideration of the impracticability of a different application to most merchants. Thus in my view to this extent Congress has not pushed its definition of “gross income” to the limit of 16th Amendment “income.” And therefore I must disagree with any intimation in Judge HARTIGAN’S opinion that Congress is required by the 16th Amendment to use the § 39.22(a)-5 method in computing any merchant’s taxable income.
Viewing the nature of his operations, it seems proper that the professional bookmaker should be treated in this respect like more typical merchants, provided Congress has not legislated to the contrary. But Congress has so legislated in § 23(h) of the Internal Revenue Code. I agree with Judge HARTIGAN in his conclusion that by enacting § 23 (h) Congress intended to include in § 22(a) all “gross income” of gamblers that it could under a 16th Amendment definition. However, he believes the only change effected by § 23(h) is as to casual gamblers, whereas there seems no reason why it should not apply equally to those engaged in the business of gambling so as to deny them the exclusion granted other merchants as a matter’ of legislative' grace under the § 39.22 (a)-5 interpretation of § 22(a). Thus, as to all gamblers § 23(h) requires an equation of “gross income” with 16th Amendment “income.” The “gross income” of a professional bookmaker is,, therefore, the total of his gains on profitable “sales” without any diminution for losses on unprofitable “sales.”
The only remaining problem is the determination of what constitutes, in this context, a “sale” by a professional bookmaker. The sole basis for upholding the decision below (other than by accepting gross receipts as gross income, which seems clearly incorrect) is to find that each bet won or lost by the bookie is a “sale.” For only under that definition did the Government succeed in showing that the defendant had a gross income in 1951 in excess of $600. This view would apparently be contrary to the views expressed by my colleagues which indicate that a single race is the smallest unit which Congress may constitutionally treat separately. Indeed, Judge HARTIGAN intimates that even this unit may be too small.
In considering this problem it should be kept in mind that we are not called upon to decide categorically whether a single bet or the bets on a single race constitute the unit most closely analogous to the usual concept of a “sale.” Instead our inquiry is: which of these units is the smallest transaction which has enough independence of other transactions so that Congress could properly tax it as a separate and single transaction, i. e. “sale.”
I am not convinced, as my colleagues appear to be, that the race is the smallest separable unit of the bookie’s business. The only thing that sets off an individual race as a unit in the bookie’s business is that if more than one horse is bet on to win he is sure of having some winning bets, and if all the horses are bet on to win he is sure of having a *780losing bet. This alone seems insufficient to change the usual concept that all parties to a “sale” have some relation to each other. Certainly there is no such relationship here, where the amount Bettor A loses has no effect on the amount Bettor B wins. It should be pointed out that the bookie differs in this respect from a pari-mutuel racetrack, for the bookie creates no pool of money from which he draws his share, paying out the remainder to winning bettors. In such a case there would be a relationship between all bettors, since the amount each bets affects the winnings of all winners. There it would be more reasonable to accept a race as a unit of sale. But this is not the case with the bookie, and we can properly say that each bet is sufficiently analogous to a “sale” so that Congress could tax it separately without reference to other bets on the same race. This conclusion is bolstered by the realization that no one questions that as to the bettors each bet is a separate transaction. Thus the views expressed by Judge HARTIGAN lead to the conclusion that as to one party to the transaction there is a “sale,” but as to the other (the bookie) there is not.
At first glance it may seem strained to hold that something which is either 100% gain or 100% loss constitutes a sale. But that is the very nature of betting, and the difficulty comes in trying to fit such transactions into customary business definitions such as “sale” or “cost-of-goods-sold.” This all- or-nothing aspect should not be permitted to obscure the fact that a bet is essentially a single sale of money to one person, gambling instinct providing the incentive for one party, favorable odds the incentive for the other.
If a single bet is the unit of sale, the Government below proved adequately that Winkler had “gross income” in 1951 in excess of $600 from betting “sales,” and the charge to the jury was proper. For these reasons I would affirm.