COMMISSIONER v. GROETZINGER
Legal provision: Internal Revenue Code
Argument of Albert G. Lauber, Jr.
Chief Justice Rehnquist: We will hear argument first this morning in No. 85-1226, Commissioner of Internal Revenue versus Robert P. Groetzinger.
Mr. Lauber, you may proceed whenever you are ready.
Mr. Lauber: Mr. Chief Justice and may it please the Court, the question here is whether a person who spends his full time gambling at racetracks for his own account is engaged in a trade or business for federal income tax purposes.
This is a question on which the Commissioner, the courts, and gamblers have gone back and forth over the years, depending largely, it seems, on whether it was good or bad taxwise for a gambler to be in a trade or business at the particular tax year involved under the relevant tax provisions.
The provision that gave rise to this case was a minimum tax provision that was in effect from 1976 until 1982 under which gambling losses generally were items of tax preference that could give rise to a minimum tax liability.
The way a gambler could avoid minimum tax would be to argue that his trade or business was gambling, so that his gambling losses were not garden variety itemized deductions, but rather were trade or business deductions that were exempt from minimum tax.
The Court of Appeals below accepted this argument, persuaded in large part by the seeming inequity of imposing a minimum tax on somebody who had net gambling losses for the taxable year, as Mr. Groetzinger did.
Congress has eliminated that inequity for years after 1982 because it amended the minimum tax law in that year to remove gambling losses from the minimum tax base.
Now that Congress has fixed that, the IRS cannot really tell whether it is better for us to win or lose this case from a revenue point of view prospectively because, as I said, it can be good or bad for a gambler to be in or not to be in business.
Unknown Speaker: Do you have any idea how much is at stake?
Mr. Lauber: It is impossible to tell, Justice Brennan, because there are so many different numbers on the tax return that can go up or down depending on whether you are in business.
It affects the adjusted gross income which is a floor beneath your casualty loss deduction and your medical deduction, the ceiling on your charitable contribution deduction.
It can enable you to take home office expenses deductions.
It can also make you liable for self-employment tax if you are in a trade or business.
It is like the FICA tax employees pay.
So, depending on whether the gambler has gains or losses for the year and whether he has medical expenses and so forth it can be good or bad and you simply can't program a computer to figure out what the net will be, so the reason we sought certiorari here was to get a clear answer to the question to resolve the conflict in the circuits and get an answer we hope will be consistent with the overall structure of the--
Unknown Speaker: Mr. Lauber, will the decision we make have any consequences under the new tax code to take effect next year or are the definitions changed enough for that that it doesn't have an impact?
Mr. Lauber: --The new tax code preserves the post-'82 treatment for gambling losses.
They are still carved out from minimum tax and so forth.
I would think the one possible effect the decision could have... I haven't read the new tax law from cover to cover but the new tax law does put a 2 percent floor underneath investment type expenses.
You can't deduct expenses of investing, of getting advice from brokers, investment, valueline, that kind of stuff except to the extent it exceeds 2 percent of your adjusted gross income, and that basically puts a floor under the Section 212 deduction now in the Code, and there may be some greater incentive for investors to try and say they are in a trade or business under the new tax law to avoid that 2 percent floor.
Unknown Speaker: By virtue of Section 212 are there any consequences if this case were affirmed outside the context of full-time gambling?
What are the real risks of an affirmance in other areas in your view?
Mr. Lauber: The greatest risk to affirmance would be if the Court did anything to impugn the rule of Higgins versus Commissioner, which held that investors are not in a trade or business.
Unknown Speaker: Well, it could be affirmed, I suppose, without doing that, depending upon what the elements were of the test to be employed.
Mr. Lauber: That's right.
Unknown Speaker: Of course, to speak of the rule of Higgins against Commissioner is to give that case the benefit of a good deal of doubt since you tell me what rule it is other than that the government won it.
Mr. Lauber: Well, one might say that very well.
Unknown Speaker: Mr. Lauber, you argued the slot machine case last year, didn't you.
Mr. Lauber: Unfortunately, I did, yes.
Unknown Speaker: You are getting to be an expert on gambling devices.
Mr. Lauber: I have quite a bit of knowledge about the different subjects now.
That is true.
Unknown Speaker: Does this definition, what amounts to a trade or business, it will have some general applicability, won't it?
Mr. Lauber: It will because the term is used in 50 different sections of the code.
Unknown Speaker: And do you think that... I guess you don't need to know, but is it supposed to mean the same thing in all these sections?
Mr. Lauber: Well, it has a number of special purpose definitions and special sections that define it--
Unknown Speaker: I see.
Mr. Lauber: --like the unrelated business income tax defines it for purposes of one section.
That is true--
Unknown Speaker: But at least for some other sections the way this is defined it will be--
Mr. Lauber: --The majority of them it is the same definition.
Section 162, Section 62.1, all of those we generally think have the same meaning of trade or business.
The Court of Appeals below held that a trade or business should be defined as any activity that can fairly be characterized as a person's livelihood, occupation, or means of earning a living, so that the only requisites of a trade or business from that point of view are that you carry on an activity on a regular and extensive basis with the intent to earn a profit or livelihood from it.
We think this definition has some obvious intuitive appeal but we think it incorrect under the code as we actually know it.
Unknown Speaker: --Has that been the consistent position of the Tax Court over the years?
Mr. Lauber: The Tax Court is one of the courts that has flip-flopped on this question.
When it first came to the Tax Court in 1976, Judge Tannenwald defined the term much more narrowly and adopted what we call the goods and services test of Justice Frankfurter's concurring opinion in Deputy v. DuPont to hold that a gambler was not in a trade or business, and the gambler there did not want to be in a trade or business because he was trying to be hit with self-employment tax.
And then after Congress put in the minimum tax provision that was bad for gamblers, the Tax Court reversed itself, overruled Judge Tannenwald's opinion, so they have not been consistent.
They have kind of sided with the gambler, depending on the equities of the particular tax provision involved for the relevant tax year.
Unknown Speaker: You mean they have been on the side of equity?
Mr. Lauber: Right.
We are not contending that there are any equities on our side in this particular case.
We are simply out to get a definition of trade or business that does not damage the entire structure of the revenue code.
The code itself regularly distinguishes between trade or business activities and other activities carried on on a regular basis with the intent to earn a profit.
Particularly in the landmark case of Higgins, that I mentioned before, this Court held that a full-time investor is not in a trade or business even though he devotes the bulk of his time to managing his securities portfolio and even though he was engaged in a regular course of activity with the intent to earn a profit or livelihood from this portfolio.
Unknown Speaker: He was trying to deduct the salaries of his employees, wasn't he, in that case?
Mr. Lauber: Mr. Higgins had a very, very large investment portfolio as well as a very large real estate activity apparently, and he did hire people to work for him, bookkeepers.
He made all the investment decisions himself, I think.
He gave the--
Unknown Speaker: Didn't Congress later decide that he should have been able to deduct these expenses?
Mr. Lauber: --It did, and then it enacted Section 212, but it is important to note that Congress thought that the problem with Higgins was the Court had defined trade or business too narrowly to exclude his kind of expenses.
They respond to that not by expanding the definition of trade or business but by enacting a new section, 212, to allow deduction of non-business expenses incurred to produce income on management investment property.
Unknown Speaker: Mr. Lauber, does a casino offer goods or services within the meaning of the term as you understand it?
Mr. Lauber: The casino itself does, and a bookie would.
Unknown Speaker: And what are the services?
Mr. Lauber: Well, a casino is running a--
Unknown Speaker: Say a casino where you have, say, just a dice table.
Mr. Lauber: --They are offering roulette, the services of a roulette wheel or a blackjack dealer that gamblers can avail themselves of to gamble.
I guess they are not really offering goods but they are offering services.
They serve drinks while you are at the gaming table, and a bookmaker--
Unknown Speaker: At the slot machines, too?
Mr. Lauber: --Pardon me?
Unknown Speaker: At the slot machines, too?
Mr. Lauber: I think that is providing a service in that they are making available to gamblers a facility to... it is like an amusement park type of service.
Unknown Speaker: It is certainly not gambling because gambling is a game of chance, and the casinos don't take chances.
Mr. Lauber: But if you think of this being like an amusement park and they take their cut and they provide fun for people--
Unknown Speaker: What if this man provided his own dice and he went to a dice game every day and he brought the dice, played with a bunch of friends and they gambled every day full-time but he is the one who supplied the dice?
Would that be enough?
Mr. Lauber: --I don't think that would be enough to make him--
Unknown Speaker: Why isn't that the same as a casino supplying the dice?
And it is always at his house.
Mr. Lauber: --Well, I think... well, if he did it on a regular, continuous basis and got paid, and got money for it.
Unknown Speaker: Well, he gets money when he wins, of course; he doesn't when he loses, just like--
Mr. Lauber: But he is the one who is providing the facilities.
Unknown Speaker: --And they use his kitchen.
Mr. Lauber: That is different from being a gambler.
Unknown Speaker: If he used his kitchen, he had a permanent poker game or dice game, then he is like a casino.
Is that right?
You don't really want us to hold that, do you?
Mr. Lauber: Well, we don't want you to tell people to hold gambling games in the kitchen as a trade or business.
No, we don't want that.
Unknown Speaker: I didn't think so.
Mr. Lauber: But I think it is different being the vendor or the provider of the facility and the consumer of the services like the respondent here.
He was just a gambler who was coming in to play, and we think that Higgins really controls this case, because we can see no real distinction between somebody who engages in a regular course of profit-seeking investment activity and somebody who engages in the regular course of profit-seeking gambling activity.
Unknown Speaker: What about real estate development?
That is like a person with an investment portfolio?
Mr. Lauber: We have an amicus brief filed on behalf of real estate developers, and we think that question is not presented here.
There is a particular doctrine that has come up in the tax shelter area called the doctrine of pre-opening expenses that kind of takes care of when a real estate developer... a real estate investment partnership is in the business of renting apartment units.
A developer himself would be in a business all the time because he is engaged in the regular course of developing, improving property.
Unknown Speaker: Mr. Lauber, the case of the full-time stock trader seems to me rather analogous to the full-time gambler--
Mr. Lauber: Well, I think the--
Unknown Speaker: --and the stock trader is treated as having deductible.
Mr. Lauber: --There is a line of cases in the lower courts that have held that a stock trader as opposed to an investor is engaged in a trade or business but I think--
Unknown Speaker: Do you think that is incorrect, that that shouldn't be the rule?
Mr. Lauber: --I think one can find analogies both between the investor and the trader to the gambler.
Let me say a little bit more concretely about how they are similar.
Unknown Speaker: How would you treat, how would you treat the full-time stock trader under the rule you seek?
Mr. Lauber: The position of the IRS is that the full-time stock traders who do rapid turnover of investments are in a trade or business, and that goes back to--
Unknown Speaker: I think that is really close to this case.
Mr. Lauber: --I agree, it is very close to this case, and I think that is what makes this case difficult.
If we didn't have that line of cases, I think this case would be easy after Higgins.
Unknown Speaker: Well, all right, if you were to develop a rule that said if it is a profit-seeking activity, if it is activity that is intensively engaged in over a period of time with personal effort of the taxpayer, and you are not structuring in the preliminary costs of getting into business, I mean, would that take care of your concerns with the investor?
Mr. Lauber: I don't think it would, because then you have to ask why did Higgins come out the way it did.
If you are right, why wasn't Mr. Higgins, who spent all of his time running around managing his investments and giving buy and sell instruction, picking stocks.
Unknown Speaker: Well, it is hard to pay that much reliance on Higgins, which was effectively overruled by statute shortly thereafter.
Mr. Lauber: It was only overruled insofar as the result, but Congress did not overrule the holding that he was not in a trade or business.
The Congress preserved that holding and enacted a new provision to allow non-business deductions to be taken.
Unknown Speaker: What element is missing out of the list I gave you?
Mr. Lauber: The element we would say is missing is, he does not hold himself out as offering to sell goods or services to others, and I think that a gambler does not do that, and there are other... there are some illegal activities, for example, embezzlers.
You may have an embezzler who spends his days casing houses and looking for... trying to find new ways to get money from his employer and tries to make a living doing that, but the courts have held he is not in a trade or business.
Unknown Speaker: What about an embezzler that sells shoddy goods and services, misrepresents them and gives you not what he said he would?
Mr. Lauber: Well, an embezzler who just takes money out of his--
Unknown Speaker: Never mind embezzler.
I mean, it is not embezzlement, but a con man who--
Mr. Lauber: --I think a con man or a drug dealer is in a trade or business because they are selling something.
It may be illegal, but if they file the tax return they could claim cost of goods sold.
Unknown Speaker: --Right, so that sort of takes some of the force out of the fact that an embezzler would be included because under any definition you are going to get some strange people included.
It seems to me no more desirable to include con men than it does embezzlers.
So no matter what definition you get you are going to get some strange people included as conducting a trade or business.
Mr. Lauber: But I think the advantage of Justice Frankfurter's test is, it explains why people like embezzlers and investors and gamblers are not in a trade or business.
Unknown Speaker: But the only difference between Higgins and the stock trader is that Higgins didn't move his stuff as fast as a stock trader would?
Mr. Lauber: That is what the courts have held, that he--
Unknown Speaker: Well, and the government agrees, I take it.
Mr. Lauber: --We agree.
We feel we are stuck with that line of cases and don't wish to abandon it.
And frankly, if the Court decides that it is impossible to rule in our favor here without disapproving the stock trader cases, my orders are to say that you should affirm the decision below because the service believes that the stock trader cases have become so firmly entrenched in the law, going back to 1918 rulings of the IRS, that they can't be... they came before Higgins in a way and they can't be abandoned, but we think that the two lines can be reconciled.
Unknown Speaker: Mr. Lauber, let me ask you another case.
Supposing a person were engaged for his own account in buying and selling old coins or other old artifacts of some kind but he never offered them to the public, he always just kind of gambled on the market and would buy from dealers and sell to dealers.
Would he be engaged in a trade or business?
Mr. Lauber: I would say he is not.
He is a coin collector who is trading--
Unknown Speaker: The same sort of thing a stock trader would be.
That is even closer to a stock trader, it seems to me, because he is buying and selling something for which there is a market, but he is always doing it just on his own account.
Mr. Lauber: --The rationale of the stock trader cases is that the trader is trying to take advantage of the kind of short-term swings in the market, like to get... much as an arbitraguer would, to get a little eighth here, an eighth there, because of market swings, and that requires extremely heavy trading.
I don't think a coin investor--
Unknown Speaker: How about gold bullion, large quantities of gold bullion always trading on your own account?
And you know, there are changes in the market every day on that.
Mr. Lauber: --Well, I think that the service would agree that a person who dealt in gold bullion in a fashion similar to a stock trader who is held to be in a business would also--
Unknown Speaker: It would have to be a short swing situation.
Mr. Lauber: --It would have to be a very short swing situation, I think, and very, very frequent trades.
Unknown Speaker: Am I correct that the Congressional overturning of Higgins only overturns it as to whether a deduction can be taken.
Mr. Lauber: That's correct.
Unknown Speaker: And that there are other elements in the Tax Code which continue to apply the Higgins rule to someone who is managing his own investments, detrimentally or, for that matter, favorably to that individual as not considering that a trade or business for purposes of other provisions of the code.
Mr. Lauber: That's right.
Section 212 allows someone to deduct expenses incurred in managing his investments, but it would not allow him to deduct, say, home office expenses, and that is why full-time investors continue to try and seek trade or business status to be able to take other deductions outside of 212 under Section 162, and the like.
But I think it may be helpful to consider in a kind of concrete way what a full-time investor does, resembles what a full-time gambler does.
A full-time investor presumably spends much of his time reading the Wall Street Journal and becoming knowledgeable about where to put his money.
He reads Value Line, follows the Dow-Jones ticker, reads corporate 10K statements, consults with brokers and people in the industry trying to figure out what the best companies or commodities are, and once he has gotten educated he places a bet essentially on a particular corporation or commodity by buying a securities contract, and he thereby expresses his hope that that company will do better than all the other companies on the stock exchange.
If he is right, he will get a payoff many times his investment.
If he is wrong, he may become worthless.
Now, a gambler who gambles full-time is very similar.
He presumably spends his days becoming knowledgeable about where to put his money.
He reads the newspapers, racing programs, racing forms.
Unknown Speaker: He only reads the Morning Telegraph.
Mr. Lauber: Excuse me?
Unknown Speaker: xxx he only reads the Morning Telegraph?
Mr. Lauber: Excuse me?
Unknown Speaker: xxx maybe he reads.
Mr. Lauber: Well, he probably reads the racing columns in all the newspapers.
That may take a couple of hours in the morning.
And then he goes down to the track and he talks to jockeys and other bettors and tries to get a sense of what the best horses or dogs are, and he then places his bet on the horse or dog he thinks is going to do best by buying a betting slip, and both the full-time gambler and the full-time investor are taking some risks, but basically they hope they can beat the market because of the superior information and sophistication they have by doing what they do full-time.
We think that neither of them, despite the fact he uses some skill in what he is doing, is in a trade or business, and the reason is, the reason Justice Frankfurter gave in his concurring opinion in Deputy v. DuPont, a case a year before Higgins which likewise involved an investor, and he said that an investor is not in a trade or business because he does not hold himself out to others as engaged in the selling of goods or services.
The same we think is true of a gambler who does not act as a bookie or casino operator or sell tips to other people, but rather gambles solely for his own account.
We think the goods or services test is a useful tool for differentiating the world of trade or business activities from a somewhat larger universe of activities undertaken with the intent to make a profit.
It explains why investors are not in a trade or business no matter how extensive and busy they are about their investments.
It explains why gamblers of all types, whether they play roulette, poker, bingo, keno, or horse races, are not in a trade or business.
It explains why housewives or house-husbands who sit home and cut the tops of cereal boxes and enter contests all day are not in a trade or business.
And it explains why people like embezzlers and burglars are not in a trade or business.
Each of these people may spend a lot of time all day trying to--
Unknown Speaker: But not why con men are not in a trade.
Mr. Lauber: --I think... well, a con man, he has to be offering goods or services, and if he is selling deficient products I would say he is in a trade or business.
If he is simply trying to--
Unknown Speaker: That really does not make the best of all possible worlds, even this test, right?
There are still some strange things that are going to be--
Mr. Lauber: --There always will be strange cases, that's true, that are hard to categorize one way or the other.
We think the Frankfurter formula is also useful as an administrative device because it allows whole categories of taxpayers to be classified and thereby avoiding the ad hoc and arbitrary line drawing approach that the respondents' approach would require.
For example, under the approach that respondent would urge the Court would have to figure out how much time one needs to spend on gambling to make it a trade or business, and there probably are millions of people in the country who gamble, many of whom, one suspects, are not in a trade or business, and the Courts would have to draw really arbitrary lines between casual and truly dedicated gamblers.
The courts might also have to draw arbitrary lines between different types of gambling activities.
The respondent probably himself would agree that a retired person who lives in Las Vegas and plays slot machines eight hours a day is not in a trade or business.
I think that would have to be... that would be correct.
And respondent might try and distinguish between gambling like bingo and slot machines and roulette from activities like poker, horseracing, and dog racing on the theory the latter involved more skill and are not purely, purely games of chance, and that also, I think, could require difficult line drawing problems depending on how much time the gambler spent on each type of gambling.
Unknown Speaker: --Where would you put numbers?
Mr. Lauber: Where would I put?
Unknown Speaker: Numbers?
Oh, you don't know anything about that?
Mr. Lauber: I don't think I know much about that.
Unknown Speaker: That's gambling.
Yes, where would you put that, where somebody buys a lottery ticket for ten cents every day?
Mr. Lauber: I think that would be like bingo.
Well, our position is, all gambling, all gamblers don't qualify, and I think that clearly is on the end of pure chance.
There is not much skill involved, I guess, in buying lottery tickets.
It is like, you know, again like the houseperson who just enters contests and sends off jingles to cereal companies.
And the problem is, because it can be good or bad to be in a trade or business, depending on the gambler's particular facts, whether he won or lost money for the year, what he is trying to deduct.
Gamblers can pull all these factual levers and pulleys involving how much time they spend and what kind of gambling they are doing trying to get the best result for that.
Unknown Speaker: What is the difference between sending in a bunch of jingles in a contest and sending a bunch of short stories to a magazine editor?
Mr. Lauber: Well, again, it would depend on the amount of time and seriousness spent.
If a person seriously was writing advertising copy for corporations I think that would be a trade or business, because you are offering services.
Someone who just sends off jingles that get put in a bin and they spin around and pick one out would not be.
That would simply be entering a contest.
That would not be--
Unknown Speaker: Yes, but don't they sometimes publish the winners of those and use the jingle in their advertising?
Mr. Lauber: --Well, maybe if you then became established as a good copywriter you could wind up later on being--
Unknown Speaker: Suppose he just wrote one story and it is published.
What about one jingle that is published on some nationally advertised product and millions of people see it on television?
Mr. Lauber: --Probably in either event just doing it once wouldn't be enough besides selling goods you have to also do it on a regular basis.
Unknown Speaker: An author who writes 100 stories and only one gets published isn't engaged in a business, and a guy who writes 100 jingles and one gets... I don't understand the difference.
Mr. Lauber: I think the difference is that the jingles have an element of entering a contest in them, and that--
Unknown Speaker: They provide a service.
I think... maybe I am wrong, but it is my understanding they use these things in their advertising if they hit one that is particularly, you know, attractive to the audience.
I don't know why that is any different than writing a short story.
Mr. Lauber: --It might also be hard to show a profit motive if you are writing jingles like thousands of people.
Unknown Speaker: If you did it full-time.
We are assuming this is full-time activity, and it is the only way he gets any money, like this man.
This one only involved $2,000 a year.
Mr. Lauber: Well, it only involves $2,000 a year.
That is absolutely right.
And we had no desire to subject Mr. Groetzinger to--
Unknown Speaker: 0 xxx.
Mr. Lauber: --Well, the reason we had to seek certiorari was because there was a circuit conflict on the question and the Commissioner couldn't simply change his position because either way he went it would be good or bad for some gamblers.
We had to have a clear answer from this Court, and we tried to keep it out of the Court for a long time, and finally we couldn't avoid it any longer and here we are, and we need to have an answer.
Unknown Speaker: But the Higgins case was decided in about 1940 or '41, and in all this time nobody has ever asked Congress to help you but in this problem.
Is that right?
I suppose they can decide some of these issues.
Mr. Lauber: Well, Congress did help gamblers out in that it took care of the minimum tax problem that created this litigation, but I think Congress has simply decided to leave to the Courts defining this term, because it has been a judicial term for a great many years, and--
Unknown Speaker: xxx any legislation defining it?
Mr. Lauber: --Not generally.
There have been proposals to find but particular purposes.
Unknown Speaker: But has the Commissioner consistently taken the position that trade or business means what you now urge it means?
Mr. Lauber: Well, except for the first gambler case to come to the Tax Court when he argued that the gambler was in business so he could be hit with self-employment tax, that, I think, is the only departure that I am aware of from the consistent position that the Frankfurter formula is correctly part of the test for trade or business.
And we took that position in the Show case which involved the research, R8D expenses in this Court, and the Department of Justice determined not to appeal that first Tax Court case where the Commissioner lost, and the Commissioner agreed with the no appeal decision.
Unknown Speaker: But he never wrote any regulations on the point, either.
Mr. Lauber: There are no regulations that define trade or business for all purposes.
It may be that the reason that... the term does appear in so many different parts of the code that it may be that there is a reluctance to have a regulation define it for all purposes for fear of having something being whipsawed in some context, but it is a term the courts have tried to define, and I think that both the Commissioner and Congress have left it to the Courts to do that.
Unknown Speaker: You don't mind us giving a general definition like that that will whipsaw everything?
It is tough for the Tax Commissioner because he doesn't know what he is doing, but we do, so we can just come up with it.
And if you don't like what comes out of here you will be--
Mr. Lauber: Then we can go to Congress.
Unknown Speaker: --you will be over across the street right away.
Mr. Lauber: Yes, then we get two bites of the apple that way.
Argument of Carroll Baymiller
Chief Justice Rehnquist: Thank you, Mr. Lauber.
We will hear now from you, Mr. Baymiller.
Mr. Baymiller: Mr. Chief Justice, and may it please the Court, I am a little surprised at the government when they likened the professional gambler to the investor.
Anybody that says placing bets at the racetrack is an investment has another think coming because he doesn't have a chance unless he knows what he is doing, unless he studies, unless he works 60 to 80 hours a week as Bob Groetzinger does.
Otherwise he has no chance.
It is not an investment.
Now, the difference between an investor and the active trader according to the courts is that the investor is letting his money earn a living for him.
He isn't doing the earning.
His investment is doing the earning.
He buys stocks and bonds and he puts them in his vault and every so often he gets a check for a dividend or for interest, so he is not working.
The active trader is working practically every day of his life.
Now, a trader who goes to the brokerage office maybe once a week or two or three times a month and buys and sells a few stocks or commodities certainly is not in business because it isn't a frequent activity.
That is one of the things that all of the courts have said, that the activity must be frequent and regular.
The government says that the active trader is engaged in holding himself out to others as selling goods or services, and they justify it by saying that he is buying and selling stocks and commodities.
Now, that is a joke.
We all know that the active trader is gambling.
He is betting that the price of a stock will go up or go down.
When he buys stock he doesn't take delivery--
Unknown Speaker: Counsel, that may well be, but it doesn't matter.
It seems to me that what the government is saying is, it is all right to gamble, and you can still qualify as being a trade or business, but you have to gamble on the purchase and sale of goods and services.
So long as that is what you are gambling on, you are still in the realm of goods and services.
You can gamble on the buying and selling of goods and services.
That is what the trader does.
He gambles that if he sells it a couple of years from now it is going to be... he is going to get more money than if he sells it today.
It isn't the fact of gambling that makes the difference.
It is what you are gambling on.
The government says, so long as you are gambling on the purchase and sale of something you are still in a trade or business, whereas the person who places a bet on a dog race is not gambling on the purchase and sale of goods.
Mr. Baymiller: --But, Your Honor, he is betting with every other patron at the track, the same as the active trader is buying and selling with every other active trader all over the country.
Unknown Speaker: That's right, and he is pitting his wits, or if you like his luck perhaps against theirs, out what determines who wins or who loses is ultimately the purchase and sale of goods.
Mr. Baymiller: I say the active trader is not buying and selling goods at all.
The active trader today is betting on the rise or fall of the Dow-Jones averages.
That is what the active trader does today.
He buys futures.
He is not buying goods at all.
He goes in and he says, I will bet that the Dow-Jones average will go up too points today.
If it goes up he wins.
If it goes down he loses.
Unknown Speaker: That may well be.
I mean, ultimately when he buys a stock he is buying a share in a company, but even if you don't, look on it that way, and you simply say he is buying a piece of paper, which some people will pay more for today than they may pay for tomorrow.
He is still buying or selling something.
What is the bettor in a dog race buying or selling?
Mr. Baymiller: He is buying part of a dog to win.
Unknown Speaker: I don't see that.
You can say that, but is it true?
Mr. Baymiller: He is making a bet.
They say that the casino operator is in business because he is offering bets to the customer.
It takes two to gamble, and the man that goes into the bookmaker's office is offering to make a bet with the bookmaker.
Now, it is different with the track.
The government says in the reply brief that the gambler is making a contract with the track.
Now, that just is not true.
The track is not making bets.
The track is a bookie, is a broker the same as a stockbroker.
The track is merely handling the bets of everybody that goes to the window and determining how what is left is to be divided, because the track and the state take about 20 percent first.
The Frankfurter test has been used to deny business status only in the gambling cases.
They did not use that test to deny business status in Higgins.
Justice Frankfurter was on the Higgins Court.
Justice Reed concurred with Justice Frankfurter in the DuPont case and wrote the decision in Higgins and never mentioned the Frankfurter test.
That test has never been mentioned by this Court since.
Unknown Speaker: How about the Courts of Appeals?
Mr. Baymiller: The Courts of Appeals, three circuits, three circuits have used the Frankfurter test which--
Unknown Speaker: And the Commissioner has.
Mr. Baymiller: --The Commissioner has.
Counsel says that the Tax Court has flip-flopped.
That is not true.
In one case, Gentile, they decided that the full-time gambler was not in business, and every case since that time, even in view of being reversed by the Second and Sixth Circuits, they adhered to the proposition that the full-time gambler is in business and that the Frankfurter test should not be used and should not be adopted by the courts in determining whether a full-time gambler is in business.
Unknown Speaker: Well, is that the definition of trade or business that the Tax Court regularly uses in other contexts?
Mr. Baymiller: I don't know that they have.
Unknown Speaker: What about... how about the investor?
Mr. Baymiller: The investor--
Unknown Speaker: What do they say about that?
Mr. Baymiller: --They don't say that the investor... well, they follow this Court's decision about the investor.
Unknown Speaker: Higgins.
Mr. Baymiller: Higgins.
But they do not say that Higgins was not in business because he did not offer to sell goods or services.
They did not use that as the test.
They said he wasn't in business because he was making investments, which is the same as all of us do, at least to some extent.
We all are investors, even if we do nothing more than put a $5 bill in a savings account every week.
That is what this Court held, but they didn't do so because in Higgins the man did not offer to sell goods and services.
Now, there are many, many other situations that we have cited in our brief where the courts have held a person to be in business where he didn't offer to sell anything.
Take for instance the tennis pro and the golf pro.
The government says that he is offering... he is selling entertainment.
That may be true for the McEnroes and the Lendis and the Nicklauses and those people, but I am talking about what may be termed the cannon fodder that go to these tournaments week after week, pay their own expenses, pay an entry fee to get in.
They aren't paid anything to come there.
Pay an entry fee to get in.
And if they win a match they win some money.
Now, what have they sold or what are they offering to sell?
There can't be any question but what they are in business.
We have cases, there are cases in the Circuit Courts, some of them even in the Second and Sixth.
Here is a man who decides to be an inventor, and he works on it day in and day out, never gets anything invented, never sells a thing, but the Court said that he was in business.
Here is a lawyer who spent--
Unknown Speaker: Of course, he has to get income, doesn't he, before he can deduct any of it, so an inventor who never sells a thing isn't going to have any income tax problems.
Mr. Baymiller: --He could still be subject to minimum tax.
Unknown Speaker: I guess in this case, Mr. Baymiller, the tax is imposed on a gross loss, not income at all.
Mr. Baymiller: That is absolutely true.
Here is a case that the Tax Court recently decided.
I don't know whether it is on appeal or not, it hasn't reached the appellate division yet, a fellow by the name of Meridith, he bet $294,000 in one year and lost $310,000 That is a $16,000 loss for the year.
And the government assessed him a minimum tax of over $16,000.
So that he had an economic loss for the year of $32,000 and paid a tremendous amount of tax to the State of Colorado and commissions to the track so that we say that the active gambler, the professional gambler does not get for himself equal protection of the law.
The law says that the casino operator can... is in business.
Why isn't the man on the other side of the fence in business?
Now, a district judge out in Reno--
Unknown Speaker: Mr. Baymiller, how can you... can we agree with you and stand by Higgins?
Let's talk about the investor as opposed to the trader, a person who has extensive investments and really spends his whole day managing those investments full-time.
He does nothing but look over this investment and see if this company is indeed still worth investing in, what are its prospects over the next five years, and so forth and so on, full-time occupation.
Why isn't that as much a trade or business as gambling if we agree with you that you don't have to be engaged in the business of buying or selling goods or services?
Mr. Baymiller: --I think it is.
I personally think that the full-time investor is in business, and Congress apparently has thought so, too, because--
Unknown Speaker: Well, I agree with you.
It seems to me that to agree with you we have to disagree with Higgins.
Mr. Baymiller: --Higgins... but Higgins did lay down the rule that you examine all of the facts and circumstances surrounding a person's activity to decide whether he is in business.
Unknown Speaker: If you call that a rule.
Mr. Baymiller: Well, it is the best we have.
It is what this Court has said in the past.
Unknown Speaker: It is not a rule.
It is a throwing up of the hands, isn't it, essentially?
Mr. Baymiller: That probably is true.
That probably is true but it is like courts have said many times.
We can't define obscenity or pornography but we know it when we see it.
And I think that is exactly what the courts should say.
We know when a man is in business and when he isn't in business.
Now, the full-time gambler is in business--
Unknown Speaker: The problem with that is that there are 600 district judges in the country and they may not know when we know when he is in business.
Mr. Baymiller: --I agree with that, but you just can't... I don't think you can have a very specific limiting definition of when a person is in business.
Justice Frankfurter, if he were here today, I am sure that he wouldn't say that a full-time gambler is not in business.
At the time he laid down this rule we knew nothing about partmutuel gambling.
Unknown Speaker: How long have gambling losses been deduction, or are they, for the purposes of the federal income tax?
Mr. Baymiller: They are deductible only to the extent of winnings, specifically.
Unknown Speaker: Well, historically, for a long time they weren't deductible at all, were they?
Mr. Baymiller: I think they have been.
Unknown Speaker: Always?
Mr. Baymiller: I think so.
Unknown Speaker: But just not against... just not against other income?
Mr. Baymiller: That's right.
Unknown Speaker: But if a gambler loses every bet he ever places he is not going to have a minimum tax.
Mr. Baymiller: That is true.
That is true, because... well, he--
Unknown Speaker: You have got to--
Mr. Baymiller: --He will soon be out of business.
Unknown Speaker: --Yes.
Well, so will the inventor who never sells an invention.
Mr. Baymiller: And about... we had the author.
Here is the author, who spends hours and hours gathering material and writing a book.
Never gets it published, never sells a thing, never offers to sell a thing, but the courts have held he is in business.
Unknown Speaker: But it doesn't do... I don't see how it does him any good to be in business if he never gets any income.
Mr. Baymiller: He deducted... he is not the same as gambler where his deductions are limited to his winnings.
Unknown Speaker: But what does he deduct it from?
Mr. Baymiller: Well, in the particular case that I refer to the man was a lawyer.
And he spent 30 hours a week working on a book, taking pictures and gathering materials to publish a book.
Unknown Speaker: So he claimed he was in business for writing a book at the same time he was a lawyer?
Mr. Baymiller: Yes, and the Court held he was.
Unknown Speaker: Oh, is that right?
Mr. Baymiller: The Court absolutely held he was, even though... and what did they say?
How did they justify it?
Unknown Speaker: Which court was this?
Mr. Baymiller: --Pardon me?
Unknown Speaker: Which court was this, one of the 600 judges?
Mr. Baymiller: I think I can find it, Your Honor.
Unknown Speaker: Well, that is all right.
Was it a Court of Appeals?
Mr. Baymiller: Yes, it was a Court of Appeals.
I think it was either the Second Sixth, which didn't follow that same reasoning when they got to the gambling cases.
Unknown Speaker: I don't know how they could have done that if they simply took account of the simple rule to take all the facts and circumstances into account.
Mr. Baymiller: They said that he worked at it, that he hoped to make a profit some day, but not during the tax year in question, but they said he worked 30 hours a week gathering materials for a book that he hoped to write.
And the Court said, well, he is in business.
He went to see some publishers to try to get it published but he never offered, he never had anything to offer for sale.
That is the reason I say that Justice Frankfurter's test does just not stand up, and if he were here today I am sure he would not say that the full-time gambler was not in business.
Unknown Speaker: 0 xxx.
You have mentioned it ten times.
Why waste my listening to hear that over and over again?
Mr. Baymiller: I am sorry, Your honor.
Unknown Speaker: That if he were here he would do this?
Mr. Baymiller, this certainly has no bearing on the case, but out of curiosity is Mr. Groetzinger still in full-time gambling?
Mr. Baymiller: Yes, he is.
In fact, he is missing the day at what he calls his office this day.
If there are no other questions, thank you.
Rebuttal of Albert G. Lauber, Jr.
Chief Justice Rehnquist: Thank you, Mr. Baymiller.
Mr. Lauber, do you have anything more?
Mr. Lauber: I might make one point in response to your questions, Mr. Chief Justice.
It is possible, the courts have held, for a person to be in more than one trade or business at a time, and what often has happened is, people have tried to use a hobby loss like raising horses or operating a winery on the side as in effect a tax shelter to shelter their professional salary income by using the losses from the second supposed business to deduct against income from the first.
Unknown Speaker: Mr. Lauber, it is clear from the code that something can be a profit-making activity but not be a trade or business.
Mr. Lauber: Absolutely.
Unknown Speaker: It is very clear that you have to draw some distinction between those two.
Mr. Lauber: The depreciation--
Unknown Speaker: But is it necessary to draw a... wouldn't it be enough to support that distinction simply to say that it has to be a profit-making activity that you engage in regularly as opposed to an isolated piece of profit?
Would that suffice to make the code distinctions make sense?
Mr. Lauber: --It still would not explain Higgins though.
Unknown Speaker: No, it wouldn't explain... well, that's true.
Mr. Lauber: He was doing it very regularly.
Chief Justice Rehnquist: Thank you, Mr. Lauber.
The case is submitted.
Argument of Speaker
Mr. Speaker: The opinion of the Court in No. 85-1226, Commissioner of Internal Revenue versus Groetzinger will be announced by Justice Blackmun.
Argument of Justice Blackmun
Mr. Blackmun: Well this is an income tax case and the issue is whether the taxpayer who devotes his full time to making wagers, gambling or the support of himself in his family, is engaged in a trade or business, as those terms are used in certain sections of the Internal Revenue Code of 1954.
If he is engaged in the trade or business certain tax consequences follow.
If he is not so engaged certain other consequences follow more adverse to him.
The Courts of Appeal have reached different conclusions on this issue and hence we took it to resolve the conflict.
In an opinion filed today, we hold that such a taxpayer who is so engaged is in a trade of business, and hence affirm the judgment of the Seventh Circuit Court of Appeals which had ruled to that effect.
Justice White has filed a dissenting opinion and is joined therein by the the Chief Justice and by Justice Scalia.