Commissioner v. Groetzinger
94 L. Ed. 2d 25, 480 US 23, 1987 U.S. LEXIS 557 (1987)
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Rule of Law:
An activity constitutes a 'trade or business' for purposes of the Internal Revenue Code if the taxpayer engages in the activity with continuity and regularity, and the taxpayer's primary purpose for engaging in the activity is for income or profit, regardless of whether they offer goods or services to others.
Facts:
- After his position was terminated in February 1978, Robert P. Groetzinger spent the rest of the year engaging in parimutuel wagering on greyhound races.
- Groetzinger had no other employment and dedicated 60 to 80 hours per week to his gambling-related activities, which included studying racing forms and programs.
- He gambled six days a week for 48 weeks in 1978.
- Groetzinger gambled solely for his own account and never placed bets for others, sold tips, or acted as a bookmaker.
- He maintained detailed records of his wagers, winnings, and losses.
- In 1978, Groetzinger had gross winnings of $70,000 from $72,032 in bets, resulting in a net gambling loss of $2,032 for the year.
Procedural Posture:
- The Commissioner of Internal Revenue audited Robert Groetzinger's 1978 tax return and determined a tax deficiency of $2,522.
- The Commissioner's determination was based on the finding that Groetzinger's gambling losses triggered a minimum tax because his gambling was not a 'trade or business'.
- Groetzinger petitioned the United States Tax Court for a redetermination of the deficiency.
- The Tax Court, in a reviewed decision, held that Groetzinger was in the trade or business of gambling and ruled in his favor.
- The Commissioner of Internal Revenue (as appellant) appealed the decision to the United States Court of Appeals for the Seventh Circuit.
- The Court of Appeals affirmed the Tax Court's judgment in favor of Groetzinger (as appellee).
- The Commissioner of Internal Revenue (as petitioner) sought and was granted a writ of certiorari by the Supreme Court of the United States due to a conflict among the circuit courts.
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Issue:
Is a full-time gambler who makes wagers solely for his own account engaged in a 'trade or business' within the meaning of the Internal Revenue Code?
Opinions:
Majority - Justice Blackmun
Yes. A full-time gambler who wagers solely for his own account is engaged in a 'trade or business' if the activity is pursued full time, in good faith, and with regularity for the production of income as a livelihood. The Court explicitly rejected the 'goods or services' test, which would require a taxpayer to hold themselves out to others as offering goods or services to be considered a trade or business. Instead, the Court established a facts-and-circumstances test focusing on the taxpayer's involvement and purpose. The taxpayer must be involved in the activity with continuity and regularity, and their primary purpose must be for income or profit, not as a hobby or amusement. Groetzinger's extensive, year-round efforts to earn a living from gambling satisfied this standard, distinguishing him from a mere investor managing his own estate as in Higgins v. Commissioner.
Dissenting - Justice White
No. A full-time gambler is not engaged in a 'trade or business.' The dissent argues that 1982 amendments to the Tax Code, which resolved the minimum tax issue for later years, implicitly confirm that Congress did not consider gambling a trade or business. If it were, the structure of the 1982 amendments would create an unintended double deduction for gamblers. The dissent contends that Congress, in 1982, was simply correcting an inequity that arose because gambling is not a trade or business, similar to how it legislatively corrected the outcome of Higgins v. Commissioner. The majority's holding is a 'sport' that applies only to a superseded statute and improperly redefines 'trade or business' to avoid a harsh result in a single case.
Analysis:
This decision is significant for formally rejecting the 'goods or services' test previously suggested in a concurring opinion in Deputy v. Du Pont. By doing so, the Court broadened the definition of 'trade or business' to include activities where a person works for their own account, provided they meet the standard of continuity, regularity, and profit motive. This case establishes that the determination is a factual one, requiring an examination of the taxpayer's level of effort and intent rather than their relationship with customers. The ruling provides a crucial framework for distinguishing a business from a hobby or a passive investment activity, impacting not only professional gamblers but also active securities traders and others in similar single-person enterprises.
