Appeal by the Commissioner of Internal Revenue from a decision of The United States Tax Court holding that a taxpayer who is a full-time gambler for his own account is engaged in a "trade or business" within the meaning of 26 U.S.C. § 62(1) and therefore entitled to deduct his net gambling losses in arriving at his adjusted gross income for income tax purposes, even though he does not hold himself out as offering goods and services to others. The Tax Court's decision would allow the taxpayer to avoid a tax otherwise due on excess itemized deductions pursuant to 26 U.S.C. § 56(a).
Mansfield, Pierce and McGowan,*fn* Circuit Judges.
MANSFIELD, Circuit Judge:
The issue raised by this appeal pursuant to 26 U.S.C. § 7482 by the Commissioner from a decision of the United States Tax Court is whether a full-time gambler for his own account can be engaged in a "trade or business" within the meaning of 26 U.S.C. § 62(1) even though he offers no goods or services to others.*fn1 If so, he could deduct his net gambling losses for purposes of arriving at his adjusted gross income subject to tax, regardless whether his gambling losses exceeded his winnings, and thus avoid a minimum tax that would otherwise be due on excess itemized deductions pursuant to 26 U.S.C. § 56(a).*fn2 The Tax Court held in favor of the taxpayer. We reverse.
The facts have been stipulated. Richard Gajewski was a full-time gambler in 1976 and 1977, who bet solely for his own account and did not act as a bookmaker or hold himself out in any way as offering goods or services to others. His only income was from pari-mutuel wagering on jai-alai. In each of the years in question he incurred gambling losses equal to or in excess of his winnings. For the purpose of determining income subject to federal income tax such losses are deductible up to the amount of winnings under 26 U.S.C. § 165(d).*fn3 Gajewski, however, filed federal tax returns on which he took his entire net losses for each year as itemized deductions in arriving at his adjusted gross income.
The Commissioner assessed deficiencies against Gajewski, claiming that gambling losses are itemized deductions subject to the minimum tax on tax preferences, 26 U.S.C. § 56. He determined that $18,612 was owing for 1976, and $10,667 for 1977. He also assessed an additional tax of $4,653 for the year 1976 pursuant to 26 U.S.C. § 6651(a)(1). In so doing the Commissioner relied on Gentile v. Commissioner, 65 T.C. 1 (1975), which held that a taxpayer engaged in gambling solely for his own account, as distinguished from one operating a gambling establishment or bookmaking service, is not engaged in a trade or business because he does not hold himself out to others as offering goods or services, which the Tax Court found to be a necessary element of any trade or business.*fn4 A contrary ruling would have meant that gambling losses could be "trade or business" deductions under § 62 of the Internal Revenue Code. The latter constitute "adjustments to gross income," rather than itemized (or "below the line") deductions, and are expressly excluded from the definition of tax preferences subject to the minimum tax. 26 U.S.C. § 57(b)(1)(A).*fn5
Gajewski filed a petition for redetermination of the deficiencies in the Tax Court. In light of Gentile, supra, he did not argue that he was engaged in a trade or business. However, while his petition was pending, the Tax Court, in a 15 to 4 decision in Ditunno v. Commissioner, 80 T.C. 362 (1983) overruled Gentile. The court rejected the "goods or services" requirement in favor of what it described as a "facts and circumstances test," under which it would look to all the facts to determine whether the taxpayer was engaged in a trade or business. Applying that test, the Ditunno court found that the taxpayer -- a full-time gambler like Gajewski -- was engaged in a trade or business, and therefore that his gambling losses were not subject to the minimum tax.
The court below ruled that the present case was indistinguishable from Ditunno and entered judgment that no tax was owing. T.C. Memo. 1983-133 (March 14, 1983). This appeal followed.
The phrase "trade or business" appears in a variety of contexts throughout the Internal Revenue Code. See, e.g., § 62(1) (adjustments to gross income); § 162 (trade or business expenses);*fn6 § 174 (research and experimental costs connected with trade or business); § 280A(c)(1) (home office deductions). However, neither the Code nor the Treasury Regulations define that phrase. As a result, its meaning has been left to the judiciary to develop on a case-by-case basis.
The courts have identified a number of requirements that the taxpayer must satisfy to be engaged in a trade or business. One is that the taxpayer be regularly and actively involved in the activity. See Stanton v. Commissioner, 399 F.2d 326, 329-30 (5th Cir. 1968); McDowell v. Ribicoff, 292 F.2d 174, 178 (3d Cir.), cert. denied, 368 U.S. 919, 7 L. Ed. 2d 135, 82 S. Ct. 240 (1961); Daily Journal Co. v. Commissioner, 135 F.2d 687, 688 (9th Cir. 1943). Another is that the taxpayer undertake the activity with the expectation that he will make a profit. Bessenyey v. Commissioner, 379 F.2d 252, 255-56 (2d Cir.), cert. denied, 389 U.S. 931, 19 L. Ed. 2d 283, 88 S. Ct. 293 (1967).
Still another requirement -- that of "holding one's self out to others as engaged in the selling of goods or services" -- finds its genesis in Justice Frankfurter's concurring opinion in Deputy v. du Pont, 308 U.S. 488, 499, 84 L. Ed. 416, 60 S. Ct. 363 (1940). Although the Court has never expressly adopted the "goods and services" requirement, it has been implicitly approved. For example, in Snow v. Commissioner, 416 U.S. 500, 40 L. Ed. 2d 336, 94 S. Ct. 1876 (1974), the Court held the "goods or services" requirement inapplicable to § 174,*fn7 which allows deduction of research expenses, by contrasting that provision with § 162:
"Section 174 was enacted in 1954 to dilute some of the conception of 'ordinary and necessary' business expenses under § 162(a) . . . . adumbrated by Mr. Justice Frankfurter in a concurring opinion in Deputy v. Du Pont, 308 U.S. 488, 499 [84 L. Ed. 416, 60 S. Ct. 363] (1940), where he said that the section in question . . . . 'involves holding one's self out to others as engaged in the selling of goods or services.'" 416 U.S. at 502-03.
Similarly, this circuit in Grosswald v. Schweiker, 653 F.2d 58 (2d Cir. 1981), indicated that we consider the "goods or services" requirement to be part of the law. In construing the meaning of the term "trade or business" for the purposes of the Social Security Act we looked to Internal Revenue ...