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Law School Case Brief

Commissioner v. Groetzinger - 480 U.S. 23, 107 S. Ct. 980 (1987)


Not every income-producing and profit-making endeavor constitutes a trade or business. The income tax law, almost from the beginning, has distinguished between a business or trade, on the one hand, and transactions entered into for profit but not connected with business or trade on the other. Congress distinguished the broad range of income or profit producing activities from those satisfying the narrow category of trade or business. To be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify.


For most of 1978, Respondent Robert P. Groetzinger devoted 60 to 80 hours per week to parimutuel wagering on dog races with a view to earning a living from such activity, had no other employment, and gambled solely for his own account. His efforts generated gross winnings of $70,000 on bets of $72,032, for a net gambling loss for the year of $2,032. Although he reported this loss on his 1978 tax return, he did not utilize it in computing his adjusted gross income or claim it as a deduction. Upon audit, the Commissioner of Internal Revenue determined that, under the Internal Revenue Code of 1954 (Code) as it existed in 1978, Groetzinger was subject to a minimum tax because part of the gambling loss deduction to which he was entitled was an "[item] of tax preference." Under the Code, such items could be lessened by certain deductions that were "attributable to a trade or business carried on by the taxpayer." In redetermining Groetzinger's tax deficiency, the Tax Court held that he was in the "trade or business" of gambling, so that no part of his gambling losses was an item of tax preference subjecting him to a minimum tax for 1978. The Court of Appeals for the Seventh Circuit affirmed. The United States Supreme Court granted the Commissioner's petiiton for certiorari review.


Is a full-time gambler who makes wagers solely for his own account engaged in a "trade or business," within the meaning of §§ 162(a) and 62(1) of the Internal Revenue Code of 1954, as amended, 26 U. S. C. §§ 162(a) and 62(1) (1976 ed. and Supp. V)?




The United States Supreme Court first reviewed the Tax Code as it read in 1978, and held that (1) a gambler is engaged in a "trade or business" within the meaning of §§ 162(a) and 62(1) of the Code, where gambling activity (a) is pursued full time, in good faith, and with regularity, to the production of income for livelihood, and (b) is not a mere hobby; (2) resolution of this issue requires an examination of the facts in each case; (3) Groetzinger's gambling activity in 1978 satisfied this gambling "trade or business" test; and (4) Groetzinger's 1978 gambling losses therefore did not constitute an item of tax preference by which he would be subjected to the minimum tax.

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