Commissioner v. Groetzinger

1987-02-24

Headline: Full-time gambling treated as a business; Court rules a person who gambled full-time for himself is engaged in a trade or business, changing how gambling winnings and losses counted on 1978 tax returns.

Holding: The Court held that a person who gambled full time solely for his own account in 1978 was engaged in a trade or business for the tax provisions at issue, so his gambling activity qualified as such for that year.

Real World Impact:

Treats full-time gamblers as running a business for 1978 tax rules.
Can change how winnings and losses affect minimum tax liability.
May expose full-time gamblers to self-employment tax.

Topics: gambling taxes, how gambling income is taxed, minimum tax rules, self-employment tax

Summary

Background

The dispute was between Robert P. Groetzinger, a man who lost his job and spent 1978 gambling full time on greyhound races, and the Commissioner of Internal Revenue. Groetzinger worked 60–80 hours a week, went to the track almost every day, kept detailed records, had $70,000 in gross winnings but bet $72,032 (a $2,032 net gambling loss), and reported only $6,498 in other income on his 1978 return. The Commissioner treated his gambling winnings as income, allowed losses only to the extent of winnings, and applied minimum-tax rules that produced a small tax deficiency. Tax Court and the Seventh Circuit sided with Groetzinger, and the Supreme Court took the case because different appeals courts had ruled differently.

Reasoning

The key question was whether a person who gambled full time for his own account in 1978 was “engaged in a trade or business” for the specific tax rules at issue. The Court reviewed older cases and rejected a narrow test that required offering goods or services to others. Instead, the Court said the right inquiry is common sense: whether the activity is carried on with continuity and regularity and primarily to make a livelihood. Because Groetzinger gambled full time, in good faith, regularly, and for income, the Court held his activity met the definition for the tax provisions at issue and affirmed the lower courts.

Real world impact

For the 1978 tax year and similar pre-1982 rules, full-time gamblers like Groetzinger can be treated as conducting a business for these tax provisions, which affects how winnings and losses are reported and how minimum-tax calculations apply. The Court noted this result could also bring self-employment tax consequences. The opinion is limited to the specific code sections and the years at issue; Congress amended the law in 1982 to change how gambling losses affect the minimum tax.

Dissents or concurrances

Justice White, joined by two Justices, dissented, arguing Congress made clear in 1982 that gambling is not a trade or business and that the Court’s change should not be used to avoid the statutory scheme Congress later fixed.