COMMISSIONER OF INTERNAL REVENUE, PETITIONER V. ROBERT P. GROETZINGER No. 85-1226 In the Supreme Court of the United States October Term, 1985 On Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit Brief for the Petitioner TABLE OF CONTENTS Opinions below Jurisdiction Statutes involved Questions Presented Statement Summary of argument Argument: Gambling for one's own account is not carrying on a trade or business within the meaning of Section 62(1) of the Code A. A taxpayer who does not hold himself out as providing goods or services to others is not engaged in a "trade or business" for federal income tax purposes B. The court of appeals' abandonment of the goods-or-services test is premised on a misconception of the Code and is at odds with this Court's view of the trade or business requirement C. The goods-or-services test provides a helpful and satisfactory framework for determining trade or business status Conclusion OPINIONS BELOW The opinion of the court of appeals (Pet. App. 1a-20a) is reported at 771 F.2d 269. The opinion of the Tax Court (Pet. App. 21a-37a) is reported at 82 T.C. 793. JURISDICTION The judgment of the court of appeals (Pet. App. 38a) was entered on August 21, 1985. On November 9, 1985, Justice Stevens extended the time within which to petition for a writ of certiorari to and including January 18, 1986. The petition was filed on January 17, 1986, and was granted on March 24, 1986 (J.A. 14). The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTES INVOLVED The relevant portions of Sections 56, 57, 62, 162, and 165 of the Internal Revenue Code of 1954 (26 U.S.C. (1976 ed. & Supp. I 1977)), as in effect for the tax year at issue, are set forth at Pet. App. 39a-41a. QUESTION PRESENTED Whether a full-time gambler who wagers solely for his own account, and who thus does not hold himself out as offering goods and services to others, is engaged in a "trade or business" for federal income tax purposes. STATEMENT 1. Respondent was employed for 20 years by a truck manufacturer in Peoria, Illinois, as a market researcher, until his job was terminated in February 1978. During the remainder of 1978, the tax year at issue, respondent devoted virtually all of his time to pari-mutuel wagering on dog races. He gambled primarily at tracks in Florida and Colorado. He went to the track six days a week. When not at the track, he spent much of his time studying racing forms, racing programs, and other materials in order to decide what bets to place. He devoted 60 to 80 hours a week to these gambling-related endeavors. He never placed bets on behalf of others, sold tips to other bettors, or collected commissions for placing bets. Rather, he gambled solely for his own account. Respondent had no other profession or employment during this period. Apart from his gambling winnings, his only sources of income were interest, dividends, and proceeds from the sale of investments. Pet. App. 4a, 22a-23a. In 1978, respondent had gambling winnings of $70,000 and gambling losses of $72,032, for a net gambling loss of $2,032. He received income from other sources in the amount of $6,498, representing interest, dividends, capital gains, and salary earned before losing his job. On his 1978 federal income tax return, he reported as income only the $6,498 received from non-gambling sources. He did not report any gambling income, nor did he deduct any gambling losses. Pet. App. 23a. /1/ On audit, the Commissioner determined that respondent's $70,000 of gambling winnings had to be included in gross income and that, pursuant to Section 165(d) of the Code, /2/ a deduction should be allowed for his gambling losses to the extent of his gambling gains. /3/ The Commissioner further determined that, under the law as it stood in 1978, a portion of respondent's $70,000 gambling-loss deduction was an "item of tax preference" subject to the minimum tax. See 26 U.S.C. (1976 ed.) 56(a). At that time, "items of tax preference" were defined to include certain itemized deductions, but to exclude deductions "attributable to a trade or business carried on by the taxpayer." See 26 U.S.C. (1976 ed. & Supp. I 1977) 57(a)(1) and (b)(1)(A), 62(1). /4/ The Commissioner determined that respondent's gambling activities during 1978 did not constitute a "trade or business" and hence that a portion of his gambling losses were "adjusted itemized deductions" subject to minimum tax. In so concluding, the Commissioner relied on the fact that respondent wagered solely for his own account and thus did not hold himself out to others "as engaged in the selling of goods or services." Deputy v. du Pont, 308 U.S. 488, 499 (1940) (Frankfurter, J., concurring). The Commissioner determined that respondent was liable for minimum tax of $2,142, resulting in a total tax deficiency (reflecting ancillary adjustments) of $2,522. Pet. App. 21a, 23a-24a. 2. Respondent sought redetermination of the deficiency in the Tax Court (J.A. 5-6). That court rejected the Commissioner's contention that "to be engaged in a trade or business, one must hold himself out to others as offering goods or services." Pet. App. 25a (footnote omitted). The Tax Court held that the correct inquiry instead "requires a broader examination of all the facts involved in each case" in order to ascertain whether the taxpayer's profit-seeking endeavors are "sufficiently regular, frequent, active and substantial to constitute a trade or business" (id. at 37a). The court noted that respondent during 1978 was engaged "full-time in pari-mutuel wagering on dog races, had no other employment during that period, * * * and devoted an extraordinary amount of time and effort to his gambling with a view to earning a living from such activity" (id. at 24a-25a). The Tax Court concluded that respondent was thus engaged in the "trade or business" of gambling, that his gambling losses were "attributable to a trade or business carried on by (him)," and that his gambling-loss deduction therefore was not an "item of tax preference" subject to minimum tax (id. at 24a & nn.7, 8, quoting 26 U.S.C. (1976 ed.) 56(a), 62(1)). The court of appeals affirmed (Pet. App. 1a-20a). The court observed that "(t)he determination of what constitutes a 'trade or business' under * * * the Internal Revenue Code has proven to be most difficult and troublesome over the years," and it noted that "neither judicial precedent nor the relevant statutory language * * * provides a clear basis for resolving this issue" (id. at 5a, 8a). The court decided that "the term 'trade or business' * * * should be construed broadly" (id. at 13a), and it agreed with the Tax Court that the offering of goods or services should not be "an absolute prerequisite to a finding that a taxpayer (is) engaged in a 'trade or business'" (id. at 7a). The court stated that "the inquiry should concentrate on whether certain activities of a taxpayer can fairly be characterized as a livelihood, occupation or means of earning a living," and it held that respondent's gambling activities constituted a "trade or business" by this standard (id. at 13a-14a). SUMMARY OF ARGUMENT A. It is well established that the term "trade or business," as used in the federal tax laws, does not encompass all activities engaged in with the intention of producing income. The Code does not contain an all-purpose definition of the term, and therefore it has fallen to the judiciary to define its boundaries. Two universally recognized requirements are that the activity be primarily designed to produce income or profit and that the taxpayer conduct the activity with regularity and continuity. It is clear, however, that these two factors, without more, are not enough to establish a "trade or business." In Higgins v. Commissioner, 312 U.S. 212 (1941), this Court held that an investor was not engaged in the "trade or business" of managing his investments, "(n)o matter how large the estate or how continuous or extended the work required may be" (id. at 218), even though the purpose of his investment activities was manifestly to produce income. But the Court in Higgins did not specify what additional factors would be needed to convert a regular, profit-seeking activity into a "trade or business." Since Higgins, courts and commentators have generally recognized as the third requirement for trade-or-business status the "goods or services" test, which has as its genesis Justice Frankfurter's concurring opinion in Deputy v. du Pont, 308 U.S. 488, 499 (1940). Joined by Justice Reed, Justice Frankfurter there stated that "'carrying on any trade or business' * * * involves holding one's self out to others as engaged in the selling of goods or services." The lower courts over the years have applied the test in a variety of contexts, and this Court's decision in Snow v. Commissioner, 416 U.S. 500, 502-503 (1974), reflects its general acceptance. The only departures from this consistent judicial pattern have occurred in cases raising the exact question presented here -- whether persons who gamble for their own account are in a "trade or business" -- and have concerned taxable years during the six-year period (1976-1982) in which application of the goods-or-services test resulted in an arguably harsh imposition of minimum tax. But that arguable flaw in the minimum tax has been corrected legislatively for years after 1982. We are frank to admit that respondent during 1978 suffered from this transitory inequity, but we think this an insufficient justification to abandon Justice Frankfurter's formula, which in all other respects has stood the test of time. B. The court of appeals' proposed definition of "trade or business" as anything that "can fairly be characterized as a livelihood" (Pet. App. 13a), while perhaps furnishing a useful starting point if one were drafting a tax system from scratch, cannot be squared with this Court's decisions or with the structure of the Code as it actually exists. The court of appeals, by focusing on a perceived dichotomy between "business" and "personal" expenses, failed to appreciate that the Code in fact distinguishes among three kinds of activity -- "personal" activities, "trade or business" activities, and nonbusiness activities carried on for the production of income. The goods-or-services test provides a useful and appropriate index for differentiating this second category from the third. The court of appeals' suggestion that the goods-or-services test is incompatible with the "facts and circumstances" approach adopted by the Court in Higgins is plainly mistaken. It is of course true that one must examine all the facts of the particular case in making the trade-or-business determination. Yet one must also have a substantive legal standard against which the facts of a particular case are to be measured. The goods-or-services test is an important component of that standard, and it is fully consistent with both the reasoning and the result of Higgins. See Gajewski v. Commissioner, 723 F.2d 1062, 1066-1067 (2d Cir. 1983), cert. denied, No. 83-1715 (Oct. 1, 1984). It is in fact not the goods-or-services test, but the rationale of the court of appeals' decision, that is seriously at odds with Higgins. The court below reasoned that any activity that constitutes a taxpayer's "livelihood" constitutes a "trade or business." Under that approach, any regular and continuous course of activity undertaken to make a profit or produce income -- such as full-time management of one's own investments -- would be a "trade or business." But that is precisely the reverse of what the Court held in Higgins. Indeed, the court of appeals' suggested test is hard to distinguish from the definition of "trade or business" advanced by the taxpayer in Higgins and specifically rejected by the Court there. See 312 U.S. at 217. C. The goods-or-services test, in conjunction with the requirements that a taxpayer's activity be regular and profit-motivated, is a sound component of the definition of "trade or business." It provides an appropriate minimum standard for distinguishing between "trade or business" activities and other activities engaged in for profit. It accords with the common sense understanding of the term "trade or business." And it provides a means of classifying entire categories of taxpayers, such as those who gamble or invest for their own account, thus eliminating the uncertainty inherent in the ad hoc approach championed by the court of appeals. ARGUMENT GAMBLING FOR ONE'S OWN ACCOUNT IS NOT CARRYING ON A TRADE OR BUSINESS WITHIN THE MEANING OF SECTION 62(1) OF THE CODE The court of appeals has held that gambling for one's own account constitutes a "trade or business," provided that the activity is designed to produce a profit and is conducted with some degree of continuity and regularity. This holding marks a serious departure from the longstanding interpretation of the term "trade or business" as used in the federal tax laws. While legislative action has eliminated for future years the relevance of this issue in the minimum tax context (see note 4, supra), the question whether a particular activity should be classified as a "trade or business" continues to be important in other contexts, in some instances with favorable tax consequences for the taxpayer and in other instances with unfavorable consequences. /5/ The court of appeals' conclusion that the term "trade or business" encompasses any activity that can reasonably be viewed as a "livelihood or occupation" is at odds with this Court's decisions holding that an investor is not engaged in a trade or business, even though investing is his full-time occupation and investments the source of his livelihood. More fundamentally, the court of appeals' decision blurs the distinction between "trade or business" and other activities carried on to produce income -- a distinction that has long been recognized and upheld in this Court's tax decisions. A substantial body of judicial precedent has established that a taxpayer, in order to be deemed engaged in a "trade or business," must do more than carry on a regular course of conduct with the intent to earn a profit. He must also hold himself out to others as offering "goods or services" for a price. The court of appeals' decision provides no adequate basis for casting aside that precedent. A. A Taxpayer Who Does Not Hold Himself Out As Providing Goods Or Services To Others Is Not Engaged In A "Trade Or Business" For Federal Income Tax Purposes 1. It is well established that the term "trade or business" as used in the Internal Revenue Code does not encompass all activities engaged in for the purpose of producing income. Almost from the very inception of the modern federal income tax, Congress distinguished between "business or trade" and "transactions entered into for profit but not connected with * * * business or trade." Revenue Act of 1916, ch. 463, Section 5(a), 39 Stat. 759. This fundamental distinction is reflected throughout the Code today. Compare, e.g., I.R.C. Sections 162(a), 165(c)(1) and 167(a)(1) with Sections 212, 165(c)(2) and 167(a)(2). These provisions show that Congress has reserved the special tax treatment accorded a "trade or business" to a limited universe of activities. In the words of this Court, the Code "distinguishe(s) the broad range of income or profit producing activities from those satisfying the narrow category of trade or business." Whipple v. Commissioner, 373 U.S. 193, 197 (1963) (emphasis added). Because the Code itself does not contain an all-purpose definition of "trade or business," /6/ it has fallen to the judiciary to develop, over a considerable period of time, the boundaries of the term. The lower courts early identified two elements requisite to a "trade or business" that are now universally recognized and are not in dispute here. The taxpayer must be extensively involved in the activity with "continuity and regularity." Stanton v. Commissioner, 399 F.2d 326, 329-330 (5th Cir. 1968); see also, e.g., Snyder v. United States, 674 F.2d 1359, 1362 (10th Cir. 1982); McDowell v. Ribicoff, 292 F.2d 174, 178 (3d Cir.), cert. denied, 368 U.S. 919 (1961); Bedell v. Commissioner, 30 F.2d 622 (2d Cir. 1929). And the taxpayer's primary purpose for engaging in the activity must be for income or profit. See, e.g., Brannen v. Commissioner, 722 F.2d 695, 704-705 (11th Cir. 1984); Bessenyey v. Commissioner, 379 F.2d 252, 256 n.5 (2d Cir.), cert. denied, 389 U.S. 931 (1967); Hirsch v. Commissioner, 315 F.2d 731, 736 (9th Cir. 1963); Union Trust Co. v. Commissioner, 54 F.2d 199 (6th Cir. 1931). Thus, trade-or-business deductions are not available where the taxpayer's activities are sporadic, amount to a mere "hobby," or are calculated primarily to produce tax benefits rather than to generate economic profit. See, e.g., Independent Electric Supply, Inc. v. Commissioner, 781 F.2d 724 (9th Cir. 1986) (investment in patents motivated by tax avoidance); Estate of Power v. Commissioner, 736 F.2d 826 (1st Cir. 1984) (horse breeding hobby). In the landmark case of Higgins v. Commissioner, 312 U.S. 212 (1941), however, this Court held that satisfaction of these two requirements -- viz., engaging in a regular course of activity with intent to earn income -- is not enough to put a taxpayer in a "trade or business." The taxpayer there was an investor who devoted a considerable portion of his time and energy to managing a sizable investment portfolio. He rented offices and employed a full-time staff to assist him, and he sought to deduct these management expenses as expenses incurred in carrying on a trade or business. It was undisputed that these investment activities were intended to produce income and that they were regularly and extensively carried on. But the Court rejected the taxpayer's contention that managing one's own investments can constitute a trade or business "where there (is) sufficient extent, continuity, variety and regularity" (312 U.S. at 216). The Court concluded that, "(n)o matter how large the estate or how continuous or extended the work required may be," a person whose energies are devoted to, and whose livelihood derives from, mamagement of his own investment portfolio is not engaged in a "trade or business." 312 U.S. at 218. Accord, e.g., Whipple v. Commissioner, 373 U.S. at 202 ("investing is not a trade or business"); Moller v. United States, 721 F.2d 810 (Fed. Cir. 1983), cert. denied, 467 U.S. 1251 (1984). /7/ The Court in Higgins specifically held that the broad definition given to the term "business" in Flint v. Stone Tracy Co., 220 U.S. 107, 171 (1911) -- a decision that had defined "business" for purposes of the Corporation Tax Law of 1909 as "a very comprehensive term that embraces everything about which a person can be employed" -- did not bear on the meaning of "trade or business" as used in the income tax provisions at issue here. While the Court's decision in Higgins established that regularity and profit motive are not by themselves enough to render an activity a "trade or business," the Court did not there provide a general description of what additional element or elements might be required to satisfy that standard. Rather, the Court stated simply that the inquiry "requires an examination of the facts in each case" (312 U.S. at 217) and concluded that management of one's investments is not a "trade or business." Nor has the Court had occasion to provide an all-purpose definition of the term subsequently. See Snow v. Commissioner, 416 U.S. 500 (1974); Whipple v. Commissioner, supra. It has therefore fallen principally to the lower courts to derive a rule of general application to aid in applying the principles of Higgins outside the investor context -- to determine, in other words, what factors, besides the existence of a profit motive and the regularity of one's activities, are requisite to a "trade or business." The rule that has come to be generally accepted in the lower courts as a third standard for categorization as a "trade or business" is the "goods or services test." This test has as its genesis a concurring opinion in Deputy v. du Pont, 308 U.S. 488 (1940), which was decided the year before Higgins. In du Pont, as in Higgins, the Court was presented with the question whether a taxpayer was entitled to deduct, as an "ordinary and necessary" expense incurred in carrying on a "trade or business," certain costs arising out of the management of his investments. The Court in du Pont found it unnecessary to decide whether "conserving and enhancing (one's) estate" (308 U.S. at 493) is a "trade or business," because it concluded that, in any event, the taxpayer's expenses were not "ordinary and necessary" (ibid.). In a concurring opinion, however, Justice Frankfurter, joined by Justice Reed, went on to address the "trade or business" issue. Foreshadowing the result the next year in Higgins, where the Court's opinion was authored by Justice Reed, they stated their preference not to make "the hypothetical, litigation-breeding assumption that (the) taxpayer's activities * * * did constitute a 'trade or business,'" but instead to make explicit the conclusion that "(e)xpenses for transactions not connected with trade or business, such as an expense for handling personal investments, are not deductible" (308 U.S. at 499). The concurring Justices explained that, in order to qualify for trade-or-business deductions, "it is not enough to incur expenses in the active concern over one's own financial interest" (ibid.). Rather, "'carrying on any trade or business' * * * involves holding one's self out to others as engaged in the selling of goods or services" (ibid.). Putting together the holding in Higgins and the concurring opinion in du Pont, courts and commentators gradually came to regard the goods-or-services test as the additional factor, apart from regularity and profit motive, necessary to qualify a course of activity as a "trade or business." See, e.g., 5 J. Mertens, The Law of Federal Income Taxation Section 28.31, at 123, 126 n.9 (1980); Grosswald v. Schweiker, 653 F.2d 58, 60 (2d Cir. 1981). The test has been widely accepted by the lower courts in a variety of contexts in determining whether the taxpayer is carrying on a trade or business. See Steffens v. Commissioner, 707 F.2d 478, 482-483 (11th Cir. 1983) (consultant for one employer); Snyder v. United States, 674 F.2d at 1364 (nature photography for potential book); Grosswald v. Schweiker, 653 F.2d at 59-61 (consultant for one employer); Stanton v. Commissioner, 399 F.2d at 329 (inventor); Trent v. Commissioner, 291 F.2d 669, 670-671 (2d Cir. 1961) (services as employee); Daily Journal Co. v. Commissioner, 135 F.2d 687, 688 (9th Cir. 1943) (management of newspaper); Helvering v. Highland, 124 F.2d 556, 561 (4th Cir. 1942) (executor's estate management); Helvering v. Wilmington Trust Co., 124 F.2d 156, 158-159 (3d Cir. 1941), rev'd on other grounds, 316 U.S. 164 (1942) (stock market investments); Gestrich v. Commissioner, 74 T.C. 525, 529 (1980), aff'd, 681 F.2d 805 (3d Cir. 1982) (writing); Green v. Commissioner, 74 T.C. 1229, 1235 (1980) (selling blood plasma). Indeed, the goods-or-services test was explicitly incorporated into what has become perhaps the most commonly quoted formulation for making the trade-or-business determination (McDowell v. Ribicoff, 292 F.2d at 178): The phrase "trade or business" connotes something more than an act or course of activity engaged in for profit. * * * The phrase "trade or business" must refer not merely to acts engaged in for profit, but to extensive activity over a substantial period of time during which the taxpayer holds himself out as selling goods or services. See, e.g., Professional Ins. Agents v. Commissioner, 726 F.2d 1097, 1102 (6th Cir. 1984); Snyder v. United States, 674 F.2d at 1364; Stanton v. Commissioner, 399 F.2d at 329. 2. This general acceptance of the goods-or-services test is reflected, though not specifically addressed, in Snow v. Commissioner, 416 U.S. 500 (1974), the most recent decision of this Court that is relevant to the question presented here. That case involved Section 174(a)(1) of the Code, which permits the deduction of "research and experimental expenditures" incurred "in connection with (a) trade or business." The question presented was whether costs incurred by a taxpayer in connection with an invention that he hoped eventually to market were deductible under Section 174(a)(1). The partnership established to develop and market the invention had not attempted to sell any products during the year in which the research expenditures were actually made. The court of appeals accordingly had disallowed the deduction, reasoning that the partnership did not hold itself out as selling goods and services in the tax year and therefore was not engaged in a "trade or business" in that year. Snow v. Commissioner, 482 F.2d 1029, 1031 (6th Cir. 1973). Accord, Stanton v. Commissioner, supra; Richmond Television Corp. v. United States, 345 F.2d 901, 907 n.7 (4th Cir.), vacated and remanded on other grounds, 382 U.S. 68 (1965). Before this Court, the taxpayer in Snow did not challenge the court of appeals' reasoning that the goods-or-services test was an essential element in determining the existence of a "trade or business" under Section 162(a), /8/ nor did he challenge the court of appeals' conclusion that his activities failed to meet that test in the tax year. Rather, the thrust of his argument was that the words "in connection with his trade or business" in Section 174(a)(1) have a broader meaning than the words "in carrying on any trade or business" in Section 162(a). Specifically, the taxpayer argued that the "in connection with" language is anticipatory in the sense that it permits the deduction of research and development expenses for years prior to the time that the business becomes fully active and the products are offered for sale. See 73-641 Pet. Br. at 12-13, 17-18; 73-641 Reply Br. at 14-21; see especially id. at 19. The taxpayer accordingly argued that he was entitled to the claimed research expense deductions under Section 174 even though application of the goods-or-services test made him ineligible to deduct business expenses generally under Section 162 for the tax year in question. See 73-641 Pet. Br. at 12-18; 73-641 Amicus Br. 6. The government likewise assumed the relevance of the goods-or-services test, but contested the taxpayer's expansive interpretation of the phrase "in connection with." See 73-641 Resp. Br. at 23-28, 30. Thus, all of the litigants in Snow clearly recognized the applicability of the goods-or-services test in considering the scope of the trade-or-business expense deduction under Section 162. /9/ This Court accepted the taxpayer's contention in Snow and held that the phrase "in connection with his trade or business" in Section 174 is broader than the language of Section 162 and that it extends to cover research expenditures incurred by "upcoming" (416 U.S. at 504) businesses in years prior to the time that the business becomes activated by the marketing of the product. Given this resolution of the case, the Court had no need to decide the meaning of "trade or business" as used in Section 162, and it did not issue any holding on that point. In the course of its discussion of Section 174, however, the Court indicated its recognition of the general acceptance of the goods-or-services test by the lower courts and, indeed, by the litigants themselves. The Court stated that Congress had deliberately used the more expansive "in connection with" formula in Section 174 because it did not want the availability of research and development deductions to depend on whether the taxpayer actually held himself out as offering goods or services during the current taxable year. In the words of the Court (416 U.S. at 502-503): "Section 174 was enacted in 1954 to dilute some of the conception of 'ordinary and necessary' business expenses under Section 162(a) * * * adumbrated by Mr. Justice Frankfurter in a concurring opinion in Deputy v. du Pont, * * * 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.'" 3. The goods-or-services test was thus well established and generally accepted at the time the question presented here -- the status of gambling solely for one's own account as a "trade or business" -- first arose in litigation. In Gentile v. Commissioner, 65 T.C. 1 (1975), the Tax Court, speaking through Judge Tannenwald, duly applied that test in holding that a taxpayer who gambles solely for his own account (as opposed to one who acts as a bookmaker or who operates a gaming establishment) was not engaged in a "trade or business" and hence was not liable for the self-employment tax imposed by Section 1401. See I.R.C. Sections 1401, 1402(a) and (c). Citing Higgins and the concurring opinion in du Pont, Judge Tannenwald explained (65 T.C. at 6) that a gambler who bets solely for his own account does not carry on a "trade or business" because: (u)pon stepping up to the betting window, (he is) not holding himself out as offering any goods or services to anyone. (His) use of his own resources to wager and his dedicated studies of the activities on which he wagered are akin to the management and investment of one's own estate and the study of market reports in order to do so more knowledgeably. The Commissioner acquiesced in the Tax Court's decision in Gentile, announcing that he would thenceforth follow its holding that a gambler who wagers solely for his own account is not engaged in a "trade or business." 1980-2 C.B. 1, 4 n.39. The taxpayer's victory in Gentile, however, threatened to turn pyrrhic when Congress amended the Code in 1976 to include "excess itemized deductions" in the category of "items of tax preference" subject to minimum tax. Tax Reform Act of 1976, Pub. L. No. 94-455, Section 301(c)(1)(A), 90 Stat. 1550. As a result of that amendment, the conclusion that gamblers were not in a "trade or business" began to yield unfavorable minimum tax consequences for certain taxpayers. /10/ Perhaps because of the seemingly harsh consequences that occasionally resulted from this 1976 amendment of the minimum tax law -- an effect which, as we have noted (note 4, supra), has been eliminated by legislative action for tax years after 1982 -- the Tax Court revisited the question and overruled Gentile in a reviewed decision. Ditunno v. Commissioner, 80 T.C. 362, 371 (1983). The court in Ditunno concluded that the goods-or-services test was "overly restrictive" (id. at 366) and held that "an active gambler (who) devot(es) his full time to gambling activities" (id. at 372) is engaged in a trade or business. The Tax Court's abandonment of the goods-or-services test was initially rejected by the courts of appeals. See Estate of Cull v. Commissioner, 746 F.2d 1148 (6th Cir. 1984), rev'g 45 T.C.M. (CCH) 691 (1983), cert. denied, No. 84-1310 (June 10, 1985); Gajewski v. Commissioner, 723 F.2d 1062 (2d Cir. 1983), rev'g 45 T.C.M. (CCH) 967 (1983), cert. denied, No. 83-1715 (Oct. 1, 1984); Noto v. United States, 598 F. Supp. 440 (D.N.J. 1984), aff'd 770 F.2d 1073 (3d Cir. 1985) (Table). /11/ The Tax Court nevertheless adhered to its view and in the instant case was affirmed by the Seventh Circuit. That court thus became the first court of appeals to go on record as rejecting the goods-or-services test. Cf. Nipper v. Commissioner, 47 T.C.M. 136 (1983), aff'd mem., 746 F.2d 813 (11th Cir. 1984) (Table) (affirming the Tax Court without opinion). In rejecting the goods-or-services test, the court of appeals held that an activity is a "trade or business" for tax purposes if it "can be termed a livelihood or occupation within the ordinary meanings of those terms" (Pet. App. 13a (footnote omitted)). This holding appears to reflect a perhaps understandable judicial reaction to the arguably harsh consequences of applying the goods-or-services test -- and thus subjecting respondent to minimum tax -- in this particular case. As we shall now explain, however, the court of appeals' resolution of the question is unsound under existing law and is at odds with the basic structure of the Code. B. The Court Of Appeals' Abandonment Of The Goods-Or-Services Test Is Premised On A Misconception Of The Structure Of The Code And Is At Odds With This Court's View Of The Trade Or Business Requirement 1. The court of appeals concluded that a taxpayer should be considered to be carrying on a "trade or business" for federal tax purposes if his activities "can fairly be characterized as a livelihood, occupation or means of earning a living" (Pet. App. 13a). This broad definition has intuitive appeal, and we do not regard it as an unreasonable one as a matter of first principles. The Internal Revenue Code would have suffered no loss of rationality if Congress had chosen to define "trade or business" in this way, or if this Court had adopted such a judicial construction of the term. But the fact is that the words "trade or business" have not been given such an expensive reading under the tax law as we know it. Both the structure of the Code and the decisions of this Court show that the definition put forth by the court of appeals is incorrect. a. The court of appeals' error seems to derive principally from its belief that the Code embodies a fundamental dichotomy between "business expenses," for which deductions are allowable, and "personal, living, or family expenses" (I.R.C. Section 262), for which deductions are not allowed. See Pet. App. 10a, 13a. "As a general matter," the court stated (id. at 10a), "items associated with the carrying on of a trade or business are deductible while non-business items are not." But this statement is a substantial oversimplification. Section 165(c)(2) of the Code, for example, allows a deduction for "losses incurred in any transaction entered into for profit, though not connected with a trade or business." Section 212 similarly permits a deduction for ordinary and necessary expenses incurred "for the production or collection of income" or for the "management, conservation or maintenance" of income-producing property, even though such expenses are not incurred in connection with a trade or business. Neither of these sections, obviously, concerns "personal, living, or family expenses" of the sort rendered nondeductible by Section 262. As these provisions show, the structure of the Code is more complex than the court of appeals believed. Rather than incorporating a dichotomy between "business" and "personal" expenses, the Code in reality differentiates among three types of activities and their associated expenses. Judge Friendly has succinctly described this framework as follows (Trent v. Commissioner, 291 F.2d at 670-671): Throughout the Internal Revenue Code there runs a distinction between those expenses and losses incident to the endeavor to earn a livelihood by "holding one's self out to others as engaged in the selling of goods or services," * * * those incident to other activities that are pecuniarly motivated, * * * and those incident to activities that are not. Deductions of the first class are usually allowed fully, some of the second and third only under limitations, and some, especially of the third class, not at all. The words which Congress has long used to mark off the first class are "trade or business" * * *. This Court has also emphasized the tripartite division of expenditures into personal expenses, "trade or business" expenses, and nonbusiness expenses "incurred for the production of income." In Whipple v. Commissioner, 373 U.S. at 197, the Court focused on the difference between the two types of income-producing activity, distinguishing between a "trade or business" and "other activities pursued for profit." In United States v. Gilmore, 372 U.S. 39 (1963), the Court focused on the two categories other than "trade or business," differentiating between a "'seeker after profit who can deduct the expenses incurred in that search * * * (and) a creature satisfying his needs as a human and those of his family but who cannot deduct such consumption and related expenditures'" (id. at 44, quoting S. Surrey & W. Warren, Cases on Federal Income Taxation 272 (1960)). /12/ The court of appeals' conclusion -- that any activity that can be described as a person's "livelihood" necessarily must be a "trade or business" because it is not a purely personal activity -- thus rests on a faulty premise. Such an activity may fall, and in the case of a person gambling for his own account does fall, into the intermediate category of income-producing activities that do not constitute a "trade or business." b. The court of appeals also supported its rejection of the goods-or-services test by suggesting (Pet. App. 20a) that such a standard is inconsistent with this Court's decision in Higgins. The test, of course, is fully consistent with the holding of that case since the taxpayer there -- an investor who managed his own securities portfolio -- did not in fact hold himself out as offering goods or services to others. Indeed, the goods-or-services test was enunciated by Justice Frankfurter in the factual setting of an investor. See Deputy v. du Pont, 308 U.S. at 492-493. In positing an inconsistency with Higgins, the court of appeals relied not on any conflict in holding or result, but rather on the assumption that Higgins set forth a test -- a so-called "facts and circumstances" test -- that is incompatible with the goods-or-services standard (Pet. App. 20a). The Court in Higgins did state (312 U.S. at 217) that one must examine all the facts of each case in order to determine whether the taxpayer is in a "trade or business." But this statement, in and of itself, obviously sets forth no "test," for it does not purport to establish any substantive legal standard against which the facts, once they have been found, are to be measured. The Second Circuit in Gajewski (723 F.2d at 1066-1067) cogently explained the fallacy of the idea that Higgins established some sort of free-standing "facts and circumstances" test: The "facts and circumstances" approach does not describe a standard at all; it is instead a predicate for application of a legal test. One must first find the relevant "facts and circumstances" in every case before applying the proper standard to those facts. To describe "facts and circumstances" as a test is therefore to adopt a misnomer; the phrase amounts to a non-test. Once the facts and circumstances are ascertained there remains the problem of deciding upon a fair and reasonable standard for determining whether the taxpayer is engaged in a trade or business. See also Estate of Cull, 746 F.2d at 1151. It is undisputed that, under Higgins, the decision whether a particular taxpayer is engaged in a trade or business must be made by examining the facts and circumstances of the particular case. But the goods-or-services standard is fully consistent with, and actually complements, this facts-and-circumstances approach, because it provides a substantive legal standard against which the facts of a particular case are to be judged. Contrary to the court of appeals' view, it is not the goods-or-services test, but rather it is the broad definition of "trade or business" that the court of appeals itself adopted, that cannot sensibly be reconciled with this Court's decision in Higgins. The taxpayer in Higgins engaged, on a continuous and regular basis, in a course of activity that produced a substantial portion of his income. His investment activities certainly qualified as his "livelihood" or "means of earning a living" as much as did the taxpayer's gambling activities in the instant case. Under the test posited by the court of appeals, therefore, it would seem that investing for one's own account in Higgins, no less than gambling for one's own account here, would qualify as a "trade or business." Yet the Court in Higgins held precisely to the contrary, and Congress, though it made a legislative response to Higgins by adding what is now Section 212 of the Code (see note 7, supra), did not alter the Court's holding that a person whose occupation is investing is not in a trade or business. The court of appeals made no serious effort to explain how the result in Higgins can be reconciled with the broad definition of "trade or business" that it adopted here. Rather, the court simply stated in conclusory fashion that managing one's investments is an inherently "personal" activity, no matter how extensive (Pet. App. 13a-14a). But this reasoning is variously flawed. To begin with, investment activities cannot be labeled "personal" in a technical tax sense, since, if they were indeed "personal, living, or family expenses," they would be nondeductible under Section 262. Yet investment expenditures are indisputably deductible as expenses incurred "for the production or collection of income" under Section 212. And even if managing one's investments could be colloquially described as a "personal" activity -- in the sense that it concerns one's own assets and is designed to benefit oneself and one's family -- it is not apparent why gambling for one's own account is any less "personal" than investing for one's own account. At bottom, the court of appeals' attempted distinction of Higgins seems to reflect a desire to confine Higgins to its facts, that is, to the situation of a rich investor managing his wealth. But the court of appeals has articulated no principled basis for thus limiting that decision. The fact is that the court of appeals' rationale is irreconcilable with the holding of Higgins, and no exercise in ipse dixit can alter that fact. c. Although this Court has never given a comprehensive definition of the term "trade or business," either in Higgins or in later cases, it has made clear statements about the scope of that term that are squarely at odds with the definition advanced by the court of appeals. In Whipple v. Commissioner, for example, the Court noted that the concept of a trade or business "falls far short of reaching every income or profit making activity" (373 U.S. at 201). And in Higgins itself, the Court specifically rejected the formula advanced in Flint v. Stone Tracy Co., 220 U.S. at 171, under which the term "business" was thought to "embrace( ) everything about which a person can be employed" -- a definition quite similar to that propounded below. Indeed, the court of appeals' idea that a trade or business includes any activity that "can fairly be characterized as a livelihood" is almost identical to the definition of trade or business as "that which occupies the time, attention, and labor of men for the purpose of a livelihood or profit" (Marlin v. Commissioner, 39 T.C.M. (P-H) Paragraph 70,309 (1970)) -- a definition that Professor Bittker has labelled "clearly repudiated" by Higgins. 1 B. Bittker, Federal Taxation of Income, Estates and Gifts Paragraph 20.1.2, at 20-6 n.13 (1981). The degree to which the court of appeals' interpretation of "trade or business" deviates from that marked out by the decisions of this Court is perhaps most clearly evidenced by an examination of the court of appeals' own characterization of its definition. The court of appeals repeatedly stated its view that the term "trade or business" should be given a "broad" definition (see Pet. App. 13a, 14a, 17a). But this Court has regularly characterized the scope of "trade or business" expenses, when compared with income-producing expenses in general, as "narrow." See Whipple, 373 U.S. at 197; United States v. Gilmore, 372 U.S. at 45; see also Snow v. Commissioner, 416 U.S. at 502-503. In sum, although the court of appeals' decision could not be said to reach an unreasonable result if it had been written on a clean slate, there can be little doubt that the definition of "trade or business" that it has propounded is at odds with the basic structure of the Internal Revenue Code and marks a substantial deviation from the precedent of this Court and a long line of lower court cases. 2. The court of appeals advanced two technical objections to the goods-or-services test, but neither of these objections withstands analysis. First, the court of appeals relied on the proposition, by now well established, that an employee is engaged in a "trade or business." Pet. App. 10a-12a. See Steffens v. Commissioner, 707 F.2d at 482-483; Grosswald v. Schweiker, 653 F.2d at 59-61; Trent v. Commissioner, 291 F.2d at 670-671, 676; Noland v. Commissioner, 269 F.2d 108, 111 (4th Cir.), cert. denied, 361 U.S. 885 (1959). The court of appeals then assumed that this proposition is inconsistent with the goods-or-services test, on the theory that an employee simply works for his employer and thus does not "hold( ) (himself) out to others as engaged in the selling of goods or services" (Deputy v. du Pont, 308 U.S. at 499 (Frankfurter, J., concurring)). See Pet. App. 18a. But that latter assumption, which presumably rests on the fact that Justice Frankfurter happened to use the plural "others" in his original formulation of the test, is plainly mistaken. An employee provides valuable services directly to his employer and indirectly to the public that his employer in turn serves. And although most employees presumably work for only one employer at any particular time, all employees "hold themselves out" as offering services whenever they look for a job. For purposes of determining whether an employee is in a "trade or business," therefore, it makes no difference whether he chooses to provide his services to many persons or to one. All the courts that have considered the question have held that an employee satisfies Justice Frankfurter's formulation of the goods-or-services test and hence have concluded that an employee is engaged in "carrying on any trade or business." See Steffens v. Commissioner, 707 F.2d at 482-483; Grosswald v. Schweiker, 653 F.2d at 59-61; Trent v. Commissioner, 291 F.2d at 670-671, 676. Contrary to the court of appeals' statement, therefore, the fact that an employee is deemed engaged in a "trade or business" provides no basis for abandonment of the goods-or-services test. The court of appeals also relied on a line of cases holding that individuals who engage in frequent and short-term trading of securities for their own account are in a "trade or business" (Pet. App. 16a-19a). These cases distinguish between long-term investing and short-term trading, noting that in the latter situation the expectation of profit derives chiefly from fluctuations in the sale price of securities rather than from dividends and interest. See Moller v. United States, 721 F.2d at 813 (discussing cases). /13/ The court of appeals believed that these cases could not easily be reconciled with the goods-or-services test, stating that securities are not "goods" within the meaning of the Uniform Commercial Code, and that "traders" do not hold themselves out to the public (Pet. App. 19a). The court also stated that it found no persuasive justification for treating stock traders differently from persons who gamble for their own account (id. at 16a-18a). Although there are undeniable similarities between gambling and certain kinds of speculative "trading" -- as there are between gambling and certain kinds of speculative "investing" -- there are also significant differences between the two types of activities that the court of appeals neglected to consider. These differences make it entirely appropriate to hold that a securities "trader" is engaged in a "trade or business," whereas a gambler who bets solely for his own account is not. A "trader," as the term itself suggests, engages in the exchange of economic goods, albeit intangible ones, with other participants in the marketplace. As the Second Circuit said in rejecting the contention that a "trader" cannot satisfy the goods-or-services test, a trader "does offer goods to others in the sense that he buys and sells securities." Gajewski, 723 F.2d at 1067 n.8. See also Ditunno v. Commissioner, 80 T.C. at 374 (Tannenwald, C.J., dissenting). The fact that stocks and bonds are not defined as "goods" in Section 9-105 of the Uniform Commercial Code (1981) plainly calls for no different conclusion; the UCC deals with "investment securities" in an entirely separate section (Article VIII). More generally, the courts have long recognized that sales of commodities and securities are distinguishable from wagering transactions for many legal purposes. See, e.g., Commissioner v. Covington, 120 F.2d 768, 770 (5th Cir. 1941); Vickers v. Commissioner, 80 T.C. 394, 408 (1983); see also Board of Trade v. Christie Grain & Stock Co., 198 U.S. 236, 248-250 (1905). The Internal Revenue Code provides special treatment for gambling transactions (I.R.C. Section 165(d)), and it is clear that securities trading, no matter how speculative, is not subject to this treatment. See Jasinski v. Commissioner, 37 T.C.M. (CCH) 1, 3 (1978); see also Revenue Act of 1934: Hearings Before the Senate Comm. on Finance, 73d Cong., 2d Sess. Pt. 1, at 32 (1934). The securities trader, moreover, directly contributes to the maintenance of a securities market by the volume and frequency of his transactions, thus facilitating the orderly purchase and sale of securities by others. Placing bets for one's own account, by contrast, is an end in itself and has no connection with the nation's business or financial markets. For these reasons, it is both sensible and consonant with established precedent to conclude that a securities "trader" is engaged in a "trade or business," while a person who gambles solely for his own account, because he offers no "goods or services" to others, is not so employed. The trader-versus-investor distinction, like the goods-or-services test, has long been an accepted feature of our tax landscape. The two doctrines coexisted quite happily for 40 years until the Seventh Circuit below pronounced them incompatible. The operation of the securities markets, of course, has changed dramatically during that 40-year period, and the picture of buyers and sellers meeting face to face to trade pieces of paper on the exchange floor now has a rather nostalgic quality. But the fact that securities "traders" today may operate at many removes from concrete economic "goods" furnishes no reason to abandon either doctrine. Despite changes in technology and a proliferation of exocit financial instruments, the goods-or-services test and the trader-versus-investor distinction alike remain conceptually sound. Both doctrines are established components of the tax structure, and neither should be disturbed. C. The Goods-or-Services Test Provides A Helpful And Satisfactory Framework For Determining Trade Or Business Status Even if the goods-or-services test were not already well established in the law, adoption of that standard would be no less appropriate here. The requirement that one "hold himself out to others as offering goods and services," of course, cannot alone furnish a comprehensive definition of a "trade or business" for income tax purposes, because that term also requires that the taxpayer's activities be regular and continuous and that they be undertaken with the motive of producing income. As one component of the overall inquiry, however, the goods-or-services test supplies an appropriate minimum standard for drawing the distinction -- recognized both by the structure of the Code and by this Court's decisions -- between "trade or business" activities and other profit-seeking activities engaged in on a regular basis. The goods-or-services requirement surely comports with the common sense understanding of the term "trade or business." As the Second Circuit observed in Gajewski, 723 F.2d at 1066, a "trade or business" is "commonly viewed as meaning a commercial activity in which a person seeks to earn a livelihood by furnishing goods or services to others for a price. Holding one's self out for such purposes is the universal characteristic of a businessman or trader in a free enterprise society." When Congress decided in 1969 to define "trade or business" for purposes of the unrelated business income tax (see I.R.C. Sections 511-515), it quite naturally echoed Justice Frankfurter's words, providing that "the term 'trade or business' includes any activity which is carried on for the production of income from the sale of goods or the performance of services." Tax Reform Act of 1969, Pub. L. No. 91-172, Section 121(c), 83 Stat. 542 (now codified at I.R.C. Section 513(c)). /14/ Interpreting the term "trade or business" to encompass a person who spends his days at the racetrack gambling for his own account stretches well beyond this ordinary understanding of the statutory language. What the court of appeals has done in essence is to substitute the words "occupation or livelihood" for the words actually used by Congress. The goods-or-services standard provides a workable index for differentiating a "trade or business" from other profitmaking activities. In the gambling context, for example, the test enables both taxpayers and the Commissioner to identify with relative certainty which participants in the gaming arena are engaged in a trade or business. Those who provide goods or services to others -- such as casino operators, bookmakers, publishers of racing forms and the like -- are plainly subject to trade-or-business treatment; those who merely gamble for their own account are not. Under the court of appeals' view, by contrast, every gambler, whether his level of activity comes closer to "occasional" or "full-time," will be subject to an ad hoc inquiry -- with results that cannot easily be predicted in advance -- as to whether he is engaged in a "trade or business." /15/ This sort of uncertainty is undesirable from the perspective of both taxpayers and the Commissioner. See Comment, Continuing Vitality of the "Goods or Services" Test, 15 U. Balt. L. Rev. 108, 128 (1985); Comment, Defining "Trade or Business" Under the Internal Revenue Code: A Survey of Relevant Cases, 11 Fla. St. U.L. Rev. 949, 976-977 (1984). The goods-or-services standard provides a sensible test that supplies a degree of predictability and order; it is both "administratively workable and fair to taxpayers" (Gajewski v. Commissioner, 723 F.2d at 1067). It is undeniable that the goods-or-services test, as applied to this particular taxpayer during his 1978 tax year, visits somewhat harsh consequences. The respondent's gambling activities yielded him both a net loss and a $2,142 minimum tax liability. But this result in our view points to no error in the Commissioner's determination that respondent was not engaged in a trade or business during 1978. Rather, it points to the perhaps unfortunate draftsmanship of a minimum tax provision that included gambling losses as tax preference items. The proper solution to the problem -- a solution that Congress has already enacted for years after 1982 -- is to change the minimum tax treatment, not to scuttle the goods-or-services test. /16/ Apart from the transitory inequity of that now-superseded tax, there is nothing inherently unreasonable or unfair about holding that people who gamble for their own accounts are not in a "trade or business." Indeed, a contrary holding could cause many gamblers to be subject to self-employment tax, and they might well decry such treatment. Compare Gentile v. Commissioner, 65 T.C. 1 (1975), with Ditunno v. Commissioner, 80 T.C. 362 (1983). The history of litigation on the question presented shows all too well that predictions about the equities furnish an uncertain guide to decision. What is constant, and what we urge be preserved, is the wisdom and sense of the words that Justice Frankfurter penned some 46 years ago. BRUCE R. ELLISEN Attorneys CONCLUSION The judgment of the court of appeals should be reversed. Respectfully submitted. CHARLES FRIED Solicitor General ROGER M. OLSEN Assistant Attorney General ALAN I. HOROWITZ Assistant to the Solicitor General JONATHAN S. COHEN JUNE 1986 /1/ Respondent reported his net gambling loss of $2,032 on Schedule E (Supplemental Income Schedule) of his return, but he did not deduct that amount in arriving at adjusted gross income or claim that amount as an itemized deduction (Pet. App. 23a; J.A. 10-11). /2/ Unless otherwise noted, all statutory references are to the Internal Revenue Code of 1954 (26 U.S.C.), as amended (the Code or I.R.C.). /3/ Section 165(d) allows losses from wagering transactions to be deducted, but only to the extent of the gains from such transactions. Thus, a gambler whose losses exceed his winnings over the course of the tax year may not use the net loss from gambling to offset income from other sources. Gambling winnings and losses are not netted in determining a taxpayer's gross income; rather, gambling winnings are includable in gross income and gambling losses (to the extent deductible) are deductions. /4/ Section 57(a)(1) as in effect in 1978 defined "items of tax preference" to include "adjusted itemized deductions," which in turn were defined by Section 57(b)(1)(A) to exclude "deductions allowable in arriving at adjusted gross income." Gambling losses are generally considered itemized deductions (I.R.C. Section 63(f)) and therefore would have been "items of tax preference" in 1978 unless they were "attributable to a trade or business carried on by the taxpayer" (I.R.C. Section 62(1)), in which case they would have been "above-the-line" deductions "allowable in arriving at adjusted gross income" under Section 62. This statutory scheme was amended by the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, Section 201(a), 96 Stat. 411. For tax years after 1982, gambling loss deductions are explicitly excluded from the minimum tax base. See I.R.C. Section 55(b)(1)(B) and (e)(1)(A). Thus, regardless of the outcome of this case, for tax years after 1982 taxpayers like respondent would not be subject to any minimum tax liability because of their gambling-loss deductions. /5/ There are categories of expenses and losses that are either not deductible or subject to less favorable tax treatment when they are not incurred in the course of carrying on a trade or business. See I.R.C. Section 166(d) (bad debts); I.R.C. Section 280A(c)(1) (home-office expenses). On the other hand, self-employed persons engaged in a trade or business are liable to pay self-employment tax, which is the analogue to the social security tax paid by employers and employees. See I.R.C. Sections 1401, 1402(a). More generally, because most trade-or-business expenses are "above-the-line" deductions that reduce a taxpayer's adjusted gross income, whereas expenses incurred in connection with nonbusiness income-producing activities (I.R.C. Section 212) are "below-the-line" itemized deductions, the resolution of the question presented here will affect the amount of a taxpayer's adjusted gross income. That in turn will often affect the amount of taxable income because adjusted gross income is the basis for the calculation of the floor beneath the deductions for medical expenses (I.R.C. Section 213(a)) and casualty losses (I.R.C. Section 165(h)(2)), the ceiling on the deduction for charitable contributions (I.R.C. Section 170(b)(1)(A), (B) and (E)), and the amount of social security benefits that are included in gross income (I.R.C. Section 86(b)). /6/ Some sections of the Code do define the term for limited purposes. See I.R.C. Section 355(b)(2) (distribution of stock of a controlled corporation); I.R.C. Sections 502(b) and 513(c) (exempt organizations); I.R.C. Section 7701(a)(26) (defining "trade or business" to include "the performance of the functions of a public office"). /7/ The specific result in Higgins, that ordinary and necessary expenses incurred in managing an investment portfolio are not deductible, was changed for future years by legislative action. In 1942, Congress enacted Section 23(a)(2) of the 1939 Code to provide a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income." Revenue Act of 1942, ch. 619, Section 121, 56 Stat. 819. See generally United States v. Gilmore, 372 U.S. 39, 44-45 (1963). This provision is found in its present form at I.R.C. Section 212. Significantly, Congress approached the problem created by Higgins by expanding the category of expenses that are deductible to include those incurred in connection with the production of nonbusiness income; Congress did not expand or alter in any way the scope of the term "trade or business." /8/ Because of the interrelationship between Sections 162(a) and 62(1), it is clear that the term "trade or business" has the same meaning in both sections. /9/ Indeed, Snow's counsel candidly admitted at oral argument that Snow would not be entitled to prevail if he were seeking a deduction under Section 162 because he did not hold himself out as offering goods or services for sale during the tax year in question (Oral Arg. Tr. 9-10). The taxpayer's counsel urged the Court to fashion a new, broader standard for determining deductibility under Section 174 and to "leave the section 162 standard that has already been fashioned intact as it exists today" (Oral Arg. Tr. 17). /10/ As explained more fully above (note 5, supra), gambling losses not incurred in carrying on a trade or business were deemed "excess itemized deductions" and hence were to be included in the minimum tax base. /11/ The Commissioner was prevented from appealing Ditunno itself because it was a "small tax case." See I.R.C. Section 7463(a) and (b). /12/ The Court's decision in United States v. Generes, 405 U.S. 93 (1972), on which the court of appeals mistakenly relied (Pet. App. 10a), is to the same effect. The Court there distinguished between business and nonbusiness items, but it noted that the latter category covered "transaction(s) entered into for profit" that do not fall within the "trade or business" category (405 U.S. at 103). Indeed, the Court made quite clear that it was not positing any dichotomy, as the court of appeals did here (see Pet. App. 10a), between deductible "business" and nondeductible "nonbusiness" expenses, because it noted that the Code gives "lesser (tax) benefits, or none at all," to the nonbusiness expenses it was considering (405 U.S. at 103). /13/ Several cases have held a securities trader to be engaged in a "trade or business." See Levin v. United States, 597 F.2d 760, 765 (Ct. Cl. 1979); Commissioner v. Nubar, 185 F.2d 584, 588 (4th Cir. 1950), cert. denied, 341 U.S. 925 (1951); Fuld v. Commissioner, 139 F.2d 465, 468-469 (2d Cir. 1943). Other cases have recited the distinction between "traders" and "investors" while concluding that the taxpayer in question was not in fact engaged in a trade or business. See Moller v. United States, supra; Purvis v. Commissioner, 530 F.2d 1332, 1334 (9th Cir. 1976); Liang v. Commissioner, 23 T.C. 1040, 1043 (1955). There is no question, of course, that securities dealers and brokers -- persons who buy securities and sell them to customers, who "make a market" in securities, or who earn their living through customer commissions -- are providing goods or services and are engaged in a "trade or business." /14/ The unrelated business income tax, which applies to certain activities of otherwise tax-exempt organizations, originally included no definition of the term "trade or business." See generally United States v. American College of Physicians, No. 84-1737 (Apr. 22, 1986), slip op. 3-6. In 1967, the Treasury Department issued regulations providing that the Treasury Department issued regulations providing that the term "generally includes any activity carried on for the production of income from the sale of goods or performance of services" (Treas. Reg. Section 1.513-1(b)), and Congress in 1969 substantially incorporated that definition into the statute. The use of this definition in the unrelated business income context, in which the meaning of "trade or business" is ordinarily considered to be the same as under Section 162 (see, e.g., Professional Insurance Agents v. Commissioner, 726 F.2d at 1102; Louisiana Credit Union League v. United States, 693 F.2d 525, 532 (5th Cir. 1982)), demonstrates both the common sense appeal and the general level of acceptance of the goods-or-services test. /15/ Although the respondent in this case was apparently a "full-time" gambler after February 1978, there is no prerequisite to trade-or-business status. It is well established that a taxpayer may have more than one "trade or business," and the Tax Court has already held that a taxpayer employed in a salaried full-time job was engaged in a second "trade or business" when he gambled for his own account on an extensive and regular basis. Estate of Cull v. Commissioner, 45 T.C.M. (CCH) 691 (1983), rev'd, 746 F.2d 1148 (6th Cir. 1984), cert. denied, No. 84-1310 (June 10, 1985). /16/ The legislative history of the 1982 minimum tax amendment, which was added in conference, does not specify the reason for the change. See H.R. Conf. Rep. 97-760, 97th Cong., 2d Sess. 475 (1982). But Congress presumably acted to correct what it perceived as an inequity in situations akin to that of respondent.