T.C. Memo. 1996-108
UNITED STATES TAX COURT
ROBERT LIBUTTI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1042-93. Filed March 7, 1996.
P gambled at T, a casino in Atlantic City, New
Jersey, and incurred losses of $4,139,100 in 1987,
$3,080,050 in 1988, and $1,215,900 in 1989. Aside from
these losses, but as an enticement to frequent T, P
received from T "complimentary" goods and services
(comps) totaling $443,278 in 1987, $974,992 in 1988,
and $1,126,856 in 1989. On his Federal income tax
returns, P included these comps in his gross income and
relied on sec. 165(d), I.R.C., to deduct from his gross
income an equal amount of his gambling losses. Held:
Sec. 165(d), I.R.C., allows him to deduct his gambling
losses to the extent of the comps.
Bernard Wishnia, for petitioner.
Daniel K. O'Brien, for respondent.
- 2 -
LARO, Judge: This case was submitted to the Court without
trial. Rule 122(a). Robert Libutti petitioned the Court to
redetermine respondent's determinations with respect to his 1987,
1988, and 1989 Federal income taxes. Respondent determined that
petitioner was liable for the following income tax deficiencies,
additions to tax for delinquent filings under section 6651(a)(1),
additions to tax for substantial understatements of income tax
under section 6661, and an accuracy-related penalty for
substantial understatement of income tax under section 6662(a),
(b)(2), and (d):
Additions to Tax Penalty
Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6661 6662
1987 $171,386 $347,673 $42,666 ---
1988 272,298 125,036 68,075 ---
1989 314,792 27,297 --- $62,958
Following petitioner’s concession in his opening brief that
he is subject to the additions to tax under section 6651(a)(1),1
we must decide whether petitioner can deduct gambling losses to
the extent of the value of "complimentary" goods and services
1
Petitioner states in his brief that he cannot prove the
filing date of his 1987 or 1988 tax return. We consider this
statement as petitioner's concession of the allegation in his
pleading that the notice of deficiency as it relates to 1987 and
1988 is time barred under sec. 6501(a). See Rule 142(a); Mecom
v. Commissioner, 101 T.C. 374, 381-383 (1993) (discussion of the
time bar of sec. 6501(a), including the burden of proof with
respect thereto), affd. without published opinion 40 F.3d 385
(5th Cir. 1994).
- 3 -
(comps) that he received from Trump Plaza Associates, t/a Trump
Plaza Hotel and Casino (Trump). We hold he can.2 Section
references are to the Internal Revenue Code in effect for the
years in issue. Rule references are to the Tax Court Rules of
Practice and Procedure. Dollar amounts are rounded to the
nearest dollar.
Background3
Petitioner resided in Secaucus, New Jersey, when he
petitioned the Court. He filed 1987 and 1988 Federal income tax
returns on November 20, 1989.4 He filed a 1989 Federal income
tax return shortly after April 15, 1990, and he did so without
receiving an extension of time under section 6081(a). All of
petitioner's returns were prepared by a certified public
accountant, and petitioner filed them using the status of
"Married filing separate return". On each return, petitioner
reported profits from his horse brokerage business called Buck
Chance Stables (the Stables), which was conducted as a sole
proprietorship. Petitioner reported that the Stables' profits
were $3,169,881 in 1987, $785,900 in 1988, and $796,031 in 1989.
2
Accordingly, we also hold that petitioner is not liable
for the additions to tax or penalty for substantial
understatements.
3
The stipulated facts and the exhibits submitted therewith
are incorporated herein by this reference.
4
He also filed an amended 1987 tax return on or about the
same day.
- 4 -
Petitioner gambled extensively. He played mostly craps, and
he gambled mainly at Trump's casino (the Casino), which was
situated in Atlantic City, New Jersey. In 1987, petitioner spent
84 days at the Casino, gambled on 75 of these days, made an
average bet of $14,964, and had an overall loss of $4,139,100.
In 1988, petitioner spent 179 days at the Casino, gambled on
148 of these days, made an average bet of $11,526, and had an
overall loss of $3,080,050. In 1989, petitioner spent 304 days
at the Casino, gambled on 70 of these days, made an average bet
of $9,226, and had an overall loss of $1,215,900. On many of the
occasions that petitioner played craps at the Casino, his total
bets for one roll of the dice ranged from $50,000 to $100,000.
As a general practice, Trump, in its sole discretion,
voluntarily transferred comps to its patrons to induce them to
patronize the Casino. In some instances, but not in the case of
petitioner, the comps were determined by a formula that allowed
each patron to receive approximately 50 percent of Trump's
anticipated win with respect to him or her.5 The formula took
into account a patron's average bet, the hours that he or she
gambled at the Casino, the estimated number of hands that he or
she played per hour, and a factor set by Trump to reflect the
fact that the odds were in its favor. Trump's senior management
determined the type and amount of petitioner's comps using their
5
With respect to petitioner, Trump’s anticipated win was
$1,531,930 in 1987; $1,861,283 in 1988; and $542,050 in 1989.
- 5 -
sole discretion, as opposed to a direct application of this
formula. Trump's payment of the comps to petitioner was
discretionary.
A summary of petitioner’s comps is as follows:
1987
Automobiles.................... $319,300
Vacations...................... 48,778
Jewelry........................ 75,200
443,278
1988
Automobiles and accessories.... 872,920
Vacations...................... 55,560
Jewelry........................ 46,512
974,992
1989
Automobiles and accessories.... 806,858
Premium champagne.............. 40,020
Entertainment tickets.......... 279,978
1,126,856
The automobiles and accessories included five Rolls Royces
with an aggregate value of $916,300, three Ferraris with an
aggregate value of $731,400 (exclusive of additional accessories
of $14,875), one Bentley Corniche valued at $212,000 (exclusive
of a $1,890 phone installed therein), one Mercedes Benz valued at
$60,583, automobile repairs of $12,740, a $14,310 payment by
Trump so that petitioner could trade a Bentley for a Rolls, and a
$34,980 payment by Trump so that petitioner could trade a Bentley
Turbo for a Bentley Corniche. The vacations included five
European vacations with an average value of $17,568 and one
- 6 -
vacation in California valued at $16,500. The jewelry included a
Rolex watch and bracelet valued at $32,300, a 2.7-carat diamond
valued at $30,000, a bracelet and diamond earrings valued at
$23,426, a bracelet watch valued at $19,800, a tennis bracelet
valued at $12,900, and a diamond bracelet valued at $3,286. The
champagne included 178 bottles of Cristal Rosé, valued at $225 a
bottle. The tickets were to theater and sporting events such as
the Super Bowl, the NCAA basketball tournament, boxing events,
and the United States Open in Flushing Meadows, New York.
Casinos in New Jersey were prohibited from transferring cash
comps to patrons during the subject years. See N.J. Stat. Ann.
sec. 5:12-102m (West 1988).6 Trump and petitioner used at least
6
N.J. Stat. Ann. sec. 5:12-102m (West 1988) provides:
No casino licensee shall offer or provide any
complimentary services, gifts, cash or other items of
value to any person unless:
(1) The complimentary consists of room, food,
beverage or entertainment expenses provided directly to
the patron and his guests by the licensee or indirectly
to the patron and his guests on behalf of a licensee by
a third party; or
(2) The complimentary consists of documented
transportation expenses provided directly to the patron
and his guests by the licensee or indirectly to the
patron and his guests on behalf of a licensee by a
third party, provided that the licensee complies with
regulations promulgated by the commission to ensure
that a patron's and his guests' documented
transportation expenses are paid for or reimbursed only
once; or
(3) The complimentary consists of coins, tokens,
(continued...)
- 7 -
the automobile comps to attempt to circumvent this prohibition.
Trump "purchased" the automobiles on behalf of petitioner, and
petitioner contemporaneously "sold" the automobiles for cash,
most (if not all) of which he gambled at the Casino. On
November 22, 1991, the New Jersey Casino Control Commission, the
State agency that regulates casinos, held Trump liable (and fined
it $450,000) for nine separate violations of N.J. Stat. Ann. sec.
5:12-102m, stemming from Trump’s “transfer” of automobiles to
petitioner and his daughter. These automobiles, which had an
aggregate value of $1,650,838, were the automobiles and
accessories that petitioner “received” from Trump during 1988 and
1989, exclusive of the car phone, automobile repairs, and
trade-in charge of $14,310.
6
(...continued)
cash or other complimentary items or services provided
through a bus coupon or other complimentary
distribution program approved by the commission or
maintained pursuant to commission regulation; or
(4) The complimentary consists of noncash gifts,
provided that such noncash gifts in excess of $2,000.00
per trip or such greater amount as the commission may
establish by regulation provided directly to the patron
and his guests by the licensee or indirectly to the
patron and his guests on behalf of a licensee by a
third party shall be supported by documentation
regarding the reason the noncash gift was provided to
the patron and his guests, including where applicable,
a patron's player rating, to be maintained by the
casino licensee. For purposes of this paragraph, all
noncash gifts presented to a patron and the patron's
guests within any five-day period shall be considered a
single noncash gift.
- 8 -
Trump issued petitioner a 1987, 1988, and 1989 Form
1099-MISC, Miscellaneous Income, reflecting that it paid him the
above-mentioned amounts of comps as "prizes and awards".
Petitioner's 1987 amended return included in his gross income the
amount of comps shown on the 1987 Form 1099-MISC, and it claimed
that petitioner's total deductions from adjusted gross income
equaled the amount of the comps. Attached to petitioner's
amended return were: (1) A copy of the 1987 Form 1099-MISC and
(2) a statement from Trump showing that petitioner's 1987 net
gambling losses at the Casino equaled $4,139,100. The amount of
comps shown on the 1988 and 1989 Forms 1099-MISC were reported on
petitioner's 1988 and 1989 tax returns, respectively, as "Other
income" from "TRUMP PLAZA ASSOC". These returns also claimed a
matching miscellaneous itemized deduction (not subject to the
2-percent floor) for "GAMBLING LOSSES".
Respondent determined that petitioner's gross income for
1987 included the amount shown on the 1987 Form 1099-MISC.7 With
respect to petitioner's 1988 and 1989 taxable years, respondent
determined that petitioner was not entitled to deduct his
gambling losses in the amounts equal to the amounts of the comps.
According to respondent's notice of deficiency, dated
November 12, 1992, "Gambling losses are allowed only to the
extent they offset gains from wagering. Income you received from
7
Respondent's determination did not reflect the fact that
petitioner reported the comps as income on his amended return.
- 9 -
Trump Plaza Associates cannot be treated as 'gains from wagering
transactions' pursuant to Internal Revenue Code Section 165(d)."
Discussion
Legal gambling is a multi-billion-dollar industry that has
proliferated across the country and has become a major source of
adult entertainment. In an effort to attract the attention of
patrons, gaming establishments routinely offer comps. In the
instant case, Trump paid more than $2.5 million in comps to
petitioner during the subject years. The term "comps" is
generally understood to imply "free of charge". Common sense,
however, makes one strongly suspicious as to whether the comps
received by petitioner were free of charge. If there is any
truth to the time-tested adage that there is "no free lunch", one
can hardly be surprised that respondent argues that petitioner's
comps are taxable to him.
Petitioner reported the subject comps as gross income on his
1987 through 1989 Federal income tax returns (including the
amendment to his 1987 return). Petitioner argues that the comps
are not taxable to him because they are wagering gains which may
be offset by his larger wagering losses.8 See sec. 165(d).
Respondent asserts that the comps are not wagering gains because
they do not have a "strong nexus" to petitioner's wagering
8
Petitioner also makes alternative arguments that the comps
are not income. For purposes of deciding the sec. 165(d) issue,
we will assume that the comps are properly includable in gross
income.
- 10 -
transactions. Petitioner bears the burden of proof. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Section 165(d) provides that an individual may deduct his or
her "Losses from wagering transactions * * * to the extent of the
gains from such transactions". Neither the Code nor the
regulations define the phrase “gains from such transactions”.
We apply the "plain, obvious, and rational meaning." Liddle v.
Commissioner, 103 T.C. 285, 293 n.4 (1994), affd. 65 F.3d 329
(3d Cir. 1995); see also Boyd v. United States, 762 F.2d 1369,
1373 (9th Cir. 1985) (sec. 165(d) interpreted according to its
"ordinary meaning").
According to Webster's New World Dictionary 551 (3d coll.
ed. 1988), the primary meaning of the word “gain” is “an
increase; addition; specif., a) [often pl.] an increase in
wealth, earnings, etc.; profit; winnings”. (Brackets in
original.) A primary meaning of the word “from” is “out of;
derived or coming out of”. Id. at 542. The word “wager” means
“bet”, id. at 1500, which, in turn, connotes "an agreement
between two persons that the one proved wrong about the outcome
of something will do or pay what is stipulated", id. at 133. The
word “transaction” is the noun of the infinitive “to transact”,
which means “to carry on, perform, conduct, or complete
(business, etc.)”. Id. at 1419.
Assuming for purposes of applying section 165(d) that the
comps are gross income, petitioner’s comps fit within the plain
- 11 -
meaning of the statutory text. The comps from Trump increased
petitioner’s wealth, and they were derived out of his betting
transactions at the Casino. The fact that petitioner’s receipt
of the comps bore a close nexus to his gambling transactions at
the Casino cannot be denied. Petitioner would not have received
the comps from Trump but for the fact that he gambled extensively
at the Casino. Although petitioner's receipt of the comps did
not directly hinge on the success or failure of his wagers, he
received the comps incident to his direct participation in
wagering transactions. The relationship between petitioner’s
comps and his wagering is close, direct, evident, and strong.
The comps are sufficiently related to his gambling losses for
purposes of section 165(d). We hold that petitioner’s comps are
“gains from * * * [wagering] transactions” under section 165(d).
We recognize that the term "gains from * * * [wagering]
transactions" has sometimes been equated with the term "gambling
winnings". See Commissioner v. Groetzinger, 480 U.S. 23, 37
(1987) (White, J., dissenting) (full-time gambler may deduct
gambling losses "to the extent of gambling winnings" in computing
adjusted gross income); Collins v. Commissioner, 3 F.3d 625, 631
(2d Cir. 1993) (section 165(d) "only allows gambling losses to
offset gambling winnings"), affg. T.C. Memo. 1992-478. Our
current holding is not in conflict with these opinions. We agree
with Justice White and the Court of Appeals for the Second
Circuit that “gains from * * * [wagering] transactions” include
- 12 -
“gambling winnings”. We do not read those opinions, however, to
suggest that “winnings” is the only meaning for the word “gains”.
Section 165(d) refers to “gains”, not “winnings”. The word
“gains” is broader than the word “winnings”. Not only does the
word “gains” include “winnings”, it also includes an “increase in
wealth”. Webster's New World Dictionary, supra at 551. If the
Congress had wanted to limit the income prong of section 165(d)
to gambling winnings, it would have said so. Instead, the
Congress used the word “gains”, and, in so doing, allowed
taxpayers to offset their gambling losses against increases to
their wealth that arose out of their wagering transactions.
Given the clarity of section 165(d), the beginning and end of our
inquiry is the statutory text, and we apply the plain and common
meaning of that text. TVA v. Hill, 437 U.S. 153 (1978); United
States v. American Trucking Associations, Inc., 310 U.S. 534,
543-544 (1940). As we have learned from the Supreme Court,
“courts must presume that a legislature says in a statute what it
means and means in a statute what it says there. * * * When the
words of a statute are unambiguous, * * * judicial inquiry is
complete.” Connecticut Natl. Bank v. Germain, 503 U.S. 249,
253-254 (1992); citations and quotation marks omitted.
We recognize the narrow interpretation that this and other
Courts have given the income prong of section 165(d). See, e.g.,
Allen v. United States, 976 F.2d 975 (5th Cir. 1992); Boyd v.
United States, 762 F.2d 1369, 1373 (9th Cir. 1985); Bevers v.
- 13 -
Commissioner, 26 T.C. 1218 (1956). Our opinion does not depart
from this view. None of the prior cases dealt with the specific
facts at hand; namely, a gambler who received comps to induce him
to gamble. The cases dealt mostly with taxpayers who worked in
gambling establishments, as opposed to placing bets in wagering
transactions there, and who received compensation that was
different than ordinary pay. In Boyd v. United States, supra,
for example, the taxpayer was a professional poker player who
managed a casino's poker room. The casino did not participate in
the poker games, but it earned money on the games by renting its
facilities to the players for a fee. The taxpayer played in the
games to attract customers, and he received a portion of the fee.
The Court of Appeals for the Ninth Circuit held that the
taxpayer's portions of the fees were not gains from wagering
transactions under section 165(d). The Court of Appeals found
controlling that the fees were a form of rental and were not
derived directly from wagering transactions entered into by the
taxpayer himself. Id. at 1373. Similarly, in Bevers v.
Commissioner, supra, this Court faced the question of whether
former section 165(d) allowed a dealer to offset his tips against
his gambling losses. The Court held that it did not. According
to the Court, the dealer’s tips were gains from his labor as a
dealer, because the tips came to him in his employment as a
dealer. Id. at 1220-1221. Once again, the dealer did not
himself place the bet in the wagering transactions; rather, it
- 14 -
was the players who placed the bets. Accord Allen v. United
States, supra.
In conclusion, we hold that petitioner's comps are "gains
from * * * [wagering] transactions" that may be offset by
wagering losses under section 165(d). In so holding, we have
considered all arguments made by respondent with respect to
section 165(d), and, to the extent not addressed above, have
found them to be without merit. In light of our holding, we need
not consider petitioner’s alternative arguments.
To reflect the foregoing,
Decision will be entered
under Rule 155.