Rahke v. United States

REED, Justice (Ret.),

sitting by designation, dissenting, with whom JONES, Chief Judge, joins.

The facts found by the court lead us to a conclusion contrary to its judgment.

Taxation should not be subject to evasion by arrangements, no matter how clever. Since Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731 where a husband by a contract, valid inter partes, agreed that all earnings and gifts received by him should be considered as received by him and his wife as joint tenants, the rule has been that “attenuated subtleties” do not evade a tax. This “technically elegant arrangement” through “lawyers’ ingenuity” does not seem to change the fact that Rahke actually participated in the profits from the gaming operation.1 Such transactions must be “viewed as a whole.” 2

Plaintiff, prior to the arrangement with the Moose, operated a printing business that produced tickets, protected by trademarks, used in wagering baseball pool transactions. These tickets were distributed by Rahke’s organization through agents and dealers, and he received all the profits. Because of the wagering tax provisions of the Revenue Act of 1951,3 imposing a ten percent tax on the wagers, his operation lost money, and plaintiff reorganized the business by arranging for it to be operated by a fraternal organization as described in the court’s opinion and findings of fact. It was hoped that the activities, when carried on in the name of the Order of the Moose, would be exempt from the wagering tax.4

*579To get this hoped-for exemption, the plaintiff transferred his trademarks, his operating space, equipment, and trained personnel to the Moose. He advanced the money for starting the pool, $9,000. We assume that all this was done for fair compensation. He agreed to produce the necessary tickets only for the Moose. Furthermore, plaintiff helped, apparently without pay, with the estimates and orders for the tickets to carry on the enterprise. Plaintiff agrees that his printing gross for the three months of this operation was $326,297.-10.

In one sense, it is true that if the lottery was profitable to the operator, “the Moose got the profit.” But only after the plaintiff had skimmed off the cream of the profits by his sale of the baseball tickets to the Moose. Before this agreement Rahke operated the entire gambling process including the printing of the tickets, their sale, and the distribution of prizes to winners. The arrangements with the Moose effected a division of this operation into two parts. We cannot acquiesce in the majority’s view that this artificial division of what is in fact an integrated process into two parts worked any legally significant change in Rahke’s status as a “person who is engaged in the business of accepting wagers” or as a “person who conducts any wagering pool or lottery.” 5

The Moose lodge involved here was not a “dummy” in the normal use of the term in that it did enjoy some independent existence apart from its function as Rahke’s agent in this scheme. The artificiality here was in the attempt to give the appearance that these were two unrelated enterprises engaged in connected but different businesses, when in fact this was one operation run by one group of persons. If we do not completely ignore the role played by the Moose lodge in this operation as a mere subterfuge, at very least we must recognize that Rahke and the lodge were joint venturers in this business. As such they come under the conclusion enunciated in Woodard v. Campbell, 7 Cir., 1956, 235 F.2d 268, and are each liable for the tax.

We would therefore enter judgment for the defendant.

WHITAKER, Judge, took no part in the consideration and decision of this case.

. See Griffiths v. Commissioner, 308 U.S. 355, 357, 60 S.Ct. 277, 278, 84 L.Ed. 319.

. Commissioner v. Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981.

. 65 Stat. 529.

. 26 U.S.C. (I.R.C.1939) § 3285(b) (2) (B) exempted from tax: “any drawing conducted by an organization exempt *579from tax under section 101, if no part of the net proceeds derived from such drawing inures to the benefit of any private shareholder or individual.”

Id., § 101 exempted from tax: “(3) Fraternal beneficiary societies, orders, or associations, (A) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system; * * * ”

. 26 U.S.C. (I.R.C.1939) § 3285(d):

“Persons liable for tax. Each person who is engaged in the business of accepting wagers shall be liable for and shall pay the tax under this subchapter on all wagers placed with him. Each person who conducts any wagering pool or lottery shall be liable for and shall pay the tax under this subchapter on all wagers placed in such pool or lottery.”