'' Baxter v. United States'', 633 F. Supp. 912 (D. Nev. 1986), was a federal tax refund case, decided in 1986, regarding the U.S. federal income tax treatment of the gambling income of a professional gambler. Because of this case, gambling winnings in the United States can in certain cases be treated as business income for federal income tax purposes. This means that in some cases expenses and losses can be deducted from gambling winnings in arriving at the net earnings from self-employment, and that winnings can be placed into retirement funds.

History

William E. (Billy) Baxter, Jr., had been a gambler since the age of fourteen. For the tax years in question (years 1978 through 1981), both Baxter and the government agreed that Baxter was engaged in the activity of gambling as a "professional gambler." The parties agreed that Baxter devoted a substantial amount of time to his gambling activity, which was

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. Baxter was a pioneer in professional

who later went on to win seven

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. He was inducted into the Poker Hall of Fame in 2006. Between 1978 and 1981, Baxter claimed $1.2 million in gambling winnings.

Background

To Baxter, the 50% versus 70% maximum marginal tax rates meant the difference of $178,000. At first, Baxter refused to pay. His

Certified Public Accountant Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the English-speaking world. It is generally equivalent to the title of chartered accountant in other English-speaking countries. In the United Sta ...

, E.J. Maddocks, advised Baxter that to avoid potential penalties and interest, Baxter should instead pay the tax asserted by the government, and later sue the government for a tax refund. The preliminary issue presented to the trial court was whether Baxter, as a professional gambler, was engaged in a "trade or business" for federal income tax purposes. If Baxter was engaged in a trade or business, then his income would be taxed at what was then a maximum rate of 50% for "personal service income" (as that term was defined in the

Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 ...

at the time). If, however, Baxter was not engaged in a trade or business, the income would not be "personal service income," and the maximum tax rate would be 70%. The tax law at the time defined "personal service income" to be "earned" income within the meaning of what was then section 911(b) of the Internal Revenue Code. The court noted that "if Baxter derived his gaming income actively from his expenditure of time, energy, and skill rather than passively from his use of his property, then his gaming income constitutes 'earned income'." The trial court analyzed two alternative tests for determining whether an activity constitutes a "trade or business" for federal income tax purposes: the "goods and services" test, and the "facts and circumstances" test. The government conceded that if the "facts and circumstances" test was the appropriate test, then Baxter's activity would constitute a trade or business, resulting in the lower tax rate and a lower tax liability.

Trial court ruling

The

Nevada Nevada ( ; ) is a U.S. state, state in the Western United States, Western region of the United States. It is bordered by Oregon to the northwest, Idaho to the northeast, California to the west, Arizona to the southeast, and Utah to the east. N ...

judge who heard the case ruled in favor of Baxter, declaring "I find the government's argument to be ludicrous. I just wish you had some money and could sit down with Mr. Baxter and play some poker." The court stated:

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the Court finds that capital was not a meterial -income-producing factor in Baxter's gaming income. In fact, the Court finds that Baxter's income was derived entirely from his personal services and that the capital he used to finance his poker playing was merely a "tool of the trade." The money, once bet, would have produced no income without the application of Baxter's skills.
. . . The ellipsis (, also known informally as dot dot dot) is a series of dots that indicates an intentional omission of a word, sentence, or whole section from a text without altering its original meaning. The plural is ellipses. The term origin ...
it was Baxter's extraordinary poker skills which generated his substantial gaming income, not the intrinsic value of the money he bet.

The trial court ruled in favor of Baxter's claims for tax refunds.

Appeal

When the government appealed the ruling to the

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, that court ruled in Baxter's favor. The government threatened to take the case to the

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, but eventually backed down.

Impact

Because of this case, gambling winnings in the United States can be treated as earned income for federal income tax purposes, depending on the facts and circumstances of the case. This means that in some cases expenses and losses can be deducted from gambling winnings in arriving at the net earnings from self-employment, and that winnings can be placed into retirement funds. The case of ''Baxter v. United States'' is currently being cited by opponents of the Unlawful Internet Gambling Enforcement Act (UIGEA). Opponents of the UIGEA argue that because poker is a game of skill, the UIGEA does not apply to online poker sites.

Other countries

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and

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have similarly declared poker to be a game of skill. In the

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case in

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, the court ruled poker to be a game of luck and so subject to the Gaming Act (though this is currently under appeal).Hintze, Haley
'Skill vs. Chance' Battle Looms in Pennsylvania Poker Case
PokerNews. August 21, 2007. Accessed 1 March 2008

Notes

External links

* {{caselaw source , case = ''Baxter v. United States'', 633 F. Supp. 912 (D. Nev. 1986) , courtlistener =https://www.courtlistener.com/opinion/1677565/baxter-v-united-states/ , googlescholar = https://scholar.google.com/scholar_case?case=10868780030955539070 , justia =https://law.justia.com/cases/federal/district-courts/FSupp/633/912/1677565/ Gambling in the United States 1986 in United States case law United States taxation and revenue case law Poker in North America United States District Court for the District of Nevada cases