Baxter v. United States
Encyclopedia
William E. Baxter Jr.
v. United States 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.
. Baxter was a pioneer in professional poker
who later went on to win seven World Series of Poker
bracelets
. He was inducted into the Poker Hall of Fame
in 2006. Between 1978 and 1981, Baxter claimed $
1.2 million in gambling winnings.
, 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
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.
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:
The trial court ruled in favor of Baxter's claims for tax refunds.
Court of Appeals
, that court ruled in Baxter's favor. The government threatened to take the case to the United States Supreme Court
, but eventually backed down.
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 believe that since poker is a game of skill that the act does not apply to online poker sites.
and Denmark
have similarly declared poker to be a game of skill. In the Gutshot Poker Club
case in England
, the court ruled poker to be a game of luck and so subject to the Gaming Act (though this is currently under appeal).
Billy Baxter (poker player)
William E. Baxter, Jr. is an American professional poker player and sports bettor. He has won numerous tournament titles in his career as a professional poker player, including seven World Series of Poker bracelets....
v. United States was a federal tax refund case, decided in 1986, regarding the U.S. federal income tax treatment
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
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 pokerPoker
Poker is a family of card games that share betting rules and usually hand rankings. Poker games differ in how the cards are dealt, how hands may be formed, whether the high or low hand wins the pot in a showdown , limits on bet sizes, and how many rounds of betting are allowed.In most modern poker...
. Baxter was a pioneer in professional poker
Poker
Poker is a family of card games that share betting rules and usually hand rankings. Poker games differ in how the cards are dealt, how hands may be formed, whether the high or low hand wins the pot in a showdown , limits on bet sizes, and how many rounds of betting are allowed.In most modern poker...
who later went on to win seven World Series of Poker
World Series of Poker
The World Series of Poker is a world-renowned series of poker tournaments held annually in Las Vegas and, since 2005, sponsored by Harrah's Entertainment...
bracelets
World Series of Poker bracelet
The World Series of Poker bracelet is considered the most coveted non-monetary prize a poker player can win. Since 1976, a bracelet has been awarded to the winner of every event at the annual WSOP. Even if the victory occurred before 1976, WSOP championships are now counted as "bracelets". ...
. He was inducted into the Poker Hall of Fame
Poker Hall of Fame
The Poker Hall of Fame is the hall of fame of professional poker playing in the United States. Founded and located in Las Vegas, Nevada, it was created in 1979 by Benny Binion, the owner of the Horseshoe Casino, to preserve the names and legacies of the world's greatest poker players and to serve...
in 2006. Between 1978 and 1981, Baxter claimed $
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
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 AccountantCertified Public Accountant
Certified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...
, 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
Internal Revenue Code
The Internal Revenue Code 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 of the United States Code...
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 NevadaUnited States District Court for the District of Nevada
The United States District Court for the District of Nevada is the Federal district court whose jurisdiction is the state of Nevada. The court has locations in Las Vegas and Reno....
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:
-
- [ . . . ] the Court finds that capital was not a meterial [sic]-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. [ . . . ] 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 Ninth CircuitUnited States Court of Appeals for the Ninth Circuit
The United States Court of Appeals for the Ninth Circuit is a U.S. federal court with appellate jurisdiction over the district courts in the following districts:* District of Alaska* District of Arizona...
Court of Appeals
United States court of appeals
The United States courts of appeals are the intermediate appellate courts of the United States federal court system...
, that court ruled in Baxter's favor. The government threatened to take the case to the United States Supreme Court
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
, 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 believe that since poker is a game of skill that the act does not apply to online poker sites.
Other countries
RussiaRussia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
and Denmark
Denmark
Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark...
have similarly declared poker to be a game of skill. In the Gutshot Poker Club
Gutshot Poker Club
The Gutshot Poker Club was a poker club, bar, restaurant and internet cafe located on Clerkenwell Road, London, England. The club opened in March 2004 and closed in 2007...
case in England
England and Wales
England and Wales is a jurisdiction within the United Kingdom. It consists of England and Wales, two of the four countries of the United Kingdom...
, the court ruled poker to be a game of luck and so subject to the Gaming Act (though this is currently under appeal).