Irving Nitzberg and Ida Nitzberg, and Sid Miller and Helen Miller v. Commissioner of Internal Revenue

This appeal from the decisions of the Tax Court in consolidated cases poses the problem of whether certain losses incurred in connection with the operation of gaming tables are to be treated as “ordinary and necessary expenses,” deductible under 26 U.S.C. § 162 (a), or as “losses from wagering transactions,” deductible only to the extent of gains, under 26 U.S.C. § 165 (d).

The facts were stipulated, and from the stipulation it appears that appellants operated the Avalon Club (Club) which rented tables at which patrons for a fee could play lo-ball draw (a variation of poker) and pan (a variation of rummy), both gambling games. The operation was in all respects legal under local laws. All of the Club *358 revenue came from table rentals and food sales. In order that there be games available to patrons, it was necessary in the business to employ shills who, when insufficient patrons were on hand, played in the card games. The shills played at the request of the Club and were given chips by the Club with which they gambled and out of which they paid table rentals. When a patron appeared wanting a place at the table, the shill was required to vacate his seat whether winning or…

(dissenting):

I respectfully dissent.

As the majority recognize, the limitations of 26 U.S.C. § 165 (d) are applicable only if the losses are sustained on wagering transactions engaged in by the Club. The Tax *359 Court held that the “shills were gambling on their own account, not on behalf of the club.” Irving Nitzberg, 44 Tax Ct. Mem. Dee. ¶ 75,154 (1975). From this it followed, thought the Tax Court, that the losses were ordinary and necessary expenses of the Club and deductible under 26 U.S.C. § 162 (a). Sharing the winnings with the shills was but a means of compensating the shills for their services.

This is not an unreasonable interpretation of the facts as stipulated. The Club’s business was not gambling but rather the rental of seats at a table at which others, including in my opinion the shills, gambled. Its entire gross income consisted solely of rentals of seats other than a small amount derived from the sale of food and beverages. It no more gambled than does one who leases a building to an operator of a casino. The Club merely provided the surroundings, of which the shills were a part, in which others could gamble. The compensation paid shills is no more wagering…

580 F.2d 357 78-2 USTC P 9667 Irving NITZBERG and Ida Nitzberg, and Sid Miller and Helen Miller, Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant. No. 76-2124. United States Court of Appeals, Ninth Circuit. Aug. 14, 1978. 1 Michael L. Paup, Atty. (argued), of Dept. of Justice, Washington, D.C., for appellant. 2 Lionel A. Rodgers, Jr. (argued), Hayward, Cal., for appellees. 3 Appeal from the Decisions of the United States Tax Court. 4 Before SNEED and TANG, Circuit Judges, and SMITH, * District Judge. RUSSELL E. SMITH, District Judge: 5 This appeal from the decisions of the Tax Court in consolidated cases poses the problem of whether certain losses incurred in connection with the operation of gaming tables are to be treated as "ordinary and necessary expenses," deductible under 26 U.S.C. § 162 (a), or as "losses from wagering transactions," deductible only to the extent of gains, under 26 U.S.C. § 165 (d). 6 The facts were stipulated, and from the stipulation it appears that appellants operated the Avalon Club (Club) which rented tables at which patrons for a fee could play lo-ball draw (a variation of poker) and pan (a variation of rummy), both gambling games.…