author: LACEY, District Judge.

text:
    Louis NOTO and Ann Noto, Plaintiffs, v. UNITED STATES, Defendant.
    Civ. A. No. 83-3952.
    United States District Court, D. New Jersey.
    June 6, 1984.

      Harvey R. Poe by Gerald Rotunda, Livingston, N.J., for plaintiffs.
    Stephen Lyons, Dept, of Justice, Washington, D.C., for defendant.
   MEMORANDUM OPINION

LACEY, District Judge.

Before this court is the motion of the Government for summary judgment. The determination of whether a genuine fact issue exists hinges upon the legal question of what legal standard is to be employed by this court to determine whether the gambling activities of plaintiff Louis Noto constitute a “trade or business” within the meaning of Sections 62(1) and 162(a) of the Internal Revenue Code (the Code), 26 U.S.C. §§ 62(1) and 162(a). The test propounded by the plaintiff necessarily involves an evaluation of the facts of the case, which, as is conceded by the Government, is inappropriate on a motion for summary judgment. On the other hand, the test advanced by the Government would be appropriate at this juncture, for the facts to which it applies are not traversed by the plaintiff.

The following facts are uncontroverted. During the calendar year 1978, plaintiff Louis Noto experienced losses from his gambling activities which exceeded his winnings from the same activities. On his original 1978 income tax return, plaintiff listed the gambling losses as an itemized deduction from adjusted gross income in arriving at taxable income and, as permitted by Section 165(d), deducted the losses only to the extent of his gambling winnings.

Upon auditing plaintiffs 1978 return, the Internal Revenue Service determined that the gambling loss deduction was properly taken but that it was an “item of tax preference” under Section, 57(a)(1) and was therefore subject to the minimum tax imposed by Section 56(a)(3). Based on its determination, the IRS assessed a deficiency in the amount of $2,763.00, which was collected by reducing the tax refund due plaintiff for the calendar year 1982.

Plaintiff then filed a claim for a refund of the $2,763.00 on the basis that the gambling losses were “attributable to a trade or business carried on by the taxpayer.” Losses in this category are “above the line” deductions, deductible from gross income to arrive at adjusted gross income pursuant to Section 62(1) and, as such, are not items of tax preference under Section 57(b)(1)(A). The IRS denied the refund claim, taking the position that the plaintiffs gambling activities did not amount to a “trade or business” within the meaning of Sections 62(1) and 162(a) of the Code.

Although the term “trade or business” appears in numerous sections of the Code, it is not defined in either the Code or the Treasury Regulations. The term has been left to judicial interpretation, and, as would be expected, there now exist different, although not necessarily inconsistent, views as to the appropriate legal standard for determining whether a taxpayer’s activities constitute a trade or business.

The standard advanced by the plaintiff is known as the “facts and circumstances” test. Its origin is in the case of Higgins v. Commissioner, 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. 783 (1941), where the Supreme Court affirmed the decision of the Board of Tax Appeals that a taxpayer’s personal investment activity did not amount to a trade or business. Writing for the Court, Justice Reed stated, “[t]o determine whether the activities of a taxpayer are ‘carrying on a business’ requires an examination of the facts in each ease.” 312 U.S. at 217, 61 S.Ct. at 478. This ostensibly innocuous language has been construed by the United States Tax Court as mandating an ad hoc evaluation of the facts in each case without applying any objective criteria. See, e.g., Ditunno v. Commissioner, 80 T.C. 362, No. 12, Tax.Ct.Rep. (CTA Dec. 39,888) (CCH 1983 Regular Decisions) and Groetzinger v. Commissioner, 82 T.C. 793, No. 61, Tax.Ct.Rep. (CTA Dec. 41,238) (CCH May 25, 1984).

The standard set forth by the Government is referred to as the “goods or services” test and has its genesis in the concurring opinion of Justice Frankfurter in Deputy v. du Pont where he stated, “ ‘... carrying on any trade or business,’ within the contemplation of § 23(a) [statutory predecessor to Section 162], involves holding one’s self out to others as engaged in the selling of goods or services.” 308 U.S. 488, 499, 60 S.Ct. 363, 369, 84 L.Ed. 416 (1940). The Government maintains that while a court must necessarily examine all the facts and circumstances of a taxpayer’s activities, it must first find that the taxpayer holds himself out to others as providing goods or services before it can conclude that his activities constitute a trade or business. Thus, in the Government’s view, the “goods or services” standard is a threshold requirement which must be met before a taxpayer’s activities may be considered to a trade or business.

It is undisputed, for the purpose of this motion, that for the year in question, plaintiff devoted a substantial amount of his time and effort to gambling. On a daily basis, plaintiff attended one of several racetracks, purchased racing forms and programs in order to handicap the races, and placed wagers on the races. He spent a substantial portion of his time gathering information for handicapping, which included videotaping races broadcast on television and conferring with owners and trainers or race horses. He maintained records of his gambling winnings and losses along with the daily racing forms used and the handicapping notes relied upon. He estimates that he spent approximately 60% of his time per week toward producing income in such a manner, while 30% of his time was devoted to his work with the Essex County Welfare Board and 10% was left for leisure. All of his gambling activity, however, was for his own benefit. That is, plaintiff used his own money for the wagers and at no time did he ever place bets for others or offer himself out to others as a horse racing consultant. Thus, if the “goods or services” standard is the appropriate test, then there is no genuine issue of material fact and summary judgment may be entered in favor of the Government.

The parties disagree as to which test has been adopted in the Third Circuit, each pointing to authority which supports its position. The Government maintains that the “goods and services” test was expressly adopted by the Third Circuit in Helvering v. Wilmington Trust Company, 124 F.2d 156, 158-59 (3d Cir.1941), reversed on other grounds, 316 U.S. 164, 62 S.Ct. 984, 86 L.Ed. 1352 (1942) and later applied by the court in McDowell v. Ribicoff, 292 F.2d 174, 178 (3d Cir.1961), cert. denied, 368 U.S. 919, 82 S.Ct. 240, 7 L.Ed.2d 135 (1961). The plaintiff, on the other hand, argues that the Third Circuit declared the “facts and circumstances” test to be the appropriate standard in Commissioner v. Stokes’ Estate, 200 F.2d 637, 638 (3d Cir.1953) and applied that standard in Commissioner v. Moffat, 373 F.2d 844, 846-47 (3d Cir.1967).

The arguments of the parties are well-taken. However, given the uncertainty in the law, the court is not prepared at this time to rule, as a matter of law, that a taxpayer must hold himself out to others as selling goods or services before his activities will constitute a trade or business. Accordingly, the motion for summary judgment will be denied.

In order that the disposition of this matter not be delayed, the parties are directed to pursue discovery, Should I ultimately conclude that the “facts and circumstances” test is the appropriate one, the plaintiffs activities in terms of substantiality and frequency would become material. Accordingly, this is an area that should be developed during discovery.

Moreover, given the limited factual area to be developed, there is no reason why this case cannot be tried on or about July 23, 1984. Thus, discovery should be commenced immediately. A pre-trial conference will be scheduled for July 5, 1984 at 9:00 a.m.

APPENDIX

TEXT OF I.R.C. STATUTES

I.R.C. Section 56(a): Imposition of Tax:

(a) General Rule. — In addition to the other taxes imposed by this chapter, there is hereby imposed for each taxable year, with respect to the income of every person, a tax equal to 15 percent of the amount by which the sum of the items of tax preference exceeds the greater of—

(1) $10,000, or

(2) the regular tax deduction for the taxable year (as determined under subsection (c)).

I.R.C. Section 162(a): Trade or Business Expenses:

(a) In General. — There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade, or business, including—

I.R.C. Section 62(1): Adjusted Gross Income Defined:

For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions:

(1) Trade and business deductions. —The deductions allowed by this chapter (other than by part YII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.

I.R.C. Section 63(b): Taxable Income Defined:

(b) Individuals. — For purposes of this subtitle, in the case of an individual, the term “taxable income” means adjusted gross income—

(1) reduced by the sum of—

(A) the excess itemized deductions, and

(B) the deductions for personal exemptions provided by Section 151, and

(2) increased (in the case of an individual for whom an unused zero bracket amount computation is provided by subsection (e)) by the unused zero bracket amount (if any). I.R.C. Section 165(d): Losses:

(d) Wagering Losses. — Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

I.R.C. Section 57(a)(1) & (b)(1): Items of Tax Preference: ■

(a) In General. — For purposes of this part, the items of tax preference are—

(1) Adjusted Itemized Deductions. — An amount equal to the adjusted itemized deductions for the taxable year (as determined under subsection (b)).

(b) Adjusted Itemized Deductions.—

(1) In General. — For purposes of paragraph (1) of subsection (a), the amount of the adjusted itemized deductions for any taxable year is the amount by which the sum of the deductions for the taxable year other than—

(A) deductions allowable in arriving at adjusted gross income,

(B) the deduction for person exemptions provided by Section 151,

(C) the deduction for medical, dental, etc., expenses provided by Section 213, and

(D) the deduction for casualty losses described in Section 165(c)(3),

exceeds 60 percent (but does not exceed 100 percent) of the taxpayer’s adjusted gross income for the taxable year.

I.R.C. Section 212: Expenses For Production of Income:

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—

(1) for the production or collection of income; .

(2) for the management, conservation, or maintenance of property held for the production of income; or

(3) in connection with the determination, collection, or refund of any tax.

      . Plaintiff Ann Noto is a party to this action solely because she filed a joint tax return with her husband, Louis, for the year 1978. Since the activities in question were those of Louis Noto, ail references in this memorandum shall be to Louis Noto.

      . All references are to the Internal Revenue Code as it was in effect during 1978. Statutory sections pertinent to this memorandum opinion are appended.

      . For tax years beginning after 1982, the question whether gambling losses are attributable to the carrying on of a trade or business will no longer be important for minimum tax purposes. Section 201 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. No. 97-248, 96 Stat. 411, revised the minimum tax of Section 56 to apply only to corporations. TEFRA further amended Section 55 to provide an "alternative minimum tax" on individuals that is similar to the Section 56 tax at issue here. However, under current law, deductions for gambling losses are specifically excluded from the Section 55 tax base.

      . These facts are taken from Plaintiff's Answers to Defendant's First Set of Interrogatories, which was attached to the Government's memorandum in support of its motion for summary judgment and relied upon by the Government in its motion.

      . I note, for example, the opposing positions taken by the Second Circuit in Gajewski v. Commissioner, 723 F.2d 1062 (2d Cir.1983) and the Tax Court in Groetzinger v. Commissioner, supra.


source: Caselaw Access Project

license: Public Domain

text:
    Louis NOTO and Ann Noto, Plaintiffs, v. UNITED STATES, Defendant.
    Civ. A. 83-3952.
    United States District Court, D. New Jersey.
    Sept. 21, 1984.
    See also D.C. 598 F.Supp. 436.

      Harvey R. Poe, Livingston, N.J., for plaintiffs.
    Stephen T. Lyons, Trial Atty., Tax Div., U.S. Dept, of Justice, Washington, D.C., for defendant.
   MEMORANDUM OPINION

LACEY, District Judge.

There is only one issue left to be decided in this action: whether the gambling activities of plaintiff Louis Noto during 1978 constitute a “trade or business” within the meaning of Sections 62(1) and 162(a) of the Internal Revenue Code (the Code), 26 U.S.C. §§ 62(1) and 162(a). Plaintiff says that they do and seeks to have his 1978 gambling losses treated as “above the line” deductions, deductible from gross income in arriving at adjusted gross income under Section 62(1). The Government maintains that the losses are not attributable to a trade or business, but are “items of tax preference,” as the term is defined by Section 57(a)(1), and subject to minimum tax imposed by Section 56(a). The facts have been stipulated..

During 1978, Louis Noto devoted approximately 60% of his waking time to his gambling activities. His exclusive domain was horse racing. On a daily basis, he went to one of several race tracks to study the horses and the track, review the racing programs, confer with horse owners and trainers, and place wagers on the races. He also videotaped races broadcast on television so that he could study the races even more closely. He recorded much of this data and used it in his self-devised system of handicapping to determine which wagers presented the most favorable odds. At no time, however, did he accept bets on behalf of others or offer any consulting services to others or in any way hold himself out to others as providing a service. He bet solely for his own account, and, as a result of his efforts, he won over $97,000 at the tracks that year. Unfortunately, he lost more than he won, so on his 1978 tax return he deducted the losses to the extent of his gambling winnings, as is permitted under Section 165.

Upon auditing the 1978 return, the IRS determined that, while the gambling loss deduction was properly taken, it was an “item of tax preference” and was subject to minimum tax under Section 56(a). The IRS assessed a deficiency of $2,763, which was collected by reducing the amount of plaintiffs tax refund for 1982. Plaintiff filed a claim for the refund of the $2,763 on the ground that his gambling losses were “attributable to a trade or business carried on by the taxpayer” and, therefore, not within the definition of “items of tax preference” set forth in Section 57. This lawsuit was filed when the IRS denied the refund claim.

The term “trade or business” is not defined by either the Code or the Treasury Regulations. This responsibility has been left to the courts, and, not unexpectedly, there now exists a divergence of opinion as to what standard a court should employ in determining whether a taxpayer’s activities constitute a trade or business.

One camp espouses what is known as the “facts and circumstances” test, derived from the Supreme Court decision in Higgins v. Commissioner, 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. 783 (1941), where Justice Reed wrote, “[t]o determine whether the activities of a taxpayer are ‘carrying on a business’ requires an examination of the facts in each case.” 312 U.S. at 217, 61 5. Ct. at 477. This test finds support in the United States Tax Court cases of Ditunno v. Commissioner, 80 T.C. 362 (1983) and Groetzinger v. Commissioner, 82 T.C. 793 (1984). While no single factor is controlling under this standard, consideration is generally given to the frequency and substantiality of the activities or transactions, as well as whether there is a genuine profit motive. See, e.g., Ditunno, 80 T.C. at 367. This is the theory urged upon the court by the plaintiff.

The test advanced by the Government is known as the “goods or services” test and has its origin in the concurring opinion of Justice Frankfurter in Deputy v. du Pont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416 (1940), where he stated, “ ‘... carrying on any trade or business,’ within the contemplation of § 23(a) [the statutory predecessor to Section 162], involves holding one’s self out to others as engaged in the selling of goods or services.” 308 U.S. at 499, 60 S.Ct. at 369. The Government argues that, while the court must necessarily examine all the facts and circumstances of a taxpayer’s activities, it must first find that the taxpayer holds himself out to others as providing goods or services before it can conclude that his activities constitute a trade or business. This standard was recently applied by the Second Circuit Court of Appeals in Gajewski v. Commissioner, 723 F.2d 1062 (2d Cir.1983), where it held that a full-time bookmaker was not engaged in a trade or business because he gambled solely for his own account. 723 F.2d at 1067. The court criticized the Tax Court’s adoption of the “facts and circumstances” approach as a rule of law:

The “facts and circumstances” approach does not describe a standard at all; it is instead a predicate for application of a legal test. One must first find the relevant “facts and circumstances” in every case before applying the proper standard to those facts. To describe “facts and circumstances” as a test is therefore to adopt a misnomer; the phrase amounts to a non-test. Once the facts and circumstances are ascertained there remains the problem of deciding upon a fair and reasonable standard for determining whether the taxpayer is engaged in a trade or business.

723 F.2d at 1066-67.

On the basis of the stipulated facts, it is clear that if the duPont / Gajewski “goods or services” test is applied here, then judgment must be entered in favor of the Government, for there is no dispute that plaintiff never held himself out to others as providing any sort of goods or services. My task is to divine the law in this circuit.

The first time the Third Circuit faced the question after the Supreme Court decisions of Deputy v. du Pont and Higgins was in Helvering v. Wilmington Trust Company, 124 F.2d 156 (3d Cir.1941), where it was called upon to determine whether a taxpayer’s personal investment activity in the stock market was a trade or business. The court expressed its preference for the “goods or services” formulation, reasoning that “[i]f carrying on a trade or business were taken to mean any activity for profit the deduction would be broader than intended.” 124 F.2d at 158-59. The court considered the Supreme Court’s opinion in Higgins and determined that the “facts and circumstances” approach did “not necessarily detract from the weight of Mr. Justice Frankfurter’s conception [in du Pont].” The court reasoned that the Supreme Court’s finding in Higgins that the taxpayer was not engaged in a trade or business under a “facts and circumstances” approach was not inconsistent with the earlier opinion of Justice Frankfurter in du Pont requiring that taxpayer hold himself out to others as providing goods or services.

The question came up again in Commissioner v. Stoke’s Estate, 200 F.2d 637 (3d Cir.1953), where the court affirmed the Tax Court’s finding that the taxpayer’s activities in purchasing and exploiting patents constituted a “trade or business.” 200 F.2d at 638. Although the sales transactions were largely between corporations in which the taxpayer held an interest, the court viewed the activities in locating, developing, and exploiting patents as involving “much more than the mere investment of funds in and management of corporations.” Id. With respect to the frequency and substantiality of the activity, the court stated:

It was quite clearly a personal activity in which a major portion of the [taxpayer’s] lifetime[,] thought and energy was enlisted and in which he engaged continuously and regularly throughout his business career.

Id. at 638-39. The court applied the Higgins “facts and circumstances” standard and concluded that the activities constituted a “trade or business.” Id. at 639.

In McDowell v. Ribicoff, 292 F.2d 174, 178 (3d Cir.1961), cert. denied 368 U.S. 919, 82 S.Ct. 240, 7 L.Ed.2d 135 (1961), the court applied the “goods or services” formulation in finding that a casual fiduciary’s investment activities in the management of the decedent’s estate did not amount to a trade or business. The court stated:

The phrase “trade or business” must refer not merely to Acts [sic] engaged in for profit, but to extensive activity over a substantial period of time during which the Taxpayer holds himself out as selling goods or services. [Emphasis added],

292 F.2d at 178.

The latest Third Circuit case on this subject is Commissioner v. Moffat, 373 F.2d 844 (3d Cir.1967), where the court had to decide whether the taxpayer’s activities in owning and leasing coal lands to a corporation constituted a trade or business. Without distinguishing or even citing to its earlier decision in McDowell v. Ribicoff, supra, the court stated the “facts and circumstances” formulation of Higgins and proceeded to examine the frequency and substantiality of the taxpayer’s activities. Finding that the “taxpayer spent seventy-five per cent of his time on the coal lands” and that he “devoted most of his time to the business of leasing and operating coal properties,” the court concluded that he was in a trade or business. 373 F.2d at 847.

Plaintiff argues that Moffat is inconsistent with and therefore overrules McDowell. He bases his argument on the absence in Moffat of any mention of a requirement that the taxpayer hold himself out to others as providing goods or services. He also infers, from the court’s citation to Higgins, that it chose the “facts and circumstances” test over the “goods or services” test.

I give little weight to these contentions because I do not regard the two approaches as mutually exclusive. Common sense compels a district court to examine all the facts and circumstances of each case. Whether the taxpayer holds himself out to others as providing goods or services is just one of the facts or circumstances to be considered. Thus, the court’s reference to “facts and circumstances” in Moffat should not be taken as a renunciation of its earlier statement in McDowell.

Moreover, I do not regard the court’s failure in Moffat to discuss the “goods or services” requirement as significant because there is no dispute that the taxpayer was rendering services to others by leasing coal properties to third parties. Hence, the court’s holding in Moffat is not inconsistent with the “goods or services” approach espoused in McDowell.

I conclude that McDowell v. Ribicoff supra, is the controlling law. In order to establish that he is in a trade or business, plaintiff would have to prove, at a minimum, that he “holds himself out as selling goods or services.” Supra, 292 F.2d at 178. Since plaintiff has stipulated that he wagered solely for his own account, his gambling activity did not, as a matter of law, constitute a trade or business. Accordingly, judgment will be entered in favor of the Government.

APPENDIX

TEXT OF I.R.C. STATUTES

I.R.C. Section 56(a): Imposition of Tax:

(a) General Rule. — In addition to the other taxes imposed by this chapter, there is hereby imposed for each taxable year, with respect to the income of every person, a tax equal to 15 percent of the amount by which the sum of the items of tax preference exceeds the greater of—
(1) $10,000, or
(2) the regular tax deduction for the taxable year (as determined under subsection (c)).

I.R.C. Section 162(a): Trade or Business Expenses:

(a) In General. — There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—

I.R.C Section 62(a): Adjusted Gross Income Defined:

For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions:
(1) Trade and business deductions. —The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.

I.R.C. Section 63(b): Taxable Income Defined:

(b) Individuals. — For purposes of this subtitle, in the case of an individual, the term “taxable income” means adjusted gross income—
(1) reduced by the sum of—
(A) the excess itemized deductions, and
(B) the deductions for personal exemptions provided by Section 151, and
(2) increased (in the case of an individual for whom an unused zero bracket amount computation is provided by subsection (e)) by the unused zero bracket amount (if any).

I.R.C. Section 165(d): Losses:

(d) Wagering Losses. — Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

I.R.C. Section 57(a)(1) & (b)(1): Items of Tax Preference:

(a) In General. — For purposes of this part, the items of tax preference are—
(1) Adjusted Itemized Deductions. —An amount equal to the adjusted itemized deductions for the taxable year (as determined under subsection (b)).
(b) Adjusted Itemized Deductions.—
(1) In General. — For purposes of paragraph (1) of subsection (a), the amount of the adjusted itemized deductions for any taxable year is the amount by which the sum of the deductions for the taxable year other than—
(A) deductions allowable in arriving at adjusted gross income,
(B) the deduction for person exemptions provided by Section 151,
(C) the deduction for medical, dental, etc., expenses provided by Section 213, and
(D) the deduction for casualty losses described in Section 165(c)(3),
exceeds 60 percent (but does not exceed 100 percent) of the taxpayer’s adjusted gross income for the taxable year.

I.R. C. Section 212: Expenses For Production of Income:

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund of any tax.

      . The parties have submitted this action for final disposition by the court without a jury on the basis of their statement of stipulated facts. I adopt their stipulation as the findings of the court that are required by Fed.R.Civ.P. 52.

      . Ann Noto is a party to this action solely because she and her husband Louis filed a joint return. All references to the plaintiff are to Louis.

      . All section references are to the Internal Revenue Code as it was in effect in 1978. Relevant portions are appended to this memorandum.

      . For tax years beginning after 1982, the question whether gambling losses are attributable to the carrying on of a trade or business is no longer important for minimum tax purposes. Section 201 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. No. 97-248, 96 Stat. 411, revised the minimum tax of Section 56 to apply only to corporations. TEFRA further amended Section 55 to provide an "alternative minimum tax” on individuals that is similar to the Section 56 tax at issue here. However, under current law, deductions for gambling losses are specifically excluded from the Section 55 tax base.

      . Plaintiff describes his system as a combination of "trip handicapping” and “pathfinder handicapping." He explains that he “plays” the racetrack instead of the horse, on the theory that regardless of how fast a particular horse is, its chances of winning are substantially reduced if the path in which it is to run happens to be in poor condition that day. In order to properly evaluate the degree to which a horse is biased by the track, plaintiff relies on his notes on that horse's performance in prior races.

      . A district court is not bound by the appellate decisions outside its own circuit. Cf. Massaro v. United States Lines Co., 198 F.Supp. 845, 848-49 (E.D.Pa.1961), affirmed 307 F.2d 299 (3d Cir. 1962).

      . In White’s Will v. Commissioner, 119 F.2d 619, 621-22 (3d Cir.1940), the court followed the "goods or services” formula of du Pont. However, White’s Will was decided before Higgins.

      . While it is evident that the court’s holding was based primarily on the substantiality of the taxpayer’s activities, it is not altogether clear what consideration the court may have also given to the fact that the transactions were between corporations in which the taxpayer held interest and whether this was viewed as "holding one’s self out to others.” If this formed part of the basis for the court’s holding, then its decision was overruled by the Supreme Court’s decision in Whipple v. Commissioner, 373 U.S. 193, 203 n. 10, 83 S.Ct. 1168, 1174 n. 10, 10 L.Ed.2d 288 (1963), which held that a taxpayer who merely provides services for his own corporations to create future income through those enterprises is not in a trade or business.

      . While my conclusion is mandated by what I perceive to be the law in this circuit, it was not arrived at without reservations. I see no meaningful distinction between an “active trader” in securities and a gambler such as the plaintiff. Yet, in several circuits, including the Second, the stock market speculator is accorded "trade or business” status if his trading is frequent and substantial. See, e.g., Fuld v. C.I.R., 139 F.2d 465, 468-69 (2d Cir.1943); Purvis v. C.I.R., 530 F.2d 1332, 1334 (9th Cir.1976); C.I.R. v. Nubar, 185 F.2d 584, 589 (4th Cir.1950).
      In Gajewski v. C.I.R., 723 F.2d 1062, 1067 n. 8 (2d Cir.1983), the Second Circuit attempted to distinguish the "active trader” cases from the gambler cases on the basis that the former offers goods to others in the sense that he buys and sells securities. I fail to see how the purchase of a security is materially different from the purchase of a betting slip.


author: MEREDITH, District Judge.

text:
    PERMA GREETINGS, INC., a Missouri corporation, Plaintiff, v. RUSS BERRIE & CO., INC., Defendant.
    No. 82-0620-C(C).
    United States District Court, E.D. Missouri, E.D.
    June 7, 1984.

      Robert E. Metzler, Joseph F. Devereux, Jr., St. Louis, Mo., for plaintiff.
    Roy A. Lieder, Frederick M. Woodruff, Gravely, Lieder & Woodruff, St. Louis, Mo., Charles A. Laff, Larry L. Saret, Lawrence R. Robins, Laff, Whitesel, Conte & Saret, Chicago, 111., for defendant.
   MEMORANDUM

MEREDITH, District Judge.

This matter is before the court on defendant’s motion for summary judgment. For the following reasons, defendant’s motion will be granted in part and denied in part. Summary judgment will be granted with respect to counts II and IV and denied with respect to counts I and III.

The pertinent facts are set out in the court’s memoranda of 15 February, 2 April 1984, and as follows. Plaintiff’s second amended complaint seeks recovery on four counts: count I, fraudulent misrepresentation; count II, breach of contract; count III, punitive damages; count IV, copyright infringement.

Summary judgment is justified only when, viewing the facts and inferences that may be derived therefrom in the light most favorable to the non-moving party, the moving party establishes that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Butter v. Bueckler, 706 F.2d 844, 846 (8th Cir.1983).

Contract Claim

In its 2 April order, the court dismissed count I of plaintiff’s first amended complaint because the alleged promise was unenforceable under the Statute of Frauds. See Mo.Rev.Stat. § 432.010. Count II of the second amended complaint is a repetition of count I, which was dismissed. Therefore, defendant’s motion for summary judgment will be granted, and count II will be dismissed.

Copyright Claim

Three of plaintiff’s original Mug Mat designs were denied protection by the Copyright Office because those “works do not contain any copyrightable matter, since words, titles, short phrases, lettering, coloring and slogans are not protected by copyright.” U.S. Copyright Office letter to plaintiff, 4 October 1982. These designs included the message space design on the back, similar to both plaintiff’s copyrighted products and defendant’s plastic coaster, greeting card product.

Both defendant’s and plaintiff’s products are the same size, are made of the same materials, are over-laminated and polished on one side and matted on the other side, and both have rounded corners. Plaintiff’s response to defendant’s interrogatories lists the copyrighted work infringed, the registration relative to it, and the work of defendant alleged to infringe it. Plaintiff lists 16 such infringements. Defendant, in its motion for summary judgment, exhibits 2 through Í7, has placed each of plaintiff’s works on a separate sheet of paper along side defendant’s work which allegedly infringes thereon.

Summary judgment may be proper in a copyright action where a comparison of the copyrighted work and the allegedly infringing work shows that substantial similarity is clearly lacking. O’Neill v. Dell Publishing Co., Inc., 630 F.2d 685, 690 (5th Cir.1980). Protection granted to a copyrighted work extends only to the particular expression of the idea and never to the idea itself. Sid and Marty Krofft Television v. McDonald’s Corp., 562 F.2d 1157, 1163 (9th Cir.1977). See generally, Baker v. Seldon, 101 U.S. 99, 25 L.Ed. 841 (1879). Thus, a similarity of idea presents no infringement question; only when defendant’s own expression “descends so far into what is concrete in a work as to invade its expression” does he violate the plaintiff’s right and infringe the copyright. Sid and Marty Krofft, 562 F.2d at 1163.

The substantial similarity between the copyrighted work and the alleged copy, which is required for infringement, must be substantial similarity of expression, not substantial similarity of ideas. In Original Appalachian Artworks, Inc. v. Toy Loft, 684 F.2d 821 (11th Cir.1982), the court held that OAA could not copyright the idea of a soft-sculpture doll; the copyright could extend only to the peculiar expression of the idea embodied in OAA’s “Little People” dolls. Further, although the idea-expression dichotomy failed to help the defendant in Toy Loft since the trial court found that the defendant had copied most, if not all, of the concrete features of OAA’s dolls, the court explicitly cautioned trial courts not to be swayed in an infringement action by the fact that two works embody similar or even identical ideas. Toy Loft, 684 F.2d at 829 n. 11. When viewing the similarity of expression, the court itself makes a comparison of the two works. If similarity of expression — as opposed to similarity or even identicality of ideas — is clearly lacking, then summary judgment should be invoked. O’Neill, 630 F.2d 690.

It must be recognized that summary judgment is a useful tool whereby needless trials may be avoided, and it should not be withheld in appropriate cases. Bellflower v. Pennise, 548 F.2d 776 (8th Cir.1977). Here, the court would not be justified in denying a directed verdict for the defendant at the conclusion of the jury trial. A side-by-side comparison of each two coaster products in question in this case establishes a lack of substantial similarity so striking that a directed verdict would be appropriate. Therefore, summary judgment is appropriate. Kern v. Tri-State Insurance Company, 386 F.2d 754 (8th Cir.1968).

Indeed, this court has ruled that “at the outset, it is clear that summary judgment is entirely appropriate in an action for copyright infringement.” Knickerbocker Toy Co. v. Genie Toys Inc., 491 F.Supp. 526, 528 (E.D.Mo.1980). And to arrive at summary judgment, “a side-by-side comparison of the works involved in a copyright infringement action is both proper and appropriate.” Knickerbocker, 491 F.Supp. at 528, citing McMahon v. Prentice Hall, 486 F.Supp. 1296 (E.D.Mo.1980). In McMahon, the court noted that although the issue of substantial similarity of the works is for the jury, summary judgment is not necessarily precluded. 486 F.Supp. at 1303. The test of substantial similarity is whether the resemblance would be recognized by ordinary observation, not fine analysis or argument. 486 F.Supp. at 1304. In McMahon, the court held that, despite defendants’ textbooks having presented a great many of the same ideas and common concepts in the same style employed by plaintiff, infringement did not exist because no similarity of expression existed. 486 F.Supp. at 1304.

In viewing each pair of coasters, the court bears in mind that the “theme,” the “plot,” the “ideas” always may be freely borrowed. Dellar v. Samuel Goldwyn, Inc., 150 F.2d 612, 612 (2nd Cir.1945). In no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work. 17 U.S.C. § 102(b). Examples of works not subject to copyright include the following: words and short phrases such as names, titles, slogans; familiar symbols or designs; mere variations of typographic ornamentation, lettering or coloring; ideas, as distinguished from the particular manner in which they are expressed; blank forms which are designed for recording information and do not in themselves convey information. 37 C.F.R. § 202.1 (1983). Clichéd language, phrases and expressions conveying an idea that is typically expressed in a limited number of stereotypic fashions, are not subject to copyright protection. Alexander v. Haley, 460 F.Supp. 40, 46 (S.D.N.Y.1978).

In looking at the compared works, the court will reference its discussion to defendant’s exhibits 2 through 17, the side-by-side presentations of the copyrighted works and alleged copies.

All items are mug-type coasters. The court notes, as matter of law, that the idea of such mug coasters is an idea unprotected by copyright. Indeed, plaintiff limits its complaints to the art work, in the substance of the designs as well as the boarders, and perhaps the words used. The message portion on the back is unprotected according to 37 C.F.R. § 202.1: it consists of a one line boardered area and the word message written inside the boarder near the top of the enclosed blank area.

Two of the products use the same phrase. Exhibit 10 shows use of the phrase “Hang in there.” Exhibit 16 uses the phrase “Along the way take time to smell the flowers.” Defendant’s separate exhibit 18 shows its use of the stereotypic phrase “hang in there” as early as 1979, before plaintiffs use. Further, such phrases are unprotected. Other exhibits show parallels in the use of the same words but in varied phrases, such as “enjoy” versus “I’d enjoy the day more;” “Mug me” versus “I love my mug;” and “A friend is someone special” versus “good friends are hard to find.” The ideas of enjoyment, a drinking mug, friendship, sunshine, flowers, are all unprotected by copyright. Defendant’s use thereof does not violate plaintiff’s copyrights.

The court has reviewed the ornamental boarders of each pair of works. Solid lines, butterflies, rounded corners, arrondi lines with leaves attached, or irregular solid line boarders are not protected.

Remaining to be considered is the artistic rendition on the front of the coaster. A short comparison of the works should be set out in the court’s discussion. See, e.g., Eden Toys, Inc. v. Marshall Field & Co., 675 F.2d 498, 500-501 (2nd Cir.1982).

In the following exhibits, the court finds no violation. Both works of exhibits 2 and 4 are mere words. Plaintiff’s art work on exhibit 3 is an open-eyed mouse-like creature sitting on a one-leafed flower; defendant’s art-work is a yellow mouse-like creature, eyes closed, dissimilar in appearance to plaintiff’s mouse, sitting in a tea cup, having a patch-work quilt pulled to his chin and a night cap covering his head. Plaintiff’s work on exhibit 5 is mere words; defendant’s art is a turtle. Plaintiff’s art on exhibit 6 is four men laughing; defendant’s art is a sleepy bear with a mug. Plaintiff’s art on exhibit 7 is four animals dancing; defendant has seven animals dancing. The idea of animals dancing is not protected; other than this common theme, there is no substantial similarity. Each coaster has in common a squirrel and a rabbit, however, these are not artistically similar. Plaintiff’s art on exhibit 8 is a smiling lemon; defendant’s art is a frog with a cup. Plaintiff’s art on exhibit 9 is bubbles, with a smiling A and a smiling V; defendant’s art is a rainbow with clouds attached. Plaintiff’s art on exhibit 10 is a mouse hanging onto a bent flower stem with its two front paws; defendant’s art is of a marsupial animal hanging from a different variety of flower by its tail. The theme of encouragement for a little creature to “hang in there,” who is hanging onto a bent flower, is the type of idea not protected by copyright. Plaintiff’s specific rendition is protected; however, there is no substantial similarity in the expression of the theme: the animals and flowers are completely different. Plaintiff’s art on exhibit 11 is a green creature holding a mug; defendant’s art is an animated beer glass holding an umbrella, wearing high-heels and pearls. Plaintiff’s art on exhibit 12 is a green creature without a mug; defendant’s art is a yellow-headed humanoid with two buck teeth, holding a white mug which also has a face with buck teeth. Plaintiff’s art on exhibit 13 is two frogs, floating on water; defendant’s scene is of a father and son bear fishing in a small body of water. Plaintiff’s art on exhibit 14 is a rabbit and a bee; defendant’s is a lone bovine.

Plaintiff’s art on exhibit 15 is a porcupine facing a mouse; defendant’s art is a panda following a turtle. Plaintiff’s art on exhibit 16 is a mouse smelling a large flower; defendant’s art is a mouse of dissimilar appearance smelling a group of small flowers. In this exhibit 16, as in some others, an idea is conveyed; here, “along the way take time to smell the flowers.” The court, viewing the two coasters, notes that on a motion for directed verdict it would have to find that no ordinary observer would be disposed to overlook the disparities and regard the aesthetic appeal in the art-work of the two products as the same. See, Peter Pan Fabrics, Inc., v. Martin Weiner, 274 F.2d 487, 489 (2nd Cir.1960). Here, the aesthetic impact to be considered is not of a coaster, but of the art-work thereon. The court is aware that the key to the ordinary observer test is substantial similarities, not differences. See, Durham Industries, Inc. v. Tomy Corp., 630 F.2d 905, 913 (2nd Cir.1980). While no one disputes that the copyright extends beyond a photographic reproduction of the design, numerous differences do under cut substantial similarity. Id., 630 F.2d at 913. Indeed, a defendant may legitimately avoid infringement by intentionally making sufficient changes in a work which otherwise would be regarded as substantially similar to the plaintiff’s. Id., 630 F.2d at 913 n. 11. After careful review of each pair of coasters, it is apparent that substantial similarity is lacking.

Finally in exhibit 17, each coaster shows a panda sitting amongst flowers. Such a theme is unprotected. In the artistic rendering of the theme, there is no substantial similarity. Defendant is not prohibited by copyright law from putting its own rendition of a panda on a coaster, merely because plaintiff has a copyrighted panda on its coaster. Cf. Eden Toys, supra, 675 F.2d at 500-501 (snowmen).

This copyright action, as a whole, has been built up partly upon a wholly erroneous understanding of the extent of copyright protection; and partly upon that obsessive conviction, so frequent among authors and composers, that all similarities ■between their works and any others which appear later must inevitably be ascribed to plagiarism. Dellar v. Samuel Goldwyn, Inc., 150 F.2d 612, 613 (2nd Cir.1945).

Fraud and Punitive Damage Claims

Material questions of fact remain, and therefore summary judgment is inappropriate on counts I and III. Defendant’s motion only addresses the fraud claim, insisting that the punitive damage claim stands or falls therewith. The court will rule likewise.

As defendant pointed out, under Missouri law, plaintiff must prove the following elements to maintain a fraud action: a representation, its falsity, its materiality, the speakers knowledge thereof, his intent it should be acted upon, the hearer’s ignorance of the falsity, his reliance on the truth of it, his right to so rely, and his injury. Swyden v. James H. Stanton Construction Co., 336 S.W.2d 389, 392 (Mo. 1960). The depositions and pleadings show that plaintiff alleges and states a dispute as to the following facts.

Plaintiff offered to show defendant a product to see if a joint venture were possible. Defendant agreed, before viewing the product, not to produce it on his own. (Representation). Defendant did so produce it. (Falsity). If defendant had not so promised, plaintiff would not have shown defendant the product. (Materiality). William Dawson was in a position to make such a promise for Russ Berrie & Co., and should have known if his promise would have been carried out. (Knowledge). Dawson made the statement in order to see the product. (Intent). Vaughn trusted Dawson. (Plaintiff’s ignorance of falsity). Plaintiff showed the product to defendant, thus sharing his idea. (Reliance). Plaintiff had a right to rely on defendant’s promise. The injury is that, even though plaintiff already might have begun production of the coasters (as defendant alleges), he could have marketed them through defendant, had a joint venture gone through. Defendant may not have thought of the idea on its own. Therefore, plaintiff’s revelation may have alerted defendant to the idea. By producing its own coaster, contrary to the alleged promise, it took away market share from plaintiff; thus the injury. If defendant made no such promise, it could have later produced the coaster after seeing that plaintiff introduced its own on the market. Such a right would not exist given a previous promise to the contrary.

That defendant already prevails on the copyright claim is of no consequence. Without a promise not to produce on its own, defendant could have made and sold the very coasters it did. However, from the deposition, plaintiff states that defendant agreed not to produce the product to be shown to him. That product was the plastic coaster. Defendant did produce a plastic coaster. If the finder of fact finds the elements as set out above, plaintiff may prevail on the fraud claim.

Jurisdiction

The court has jurisdiction over the remaining counts by virtue of diversity, 28 U.S.C. § 1332.

Attorney’s Fees

This issue of attorney’s fees will not be decided at this time since defendant still maintains its cause of action against plaintiff.

An order has been entered accordingly, this date.

ORDER

A memorandum dated this day is made a part of this order.

IT HEREBY IS ORDERED that defendant’s motion for summary judgment be and hereby is granted in part and denied in part. Summary judgment is granted with respect to counts II and IV; summary judgment is denied with respect to counts I and III. Counts II and IV are dismissed.


author: FRYE, Judge:

text:
    Kenneth J. LUNDY, Plaintiff-Appellant, v. UNION CARBIDE CORPORATION, a New York corporation; and Harrisons & Crosfield (Pacific), Inc., a California corporation, Defendants-Appellees.
    Civ. No. 79-821FR.
    United States District Court, D. Oregon.
    June 11, 1984.
    Kenneth J. Lundy, plaintiff-appellant, pro se.
    Jerard S. Weigler, Rick T. Haselton, Cory Streisinger, Lindsay, Hart, Neil & Weigler, Portland, Or., for defendants-appellees.
   ORDER

FRYE, Judge:

Plaintiff Kenneth J. Lundy is appealing the judgment entered in favor of defendants, as well as the court’s denial of his motion for retrial, to the United States Court of Appeals for the Ninth Circuit.

Defendants seek an order requiring Lundy to file a bond or provide other security as an undertaking for costs on appeal in the amount of $2500 pursuant to Fed.R. App.P. 7. Defendants maintain that a bond is neces°sary because Lundy designated only select portions of the transcript of the trial court proceedings as the record on appeal.

Lundy opposes the motion on several grounds. First, Lundy states his designation of the record encompasses all of the trial court record with the exception of voir dire, closing arguments, and approximately three hours of testimony. Lundy argues that the undesignated portions of the record are not relevant to the issues on appeal. Second, Lundy contends that the cost of transcribing the undesignated testimony (not voir dire and closing arguments) would be about $150 based on the invoice submitted to him by defendants for a previous transcription of a portion of the record. Third, Lundy points out that pursuant to 9th Cir.R. 4(c), which cross-references Fed. R.App.P. 10(b), defendants failed to file and serve on him a designation of additional portions of the record within the ten days following service of his designation of record on defendants. Lundy argues that he is not responsible for the defendants’ failure to follow the rules and characterizes defendants’ motion as an attempt to harass, delay, and intimidate him in pursuing his appeal. Fourth, Lundy argues that if any bond is required, it should be limited to the $150 he estimates the additional transcript of testimony will cost and that it should be offset by the costs assessed against defendants by the United States Court of Appeals for the Ninth Circuit in April, 1983 in connection with a previous appeal, in this matter.

After Lundy responded to defendants’ motion, defendants did file a cross-designation of transcript, designating all portions of the record from January 31, 1984 onward not previously designated by Lundy, including closing arguments, but also excluding voir dire and opening statements.

Fed.R.App.P. 7 provides, in pertinent part:

The district court may require an appellant to file a bond or provide other security in such form and amount as it finds necessary to ensure payment of costs on appeal in a civil case.

The requirement of an appeal bond under Appellate Rule 7 is left to the discretion of the district court. Federal Prescription Service, Inc. v. American Pharmaceutical Association, 636 F.2d 755 (D.C.Cir.1980).

The first question the court must decide is whether to require Lundy to file a bond or provide security for costs on appeal. Defendants have requested that Lundy file a bond in order to cover the costs of the transcription of additional portions of the record which were not designated by Lundy for the record on appeal. The question therefore becomes: which party is required to pay the costs of transcribing the additional portions of the record requested by defendants.

Appellate Rule 10(b) places on the appellant the burden of ordering and paying for the necessary parts of the trial transcript. 9 J. Moore, Moore’s Federal Practice ¶ 210.05[1] at 10-23 (2d ed. 1983). Appellant must order transcribed “such parts of the proceedings not already on file as he deems necessary.” Fed.R.App.P. 10(b)(1). Appellee then has ten days to designate additional parts for inclusion in the transcript. Fed.R.App.P. 10(b)(3). However, the primary responsibility for ordering necessary parts of the transcript rests with the appellant. 9 J. Moore, Moore’s Federal Practice, ¶ 210.05[3] at 10-33 (2d ed. 1983).

Because Lundy has the primary responsibility for designating and paying for the necessary parts of the transcript, the court feels it would be proper for him to file a bond to ensure payment of the additional portions of the transcript ordered by defendants.

It remains to consider the amount of the bond Lundy should file. Lundy has estimated the cost of transcribing the additional testimony designated by defendants at $150. The estimate, however, does not include the cost of transcribing the closing arguments designated by defendants. Defendants have made no attempt to estimate the costs of transcription nor to justify their request for a bond in the amount of $2,500. Accordingly, the court thinks a bond in the amount of $500 would be appropriate. Lundy additionally has argued that the amount of the bond should be offset by the costs previously assessed against defendants by the United States Court of Appeals for the Ninth Circuit. The court can find no authority for offsetting costs at this stage of the proceedings and, therefore, declines to do so.

NOW, THEREFORE, IT IS HEREBY ORDERED that plaintiff-appellant Lundy shall file an appropriate bond in the amount of $500 to ensure the cost of transcription of the additional portions of the trial transcript designated by defendants.