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Graham v. Green

[1925] 2 KB 37
[1886] 18 QBD 276

(Judgment by: Rowlatt J)

Between: Graham
And: Green (Inspector of Taxes)

Kings Bench Division

Rowlatt J

Subject references:
Income Tax
Livelihood gained by backing Horses at starting Price
Profits or Gains

Legislative references:
Income Tax Act 1918 - (8 & 9 Geo 5 c40) Sch D 1 (a) (ii) Cases 2, 6

Hearing date: March 10 1925
Judgment date: 11 March 1925

Judgment by:
Rowlatt J

In this case the appellant was in the habit of betting on horses at starting prices. He did it on a large and sustained scale, and he did it with such shrewdness that he made an income out of it, and it is found that substantially it was his means of living. Under those circumstances he has been assessed to income tax in respect of those emoluments, and hence this appeal.

The question arises under Case 2 and under Case 6 of Sch. D. It arises under Case 6 upon the question whether the winnings on the appellant's bets as bets are "profits or gains" within the meaning of that case. It arises under Case 2 on the question whether, assuming the winnings from the bets themselves are not profits or gains, the aggregate of his winnings, as the result of his sustained and continued action, are the profits or gains of a "vocation" or possibly, as it might have been put, of a trade or adventure within the meaning of the general words of Case 1.

Looking first at Case 6, one is faced with the difficult question of what is profit or gain. My attention, of course, was drawn to my decision in Ryall v. Hoare ( [1923] 2 K.B. 447 ), which was the case of an appellant who had guaranteed an overdraft for a company of which he was a director. He was paid a commission for it, and it was the only time in his life that he ever did anything of the sort. The question before me there was not whether a commission paid to a man for a service of this kind was a profit or gain in itself, which it obviously was, as a payment for commercial services rendered, but whether it was an annual profit or gain. In the course of my judgment I said that a mere receipt by finding an object of value, or a mere gift, was not a profit or gain, and I do not feel much doubt about that. I further said that the winning of a bet did not result in a profit or gain. Until I am corrected, I think I was right in that. Whether it is a gift or whether it is a finding, there is nothing of which there is a profit. There is no increment, there is no service, there is merely the picking up of something either by the will of the person who had it before or because there is no person to oppose the picking up. When one comes to the question of a bet, it seems to me that the position is substantially the same. What is a bet? A bet is merely an irrational agreement that one person should pay another person something on the happening of an event. A. agrees to pay B. something if C.'s horse runs quicker than D.'s or if a coin comes one side up rather than the other side up. There is no relevance at all between the event and the acquisition of property. The event does not really produce it at all. It rests, as I say, on a mere irrational agreement.

So much for Case 6. But then there is no doubt that if you set on foot an organized seeking after emoluments which are not in themselves profits, you may create, by way of a trade, or an adventure, or a vocation, a subject matter which does bear fruit in the shape of profits or gains. A different conception arises, a conception of a trade or vocation which differs in its nature, in my judgment, from the individual acts which go to build it up, just as a bundle differs from odd sticks. You may say, I think, without an abuse of language, that there is something organic about the whole which does not exist in its separate parts.

It is said that the appellant, by continually betting from his house or from any place where he could get access to the telegraph office, had set up a vocation. That is contended by the respondent on the facts of this case, and certainly the contention is one which, if sound, has very startling results. A loss in a vocation, or a trade, or an adventure can be set off against other profits and we are face to face with this result, that a person earning a profit in some recognized form of industry, but having the bad habit of frequently, persistently and continuously and systematically betting with bookmakers, might for income tax purposes set off the losses by which he had squandered the fruits of his industry against his profits of industry, a very remarkable result indeed and one, I am afraid, which would be of very wide application. Allowances are granted to the income tax payer because of the family he has to support, and we are now threatened with a further allowance in respect of the loss which he makes by habitual betting. It certainly sounds very remarkable, and would entitle a person, when he wastes his earnings by betting, to make the State a partner in his gambling. However, the question must be faced.

As I have said, there is no doubt that one might create a trade by making an organized effort to obtain emoluments which are not in themselves taxable as profits, and the most familiar instance of all, of course, is a trade which has for

its object the securing of capital increment. A person who buys an object which subsequently turns out to be worth more than he gave for it, and which he sells, does not thereby make a profit or gain for income tax purposes. But he can organize himself to do that in a commercial and mercantile way, and the profits which emerge are taxable profits, not of the transaction, but of the trade. In the same way, he may carry on the trade of selling things which he has not got and buying them when the price has fallen. That is a capital accretion, only the operations are reversed. He sells first and buys afterwards. And in that way he may make losses or he may make profits. If he makes losses, the losses cannot be said to be the results of the individual acts; they are the results of the trade as a whole. Test it in this way. A person may organize an effort to find things. He may start a salvage or exploring undertaking and he may make profits. The profits are not the profits of the findings, they are the profits of the adventure as a whole. Again he may make a loss. One cannot say that the loss was due to the failure to find. The loss is due to the trade. That is a good test, because it shows the difference between the trade as an organism and the individual acts.

So much is clear, I think, with regard to the cases of making a trade or a vocation or an adventure of obtaining differences in prices or obtaining things which are the subject of finding. The trade or vocation which has to do with difference in prices may be popularly spoken of as gambling, because there is no intention to accept or deliver the thing bought and sold. But the operations in those cases are operations in relation to the difference of prices of commodities, and there is an element of fecundity in them, and indeed those operations form the subject matter of a great deal of trade.

Now we come to betting, pure and simple. It has been settled that a bookmaker carries on a taxable vocation. What is the bookmaker's system? He knows that there are a great many people who are willing to back horses, and that they will back horses with anybody who holds himself out to give reasonable odds as a bookmaker. By calculating

the odds in the case of various horses over a long period of time and quoting them so that on the whole the aggregate odds, if I may use the expression, are in his favour, he makes a profit. That seems to me to be organizing an effort in the same way that a person organizes an effort if he sets out to buy himself things with a view to securing a profit by the difference in their capital value in individual cases.

Now we come to the other side, the man who bets with the bookmaker, and that is this case. These are mere bets. Each time he puts on his money at whatever may be the starting price. I do not think he could be said to organize his effort in the same way as a bookmaker organizes his, for I do not think the subject matter from his point of view is susceptible of it. In effect all he is doing is just what a man does who is a skilful player at cards, who plays every day. He plays to-day, and he plays to-morrow, and he plays the next day, and he is skilful on each of the three days, more skilful on the whole than the people with whom he plays, and he wins. But it does not seem that one can find, in that case, any conception arising in which his individual operations can be said to be merged in the way that particular operations are merged in the conception of a trade. I think all you can say of that man, in the fair use of the English language, is that he is addicted to betting. It is extremely difficult to express, but it seems to me that people would say he is addicted to betting, and could not say that his vocation is betting. The subject is involved in great difficulty of language, which I think represents great difficulty of thought. There is no tax on a habit. I do not think "habitual" or even "systematic" fully describes what is essential in the phrase "trade, adventure, employment, or vocation." All I can say is that in my judgment the income which this gentleman succeeded in making is not profits or gains, and that the appeal must be allowed, with costs.

Appeal allowed.

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