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2016 (Gyo-Hi) 303

2017.12.15
2016 (Gyo-Hi) 303
Minshu Vol. 71, No. 10
Judgment on a case where payouts from winning horse race betting tickets are regarded as constituting miscellaneous income as referred to in Article 35, paragraph (1) of the Income Tax Act
Case seeking revocation of reassessment of income tax
Judgment of the Second Petty bench, dismissed
Tokyo High Court, Judgment of April 21, 2016
1. Under the circumstances described in the Court’s judgment where the appellee continued for six years to purchase a large number of horse race betting tickets in the amount of several million yen to tens of millions of yen per window or in the total amount of approximately 300 million yen to 2.1 billion yen per year, by following certain purchasing patterns established based on combinations of high or low degrees of certainty of forecasts and high or low payout rates on winning occasions, with a goal of purchasing horse race betting tickets for almost all races throughout a year, and by devising ways of making a profit in terms of the annual balance of income and expenditure, and where the appellee did make a profit in terms of the annual balance of income and expenditure in each of the aforementioned years, in the amount of approximately 18 million yen for the least profitable year to approximately 200 million yen for the most profitable year, which means that the appellee continued to purchase horse race betting tickets by successfully making selections so that the ratio of return would exceed 100% on the whole, the payouts from winning horse race betting tickets received as a result of the aforementioned purchases constitute miscellaneous income as referred to in Article 35, paragraph (1) of the Income Tax Act.

Window: A window is basically a date on which horse races take place or, if horse races take place on two or more consecutive dates, the period consisting of such dates.

Ratio of return: The ratio of the total payouts from winning horse race betting tickets to the total purchase prices of all valid horse race betting tickets.

2. Under the circumstances where the appellee continuously purchased horse race betting tickets so that a profit can be made in terms of the annual balance of income and expenditure by frequently purchasing a large number of horse race betting tickets for a long time in order to mitigate the effects of contingency, and where it was inevitable to purchase losing horse race betting tickets in order to make a profit through such series of purchases of betting tickets, the purchase prices of losing horse race betting tickets constitute necessary expenses as referred to in Article 37, paragraph (1) of the Income Tax Act, since they are expenses directly required to receive payouts from winning horse race betting tickets, which constitute miscellaneous income.
(For 1) Article 34, paragraph (1) and Article 35, paragraph (1) of the Income Tax Act

(For 2) Article 35, paragraph (2) and Article 37, paragraph (1) of the Income Tax Act



Income Tax Act

(Occasional Income)

Article 34 (1) Occasional income shall be income other than interest income, dividend income, real property income, business income, employment income, retirement income, timber income, and capital gains, which is occasional income other than that arising from a continuous act for the purpose of profit and does not have the nature of a compensation for labor or other services or the transfer of assets.

(Miscellaneous Income)

Article 35 (1) Miscellaneous income shall be income that does not fall under any of the categories of interest income, dividend income, real property income, business income, employment income, retirement income, timber income, capital gains and occasional income.

(2) The amount of miscellaneous income shall be the sum of the amount listed in the following items:

(i) The amount that remains after deducting the amount of a public annuities deduction from the revenue from public annuities, etc. for the year

(ii) The amount that remains after deducting the necessary expenses from gross revenue related to miscellaneous income (excluding income related to public annuities, etc.) for the year

(Necessary Expenses)

Article 37 (1) The amount to be included in necessary expenses in the calculation of the amount of real property income, business income, or miscellaneous income (excluding the portion of the amount of business income and miscellaneous income that relates to the felling or transfer of forests and the portion of the amount of miscellaneous income that relates to public annuities, etc. as prescribed in Article 35, paragraph (3) (Definition of Public Annuities, etc.)) for the year shall be, except as otherwise provided, the amount of the cost of sales for the respective income for gross revenue, other expenses directly required to acquire said gross revenue, and selling expenses, general administrative expenses and any other expenses for operations for the year needed to generate such income (excluding expenses other than a depreciation allowance for which the obligation is not determined in the year).
The final appeal is dismissed.

The cost of final appeal shall be borne by the appellant.
Reasons for the petition for acceptance of final appeal filed by the counsels for the appeal, JOZUKA Makoto et al.



1. In this case, the appellee purchased horse race betting tickets and received payouts from winning betting tickets for a long time. The appellee filed income tax returns for the fiscal years 2005 to 2010, in which the appellee calculated the amount of total income and the amount of tax due assuming that the income corresponding to payouts from winning horse race betting tickets (hereinafter referred to as the “Income”) constituted miscellaneous income and the purchase prices of losing horse race betting tickets constituted necessary expenses. However, the appellee received from the district director of the competent tax office: (i) reassessment of income tax for each of the aforementioned fiscal years; and (ii) assessment and determination of additional tax for not filing income tax returns for the fiscal years 2005 to 2009 and of additional tax for understatement of income tax for the fiscal year 2010, both on the grounds that the Income constituted occasional income and it was not permitted to deduct the purchase prices of losing horse race betting tickets from gross revenue related to occasional income. The appellee seeks from the appellant: (i) revocation of such part of the aforementioned reassessment as exceeds the respective amounts of income tax declared for the fiscal years 2005 to 2010; and (ii) revocation of the aforementioned assessment and determination of the additional taxes.

2. An outline of the facts and other circumstances duly confirmed by the court of prior instance is as follows:

(1) a. By utilizing the service which allows customers to purchase horse race betting tickets through the Internet using a personal computer at home, the appellee continued to purchase a large number of betting tickets for JRA (Japan Racing Association) racing for the period of six years from 2005 to 2010, in the amount of several million yen to tens of millions of yen per window (basically meaning a date on which horse races take place or, if horse races take place on two or more consecutive dates, the period consisting of such dates) or in the total amount of approximately 300 million yen to 2.1 billion yen per year. The aforementioned service allowed customers to appropriate payouts from winning betting tickets for purchases of betting tickets for subsequent horse races and to settle, per window, payment for purchases of betting tickets and receipt of payouts from winning betting tickets through a bank account. During the year 2009 for which records are retained at the JRA, the appellee purchased betting tickets for 2,445 races out of all 3,453 races organized by the JRA (approximately 70.8% of all races).

b. The appellee’s method for purchasing horse race betting tickets is roughly as follows:

First, the appellee continuously collects and accumulates information on, among other things, the characteristics of all race horses and jockeys registered with the JRA and the tendencies of races at each racecourse. Then the appellee personally analyzes and assesses the information and forecasts the placing of each race by evaluating and comparing the performance of the race horses, (skills of) the jockeys, aptitude for the course, post positions (gate numbers), aptitude for the condition of the racecourse, race development, the conditions of the race horses, and other factors to be taken into account. The appellee then establishes purchasing patterns with different amounts and types of betting tickets to be purchased and different proportions of different types of betting tickets to be purchased, based on combinations of high or low degrees of certainty of forecasts and high or low payout rates on winning occasions. According to these patterns, the appellee decides on which betting tickets to purchase for the race. With regard to the number of times and frequency of purchase of betting tickets, the appellee makes it a goal to purchase betting tickets for almost all races throughout a year in order to mitigate the effects of contingency. By combining the aforementioned purchasing patterns appropriately, the appellee devises ways of making a profit in terms of the annual balance of income and expenditure (i.e., the difference between the total payouts from winning betting tickets and the purchase prices of all valid betting tickets, including losing ones).

(2) By purchasing horse race betting tickets as described in (1) above, the appellee’s ratio of return, which is the ratio of the total payouts from winning horse race betting tickets to the total purchase prices of all valid horse race betting tickets, exceeded 100% for each of the years 2005 to 2010. In terms of the balance of income and expenditure, the appellee made a profit of approximately 18 million yen, approximately 58 million yen, approximately 120 million yen, approximately 100 million yen, approximately 200 million yen and approximately 55 million yen in 2005, 2006, 2007, 2008, 2009 and 2010, respectively.

(3) The appellee filed income tax returns for the years 2005 to 2009 after the due date for filing return and income tax returns for 2010 in a timely manner, in which the appellee calculated the amount of total income and the amount of tax due assuming that the Income constituted miscellaneous income and the purchase prices of losing horse race betting tickets constituted necessary expenses. However, the appellee received from the district director of the competent tax office: (i) reassessment of income tax and assessment and determination of additional tax for not filing an income tax return for each of the years 2005 to 2009; and (ii) reassessment of income tax and assessment and determination of additional tax for understatement of income tax for the fiscal year 2010, both on the grounds that the Income constituted occasional income and it was not permitted to deduct the purchase prices of losing horse race betting tickets from gross revenue related to occasional income.

3. The appellant alleges that the Income does not constitute income arising from a continuous act for the purpose of profit but constitutes occasional income, and the appellant argues that the court of prior instance’s judgment contains a legal violation in that it regarded the Income as constituting miscellaneous income and permitted the purchase prices of losing horse race betting tickets to be deducted as necessary expenses.

4. (1) Under the Income Tax Act, income other than interest income, dividend income, real property income, business income, employment income, retirement income, timber income or capital gains rising from a continuous act for the purpose of profit is categorized not as occasional income but as miscellaneous income (Article 34, paragraph (1) and Article 35, paragraph (1)). In light of the context of the relevant provisions, it is appropriate to judge whether or not income has arisen from a continuous act for the purpose of profit by taking comprehensively into account the period, number of times, frequency and other aspects of the act, the size of profit generated, the period during which profit is generated, and other circumstances (see Supreme Court, 2014 (A) 948, Judgment of the Third Petty bench of March 10, 2015, Keishu Vol. 69, No. 2, p. 434).

Let us apply the above arguments to this case. The appellee continued for six years to purchase a large number of horse race betting tickets in the amount of several million yen to tens of millions of yen per window or in the total amount of approximately 300 million yen to 2.1 billion yen per year, by deciding to follow certain purchasing patterns established based on combinations of high or low degrees of certainty of forecasts and high or low payout rates on winning occasions, with a goal of purchasing horse race betting tickets for almost all races throughout a year in order to mitigate the effects of contingency, and by devising ways of making a profit in terms of the annual balance of income and expenditure. In light of such period, number of times, frequency and other aspects of the appellee’s purchases of betting tickets, the series of the appellee’s acts described above is regarded as a continuous act.

The appellee made a profit in terms of the annual balance of income and expenditure in each of the aforementioned six years, in the amount of approximately 18 million yen for the least profitable year to approximately 200 million yen for the most profitable year. In light of such size of profit generated, such period during which profit was generated, and other circumstances in addition to the aspects of the appellee’s purchases of betting tickets described above, the appellee is regarded as having continued to purchase betting tickets by successfully making selections so that the ratio of return would exceed 100% on the whole. Such series of the appellee’s acts described above is objectively regarded as intended for profit.

For the reasons described above, it is appropriate to understand that the Income constitutes miscellaneous income as referred to in Article 35, paragraph (1) of the Income Tax Act, since it arose from a continuous act for the purpose of profit.

(2) The Income Tax Act provides that necessary expenses, which are deducted from gross revenue related to miscellaneous income, include the amount of the cost of sales for gross revenue from the miscellaneous income and other expenses directly required to acquire said gross revenue (Article 35, paragraph (2), item (ii) and Article 37, paragraph (1)). In this case, the appellee continuously purchased horse race betting tickets so that a profit can be made in terms of the annual balance of income and expenditure by frequently purchasing a large number of betting tickets for a long time in order to mitigate the effects of contingency as described above. It is inarguably inevitable to purchase losing betting tickets in order to make a profit by such series of purchases of betting tickets. Therefore, it is appropriate to understand that the purchase prices of losing betting tickets in this case constitute necessary expenses as referred to in Article 37, paragraph (1) of the said act, since they were expenses directly required to receive payouts from winning betting tickets, which constitute miscellaneous income.

5. The court of prior instance’s judgment on the points argued above is acceptable as consistent with the above arguments. The reasons for final appeal are not acceptable.

Accordingly, the Court unanimously decides as set forth in the main text.
Justice KANNO Hiroyuki

Justice ONUKI Yoshinobu

Justice ONIMARU Kaoru

Justice YAMAMOTO Tsuneyuki
(This translation is provisional and subject to revision.)