Billy Baxter - The Man Who Made a Difference - He went heads up against the IRS - and won

Billy Baxter, a "man about town" in Las Vegas, is a very successful 63-year-old professional gambler. He's a sports-betting expert and well-known high-stakes poker player who has seven World Series of Poker bracelets to his credit, trailing only Doyle Brunson, Johnny Chan, and Phil Hellmuth in that category. Many know him as the guy who staked Stu Ungar when he captured his third world championship in 1997.

Baxter is renowned for his gambling expertise and poker accomplishments. His greatest achievement, however, came not on the green felt, but in the courtroom, where he stood up to the IRS (William E. Baxter Jr. vs. the United States) in a case that became a landmark decision for professional poker players. That case, decided in 1986, grew out of an earlier IRS ruling that Baxter's $1.2 million in gambling winnings from 1978 to 1981 was "unearned income," in the same category as dividends and interest.

Under the tax laws that applied for those years, "unearned income" was taxable at the maximum rate of 70 percent. Baxter, who was in the 50-percent tax bracket (and paying that rate), claimed the money was earned income, like a salary, and shouldn't be in the 70-percent tax bracket. The IRS didn't see it that way. It claimed his gambling income was luck, and said he owed $178,000 more.

His CPA (E.J. Maddocks) advised Baxter to pay the money to the IRS (inasmuch as penalties and interest could pile up considerably), but to pay it under protest. Baxter did so, and then sued for return of the money. To him, it was earned income, and he was willing to fight the IRS (which had never lost a case like this) to get his money back. Baxter strongly believed that when he went to work to play a poker tournament, it was no different than when Jack Nicklaus went to work to play a golf tournament – and they should pay the same tax.

The case was heard in Reno, Nevada. The judge listened to the IRS' side and then to Baxter's side. In ruling, the judge said, "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." He ruled that the government should give Baxter his money back with interest.

The government appealed the ruling, and the case then went to a U.S. Circuit Court of Appeals. Again, the court ruled in Baxter's favor. And again, the government appealed and said it was were going to take the case to the U.S. Supreme Court.

After due consideration, the government apparently thought it might not win there, and wanted to make a deal with Baxter. He held his ground and emphatically said, "No!" The government later dropped the case and Baxter got all of his money back with interest. (The interest barely covered his attorney's fees, but it was a sweet victory, which was all Baxter wanted.) He had stepped up to the plate and hit a home run off the government.

In poker terms, the government was bluffing when it said it wanted to go to the Supreme Court – and Baxter called the bluff. Numerous articles were written about the case (including in TIME and Sports Illustrated), as it was historical in significance. Poker winnings are now considered "earned income" because of Baxter vs. the United States. This means that poker players can pay taxes on earned income, deduct expenses and losses, put money into retirement funds, and so on.

If you're a professional poker player, the next time you see Billy Baxter, go up to him and thank him for fighting the IRS 20 years ago. Your life is better because of him.

Take care.

Mike Sexton is the host of PartyPoker.com, a commentator on the World Poker Tour (which can be seen every Wednesday on the Travel Channel), and the author of Shuffle Up and Deal (which is on The New York Times best-seller list).