Olk v. United States, Civ. No. LV 2076

• Decision Date: 11 February 1975
• Docket Number: Civ. No. LV 2076
• Citation: 388 F. Supp. 1108
• Parties: Wendell OLK v. UNITED STATES of America.
• Court: U.S. District Court — District of Nevada

388 F. Supp. 1108

Wendell OLK v. UNITED STATES of America.

Civ. No. LV 2076, RDF.

United States District Court, D. Nevada.

February 11, 1975.

George Bouchard, Laguna Hills, Cal., Bart M. Schouweiler, Reno, Nev., for plaintiff.

Lawrence J. Semenza, U. S. Atty., John R. Lusk, Asst. U. S. Atty., Las Vegas, Nev., Yale F. Goldberg, Tax Div., Dept. of Justice, Washington, D.C., for defendant.

MEMORANDUM, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

CLARY, Senior District Judge (Sitting by Special Designation).

This action for a tax refund was tried to the Court on January 20, 1975. The case presented by plaintiff was brief and the Government offered no testimony, contenting itself with the introduction of two exhibits. Although only one issue is presented for resolution, the outcome is of some interest in Nevada. The Court must determine whether monies or "tokes" which were received by plaintiff from patrons of the casinos where he worked were taxable income or gifts.

Gross income, from which taxable income is computed, is succinctly defined:

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

(1) compensation for services, including fees, commissions, and similar items; . . . . Int.Rev.Code of 1954, § 61.

Tips are specifically included in gross income according to the applicable regulation:

(a) In general. (1) wages, salaries, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, . . . are income to the recipients unless excluded by law . . . . 26 C.F.R. § 1.61-2(a)

Plaintiff contends that the monies are not income as defined above, but gifts from the patrons specifically excluded from gross income. "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. . . ." Int.Rev.Code of 1954, § 102(a).

This divergence of opinion is the heart of the controversy and presents a nice question. To characterize the monies received as "tips," which the Government does, assumes the answer. Such monies will, therefore, be referred to as "tokes," a colloquial term, until their legal and taxable status is determined.

FACTS

The underlying facts do not present an area of significant dispute. In 1971 plaintiff was employed as a craps dealer in two Las Vegas gambling casinos, the Horseshoe Club and the Sahara Hotel. The basic services performed by plaintiff and other dealers were described at trial. There are four persons¹ involved in the operation of the game, a boxman and three dealers. One of the three dealers, the stickman, calls the roll of the dice and then collects them for the next shooter. The other two dealers collect losing bets and pay off winning bets under the supervision of the boxman. The boxman is the casino employee charged with direct supervision of the dealers and the play at one particular table. He in turn is supervised by the pit boss who is responsible for several tables. The dealers also make change, advise the boxman when a player would like to drink and answer basic questions about the game for the players.

Dealers are forbidden to fraternize or engage in unnecessary conversation with the casino patrons, and must remain in separate areas while on their breaks. Dealers must treat all patrons equally, and any attempt to provide special service to a patron is grounds for termination.

At times, players will give money to the dealers or place bets for them. The witnesses testified that most casinos do not allow boxmen to receive money from patrons because of their supervisory positions, although some do permit this. The pit bosses are not permitted to receive anything from patrons because they are in a position in which they can insure that a patron receives some special service or treatment.

The money or tokes are combined by the four dealers and split equally at the end of each shift so that a dealer will get his share of the tokes received even while he is taking his break. Uncontradicted testimony indicated that a dealer would be terminated if he kept a toke rather than placed it in the common fund.

Casino management either required the dealers to pool and divide tokes or encouraged them to do so. Although the practice is tolerated by management, it is not encouraged since tokes represent money that players are not wagering and thus cannot be won by the casino. Plaintiff received about $10 per day as his share of tokes at the Horseshoe Club and an average of $20 per day in tokes at the Sahara.²

Plaintiff's 1971 tax return was audited by the Internal Revenue Service and he was assessed a total of $792.42 in additional taxes, interest and penalties based on the tokes from the casinos which had not been reported as income. Plaintiff paid this amount, filed a timely Claim for Refund, and then commenced this suit.

DISCUSSION

A payment of money cannot be both compensation for services and a non-taxable gift. The terms are mutually exclusive. Bogardus v. Commissioner, 302 U.S. 34, 58 S.Ct. 61, 82 L.Ed. 32 (1937). In the leading case of Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960), the Supreme Court defined the term "gift" for purposes of the Internal Revenue Code.

A gift in the statutory sense, on the other hand, proceeds from a "detached and disinterested generosity," . . . "out of affection, respect, admiration, charity or like impulses." And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's "intention." 363 U.S. 278, 285-86, 80 S.Ct. 1190, 1197 (1960) (citations omitted).

Of equal importance for purposes of this case is what the Supreme Court excluded from the definition of a gift, "And, conversely, `Where the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it.'" In the accompanying footnote, the Court referred to cases including "tips" in gross income as "classic examples" of situations where the payment was not a gift for tax purposes, citing Roberts v. Commissioner, 176 F.2d 221 (9th Cir. 1949). Commissioner v. Duberstein, 363 U.S. 278, 285, fn. 7, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960).

The characterization given to the transaction by the donor is not determinative; there must be an objective inquiry made to determine whether a gift in name is also one in fact. Commissioner v. Duberstein, supra; Bogardus v. Commissioner, supra. Accordingly, whether the payment is a gift or taxable income is a question of fact to be determined by a consideration of the specific circumstances of the case, Commissioner v. Duberstein, supra; Woody v. United States, 368 F.2d 668 (9th Cir. 1966), emphasizing the experiences of the fact-finder with human nature.

Decision of the issue presented in these cases must be based ultimately on the application of the fact-finding tribunal's experience with the mainsprings of human conduct to the totality of the facts of each case. The nontechnical nature of the statutory standard, the close relationship of it to the data of practical human experience, and the multiplicity of relevant factual elements, with their various combinations, creating the necessity of ascribing the proper force to each, confirm us in our conclusion that primary weight in this area must be given to the conclusions of the trier of fact. Commissioner v. Duberstein, 393 U.S. 278, 289, 80 S.Ct. 1190, 1198 (1960).

For present purposes, a tip may be defined as a payment of money to an individual who has rendered a service, either as additional compensation because of the quality or promptness of the service or, as a result of social compulsion, because the recipient feels obligated to give the individual a sum of money beyond what is charged for the service itself. In either event, the giving of a tip is closely related to the performance of a personal service and has become "expected" to the extent that it is no longer, if it even was, the product of "detached and disinterested generosity." Because of the tie to services rendered and social compulsion, the status of tips as taxable income is well established. Andrews v. United States, 295 F.2d 819, 155 Ct.Cl. 584 (1961), cert. denied, 369 U.S. 829, 82 S.Ct. 846, 7 L. Ed.2d 794 (1962) (taxicab driver); Roberts v. Commissioner, 176 F.2d 221 (9th Cir. 1949) (taxicab driver); Meneguzzo v. Commissioner, 43 T.C. 824 (1965) (waiter).

Plaintiff does not dispute the fact that tips are taxable, but instead strongly argues that tokes are not tips. He is challenged in this contention by the Government which has cited Bevers v. Commissioner, 26 T.C. 1218 (1956) as dispositive of the issue. The facts of Bevers are identical with those in the present case. The petitioner, Bevers, was employed in Las Vegas casinos as a dealer in blackjack, roulette and dice (craps). His duties as a craps dealer were the same as those performed by plaintiff here, and the same rules prohibiting fraternization with patrons applied. Dealers on each shift pooled the money they received from patrons, and management acquiesced in the practice.

Relying on its decision in Roberts, affirmed by the Ninth Circuit, the Tax Court held that the "side money" received by petitioner constituted taxable income. This Court, having scrutinized the evidence and the Bevers opinion with great care, has come to the conclusion that the Tax Court misapplied the principles enunciated in Roberts.

The Court is of the opinion that the Tax Court failed to take into account the uniqueness of a dealer's activities when compared to those engaged in by a cab driver or one in a similar service capacity. In Roberts, tips were directly related to personal services performed by the cab driver. The driver's compensation by his employer was fixed according to a formula, and he was forbidden to solicit tips. He was not, however,...