Bruno v. Commissioner, Docket No. 9578-82
| Decision Date | 04 April 1985 |
| Docket Number | 27315-82.,Docket No. 9578-82,13439-82,11000-82,13484-82 |
| Citation | 49 TCM (CCH) 1147,1985 TC Memo 168 |
| Parties | Theresa J. Bruno, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Stephen P. Patrizio, Joseph W. Hopkins, and Philip A. Yampolsky, for the petitioners. Dermot F. Kennedy and George W. Reynolds, for the respondent.
In these consolidated cases, respondent determined the following deficiencies in and additions to petitioners' Federal income tax liabilities for the year 1978 as follows:
Additions to Tax
Docket No. Tax § 6653(a)2
Theresa J. Bruno .......... 9578-82 $2,292.00 $114.60
Cathy A. Stutzman ......... 11000-82 3,271.00 163.55
Margo A. Achille .......... 13439-82 4,655.74 232.79
Bonnie L. Gasperini ....... 13484-82 1,031.00 51.55
Clara M. Fesco ............ 27315-82 3,642.00 182.00
The issues for decision herein are: (1) Whether petitioners understated tip income on their respective 1978 Federal income tax returns, and if so, by what amounts, and (2) whether petitioners are liable for the 5-percent addition to tax under section 6653(a). In the main body of our findings of fact and opinion we address matters pertinent to all petitioners. In an appendix, we have made additional findings of fact pertinent to each separate petitioner.
Some of the facts have been stipulated and are so found. At the time the petitions herein were filed, each of the petitioners resided in the state of New Jersey.
During the last six-and-a-half months of 1978, petitioners were employed as cocktail waitresses at the Resorts International Hotel and Casino in Atlantic City, New Jersey (hereinafter referred to as "Resorts"). In that capacity, they spent a major portion of their time serving complimentary drinks to gamblers on the casino floor. The Resorts hotel and gambling casino opened to the public on May 24, 1978. Resorts was the first licensed gambling casino to open in Atlantic City, after enactment in New Jersey of laws legalizing casino gambling. Resorts also was the only casino in operation in Atlantic City in 1978.
Each petitioner timely filed an individual Federal income tax return for 1978. The amount of tip income separately reported on petitioners' respective 1978 returns ranged from zero by petitioner Achille to $3,200 by petitioner Gasperini. None of the petitioners maintained or kept contemporaneous records of tip income received in 1978.
The work performed by petitioners and Resorts' records. As cocktail waitresses assigned to Resorts' casino floor, petitioners' responsibilities included taking orders for, obtaining, and serving, complimentary drinks (both alcoholic and non-alcoholic) to gamblers on the casino floor. Each waitress was assigned a particular area or "pit" on the casino floor. Each pit consisted of a designated group of tables in a particular gaming area (either "twenty-one", roulette, craps, baccarat or "big wheel"3). The waitresses served complimentary drinks only to gamblers actually placing bets at the tables. Individuals merely observing the action were not to be served complimentary drinks.
After taking orders for drinks, each waitress would walk to the service bar, obtain glasses, place ice in the glasses, and then would wait for the service bartender to mix or pour the drinks ordered. The waitress next would walk back to her pit, find the gamblers who had ordered the drinks and serve them the drinks. A barboy assigned to each shift assisted the waitresses by putting out glasses, cutting garnishes, and making sure the ice machine was working.
Petitioners normally worked six-hour shifts, five days per week. There were three shifts per day as follows: Day shift, 10 a. m.-4 p. m.; swing shift, 4 p. m.-10 p. m.; and graveyard shift, 10 p. m.-4 a. m. On Fridays, Saturdays, and holidays the graveyard shift would last until 6 a. m. Petitioners were allowed one scheduled half-hour break per six-hour shift, during which time a substitute or "breaker" would cover their assigned pits, and additional breaks of five minutes per hour as needed. In return for serving drinks, petitioners were paid wages by Resorts at a level below the minimum wage.4 They did, however, also receive tips from gamblers for serving the complimentary drinks.
Because Resorts was the first and only gambling casino open on the East Coast in 1978, the casino floor during that year was frequently very crowded. It was not unusual to have three or more individuals waiting behind each individual actually placing bets for their opportunity to play. In addition, in 1978 there were a significant number of people who came to the casino floor out of curiosity, merely to watch others play, because they had not previously been in a gambling casino.
Occasionally in 1978, Resorts had to initiate crowd control measures in order to limit the number of people on the casino floor. Although the large number of people on the casino floor in 1978 constituted a large source of potential tips for the cocktail waitresses, the crowded conditions also made it difficult for the waitresses, with drinks and trays in hand, to walk quickly to and from their pit areas to obtain and serve drinks. Occasionally, it was even necessary for the waitresses to join arms with a security guard in order to successfully maneuver their way through the crowds.
Resorts encountered a number of start-up problems during 1978. Significant to this case is the fact that the procedures used by Resorts to maintain an accurate inventory of the alcoholic beverages in that year were not accurate. The inventory records of the liquor purchased were not carefully maintained. It was not unusual to find several bottles of liquor missing from the service bar area at the beginning of a shift. Except for December, the bartenders at Resorts utilized the "free-pour" method of dispensing alcoholic drinks into the glasses throughout 1978, with the frequent result that a larger portion of liquor was poured into the average drink than the 1.25 ounces estimated by Resorts for purposes of its inventory and bookkeeping procedures. Double and triple shots of liquor often were poured into one glass by the bartenders. An automatic measuring "gun" system of dispensing liquor, which would dispense only the specified amount of liquor per drink, was not instituted until December of 1978.
An additional start-up problem material to this case was that the 1978 payroll records were not carefully maintained. These records for 1978 reflected significant errors and inconsistencies in the number of hours worked by the cocktail waitresses.
The IRS Audit. In 1980 and 1981, food and beverage servers employed by the hotels and gambling casinos located in Atlantic City, New Jersey, were the subject of an Internal Revenue Service coordinated audit project referred to within the Internal Revenue Service as "The Atlantic City Tip Project." One important part of that project was to establish average hourly rates of tips that could be used in auditing the 1978 Federal income tax returns of the food and beverage servers employed by the hotels and casinos in Atlantic City in 1978.
In the case of food and beverage servers who worked in the restaurants and bars within each hotel and casino (as distinguished from those who worked on the gambling casino floors), the methodology used by the Internal Revenue Service audit team to determine average hourly rates of tips was as follows. Credit card sales slips for a sample test period for each restaurant and bar were used to determine the average tips received as a percentage of total food and beverage credit sales (generally taking into account a "stiff" rate ranging from zero to 40-percent). That percentage was applied to the total credit and cash sales of each restaurant and each bar in order to determine an estimated total amount of gross tips received by all of the food and beverage servers at a particular restaurant or bar during 1978. The total estimated amount of gross tips for each restaurant and bar then was divided by the total number of hours collectively worked by all of the food and beverage servers in each restaurant and bar in order to determine an average tip rate per hour for food and beverage servers at each restaurant and bar location.
Depending on the practices of each particular restaurant and bar (as determined in interviews), a further adjustment where appropriate would be made in the average tip rate per hour for the sharing of tips with busboys and bartenders. In reconstructing the tip income of a particular food or beverage server for any one year, the average net tip rate per hour that was calculated in the manner described above for each restaurant and bar would be multiplied by the number of hours worked by each food and beverage server in each restaurant and bar location.
Using the above methodology, respondent calculated that the average net tip rates per hour for food and beverage servers at the various restaurants and bars located within Resorts during 1978 (not including the cocktail waitresses who served complimentary drinks on the casino floor) were as follows:
Restaurant and Bar Locations within Average Net Tip Percentage of Net
Resorts (excluding Casino Floor) Rate Per Hour Tips to Gross Sales
Le Palais (gourmet restaurant) .................... $5.80 14.64%
Wedgewood Pavillion (informal restaurant) ......... 5.53 11.84%
Camelot Restaurant ................................ 6.23 14.03%
Room Service ...................................... 2.43 15.86%
Superstar Theatre (showroom) ...................... 4.20 16.21%
Renaissance/Gold Room (restaurant)...To continue reading
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