Collins v. Commissioner
| Decision Date | 24 August 1992 |
| Docket Number | Docket No. 11579-90. |
| Citation | 64 T.C.M. 557 |
| Parties | Mark D. Collins v. Commissioner. |
| Court | U.S. Tax Court |
James B. Lewis, for the petitioner. Raymond A. Kahn, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioner's 1988 Federal income tax of $9,376, plus additions to tax of $469 under section 6653(a)(1)1 and $2,344 under section 6661.
The issues for decision are whether petitioner had taxable unreported income from gambling or theft during 1988, and whether he is liable for the additions to tax for negligence and substantial understatement of tax liability. We hold that petitioner had unreported income, but that he is not liable for additions to tax.
We find and incorporate the stipulated facts and exhibits. We also take judicial notice of the results, as published in the Daily Racing Form (Eastern ed. July 20, 1988) (reproduced in Appendix A to this opinion), of the thoroughbred horseraces petitioner bet on that are the subject of this case.
Petitioner resided in Auburn, New York, at the time he filed his petition. During 1988 petitioner was employed as a ticket seller at the Off-Track Betting (OTB) parlor in Auburn. OTB operates a statewide network of betting parlors that allow patrons to place legal bets on horseraces run in New York State (as well as certain races run elsewhere) without going to the track. Patrons also may cash in winning tickets at OTB.
Petitioner was a compulsive gambler who, while placing bets for OTB patrons in the course of his employment, could not resist the temptation to gamble without paying for the privilege of doing so. On Sunday, July 17, 1988, petitioner decided, as he had on several prior occasions, that he "would like some money" and began placing bets on his own behalf. He punched the bets into his computer terminal, which entered his bets and printed the tickets.2 When he had done so on prior occasions, petitioner either ended up ahead or lost a small amount, which he covered without being detected by anyone at OTB.
Petitioner appears to have employed a variant of a technique for betting on horseraces in which he bet on the favorite (the horse with the lowest odds) in each race, increasing the amount of each subsequent bet until he would pick a winner, which would recoup his prior losses and provide a modest surplus. This time, however, petitioner encountered a series of losses that caused his gambling fever to spiral out of control.
He started by placing three $20 bets on one horse in the first race at Finger Lakes Race Track. He bet on this horse to win, place (finish second or better), and show (finish third or better), for total bets of $60. This horse did not finish among the top three. Petitioner then tried to recoup his $60 loss by betting $40 in the second race on one horse to win, place, and show, for total bets of $120. This horse also failed to run in the money.
Petitioner bet a total of $600 on the third race, repeating the pattern of dividing his bets equally among win, place, and show bets on the same horse. At this point, petitioner was trying to recoup the losses he had caused his employer, which he knew he would be responsible for. He also intended to appropriate any net winnings. He lost again.
Petitioner bet a total of $1,500 on the fourth race and lost. He skipped the fifth race, but bet another $1,500 on the sixth race and lost. He bet $7,500 on the seventh race and $15,000 on the eighth. Both times he lost.
With two races left that day, petitioner owed OTB $26,280. He bet $25,500 on the ninth race. His horse came in third, so one of his three $8,500 bets paid off, but it paid only $8,925.
By the 10th race, petitioner was down $42,855. He made three bets totaling $28,500 on one horse in the 10th race. He finally caught the winner, which paid a total of $33,250 on his three bets. But petitioner still was behind $38,105, and the racing day was over. Petitioner's bets had totaled $80,280.
At the end of the racing day, petitioner deposited the winning tickets of $42,175 in his cash drawer and told his supervisor, Debbie D'Angelo, that he had "screwed up". D'Angelo called the police, who took petitioner into custody. Petitioner signed an affidavit, prepared by the police, admitting his actions.
After a terminal operator completes his shift, his terminal prints out a summary of sales and redemptions at the terminal, which the terminal operator or his supervisor uses to prepare a settlement sheet. The settlement sheet shows the difference, if any, between the amount of cash in the drawer and the amount of cash that should be there. Petitioner's settlement sheet for July 17, 1988, shows that he began his work shift that day with $805 in his cash drawer and ended the day with $843.40 in the drawer. His terminal recorded "sales" of $84,137. Inasmuch as $80,280 of sales were petitioner's bets, legitimate sales amounted to $3,857. Petitioner also took in telephone deposits of $29.3 Inasmuch as the total of petitioner's cash inflows (including his opening balance) was $4,691, he never had more than that amount of cash in his drawer. On an ordinary day, petitioner could have expected to process between $1,000 and $3,000 in bets, all placed in cash.
Petitioner also had to pay out on customers' winning bets. His terminal indicated $45,951.60 had been "paid" during his shift. Inasmuch as $42,175 of the payouts were actually the winning tickets petitioner turned over to OTB without receiving cash for them, legitimate payouts were $3,776.60. Petitioner never took any cash from OTB. Nonetheless, petitioner's terminal indicated that the drawer was $38,135.80 short.
On October 27, 1988, petitioner pleaded guilty in Cayuga County Court to one count of grand larceny in the third degree, a felony in New York defined as theft of property worth more than $3,000. He was sentenced to 5 years' probation, 150 hours' community service, and a $100 surcharge.
OTB is a strictly cash business. Bets on credit are absolutely prohibited. OTB has an equally strict policy against employee gambling on any race within New York, and on any other race for which OTB accepts a bet. Employee betting is a major concern to OTB. Employees are indoctrinated during initial training not to bet and OTB frequently and regularly repeats this message in oral and written communications to its employees.
In numerous instances, patrons have reported OTB employees for betting; OTB investigates these charges and takes disciplinary action against employees who have violated the policy. All OTB employees are duty bound to notify their supervisor when a fellow employee violates the rule against betting. Within limitations set by a collective bargaining agreement, an employee who violates OTB's policy, even with an otherwise legal bet, may be disciplined. In addition, if an employee causes a loss to the corporation, OTB is authorized by State regulations to deduct the amount of the loss from the employee's wages.
To prevent employee theft, OTB's internal auditors conduct random spot checks, sometimes during business hours, to determine whether employees' cash drawers are in balance. OTB also uses undercover investigators to detect employee theft. OTB's total shortages from all sources, including theft, amount to far less than 1 percent of the $1.9 billion per year wagered at OTB.
Despite OTB's concerns about theft and employee betting, its employees are not under constant surveillance by their supervisors. OTB's computer system did not have the capability to allow petitioner's supervisor, D'Angelo, to monitor from her location in an adjoining office the entries petitioner was making at his computer terminal. During petitioner's work shift, D'Angelo would not have been aware of unusual activity at his computer terminal unless she could have observed the activity directly. A ticket seller generally has contact with a supervisor at the beginning and end of his shift, if a patron presents a particularly large winning ticket for payment (such as one requiring Federal income tax withholding), or if the employee's cash drawer becomes too full of money or needs to be refilled. Neither D'Angelo nor any of petitioner's fellow employees noticed anything out of the ordinary on the fateful day until petitioner turned himself in. Of course, if petitioner had not turned himself in, his day-end terminal print-out would have revealed his actions to OTB.
Petitioner's actions caused OTB to claim $37,588 against its theft insurance policy with Hartford Accident & Indemnity Co., Inc. Hartford paid the claim in full, less a $5,000 deductible, and obtained a judgment against petitioner in December 1989 for the amount of its payment, plus costs, totaling $36,601.94. Hartford has attempted to enforce its judgment, with little success, inasmuch as petitioner has neither the income nor the assets to satisfy the judgment. At no time did petitioner sign a promissory note or consent to entry of judgment against himself.
Petitioner's actions not only caused a shortfall in his cash drawer at OTB. They also had a ripple effect that changed the odds and the payoffs to all bettors who made legal single bets4 on any of the races (other than the fifth) at Finger Lakes that day, whether they bet through OTB or at the track. To understand why, we must explain how pari-mutuel5 gambling works.
The only legal gambling on horseraces in New York is pari-mutuel wagering, in which all bets on each type of wager for each race are pooled into a single fund, called a mutuel pool. For instance, the sum of all bets on all horses "to win" a particular race is placed in a single statewide pool, regardless of whether the bets are placed at OTB or the track. Place and show bets have their own pools. On single...
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