Mendelson v. CIR

• Decision Date: 17 July 1962
• Docket Number: No. 13675.,13675.
• Citation: 305 F.2d 519
• Parties: Julius MENDELSON and Pearl Mendelson, his wife, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

305 F.2d 519 (1962)

Julius MENDELSON and Pearl Mendelson, his wife, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 13675.

United States Court of Appeals Seventh Circuit.

July 17, 1962.

Andrew F. Slaby, Sydney M. Eisenberg, Milwaukee, Wis., for petitioners-appellants.

Louis F. Oberdorfer, Asst. Atty. Gen., Alec A. Pandaleon, Atty., Tax Division, U. S. Dept. of Justice, Lee A. Jackson, Gilbert E. Andrews, Attys., Dept. of Justice, Washington, D. C., for respondent-appellee.

Before DUFFY, SWYGERT and MAJOR, Circuit Judges.

MAJOR, Circuit Judge.

This case is here on petition for review of a decision of the Tax Court sustaining in part deficiencies determined by respondent in income taxes due from the petitioners for the taxable years 1957 and 1958. Petitioners as husband and wife filed joint returns for those years. The failure to report income concerns only the wife, Pearl Mendelson, who will be referred to as the petitioner or taxpayer.

Respondent determined a deficiency of $638.43 for the year 1957, and an additional tax for negligence in the amount of $31.92, and a deficiency of $870.24 for the year 1958, and an additional tax for negligence in the amount of $43.51. The Tax Court reduced these deficiencies to $536.56 for 1957, and $717.23 for 1958, with negligence penalties of $26.83 and $35.86, respectively.

The unreported income from which such deficiencies were determined consisted of tips received by the taxpayer while serving as a waitress. She reported $200 as income from tipping for 1957, and no income from that source for 1958. Taxpayer worked as a waitress at the El Dorado Restaurant, in the City of Wauwatosa, County of Milwaukee, Wisconsin. She kept no records or books relative to the amount of income received during the taxable years. Under such circumstances, Sec. 446 of the Internal Revenue Code (Title 26 U.S.C.A. Sec. 446) provides:

"* * * the computation of taxable income shall be made under such method as, in the opinion of the Secretary or his delegate, does clearly reflect income."

Pursuant to this authority, respondent formulated a method by which he determined taxpayer's unreported income received from tips, with the deficiencies resulting therefrom.

The principal contention of petitioner is that respondent in determining her income from tips exceeded his legal limitations and that the method employed by him was arbitrary, excessive and without rational foundation. On first impression we thought there might be merit in petitioner's contention; however, after reading the entire transcript of the proceedings before the Tax Court, we are definitely of the conviction that the record furnishes ample support for its findings of fact, as well as its decision based thereon.

The fallacy of petitioner's attack on the findings is that her argument in the main is based upon petitioner's testimony which the Tax Court was not obligated to accept, particularly in view of her self-interest and the numerous contradictions between her testimony and that of other witnesses. It would unduly burden this opinion to recite the findings in detail. A brief summary will suffice.

The El Dorado was an attractive, high-class restaurant on two levels, the upper to seat the overflow from the lower, and occasionally for parties. It was well located, operated a bar, and served both food and drink. During the taxable years, petitioner worked as a part-time waitress. All of the waitresses were rotated to the various stations and all performed the same character of work. The tipping custom ranged from nothing to more than 15% of the customer's check, with less tipping by customers served on the upper level. During the baseball season, the restaurant served large groups of baseball fans whose expenditures for food were nominal, as well as their tips. In some instances, customers after having been served evaded the waitresses and left without tipping or paying their checks.

The employment arrangement was that waitresses were to give 10% of their tips to the hostess and 10% to the busboy. Occasionally, waitresses were assigned to the duties of hostess and to work in the restaurant's checkroom. Most of the tips received in the checkroom were turned over to the management.

From records of the restaurant respondent obtained a statement of the total food and liquor sales, the portion of liquor sales served at tables, total hours worked by all waitresses inclusive of service as hostess and in the checkroom, total hours worked by all waitresses exclusive of service as hostess and in the checkroom, including those worked by petitioner during the years in question. (The findings set forth the facts with reference to each of these items.)

No guest checks were available showing the amount of food and liquor served by the individual waitresses during the taxable years. There being no records kept, either by the taxpayer or by management, showing the amount of food and liquor served by taxpayer, respondent concluded that the taxable amount of tips received by her during the years in question should be determined in the following...