Mesi v. Comm'r of Internal Revenue
| Decision Date | 16 December 1955 |
| Docket Number | Docket No. 50868. |
| Citation | 25 T.C. 513 |
| Parties | SAM MESI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioner operated an illegal bookmaking business in 1946. His records and income tax return for that year disclose a gross profit of 5 1/2 per cent on the total bets received. Respondent accepted the accuracy of the reported gross receipts and operating expenses but determined that petitioner had overstated the amounts paid to winning bettors. Respondent disallowed $48,010.41 of the wagering losses claimed by petitioner. This amount was arrived at by increasing the percentage of gross profit earned by petitioner to 11 1/2 per cent on the basis that 11 1/2 per cent of the amounts bet at the parimutuel machines at certain race tracks in Illinois was retained for the benefit of the racing association and the tax authorities. Held, the gross profit earned by petitioner bears no relation to the percentage retained out of amounts bet at parimutuel machines, and respondent's determination is excessive. However, because of petitioner's failure to explain certain discrepancies in his records, it is held, further, that he overstated deductible wagering losses by $5,000 on his return for 1946.
2. Petitioner paid wages aggregating $14,563.84 to employees in his illegal bookmaking business during 1946. The payment of the wages, in and of itself, constituted an illegal act. Held, such payments violated the clearly defined public policy of the State of Illinois and are not deductible as ordinary and necessary expenses under section 23(a)(1)(A) of the 1939 Code. Howard R. Slater, Esq., for the petitioner.
Edward L. Newberger, Esq., for the respondent.
This proceeding involves a deficiency in income tax determined against Sam Mesi (hereinafter referred to as petitioner) in the amount of $41,555.81 for the taxable year 1946.
The issues to be decided are: (1) Whether petitioner overstated the amounts paid to winning bettors in reporting the gross income from his bookmaking business; and (2) whether the amounts paid by petitioner as wages in the conduct of his illegal bookmaking business are deductible as ordinary and necessary business expenses under section 23(a)(1)(A) of the 1939 Code.
Some of the facts were stipulated.
The stipulated facts are so found and are incorporated herein by this reference.
Petitioner resided in Chicago, Illinois, during the calendar year 1946 and filed his Federal income tax return for that year with the collector of internal revenue for the first district of Illinois.
During the year 1946, petitioner was engaged in the business of accepting wagers on horse races, commonly known as bookmaking. Petitioner operated his gambling business from three or four different locations at various times during that year. He had a principal location for which he paid an annual rental, but he was compelled to move about because of raids by the police. He operated from a garage and even in basements, hallways, and alleyways during certain periods in 1946.
Petitioner spent very little time at his bookmaking establishment during the daytime. He occasionally visited it in the afternoons and usually went there in the evenings when the summaries of the day's activities were being prepared. Although engaged in an illegal business and although his establishment was raided several times during 1946, he was not personally arrested at any time during that year.
Petitioner's gambling business was an extensive one. Although the great majority of the bets taken were small, being for 50 cents, $1, or $2, and though no bets in excess of $100 were accepted, incoming bets totaled $793,287.50 in 1946. He employed 6 or 7 persons during that year, paying them gross wages in the amount of $14,563.84. Among these employees were a cashier, 2 or 3 sheet writers who accepted and entered the incoming bets, men on the ‘hard cards,‘ and a doorman. The hard cards were large cardboard sheets, one for each track, which showed the entries for the day, the jockey, and the probable odds. Each horse was shown by name and number and such numbers were used in designating the horses on the betting tickets. Petitioner subscribed to a wire service which broadcast racing news over a loudspeaker, such as the time when a race commenced, the progress of the race until it ended, the result, and the odds payable at the track to the winners of ‘win,’ ‘place,‘ and ‘show’ bets.
Petitioner paid winning bettors according to the odds shown by the parimutuel machines at the race tracks with a limitation that in no event would he pay more than $30 for $1, in respect of a bet to win, $12 for $1, in respect of a bet to place, and $6 for $1, in respect of a bet to show. Certain additional limitations were imposed on daily double bets and on parlay bets.
Bets were entered by the sheet writers on small, printed cardboard tickets, approximately 1 1/2 by 5 inches in size. Each ticket bore an alphabetical and numerical designation in addition to its identifying color. The tickets were attached in groups of 20 to sheets of paper approximately 5 by 13 1/2 inches in size, which are called 20-line sheets. The tickets were arranged and attached, in numerical sequence, in such fashion that each of the 20 tickets was directly over a line bearing a number corresponding to that on the ticket. Series of these sheets and tickets were bound together in book form and purchased, as they were needed, from a local supplier. When entering a bet, the sheet writer would insert carbon paper between the betting tickets and the 20-line sheet and simultaneously record on the ticket and the 20-line sheet the amount of the bet, whether the bet was to win, place, show, or any combination of the three, and the code number which indicated the track, race, and name of the horse on which the bet was placed. The amount of the bet was then paid to the sheet writer and the betting ticket was detached and given to the bettor as his receipt. After recording 20 bets on a given 20-line sheet, the sheet writer turned over the sheet and the cash taken in with respect to the bets recorded on that sheet to the cashier employed by petitioner.
The sheet writers obtained their books of betting tickets and 20-line sheets from the cashier. Such books were not necessarily used in alphabetical or numerical sequence. The cashier maintained no inventory or running record of unused books, or of tickets received, on hand, or disposed of.
A winner was required to present his ticket to the cashier in order to collect his wager. When presented, it was verified against the carbon copy on the 20-line sheet possessed by the cashier. If the carbon copy showed it to be a correct ticket, the amount payable for that bet, according to the result at the track but subject to the limitations enforced by petitioner, was entered on the 20-line sheet immediately adjacent to the carbon notation of the bet and the bettor was paid in cash by the cashier. No receipts were obtained from the bettors and petitioner's records do not disclose their identities.
At the close of each day or early on the following day, petitioner's cashier totaled the bets written on the 20-line sheets, referred to as the ‘ins,‘ and also totaled the bets shown on such sheets as having been paid off by petitioner, which were termed the ‘outs,‘ These totals, together with the day's expenses for wages, stationery, rent, and other incidentals, were entered on a prepared form known as a daily summary report. The daily summary reports were prepared in duplicate and one copy was sent to petitioner's accountant and the other retained for petitioner.
At various times during the year, petitioner's accountant prepared a monthly summary on the basis of the daily summary reports which had been submitted to him. He prepared petitioner's income tax return for the year 1946, on the cash receipts and disbursements basis, from such monthly summaries. No audit was made to determine the accuracy of the ins and outs reported on the summaries, and petitioner's accountant stated that there was no method of verifying the total amounts received and paid out by petitioner. The total ins, the total outs, the gross profit, and the percentage of gross profit to ins, for the year 1946, according to such monthly summaries and petitioner's return for that year, are as follows:
+--------------------------------+
¦Total ins ¦$793,287.50¦
+--------------------+-----------¦
¦Total outs ¦750,069.85 ¦
+--------------------+-----------¦
¦Gross profit ¦$43,217.65 ¦
+--------------------+-----------¦
¦Percentage of profit¦5.45 ¦
+--------------------------------+
Petitioner's records for March 16, 1946, were stipulated to be typical of his records for the entire year 1946. The records for this one day disclose that, in two instances, the winning tickets bore a notation indicating only a bet to win or a bet to place, whereas the 20-line sheets indicated that these two bets had been made for both win and place. Payments on such bets were made according to the 20-line sheets.
In the statutory notice of deficiency, respondent made no change in the reported ins. Respondent, however, increased petitioner's reported gross profit by $48,010.41 by disallowing a portion of the claimed outs. This increased the percentage of gross profit on total receipts from 5.45 per cent to 11.5 per cent.
At parimutuel race tracks throughout the United States, an amount ranging from 10 to 17 per cent of all bets placed is deducted for the benefit of the racing association and the tax authorities. The remaining 90 to 83 per cent of the amounts bet is distributed to winning bettors. Under the laws of Illinois for the year 1946, either 88 1/2 or 87 1/2 per cent of the amounts bet at parimutuel tracks was distributed to winning bettors, depending upon the location of the race track.
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