Rihn v. Franchise Tax Bd.

• Decision Date: 08 March 1955
• Citation: 280 P.2d 893,131 Cal.App.2d 356
• Court: California Court of Appeals Court of Appeals
• Parties: Hugo RIHN, Plaintiff and Appellant, v. FRANCHISE TAX BOARD of the State of California, Defendant and Respondent. Civ. 20459.

Page 893

280 P.2d 893

131 Cal.App.2d 356

Hugo RIHN, Plaintiff and Appellant, v. FRANCHISE TAX BOARD of the State of California, Defendant and Respondent.

Civ. 20459.

District Court of Appeal, Second District, Division 3, California.

March 8, 1955.

Geo. H. Zeutzius, Los Angeles, for appellant.

Edmund G. Brown, Atty. Gen., Edward Sumner, Deputy Atty. Gen., for respondent.

ASHBURN, Justice pro tem.

Action to recover money paid under protest as a state income tax upon tips received by plaintiff-appellant while working as a waiter at the Biltmore Hotel, Los Angeles, during the year 1951. The sole question is whether a waiter's tips may be taxed as income under the Personal Income Tax Law of this state, Rev. & Tax Code § 17001 et seq. The trial court answered that question in the affirmative. Plaintiff, as appellant, contends that tips are gratuities, gifts, and as such not taxable. The case was submitted upon stipulated facts; it appeared that plaintiff collected wages of $2,106.05 and received tips aggregating $1,573. There is nothing in the record to suggest that the employer received any portion of the tips or credited same on wages, or that appellant was required to report their receipt to his employer.

The applicable statute is section 17101 Revenue and Taxation Code. It says: 'Gross income includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.' The crucial phrases are '* * * gains, profits, and income derived from * * * compensation for personal service, of whatever kind and in whatever form paid * * *' and 'gains or profits and income derived from any source whatever.'

This section is interpreted by Personal Income Tax Regulation 17101(b), which, so far as pertinent, is as follows: 'Commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, and pensions or retiring allowance paid by private persons or by the United States are income to the recipients; as are also marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other contributions received by a clergyman, evangelist, or religious worker for services rendered. However, so-called pensions awarded by one to whom no services have been rendered, by either a taxpayer or taxpayer's beneficiary, are mere gifts or gratuities and are not taxable.'

Our section 17101 of the statute is copied from Section 22(a) Internal Revenue Code, 26 U.S.C.A. § 22(a), as it stood before the 1954 revision, with one immaterial departure. ¹ And our regulation 17101(b) is in the same phrasing as Federal Income Tax Regulations 111, Section 29.22(a)-2, down to and including the word 'tips'; in other particulars it is substantially the same so far as the problem presented in this case is concerned.

The federal courts have declared that the statute, Internal Revenue Code § 22(a), uses broad language as an 'effective means to indicate the purpose to include all items that are constitutionally income.' Commissioner of Internal Revenue v. Linde, 9 Cir., 213 F.2d 1, 6. In United States v. Robertson, 10 Cir., 190 F.2d 680, 682, the court said: 'Sec. 22(a) broadly defines gross income and by its sweeping terms it is evident that Congress intended that income should be taxed comprehensively and in so doing intended to exercise to the 'full measure' its constitutional power. * * * Under this Section all income is taxable unless specifically excluded by other provisions of the statute. Sec. 22(b)(3), excludes gifts from the income tax provisions but in view of the general purpose to tax all income, specific exemptions should be strictly construed. * * * The practical test which the courts have applied in cases where income has been claimed to have been a gift is to determine if the income was received gratuitously and in exchange for nothing.'

And the use of the word 'tips' in the regulation has been held to be permissible interpretation of the broad statutory language. The current of federal decisions is uniform in this direction. Roberts v. Commissioner of Internal Revenue, 9 Cir., 176 F.2d 221, 10 A.L.R.2d 186, is directly in point. It deals with tips received and retained by a taxicab driver, who also collected a salary from his employer. The court said at page 223: 'The essential question for determination is whether tips are income.' In rejecting the argument that they are gifts, it also said: 'From the very beginning of the practice, it was evident that, whether considered from the standpoint of the giver or the recipient, it lacked the essential element of a gift,--namely, the free bestowing of a gratuity without consideration. Despite apparent voluntariness, there is an element of compulsion in tipping. * * * In tipping, the financial advantage is conferred on the basis of a consideration which is related to service. This makes it clearly income. * * * So it is quite plain that the contention here made that tips, in general, are merely the result of the donor's exhibitionism and are given merely to satisfy the egotistical instinct of the giver, cannot overcome the unalterable fact that, so far as the recipient is concerned,--the petitioner here,--he received tips as an incident to the service which he rendered to his patrons. They were paid concurrently with the fare as a token of better service received. They are gain derived from his labor as a taxicab driver, i. e., income from the practice of a calling.'

In United States v. Burdick, 3 Cir., 214 F.2d 768, a conviction for fraudulent income tax return was affirmed. Defendant was Executive Clerk of the New Jersey State Senate and received moneys from various persons whose contributions were designed to help them in legislative matters. The failure to report these receipts formed the basis of the criminal charge. The court said at page 771: 'The testimony fully established that defendant's unreported receipts, which he treated as 'gifts' were compensation for services rendered or to be rendered, even though the payments were voluntarily made. They could, at the least, be broadly identified as 'gratuities' or 'tips' and it is well-settled that such receipts are not gifts, but taxable income.'

In Williams v. Jacksonville Terminal Co., 315 U.S. 386, 62 S.Ct. 659, 86 L.Ed. 914: 'The court had before it the question of whether the tips received by red caps could be counted as a part of the minimum wage under the Fair Labor Standards Act, 29 U.S.C.A. 201 et seq. It was held that they could and that legally speaking such tips were wages under the agreement between the employer and employee.' ² The Williams opinion contains this observation in 315 U.S. at page 398, 62 S.Ct. at page 667: 'A tip to a red cap is compensation for service. It is customarily given and always expected when such service is rendered.' See, also, Bateman v. Commissioner, 34 B.T.A. (1936) 351, 367; Stephen v. Commissioner, 11 T.C.M. 157; and 10 A.L.R.2d 191, Annotation 'Tips as Taxable Income.'

Where, as here, the federal and state tax statutes and regulations are substantially identical, the interpretations and effect given them by the federal courts are highly persuasive. In Holmes v. McColgan, 17 Cal.2d 426, 430, 110 P.2d 428, 430, it is said: 'The legislature has consistently followed the federal provisions generally in the Personal Income Tax Act. This policy makes available to the state a ground work of relevant federal experience and judicial pronouncements. 'It is a cardinal principle of statutory construction that where legislation is framed in the language of an earlier enactment on the same or an analogous subject, which has been judicially construed, there is a very strong presumption of intent to adopt the construction as well as the language of the prior enactment. * * * A similar principle applies where a statute is patterned after legislation of another state, or of the federal government, or, indeed of a foreign country, which has been judicially construed in the jurisdiction of its enactment.'' Innes v. McColgan, 47 Cal.App.2d 781, 784, 118 P.2d 855, 856: 'The California Personal Income Tax Act [Deering's Gen.Laws, 1937, Act 8494] in many respects closely follows the provisions of the Federal Income Tax Law. 26 U.S.C.A. Int.Rev.Code, § 1 et seq. The definitions of gross income are similar in both enactments so we may presume that the California law was adopted with the definition in mind that the federal courts had placed on gross income. Union Oil Associates v. Johnson, 2 Cal.2d 727, 32 P.2d 360, 43 P.2d 291, 98 A.L.R. 1499. Therefore, we will look to the decisions of the federal courts to determine the definition of gross income in cases identical with or similar to the one we have here.' The court, in Meanley v. McColgan, 49 Cal.App.2d 313, 317, 121 P.2d 772, 774, puts the matter thus: 'The provisions of our statute applicable to the present problem were copied from the federal statute. Under such circumstances the federal decisions constitute not only argumentative authority, but are conclusive on the proper interpretation of our statute.'

California cases are not opposed to the federal rulings on this matter of tips.

Hartford Accident & Indemnity Co. v. Industrial Acc. Comm., 41 Cal.App. 543, 183 P. 234, holds that tips received by a waiter and retained by him are properly included as earnings in computing an award under the Workmen's Compensation Act. This result was reached without the aid of any regulation such as 17101(b), supra. The court said in 41 Cal.App....