Sims v. US, 3:89-0461.

CourtUnited States District Courts. 6th Circuit. United States District Court of Middle District of Tennessee
Writing for the CourtWISEMAN
Citation756 F. Supp. 1048
PartiesSam SIMS, Jr., Plaintiff, v. UNITED STATES of America, Defendant.
Docket NumberNo. 3:89-0461.,3:89-0461.
Decision Date20 February 1991

756 F. Supp. 1048

Sam SIMS, Jr., Plaintiff,
UNITED STATES of America, Defendant.

No. 3:89-0461.

United States District Court, M.D. Tennessee, Nashville Division.

February 20, 1991.

Alfred H. Knight, Alan D. Johnson, Willis & Knight, Nashville, Tenn., for plaintiff.

Joe Brown, U.S. Atty., Glen Cagle, Dist. Director, IRS, Nashville, Tenn., Carl Q. Carter, Ann Reid, U.S. Dept. of Justice, Tax Div., Washington, D.C., for defendant.


WISEMAN, Chief Judge.

This action was brought by Sims for refund of withholding taxes paid on gambling winnings in the amount of $4,018.99 pursuant to 26 U.S.C. § 3402(q)(1). The government counterclaimed for the unpaid balance of the assessments against Sims in the amount of $959,790.83, plus statutory

756 F. Supp. 1049
additions. Sims also seeks preliminary and permanent injunctions restraining the Internal Revenue Service ("IRS") from collecting the balance of the taxes, penalty, and interest

This Court held a bench trial on December 11, 1990. Pursuant to the Court's direction at the close of the trial, the parties have filed proposed findings of fact and conclusions of law. For the reasons stated below, the Court grants all relief requested by Sam Sims, Jr. and dismisses the government's counterclaim.

I. Facts

Sims seeks a refund of withholding taxes, applicable to the years 1982, 1983, and 1984. The payments were made pursuant to the provisions of 26 U.S.C. § 3402(q),1 which impose a withholding obligation upon persons who make payments of gambling winnings in excess of $1,000.

During the federal tax years 1982, 1983, and 1984, Sims was a "numbers banker" in Davidson County, Tennessee. As a banker of a gambling operation, Sims provided money to "runners," or "pick-up men," to pay winning bettors. The runners had no designated territory. They could obtain customers from wherever they found them, and they had the choice of taking their bets and betting slips to other numbers bankers instead of to Sims. Sims accepted business from virtually any runner who had an honest reputation. Sims generally did not know where the runners operated or the identities of their customers.

The runners wrote the customers' bets on a piece of paper, often leaving with the customer a duplicate copy of the betting slip. The slip identified the customer by a code name or initials. The runners would take the betting slips and the customers' bets to S & S Discount House every day, or in some instances, Sims made arrangements to pick up the slips.

Sims exercised no control over how the runners conducted their businesses, how long or hard they worked, or how many bets they placed. If a runner proved to be dishonest in his dealings with his customers or with Sims, Sims would cease doing business with the runner, but the nature and extent of the runner's efforts would otherwise be his own affair.

Sims picked a daily winning number from various sources, such as the Dow Jones Average. Because the winning number had to contain three random digits, the odds of winning were necessarily 1000 to 1. The pay-off for a winning number was 700 to 1.

An employee of Sims would check all the bets against the winning number. Sims would then pay the runner who had brought in the winning bet. No one other than Sims or his brother ever paid the runners. Once the runners were paid the winning bets, the runners would deliver the winnings in cash to the customer.

Sims paid the runners in cash a percentage commission of the bets they collected, usually 10 to 20 percent, on a daily or weekly basis depending on the agreement between Sims and the runners. Alternatively, some runners would deduct their commission from the dollar amount of their bets prior to delivering the money to Sims.

Runners sometimes, in essence, "ran a tab" with Sims by turning in betting slips unaccompanied by cash. When this occurred, the runner's account would be debited accordingly and the amount of the debit would be deducted from any payment

756 F. Supp. 1050
of winnings Sims subsequently made to the runner. To the extent such payments did not cover winnings, the runner would supply the deficiency from his or her own funds

Sims recognized no responsibility to the bettors. If a bettor complained to Sims about not being paid for a winning number, he would inform the runner of the complaint, but not make the payment himself.

Sims recorded the total "take" from bets each day and the aggregate winnings. He did not keep records of the amount of individual bets, nor did he record the individual winnings. He threw the betting slips away after a few days.

Sometime in the mid 1970's, but prior to 1976, Sims was approached by an Alcohol, Tobacco, and Firearms ("ATF") agent and an IRS agent regarding the manner in which he should maintain gambling records to insure compliance with federal excise and income tax laws. The agents advised him to maintain daily totals of receipts and disbursements, for purposes of paying federal gambling excise taxes. They further advised him to discard records of individual betting transactions, presumably in order to avoid state gambling prosecutions. Sims thereafter maintained records only of aggregate daily receipts and winnings, and not of individual transactions.

Sims never withheld any money from the winnings paid to bettors, nor filed a return with the IRS reporting any withholding on gambling winnings. In 1985 the IRS conducted an audit of Sims' income tax returns. During the course of the audit, the auditor, Stephanie Borop, determined that Sims was liable under the withholding provisions of 26 U.S.C. § 3402(q). The records Sims had kept were not sufficient for purposes of imposing the withholding and reporting obligations of § 3402(q). Because Sims' books and records listed the amounts of winnings in daily totals, rather than broken down by individual winnings, Ms. Borop determined that Sims was liable for withholding on winnings on each day in which the aggregate winnings exceeded $1,000.

Sims has paid a portion of the assessment for each quarter, and timely filed a claim for refund. The IRS disallowed the claim. Sims timely filed this suit for refund of taxes pursuant to 26 U.S.C. § 7422. The United States counterclaimed for the remaining balance.


Sims raises four legal questions in his proposed conclusions of law:

1. Whether § 3402(q) violates the compulsory self-incrimination clause of the fifth amendment;
2. Whether application of § 3402(q) by the government in this case violates the due process clause of the fifth amendment by imposing what amounts to a huge economic "penalty" on Sims for failing to do the impossible (report names and addresses of unknown bettors);
3. Whether the withholding and reporting provisions of § 3402(q) apply to Sims as the person who "controls" payment of winnings;
4. Whether the present assessment is invalid, under the proper burden of proof, as constituting either an excessive or a "naked" assessment.

The Court will discuss the first two legal questions only briefly because the third and fourth issues are dispositive of this case.

A. Fifth Amendment Self-Incrimination

Sims argues that 26 U.S.C. § 3402(q) violates the compulsory self-incrimination clause of the fifth amendment to the United States Constitution, both on its face and as the government has applied it in this case. He asserts the provision is unenforceable against him because it requires him to keep records of and file returns for certain illegal gambling transactions, thus violating his fifth amendment privilege against self-incrimination. Moreover, he describes the IRS's assessment against him as a "punitive over-assessment" imposed because of his failure to keep individualized records of payouts to winning bettors. According to Sims, the choice between keeping

756 F. Supp. 1051
individualized records and filing returns and thereby risking prosecution under state and federal gambling laws versus not keeping records and not filing returns and thereby facing a "punitive over-assessment" is impermissible under the fifth amendment

This constitutional argument is interesting and persuasive, but the Court need not decide the question in light of the holding below. It is a well-established principle that federal courts should not decide a constitutional question if there is some other ground upon which to dispose of the case. Miami Univ. Assoc'd Student Gov't v. Shriver, 735 F.2d 201, 203 (6th Cir.1984) (citing Ashwander v. Tennessee Valley Authority, 297 U.S. 288, 347, 56 S.Ct. 466, 483, 80 L.Ed. 688 (1936) (Brandeis, J., concurring)).

B. Deprivation of Property Without Due Process

Sims also contends that the government, in applying § 3402(q) to his gambling operation, has imposed an obligation which he could not possibly have performed, and that this governmental conduct constitutes an attempt to take his property without due process of law. Sims argues the withholding obligation forces him to forfeit money due to his failure to report and pay over taxes owed by other taxpayers, i.e., the winning bettors.

At trial Sims explained why he could not comply with the withholding requirements. Sims testified that any effort to follow the statute would have dissolved his business in short order; moreover, compliance might have placed him in a physically perilous position because winning bettors expected to be paid in full. The most compelling reason, however, is the impossibility of Sims' complying with the reporting provision of § 3402(q). Section 3402(q)(6) requires every person receiving a payment of winnings subject to withholding to "furnish the person making such payment a statement, made under the penalties of perjury, containing the name, address, and taxpayer identification number of the person receiving the payment and of each person entitled to any portion of such payment." Emphasis added. The evidence at trial established that runners wrote customers' bets on pieces of...

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1 practice notes
  • U.S. v. Sims, Nos. 95-5009
    • United States
    • United States Courts of Appeals. United States Court of Appeals (6th Circuit)
    • 19 Octubre 1995
    ...of 1990. Mr. Sims prevailed both on his claim against the government and on the government's counter-claim. See Sims v. United States, 756 F. Supp. 1048 (M.D. Tenn. Prior to the trial of the criminal case, which was conducted by Judge Robert Echols, the Sims brothers indicated that they int......
1 cases
  • U.S. v. Sims, s. 95-5009
    • United States
    • United States Courts of Appeals. United States Court of Appeals (6th Circuit)
    • 19 Octubre 1995
    ...of 1990. Mr. Sims prevailed both on his claim against the government and on the government's counter-claim. See Sims v. United States, 756 F. Supp. 1048 (M.D. Tenn. Prior to the trial of the criminal case, which was conducted by Judge Robert Echols, the Sims brothers indicated that they int......

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