SCOTUS Reports

Tag: Casino Tokes

  • Tomburello v. Commissioner, 84 T.C. 972 (1985): Taxability of Casino Tokes and IRS Summons Procedures

    Tomburello v. Commissioner, 84 T. C. 972 (1985)

    Tokes received by casino dealers are taxable income, not gifts, and an employer is not considered a third-party recordkeeper for IRS summons purposes.

    Summary

    In Tomburello v. Commissioner, the Tax Court ruled that casino tokes (tips) received by a card dealer are taxable income, not gifts, and upheld the IRS’s determination of a tax deficiency based on unreported toke income. The court also clarified that an employer is not a third-party recordkeeper for IRS summons purposes, thus no notice is required to the employee when the IRS summons the employer’s records. This decision reinforces the taxability of income from tips and establishes important procedural rules for IRS investigations.

    Facts

    Louis R. Tomburello, a card dealer at the MGM-Grand-Reno Hotel and Casino, received tokes (tips in the form of casino chips) during his employment in 1980. These tokes were pooled and distributed among dealers on each shift. Tomburello did not report these tokes on his 1980 federal income tax return. The IRS, after serving a summons on MGM for payroll records, determined a tax deficiency and added a negligence penalty for unreported toke income.

    Procedural History

    The IRS issued a notice of deficiency to Tomburello for unreported income from tokes and a negligence penalty. Tomburello petitioned the Tax Court, arguing that tokes were non-taxable gifts and challenging the IRS’s summons procedure. The Tax Court upheld the IRS’s determination, finding tokes taxable and the summons procedure valid.

    Issue(s)

    1. Whether tokes received by a casino dealer constitute taxable income or non-taxable gifts.
    2. Whether an employer is a third-party recordkeeper under section 7609, requiring notice to the employee when the IRS summons the employer’s records.

    Holding

    1. Yes, because tokes are compensation for services rendered and not gifts under section 102.
    2. No, because an employer does not qualify as a third-party recordkeeper under section 7609, and thus no notice is required to the employee when the IRS summons the employer’s records.

    Court’s Reasoning

    The court applied established legal principles to determine that tokes are taxable income, referencing Olk v. United States and Catalano v. Commissioner. The court rejected Tomburello’s arguments that tokes were gifts and not taxable, citing the lack of a direct relationship between the service performed and the tokes received. The court also analyzed the statutory language of section 7609 and its legislative history, concluding that an employer is not a third-party recordkeeper as defined in the statute. The court supported its decision with citations to Ninth Circuit cases and other federal courts that have similarly interpreted section 7609. The court emphasized that the IRS’s summons of an employer’s own business records does not trigger the special procedural rules of section 7609, thus no notice to the employee is required.

    Practical Implications

    This decision clarifies that tips or tokes received by service industry employees, including casino dealers, are taxable income and must be reported. It reinforces the importance of accurate record-keeping and reporting of all income sources. For legal practitioners, this case provides guidance on challenging IRS determinations of unreported income and understanding the scope of section 7609 regarding third-party summonses. Businesses in the service industry should ensure compliance with tax reporting requirements for tips. Subsequent cases have relied on this ruling to affirm the taxability of tips and the procedural aspects of IRS summonses.

  • Arrighi v. Commissioner, 81 T.C. 42 (1983): Validity of IRS Surveillance Methods for Reconstructing Income

    Arrighi v. Commissioner, 81 T. C. 42 (1983)

    The IRS may use reasonable surveillance methods to reconstruct unreported income, even if those methods are not perfect, as long as they are designed to clearly reflect the taxpayer’s income.

    Summary

    In Arrighi v. Commissioner, the Tax Court upheld the IRS’s use of a surveillance project to reconstruct the unreported ‘toke’ income of casino dealers at Caesar’s Palace. The IRS observed dealers’ daily toke exchanges and calculated an average hourly rate, which was then applied to the dealers’ work hours to determine their income. The court found the IRS’s method reasonable despite minor inaccuracies, emphasizing the dealers’ failure to maintain adequate records. The decision also affirmed negligence penalties for the dealers’ lack of record-keeping. This case illustrates the broad latitude the IRS has in reconstructing income when taxpayers fail to report it accurately.

    Facts

    Petitioners were blackjack, roulette, and Big Wheel dealers at Caesar’s Palace in Las Vegas, receiving ‘tokes’ (tips) from players. These tokes were pooled and counted daily. The IRS conducted a surveillance project from February 1976 to January 1977, observing 48 days of toke exchanges at the casino’s cashier cage. The agents recorded the chip counts and calculated an average daily toke rate of $63. 45, which was adjusted to an hourly rate of $7. 93. The petitioners did not maintain records of their toke income, instead reporting arbitrary amounts on their tax returns. The IRS used the surveillance data to reconstruct the petitioners’ income for the years 1976-79 and assessed deficiencies and negligence penalties.

    Procedural History

    The petitioners challenged the IRS’s determinations in the U. S. Tax Court. The court consolidated 112 cases involving similar issues. After reviewing the evidence and arguments, the Tax Court sustained the IRS’s reconstruction of the petitioners’ toke income and upheld the negligence penalties.

    Issue(s)

    1. Whether the petitioners understated their toke income by the amounts determined by the IRS.
    2. Whether the petitioners are liable for additions to tax under section 6653(a) for negligence.

    Holding

    1. No, because the IRS’s method of reconstructing the petitioners’ toke income was reasonable and not arbitrary or excessive.
    2. Yes, because the petitioners failed to maintain adequate records of their toke income, justifying the imposition of negligence penalties.

    Court’s Reasoning

    The court applied the principle that the IRS has broad latitude in reconstructing a taxpayer’s income when the taxpayer fails to maintain adequate records. The court found the IRS’s surveillance method reasonable despite minor discrepancies, as the agents observed the toke exchanges from various vantage points in a public area. The court rejected the petitioners’ arguments that the surveillance data was unreliable, noting that any errors were likely to result in conservative estimates. The use of a 95% confidence level further ensured the accuracy of the IRS’s calculations. The court also upheld the negligence penalties, citing the petitioners’ failure to keep adequate records as required by section 6001. The court referenced several cases to support its reasoning, including Olk v. United States, Welch v. Helvering, and Meneguzzo v. Commissioner.

    Practical Implications

    This decision reinforces the IRS’s ability to use indirect methods to reconstruct income when taxpayers fail to report it accurately. Legal practitioners should advise clients in similar situations to maintain detailed records of all income, including tips and gratuities. The case may influence how the IRS approaches income reconstruction in other industries where tips are common, such as restaurants and hospitality. Businesses should be aware that the IRS may employ surveillance techniques to verify income, even if those methods are not perfect. Subsequent cases, such as Cracchiola v. Commissioner, have cited Arrighi to support the use of average tip figures in income reconstruction without requiring a confidence level.