DocketNumber： Docket No. 4689-79.
Filed Date： 6/22/1981
Status： Non-Precedential
Modified Date： 11/20/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON,
HALLETT, This case was tried with 12 other cases which were consolidated for purposes of trial only and which involve similar issues. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner Gordon A. Chappell was a resident of Las Vegas, Nevada, at the time the petition was filed. He worked as a "21" dealer at the Las Vegas MGM Grand casino during the calendar years 1975 and 1976. He worked approximately1981 Tax Ct. Memo LEXIS 428">*430 2,087 hours during the year 1975, and 1,987 hours during 1976. These hours included regular, overtime, and sick pay hours. Petitioner normally worked an eight-hour shift. The MGM Grand is located on the corner of the Las Vegas Strip. It is adjacent to Caesar's Palace, the Dunes, and the Flamingo Hilton Hotel. During the years in question, the MGM casino was almost as large as a football field. It had 930 slot machines, 10 crap tables, 6 roulette wheels, 2 baccarat tables, 3 big six wheels, and a 200-seat keno lounge with closed-circuit TV to other areas. The casino also had a 16-table poker parlor and 4 casino bars. In addition, the casino had 60 "21" tables, each with a seven-player capacity. Approximately 200 dealers were employed during a 24-hours shift to service these tables (not all tables would be in operation at any particular time). Approximately 80 percent of the "21" tables in operation had a $ 2 minimum betting limit. Other tables had higher limits, such as $ 5 and $ 25. Petitioner and the other "21" dealers spent their shifts, except for brief relief periods, playing "21" a the dealers with patrons of the casino. There was a constant turnover of patrons1981 Tax Ct. Memo LEXIS 428">*431 during each shift. The number of players at a table varied throughout the shifts, depending upon such things at the time of day or night, the season of the year, and the relationship to the beginning or ending of a show being held at the MGM Grand. Some patrons, but by no means all or necessarily even a majority, left a tip, which is referred to in the industry as a "toke", for the dealer during or at the completion of the patron's play. Tokes were received either directly from the patron in the form of cash or chips, or they were received a a consequence of a winning bet placed for the dealer by the player. Tokes received as a consequence of a winning bet resulted from the player's stating when the bet was placed that the winnings, if any, were "for the dealer." If the bet was lost, then the dealer got nothing. If the bet was won, he usually, but not always, received the winnings. The "21" dealers were required to place all of the tokes received by them in a box kept near the tables. These boxes containing the tokes were periodically picked up by a designated individual and taken to a central place in the casino. The total tokes collected during each 24-hour shift were counted1981 Tax Ct. Memo LEXIS 428">*432 by designated dealers serving as an informal group referred to as the "toke committee." The toke committee obtained a dealer sign-in sheet, which each dealer working during the shift was required to sign, and determined by reference to that sheet the number of dealers working during the shift. Committee members divided the total number of tokes equally among all of the dealers, except that each dealer working overtime received an additional one-eighth share for each hour of overtime worked, and members of the committee would often receive an extra $ 5 or $ 10 per day for their work on the committee. The result of the count and distribution normally was written on the back of the sign-in sheet and was provided to an employee working in the casino cage. This employee checked the count of the total tokes, resolved any discrepancies, and placed each dealer's determined share in an envelope. The dealers would then pick up the envelope at the main bank cashier's window and sign a payroll sheet signifying receipt of the tokes. Tokes were always whole dollar amounts, i.e., no small change was ever included in the envelopes. The records reflecting the daily determination and distribution1981 Tax Ct. Memo LEXIS 428">*433 of tokes for the years 1975 and 1976 were requested by respondent's agents by summonses served upon responsible MGM officials. The records were not available at the time the summonses were served. The records were destroyed by an MGM employee as a matter of convenience shortly after the daily distribution was made. On February 11, 1975, an opinion was issued by the United States District Court for the District of Nevada in In 1977, respondent's agents in the State of Nevada undertook a project to determine the toke income of MGM "21" dealers for the years 1975 and 1976. In this respect, respondent's agent Joe Page, the project coordinator, arranged for approximately 300 returns covering the years 1975 and 1976 and involving individuals who were dealers at the MGM Grand during those years to be selected for examination. Of the 300 returns, approximately 30 were selected for detailed analysis. Mr. Page made some effort to obtain information from the taxpayers involved and from available public records concerning the income and expenditures of the individuals in this group. After some analysis of public records information and personally meeting with approximately 23 or 24 of the group, Mr. Page concluded that he could "complete" a detailed financial analysis of six out of the group. This detailed financial analysis consisted of what is commonly referred to as a "source and applications of funds analysis." Source and applications of funds analyses considered complete by Mr. Page related to three of the petitioners in the cases consolidated with this case for trial, Mr. Keen, Mr. Chappell, and Mr. 1981 Tax Ct. Memo LEXIS 428">*435 Kozloff, and to three other taxpayers whose cases were not involved in these consolidated proceedings. However, the results of the source and applications of funds analyses with respect to two of the non-petitioning taxpayers, as well as Mr. Page's worksheets concerning these two taxpayers, were admitted into evidence with deletions to protect the confidentiality and identity of these taxpayers. These taxpayers are referred to in the record as taxpayer "F" and taxpayer "A". 1981 Tax Ct. Memo LEXIS 428">*436 with the source and applications of funds analyses for the five dealers referred to above, the total hours worked by each dealer during the year 1975 were adjusted by a reduction of 5 percent to allow for shifts for which the dealer may have been paid a salary but received no tips because of sick leave or lack of business, and to allow for possible error in the records of the MGM Grand. For the year 1976, respondent made an additional 10 percent reduction in hours to account for the culinary strike that year and a change in the employer's method of accounting for holidays worked. The resulting figure, divided by eight, is referred to as "adjusted shifts." Respondent determined the total sources of funds and the total applications of funds for each of the five taxpayers for the year 1975. The excess of total applications of funds over total sources of funds for each dealer was determined by respondent to represent the dealer's taxable tokes for the year 1975. That figure, divided by the number of the dealer's adjusted shifts for the year, produced respondent's determination as to the tokes received per adjusted shift. The following is a summary of respondent's determination in1981 Tax Ct. Memo LEXIS 428">*437 this regard: Unaccounted Adjusted Rate Per Adjusted Taxpayer Funds (Tokes) Shifts Shifts Kozloff $ 14,888.68 252.58 $ 58.95 Chappell 10,150.52 248.42 40.86 Keen 10,518.83 265.29 39.65 "F" 6,601.47 261.01 25.29 "A" 9,376.58 254.60 36.83
Based upon the results of the source and applications of funds analyses and other information respondent determined that petitioner and all other MGM dealers whose returns were examined for the years 1975 and 1976 received tokes for these years totaling $ 44 per adjusted shift.
Petitioner Gordon A. Chappell kept no records of his toke income during the years 1975 and 1976. Petitioner declared no tokes to his employer, MGM Grand, during 1975 and 1976. No toke income was reported on the 1975 return. On petitioner's 1976 return, toke income of $ 5,750 was reported. This amounts to a rate of $ 26.62 per adjusted shift.
Petitioner's adjusted shifts for 1975 and 1976, determined by making the reductions to total shifts referred to above, are 248.42 and 216.01, respectively.
Respondent's source and applications of funds analysis for Mr. Keen included as an application of funds $ 3,389.68 for food.1981 Tax Ct. Memo LEXIS 428">*438 This figure was an estimate by respondent based upon the United States Bureau of Labor Statistics estimates as to the national average cost of food for a family of three individuals. (Mr. Keen is married and has one child). This figure must be adjusted, however, to reflect the fact that Mr. Keen, unlike the "average" breadwinner presumably included in the Bureau of Labor Statistics estimate, was provided two meals per shift by his employer at no cost. A reasonable adjustment for this item is $ 5 per shift or $ 1,395. Respondent also included as an application of funds in Mr. Keen's analysis an item for "entertainment" of $ 886.42. This figure too was based upon the Bureau of Labor Statistics estimate. However, respondent included in Mr. Keen's applications of funds checks totaling $ 633.45 which were paid by Mr. Keen to Western Airlines in connection with vacations taken during 1975. To this extent, respondent's determination involves a duplication, and the applications of funds determined by respondent should be reduced by $ 633.45. Likewise, respondent based Mr. Keen's automobile expenses on estimates, and arrived at a figure of $ 1,212.78. However, included in numerous checks1981 Tax Ct. Memo LEXIS 428">*439 used by respondent in determining the total applications of funds for Mr. Keen was $ 743.12 in checks representing automobile expenses. A further adjustment should be made to Mr. Keen's source and applications of funds by reducing applications of funds by $ 743.12 to account for this item.
Mr. Keen testified that he had $ 3,000 cash on hand at the beginning of 1975, and that this "cash hoard" was used to purchase a therapy spa, the cost of which was included in respondent's application of funds. The evidence does not establish, however, that Mr. Keen's "cash hoard" was any more or less at the end of 1975 than it was at the beginning of 1975.
Adjusting respondent's source and applications of funds analysis for Mr. Keen for food, entertainment, and automobile expenses, as referred to above, results in an adjusted shift toke rate of $ 31.07. 1981 Tax Ct. Memo LEXIS 428">*440 $ 960 for the year 1975. This amount was not included by respondent as a source of funds of Mr. Chappell. Mr. Chappell testified at trial that he believed he and his wife received cash gifts from his mother during 1975 totaling $ 3,000. However, a supplemental stipulation and Mr. Chappell' mother's Federal gift tax returns disclose that there were substantial cash gifts to Mr. Chappell and his wife during 1976, but no gifts during 1975. Adjustment of Mr. Chappell's source and applications of funds analysis for the disability pension results in an indicated toke rate per adjusted shift for Mr. Chappell of $ 36.99.
Respondent' source and applications of funds analysis for Mr. Kozloff should be adjusted with respect to total sources to reflect an addition of at least $ 3,400 for cash on hand as of January 1, 1975. This sum represents a January 3, 1975, currency deposit to a bank account of Mr. Kozloff as well as two other extraordinary currency deposits made by Mr. Kozloff in April 1975. Mr. Kozloff's source and applications of funds analysis, as determined by the respondent, should be further adjusted by at least $ 1,329 because the Bureau of Labor Statistics estimate for food1981 Tax Ct. Memo LEXIS 428">*441 expenditures used by respondent does not reflect that Mr. Kozloff, like Mr. Keen, was provided two free meals per shift by his employer. These two adjustments to respondent's source and applications of funds analysis result in an indicated toke rate per shift of $ 40.22 for Mr. Kozloff.
The source and applications of funds analysis for taxpayer "F" includes as an application of funds for food and entertainment only actual check or documented cash expenditures by the taxpayer during the year. No amounts have been estimated for these amounts or other expenditures.
The source and applications of funds analysis for taxpayer "A" includes an estimate for food based upon the Bureau of Labor Statistics figures. Therefore, the same adjustment as was made in the cases of Mr. Keen and Mr. Kozloff to reflect the fact that taxpayer "A" did not expend money for two of his three meals during working days is necessary. This adjustment amounts to a reduction in applications of funds in the amount of $ 1,272.50, which results in a revised indicated rate of tokes per adjusted shift of $ 31.78 for taxpayer "A".
Mr. Frank Martins was a "21" dealer at the MGM Grand during the years 1975 and1981 Tax Ct. Memo LEXIS 428">*442 1976. For the year 1976, he reported tokes on his 1976 return amounting to $ 40 per day. Mr. Martins kept no records as to his actual tips for the year 1976, and the amount he reported on his 1976 return was based upon an estimate made at the time the return was prepared. Mr. Martins' accountant advised him in connection with the preparation of the 1976 return to report tokes of $ 40 per day.
ULTIMATE FINDING OF FACT
Petitioner's toke income for the years 1975 and 1976 was $ 32 per adjusted shift.
OPINION
The issue for decision here is purely a factual one, namely, what was the amount of tokes received by petitioner during 1975 and 1976. In view of the Ninth Circuit's decision in
In these circumstances, there is no question that the respondent can resort to indirect methods of proof to reconstruct the amount of petitioner's unreported income.
There is clearly an element of commonality among petitioner and the other MGM "21" dealers who worked on a fulltime basis during the years in question which makes evidence as to toke income received by one dealer relevant in determining the income received by others. This is so because the evidence is clear that tokes were, throughout both tax years in question, distributed evenly among all dealers working during a 24-hour shift. Accordingly, there is not the likelihood that each dealer's daily tokes would vary substantially, depending upon such things as the location of a dealer's table assignment, the 8-hour period during which the dealer1981 Tax Ct. Memo LEXIS 428">*445 worked within a 24-hour shift, and the whim of the individual player the dealer happened to draw. In addition, this petitioner and others involved in the cases consolidated with petitioner's case for trial did not contend or testify that the total tokes received for the full year 1975 and 1976 varied significantly among individual dealers, because of different days on and of duty. Indeed, the evidence is virtually undisputed that whatever the toke income of petitioner should be, the amount should be substantially the same for the other dealers.
This being the case, the evidence as to toke income received by other dealers, consisting of the source of applications of funds analyses of those individuals, is relevant and was properly utilized by the respondent in determining petitioner's toke income.
In theory, a source and applications of funds analysis should show precisely the amount of a taxpayer's unreported income. In fact, since it is almost always necessarily based upon estimates and assumptions, it is at best a reasonable indication of the amount of unreported income. In these cases the source and applications of funds analyses do no more than indicate a range within which1981 Tax Ct. Memo LEXIS 428">*446 the average amount of toke income should lie. In this respect, respondent's calculations for the five individuals, unadjusted for items in controversy, show the range from a low of $ 25.29 to a high of $ 58.95. This is so even though the evidence is virtually uncontradicted that these individuals should have approximately the same toke income for the year 1975.
Because of these factors, we believe that undue emphasis should not be placed upon the results of any one particular source and applications of funds analysis. We have adjusted each individual analysis for items we believe clearly warrant adjustment. After making these adjustments, the analyses indicate the following:
| Taxpayer | Rate |
| Kozloff | $ 40.22 |
| Chappell | $ 36.99 |
| Keen | $ 31.07 |
| "F" | $ 25.29 |
| "A" | $ 31.78 |
In arriving at our conclusion as to the appropriate rate for petitioner, we have considered both the range of rates indicated by the five analyses and the relative weight which should be afforded each individual analysis. For example, we believe the analysis of Mr. Kozloff should be afforded relatively less weight than that of the other individuals, because of the considerable uncertainty that1981 Tax Ct. Memo LEXIS 428">*447 exists in determining the amount of increase or decrease in cash accumulations by Mr. Kozloff during the year, as well as in determining his cash expenditures.
Further, we reject respondent's argument on brief that the analyses regarding taxpayers "F" and "A" should be afforded "little weight," apparently on the grounds these two individuals were not called to testify at trial. We find this argument somewhat surprising in view of the fact that the results of respondent's source and applications of funds analyses regarding these two taxpayers, as well as Mr. Page's detailed workpapers supporting the results, were introduced into evidence by respondent over petitioner's objection. We overruled petitioner's objection to the admission of these analyses based upon
We have also considered the testimony of Mr. Martins, who was a "21" dealer throughout the year and who voluntarily reported toke income based upon $ 40 per shift. However, we do not believe that his testimony alone warrants a finding tht petitioner's toke income for the year 1976 was at least $ 40 per shift. We must consider that Mr. Martins, like petitioner, kept no contemporaneous records of his income during the year 1976, and he based the amount reported solely upon an estimate arrived at between him and his accountant. Simply because the estimate favors the respondent's determination in this case more than it does petitioner's contention does not mean it should be accepted as any better evidence than it is, namely, an estimate.
Finally, we have considered respondent's determination and our opinion upholding that determination with respect to the toke income of dealers at the Las Vegas Hilton for the years 1972 and 1973. See
We have considered the petitioner's toke income for each year 1975 and 1976. We conclude that the evidence in this case establishes that the amount of toke income did not significantly vary between these two years.
Considering the evidence as a whole, we conclude and have found as an ultimate fact that petitioner's toke income was $ 32 per adjusted shift.
Respondent asserted the addition to tax provided by section 6653(a) for the year 1976, but not for 1975. Respondent's failure to assert the addition to tax for 1975 recognizes the uncertainty in the law that existed during that year as a result of the decision in
1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. ↩
2. The Court has concluded that the post-trial procedures of
2a. Olympia K. Chappell is a party to this action only because she filed a joint return with Gordon A. Chappell, hereinafter petitioner.↩
3. Respondent offered into evidence the conclusions regarding Mr. Page's source and applications of funds analysis of the sixth taxpayer, referred to as taxpayer "E". The detailed workpapers concerning the support for the final figures used by Mr. Page were unavailable at the time of trial, such that neither the petitioners nor the Court could determine the treatment of such matters as cash on hand and living expenses, which, as subsequently discussed herein, require adjustments to Mr. Page's figures for the other source and applications of funds analyses. Accordingly, the Court concluded that the "bottom line figures" with respect to taxpayer "E" should not be admitted into evidence.↩
4. This figure also reflects the addition of reported tips to unreported tips.↩
5. There was some contention at trial that to the extent tokes were received as a result of a winning bet placed by the player, they constitute gambling winnings and can be offset by gambling losses. However, there was no evidence submitted as to what portion of the tokes received were the result of a bet placed by the player, and what portion were simply cash or chips left by the player on the table. Moreover, for the reasons fully discussed in our opinion in