Opinion
Docket Nos. 70179 70186.
1959-06-30
DOROTHY L. SUTHERLAND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JOHN M. SUTHERLAND AND DOROTHY L. SUTHERLAND, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Grant G. Calhoun, Esq., for the petitioners. Nat F. Richardson, Esq., and Clyde R. Maxwell, Esq., for the respondent.
Grant G. Calhoun, Esq., for the petitioners. Nat F. Richardson, Esq., and Clyde R. Maxwell, Esq., for the respondent.
1. DUTY OF TAXPAYERS, IN GENERAL— RECORDS OF INCOME.— Every taxpayer is required to fully report all gross income, and must keep records of total amounts of all kinds of income so as to show himself and the Commissioner the entire amount of income. Petitioners did not keep any kind of records of the amounts of tips each received. Held, petitioners failed in meeting their burden of proof, in part, because they negligently failed to keep records of the amounts of their tips.
2. BURDEN OF PROOF.— The Commissioner's determinations are presumed to be correct, and taxpayers have the burden of proving that his determinations are incorrect. Petitioners relied upon their tax returns and their estimates of the total amounts of their tips. Held, petitioners failed to meet their burden of proof, in part, by relying upon their own estimates of the average amounts of their tips each year in the absence of records of the actual amounts of tips received.
3. Held, on the record the amounts of tips received by each petitioner are determined.
The Commissioner determined deficiencies in income tax for the years 1953-1955, inclusive, and additions to tax under sections 294(d)(1)(A) and 294(d)(2), 1939 Code,
The additions to tax for 1954 were made under the 1939 Code.
+---+ ¦¦¦¦¦ +---+
Year Deficiency Sec. Sec. 294(d)(1)(A) 294(d)(2) 1953 $234.00 $27.75 $18.49 1954 566.55 64.86 42.07 1955 300.00
The question for decision is whether each of the petitioners received tips in larger amounts than were reported and, if so, what amounts of tips were received in the taxable years.
FINDINGS OF FACT.
Petitioners, residents of Reno, Nevada, filed their income tax returns with the director of internal revenue for the district of Nevada. Dorothy Sutherland filed an individual return for 1953, and joint returns were filed for 1954 and 1955.
The petitioners were married in October 1954. Dorothy Foster Sutherland (hereinafter called Dorothy) was a waitress employed by the Mapes Hotel in Reno during 1953 and in 1954 until October 15, when she terminated her work. John M. Sutherland (hereinafter called John) is a waiter. He was employed by the Riverside Hotel in Reno in 1954 until June, and by the Mapes Hotel during the remainder of 1954 and during 1955. Petitioners are members of the Culinary and Hotel Service Union.
In the income tax returns for 1953 and 1954, Dorothy reported tips received, in addition to wages, in the amounts of $350 for each year. For 1954 and 1955, John reported tips in the amounts of $450 and $435, respectively. The respondent determined that petitioners received larger amounts of tips than were reported; that Dorothy received tips in the amounts of $1,450 in each year, about 64.7 per cent of her wages for 1953, and 66 per cent for 1954; and that in each year John's tips were in the same amount as his wages. The following schedules set forth for the taxable years the wages of each petitioner, the total amounts of their tips as determined by the respondent, tips reported, and respondent's determination of the amounts of unreported tips.
+-------------------+ ¦Dorothy Sutherland ¦ +-------------------¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------------+
Year Wages Tips Tips Tips not received determined reported reported 1953 $2,240.65 $1,450 $350 $1,100 1954 2,182.87 1,450 350 1,100
John Sutherland 1954 $2,259.99 $2,260 $450 $1,810 1955 2,078.99 2,078 435 1,643
Neither Dorothy nor John kept any records of the amounts of the tips received. The amounts of tips which each reported were estimates of what were received. Neither one kept any record of days and weeks of employment or of unemployment.
The Mapes and Riverside Hotels are the leading hotels in Reno. The hotel and restaurant business in Reno is seasonal. The best season is during July, August, and September. Both hotels employ more waiters during that season. During the best season waiters may work 8 hours a day, and overtime, and 6 days a week, the standard work-week. During the winter months business is slack, the best days being the weekends. During the winter months waiters may work only 3 or 4 days a week, and they may be excused before the end of a shift. The poorest months are November through February. In March, April, May, and October business is moderately good.
The Mapes and Riverside Hotels each has a theatre-type dining room where floor shows are presented. Such dining room at the Mapes is the Sky Room; at the Riverside, it is the Theatre Restaurant. During the taxable years these dining rooms were open every evening of the year from 5 or 6 p.m. to 2 a.m. During the best season, and when business was good, the floor shows were presented twice in each evening. The charges for meals in the Theatre Restaurant were from $3.50 to $6.50, with a minimum charge of $3.50. In the Sky Room, the charges for meals were from $2.75 to $5.50, with a minimum charge of $2. Both theatre-type dining rooms were operated in about the same way. Waiters worked in teams of two waiters each, assisted by a busboy. Teams of waiters were rotated so that all had the opportunity of serving in the best locations, close to the floor show, but not all teams always had good locations. A team of waiters pooled tips, gave 15 per cent to busboys and retained 85 per cent.
Each hotel has a banquet room. The hotel adds for tips 10 per cent of the bill to the total charges. Of the total collected by the hotel for such tips, 15 per cent of the tip is given to the busboys and the waiters share equally the remaining 85 per cent.
The Mapes Hotel has a smaller dining room called the Terrace Room and a bar.
Dorothy was a waitress in the Sky Room during the first part of 1953; until June 2; she was a cocktail waitress in the bar, or cocktail room, from June 3 to August 8; and she was at times a waitress and at other times a hostess in the Sky Room from August 9 until the end of 1953. During 1953, Dorothy was sometimes a relief hostess in the Terrace Room. She worked the day shift when she was a cocktail waitress. During 1954 until her employment ended on October 15, Dorothy was a waitress in the Sky Room, but she frequently was assigned to taking telephone reservations during the busy season. She sometimes served at banquets. She did not receive any tips when she was a hostess or took telephone reservations. Dorothy was not employed during all of 1953, and she worked only 3 or 4 days a week during the winter months of 1953-1954. She was subject to being called upon to work when business was good during the slack seasons, and she was often sent home before the end of a shift if business was poor. She shares her tips with busboys.
John worked in the Theatre Restaurant at the Riverside and in the Sky Room at the Mapes. He sometimes served at banquets. John was not employed every working day during 1954 and 1955. During the winter season he worked 3 of 4 days a week, and when business was poor he worked less than a full shift. He shared his tips with busboys.
Under the union agreement in the years 1953-1955, waiters employed by the Mapes and Riverside Hotels were paid $6.50 for an 8-hour day, and received meals, $5.20 for a 6-hour shift, and $3.95 for a 4-hour shift. The rate of pay for overtime was time and one-half. At banquets waiters worked a 3-hour shift and received $1.35 per hour.
After John was married, he had a joint bank account with Dorothy at the First National Bank of Nevada. John and Dorothy made deposits of their earnings, including tips, in the bank account. Occasionally John borrowed money and he deposited such funds in the bank account. On June 1, 1955, he borrowed $894.37 from Aetna Finance Company in Reno. Payments reduced the amount of the loan to $692.99. After such payments, John borrowed additional funds so that the amount of the loan was increased to $806. Some of the borrowed funds were used to make payments on an automobile and to cover maternity expenses in 1955 when a child of the Sutherlands was born.
Dorothy received tips in at least the amounts set forth below during 1953 and 1954, and she failed to report tips as follows:
+---+ ¦¦¦¦¦ +---+
Year Total tips Tips Tips not received reported reported 1953 $1,100 $350 $750 1954 950 350 600
John received tips in at least the amounts set forth below during 1954 and 1955, and he failed to report tips as follows:
+---+ ¦¦¦¦¦ +---+
Year Total tips Tips Tips not received reported reported 1954 $1.582 $450 $1,132 1955 1,455 435 1,020
OPINION.
HARRON, Judge:
Tips are part of compensation for services, therefore, taxable income under section 22(a), 1939 Code, as petitioners admit. Roberts v. Commissioner, 176 F.2d 221, affirming 10 T.C. 581; Regs. 111, sec. 29.22(a)-2. The question for decision is whether the amount of tips received by each petitioner in each taxable year is a larger amount than was reported.
The respondent has determined that each petitioner received a specific amount of tips. His determination is presumptively correct under law and each petitioner has the burden of proving that each amount for tips actually received is not correct. Reinecke v. Spalding, 280 U.S. 227; Welch v. Helvering, 290 U.S. 111, 115; Greenfeld v. Commissioner, 165 F.2d 318; 9 Mertens, Law of Federal Income Taxation (Zimet Revision) sec. 50.61. If the petitioners fail to meet their burden of proof by presenting competent proof of the amounts of tips received, the respondent's determinations of the amounts must be sustained.
Although the question is one of fact, it is of widespread interest both to the Commissioner and to taxpayers who receive tips as part of compensation for services,
of which there are well over 100,000. This case is before this Court because the taxpayers did not keep any records of the amounts of tips received, or any other records which might be helpful in determining with a reasonable amount of accuracy the amounts of tips received, such as records of the hours of shifts worked; when the shifts were, during either the day or the evening; the number of days of employment during various seasons of the year; and the number of days and seasons of unemployment.
According to recent reports of the United States Bureau of the Census, in 1950 there were the following number of waiters and taxicab drivers in the United States:
But every taxpayer is required by law to report in his income tax return, fully and honestly, every item of gross income received, and must maintain adequate records of some kind which will show to him and to the Commissioner the amount of income of all types received in each year.
If a taxpayer does not keep any records to show the full amount of every kind of income received in a taxable year, or if such records as are kept do not clearly show the entire income, the Commissioner is authorized to make a computation of the amount of income in accordance with such method as in his opinion does clearly show the full amount of income received.
See sections 41 and 54 of the 1939 Code, sections 446 and 6001 of the 1954 Code, and the regulations thereunder.
As we said in Louis Halle, 7 T.C. 245, affd. 175 F.2d 500, certiorari denied 338 U.S. 949:
SEC. 41. GENERAL RULE.The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *
The Commissioner need not accept, as complete, correct, and accurate, the returns filed or the sworn statement of the taxpayer that his returns completely and correctly disclose his tax liability. The Commissioner has authority to check the returns against the records of the taxpayer and, if no records have been kept or if the records are incomplete, inaccurate, or otherwise unsatisfactory, he may seek information elsewhere to discover, assess, and collect the full tax liability imposed by law.
See, also, Estate of Robert Lyons Hague, 45 B.T.A. 104, 109, affd. 132 F.2d 775.
In failing to keep records of their tips for each year, the petitioners failed to comply with legal requirements. The respondent, being unable to verify the amounts of tips reported, was authorized to make a computation of the amount of each petitioner's tips in each year in accordance with a method which in his opinion showed the entire amount thereof.
In these cases the respondent has determined that John Sutherland received tips during each taxable year in the same amount as his wages; and that Dorothy Sutherland's tips amounted to about 64.7 per cent and 66 per cent of her wages, taking into account the fact that she was at times a hostess in a dining room and did not receive tops when she was assigned to that job. Respondent's agent gave each petitioner an opportunity to discuss the audit which was being made of their returns, but neither got in touch with him.
Petitioners claim that the tips received did not exceed the amounts they reported in their returns. In support of their contention they rely upon their own testimony about the conditions under which they worked and the seasonal nature of the hotel and restaurant business in Reno. They testified that they were not employed every working day during the year, that during the fall, winter, and spring seasons business was slack, and that during the busy season, July, August, and September, extra waiters were employed and their opportunity to earn large amounts of tips was thereby reduced.
The respondent introduced evidence consisting of the testimony of witnesses who had worked as either waiter, or captain of waiters, or dining room manager at the Riverside and Mapes Hotels, and records of both hotels showing by month the total amounts of food sales and of total wages paid to waiters. On the basis of the latter information, respondent presented a formula showing the ratio of waiters' wages to food sales, the average dollar amount of food sold by a waiter per dollar of wages, and a percentage of food sales which a waiter could be expected to receive for tips based upon a tip of 10 per cent of a patron's purchase of food and beverages. On the basis of such evidence, respondent contends that his determinations of the amounts of tips received by the petitioners are correct.
Upon consideration of all of the evidence, it must be concluded that some weight must be given to the testimony of the petitioners that the business of their respective employers was seasonal and that, therefore, the tips received during the fall, winter, and spring months were less than during the summer season. However, petitioners have failed to a substantial degree in meeting their burden of proving that the respondent's determinations are wholly invalid. Petitioners did not testify about any actual amounts of tips received per day either during the busy season and when they worked overtime, or during the slack season. This Court cannot accept as the full discharge of a taxpayer's burden of proof mere estimates of income, or his unsubstantiated, uncorroborated, and self-serving testimony that the amounts reported in his returns are correct. To do so would mean that the Commissioner's adjustments would not be presumptively correct where the taxpayer swore to the correctness of his return. Louis Halle, supra.
We are unable to believe that in each year each petitioner received tips in an amount which was no more than was reported. John and Dorothy have failed in their burden of proof, in part, because he and she did not keep any written records of the amounts of tips actually received. Since each was extremely negligent in failing to keep such records, each must bear the tax consequences of his own negligence. Since every taxpayer must maintain adequate records of some kind in order to fully and honestly report all of his income, from whatever source derived, in his income tax return, Louis Halle, supra at 249, 250, it behooves each petitioner, in the future, to make an honest, accurate, and complete record of the full amount of tips received each day so as to know what is the total amount of income from tips to be reported in income tax returns.
Upon the entire record it is found and held that each petitioner received in each year at least the total amount of tips stated in the Findings of Fact, and that each failed to report tips in the following amounts:
Dorothy failed to report tips in the amounts of $750 for 1953, and $600 for 1954.
John failed to report tips in the amounts of $1,132 for 1954, and $1,020 for 1955.
The remaining question is whether petitioners are liable for additions to tax under sections 294(d)(1)(A) and 294(d)(2). Petitioners offered no evidence with respect thereto and, on brief, they made no contention that imposition of the additions was not proper. Therefore, it is understood that this issue has been abandoned. However, there is no proof that petitioners' failure to file declarations of estimated tax was due to reasonable cause and not to willful neglect. Additions under section 294(d)(1)(A) are sustained. Under the holdings made, there must be recomputation of the deficiencies under Rule 50. The parties will recompute the amounts of the additions due under sections 294(d)(1)(A) and 294(d)(2). See Albert N. Shahadi, 29 T.C. 1157, affd. 266 F.2d 495.
Decisions will be entered under Rule 50.
+-------------------------------------------------------------------------+ ¦Waiters, bartenders, counter workers, and all service¦ ¦ ¦ +-----------------------------------------------------+-------+-----------¦ ¦workers except household ¦(Male ¦136,465 ¦ +-----------------------------------------------------+-------+-----------¦ ¦ ¦(Female¦134,885 ¦ +-----------------------------------------------------+-------+-----------¦ ¦ ¦ ¦271,350 ¦ +-----------------------------------------------------+-------+-----------¦ ¦Taxi drivers and chauffeurs ¦(Male ¦76,599 ¦ +-----------------------------------------------------+-------+-----------¦ ¦ ¦(Female¦none stated¦ +-----------------------------------------------------+-------+-----------¦ ¦ ¦ ¦76,599 ¦ +-----------------------------------------------------+-------+-----------¦ ¦ ¦ ¦347,949 ¦ +-------------------------------------------------------------------------+