1978 Tax Ct. Memo LEXIS 306 | Tax Ct. | 1978
1978 Tax Ct. Memo LEXIS 306">*308 MEMORANDUM OPINION
DAWSON,
This case was submitted fully stipulated pursuant to
Alvin Butchko and Alice B. Butchko (petitioners), husband and wife, resided in San Francisco, California, at the time they filed their petition in this case. Petitioners timely filed a joint Federal income tax return for 1974 with the office of the Internal Revenue Service at Fresno, California. Since Alice B. Butchko is involved in this proceeding solely because a joint return was filed, Alvin Butchko will be referred to as petitioner.
Petitioner is a racetrack teller who accepts wagers at various1978 Tax Ct. Memo LEXIS 306">*309 racetracks by selling pari-mutuel tickets to the customers of those tracks. During 1974, petitioner was employed as a pari-mutuel clerk by the California Jockey Club, the Tanforan Racing Association, the Pacific Racing Association and the California Capitol Trotting Association during the racing season of each. A pari-mutuel clerk, such as petitioner, participates in many monetary transactions and occasionally makes errors. If, as a result of these errors, a pari-mutuel employee at the end of the day has more money than he should, it is termed an overage. If at the end of the day that employee has less money than he should, it is termed a shortage.
Petitioner's employment was subject to the provisions of the agreement of his employers with the Pari-Mutuel Employee's Guild of California, Local 280, Service Employee's International Union, AFL-CIO (Agreement). Article VI of that agreement provides in part:
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The attachment to the agreement sets forth a specific daily rate of pay for petitioner's job as a seller. The agreement further provides for additional pay to sellers and other racetrack employees in specific circumstances, for example, when more than eight races are run in any one day.
Section 1 of Article VII of the agreement provides that:
Consistent with the foregoing agreement, the employment applications completed and signed by petitioner for each of his employers contained the following statement: "I agree to pay for all shortages for which I may be responsible."
For certain days and for certain weeks petitioner had overages. Petitioner's employers did not pay him his overages each day they occurred but held the overages to be set off against possible future shortages. If petitioner had a net overage, in accordance with the agreement, it would have been paid to him at the termination of that particular employer's racing season.
In 1974, however, petitioner had total net shortages of $358. When employed by the Tanforan Racing Association, petitioner's shortages were deducted from his pay. When petitioner was employed by the California Capitol Trotting Association in the Sacramento1978 Tax Ct. Memo LEXIS 306">*312 area, he received a shortage notice at the end of each week and was required to pay his shortage before he was permitted to work the following week.
The statutory framework for the classification of income for the Federal income taxation of individuals is essentially three-tiered: gross income, adjusted gross income and taxable income. Section 61(a) 1 provides the general definition of gross income: "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, and similar items * * *". Courts have viewed this broad definition as evidence of congressional intent to tax all gains except those specifically excluded by law. See, e.g.,
Adjusted gross income is defined in section 62 in pertinent part as follows:
For purposes of this subtitle, the term "adjusted gross income" means, in the case of an individual, gross income minus the following deductions:
(1) TRADE AND BUSINESS DEDUCTIONS.--The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.
(2) TRADE AND BUSINESS DEDUCTIONS OF EMPLOYEES.--
(A) REIMBURSED EXPENSES.--The deductions allowed by part VI (sec. 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer.
(B) EXPENSES FOR TRAVEL AWAY FROM HOME.--The deductions allowed by part1978 Tax Ct. Memo LEXIS 306">*314 VI (sec. 161 and following) which consist of expenses of travel, meals, and lodging while away from home, paid or incurred by the taxpayer in connection with the performance by him of services as an employee.
(C) TRANSPORTATION EXPENSES.--The deductions allowed by part VI (sec. 161 and following) which consist of expenses of transportation paid or incurred by the taxpayer in connection with the performance by him of services as an employee.
(D) OUTSIDE SALESMEN.--The deductions allowed by part VI (sec. 161 and following) which are attributable to a trade or business carried on by the taxpayer, if such trade or business consists of the performance of services by the taxpayer as an employee and if such trade or business is to solicit, away from the employer's place of business, business for the employer.
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The final tier, taxable income, is defined in section 63: 2
(a) GENERAL RULE.--Except as provided in subsection (b), for purposes of this subtitle the term "taxable income" means gross income, minus the deductions allowed by this chapter, other than the standard deduction allowed by part IV (sec. 141 and following).
(b) INDIVIDUALS ELECTING STANDARD DEDUCTION.1978 Tax Ct. Memo LEXIS 306">*315 --In the case of an individual electing under section 144 to use the standard deduction provided in part IV (sec. 141 and following), for purposes of this subtitle the term "taxable income" means adjusted gross income, minus--
(1) such standard deduction, and
(2) the deductions for personal exemptions provided in section 151.
Expenses which are allowable as itemized deductions include those allowable under section 162 as ordinary and necessary business expenses incurred in carrying on the trade or business of being an employee. See, e.g.,
In summary, gross income is defined as all gain from whatever source derived unless specifically excluded by law. Adjusted gross income is gross income less certain specified deductions. Taxable income is less certain specified deductions. Taxable income is adjusted gross income less1978 Tax Ct. Memo LEXIS 306">*316 personal exemptions and itemized deductions or, in lieu of itemized deductions, the standard deduction.
The issue here is where within this framework petitioner's shortages fall. Petitioner contends that the shortages should be allowed as an offset against gross income, in effect as an exclusion of the amount of his wages necessary to compensate his employer for shortages incurred by petitioner. In the alternative petitioner contends that with respect to overages and shortages he was engaged in a separate trade or business apart from his status as an employee so that the shortages are deductible in determining adjusted gross income, presumably pursuant to section 62(1). Respondent, on the other hand, argues that the shortages are an employee business expense of a type which qualifies for deduction only from adjusted gross income and only if deductions are itemized. We think the statutory structure mandates the conclusion advanced by respondent.
We find no merit in petitioner's contention that the shortages should be allowed as an offset against gross income. Petitioner was in the trade or business of being an employee of the various racetracks as a pari-mutuel clerk. As such1978 Tax Ct. Memo LEXIS 306">*317 his compensation was specified in the collective bargaining agreement at a set rate and must be included in its entirety in gross income. Petitioner's shortages were not a factor in determining gross compensation. Rather, the shortages were an expense which petitioner incurred in earning the agreed gross compensation.
Petitioner may not, as he attempts to, escape characterization of the shortages as employee business expenses by arguing that he had "no claim of right" 2 to such amounts. The fact that, as a condition of employment, petitioner was obligated to pay for the shortages does not permit circumvention of the statutory design to treat employee business expenses as deductions rather than exclusions from gross income. In this respect petitioner's shortages are no different from expenses for items such as uniforms or tools which certain employees may be required to incur as a condition of employment. The Code and regulations thereunder provide that such employee business expenses are allowable as deductions in determining adjusted gross income or taxable income as appropriate. By negative inference, such employee business expenses have no effect on the calculation of gross1978 Tax Ct. Memo LEXIS 306">*318 income.
1978 Tax Ct. Memo LEXIS 306">*319 This result is not altered by the deduction of such amounts by some of petitioner's employers prior to paying him. The situation here is analogous to cases where gross income was found to include income from discharge of preexisting indebtedness owed to the employer. See
As an alternative argument petitioner seeks to characterize his shortages and overages as a trade or business distinct from his employee status so that the expenses would qualify as a deduction from adjusted gross income pursuant to section 62(1). Petitioner's1978 Tax Ct. Memo LEXIS 306">*320 argument is frivolous. Petitioner's shortages and overages occurred as a result of inadvertent errors in transactions which were an integral part of his employment as a parimutuel clerk. They in no way may be likened to a separate trade or business. The shortages arose from errors in transactions undertaken in the "performance of services by the taxpayer as an employee" and therefore do not qualify for deduction from gross income pursuant to section 62(1).
As a result, the allowability of these shortages as deductions from gross income is governed by section 62(2).Section 62(2) allows a deduction of employee business expenses from gross income if they are expenses for which the employee receives reimbursement from his employer, expenses for travel away from home, transportation expenses, or expenses of outside salesmen. Petitioner's shortages may be characterized as none of these. Consequently, the shortages are employee business expenses which do not qualify for deduction under section 62(2); they qualify for deduction only as itemized deductions from adjusted gross income. Since petitioner elected the standard deduction, he may not also deduct these expenses separately.
1978 Tax Ct. Memo LEXIS 306">*321 We hold that the shortages may not be utilized by petitioner as an offset against gross income or as a deduction in determining adjusted gross income. The shortages are an employee business expense of the type which may only be deducted from adjusted gross income and only if the standard deduction is not elected.
To reflect concessions by the parties and our conclusion on the disputed issue,
Footnotes
1. Unless specified otherwise, all section references are to the Internal Revenue Code of 1954 as amended and in effect during the year in issue.↩
2. Section 63 was amended to replace the standard deduction with zero bracket amounts for taxable years beginning after December 31, 1976. Sec. 102(a), Tax Reduction and Simplification Act of 1977, Pub. L. 95-30, 91 Stat. 134.↩
2. By using this language to describe his responsibility for the shortages, petitioner seeks to invoke the claim of right doctrine and the case law developed thereunder. Under that doctrine, if "a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent."
North American Oil Consolidated v. Burnet, 286 U.S. 417">286 U.S. 417United States v. Merrill, 211 F.2d 297">211 F.2d 297Curran Realty Co. v. Commissioner, 15 T.C. 341">15 T.C. 341Clark v. Commissioner, 11 T.C. 672">11 T.C. 672↩