                          T.C. Memo. 1996-310



                        UNITED STATES TAX COURT



                KATHLEEN A. BROWN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20832-95.                         Filed July 10, 1996.



     Kathleen A. Brown, pro se.

     T. Alan Friday, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SCOTT, Judge:     Respondent determined deficiencies in

petitioner's Federal income taxes and accuracy-related penalties

under section 6662.1    The deficiencies were in the amounts of

     1
        All section references are to the Internal Revenue Code
in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
$956 and $1,213, and the accuracy-related penalties were in the

amounts of $191.20 and $242.60, for the calendar years 1991 and

1992, respectively.

     The issues for decision are:    (1) The amount of income from

tips that petitioner is required to report for each of the years

here in issue, and (2) whether petitioner is liable for the

accuracy-related penalties as determined by respondent.

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are found

accordingly.

     During the years 1991 and 1992, and for a number of years

prior thereto, petitioner worked as a waitress at Angelo's Steak

Pit restaurant (Angelo's) in Panama City Beach, Florida.

Petitioner's legal residence at the time she filed her petition

in this case was in Panama City, Florida.    Petitioner filed her

Federal income tax returns for the years 1991 and 1992, reporting

both wage income and tip income.    Petitioner was an experienced

waitress during the years here in issue.    She had been working as

a waitress for approximately 24 years.

     Angelo's was a seasonal restaurant open only during the

months March through September.    In 1991 petitioner worked at

Angelo's 147 days during the months March through September, and

in 1992 she worked 157 days at Angelo's during these months.

Petitioner worked the dinner shift from approximately 4 p.m.

until 9:30 or 10 p.m. each day she worked.    About 20 percent of
                               - 3 -


petitioner's customers charged their food, and the remaining 80

percent of her customers paid cash for their food.   The customers

who charged food generally put an amount for a tip on the charge

slip, but the restaurant would give the amount of such tips to

petitioner in cash before she left for the day.    During the years

1991 and 1992, petitioner kept a record of her tips in a

notebook.   Petitioner would place in her pocket the cash tips she

received and the cash she received from tips that were charged.

Before she left the restaurant, she generally gave a portion of

her tips to the busboys, the bartenders, sometimes the cooks,

and, if she had been unusually busy, other waitresses from whom

she had received help.   Although the amounts she gave varied, she

always gave a portion of her tips to these employees, except on

the rare occasions when she had a very slow night and received

minimal tips.   Occasionally she would have a misorder of food or

would break some dishes.   When this happened, petitioner would be

required to pay the restaurant the amount of the misordered food

or the value of the items broken.   Petitioner was a good waitress

and did not often misorder food or break plates.

Occasionally, one of petitioner's customers would walk out

without paying for the food he had been served, and petitioner

was required to pay the restaurant the amount due by the

customer.
                               - 4 -


     Petitioner would take the amounts she paid busboys,

bartenders, cooks, and other waitresses, and any amount she had

to pay for misordered food, breakage, or unpaid orders from the

cash in her pocket from tips to make the payments before she left

the restaurant for the evening.

     Busboys who served a station in which petitioner worked in

Angelo's would stand, when not busy, at a place in the restaurant

where they could see all the tables petitioner served and would

attempt to remove used dishes promptly.   Most waitresses at

Angelo's, as did petitioner, regularly shared their tips with

busboys, bartenders, and cooks.   However, because a few

waitresses did not regularly follow this practice, in 1996

Angelo's put in a requirement that each waitress turn over to the

manager each evening before she left $3 of her tips to be divided

among the employees.   After this practice was put into effect,

petitioner, as did a number of other waitresses, would give an

amount to these employees in addition to the $3.

     Angelo's was a family restaurant.    Occasionally, a group of

10 to 15 persons would come in as a party and be seated at

separate tables, but the entire check would be paid by one

person.   On such occasions, if different waitresses served the

different tables, the waitresses would split the tip.

     Although petitioner "paid out" different amounts to the

busboys, bartenders, and cooks, depending on how much she had
                                - 5 -


received in tips during the evening, the average of her "payout"

to these other employees was $10 a day.

     When petitioner arrived home after work each evening, she

would enter in a notebook the date, day of the week, number of

customers she had served, her hours worked, and the amount of

cash she had left in her pocket when she got home, which amount

she listed as tips.    It was from these records that her return

preparer computed her tip income reported on her income tax

return in each of the years 1991 and 1992.     The amount of tips

she computed from these records was $7,821.38 for 1991 and

$8,059.16 for 1992.    These amounts are substantially the sums

resulting from an addition of the amounts that petitioner entered

in the notebooks she kept as a record of her tips.     The system

petitioner used to record her tips was one that had been

suggested to her, and she had followed it for many years.

     Respondent determined that petitioner had earned $11,340 and

$12,457 in tips for the years 1991 and 1992, respectively.     These

amounts were determined based on a report of a revenue agent, who

had used the "McQuatters Formula" to determine the amount of the

tips.    Respondent gave this name to the formula, because this

formula had been accepted in the case of McQuatters v.

Commissioner, T.C. Memo. 1973-240.2     In general, the formula is

     2
        It should be noted that the Court in McQuatters v.
Commissioner, T.C. Memo. 1973-240, did not approve the amount
determined by respondent by the formula in full, but reduced the
                               - 6 -


applied by obtaining from the restaurant the total sales each

individual waitress had made and reducing those sales for

"stiffs", which in this case was based on 13.33 percent of sales,

to arrive at sales subject to tips.     The tip rate was then

determined by the average tips as shown on charge sales, reduced

by approximately 1 percent, with the resulting percent, which was

14.63 percent in this case, applied to the sales subject to tips.

     On her income tax returns filed for 1991 and 1992,

petitioner claimed the standard deduction of $5,000 for 1991, and

$5,250 for 1992 in lieu of itemized deductions.

     On certain days the tips petitioner showed on her records

were less than the tips shown on the charge slips of her

customers.   It is petitioner's position that at least a

substantial amount, if not all, of the difference in the amount

that respondent determined to be her tips and the amount she

showed on the records she kept was due to her payout of tips to

the busboys, bartenders, cooks, and other waitresses, and her

payment for breakage, walkouts, and similar items.

                              OPINION

     The record here shows that, except for mistakes petitioner

might have made, her records reported only the cash that she had



amount, stating: "We are convinced that petitioners gave 10 to
15 percent of their tips to the captains and that to account for
this and other factors respondent's formula should be applied
with a 10 percent rather than a 12 percent rate of tipping."
                                - 7 -


left in her pocket when she got home from work, after paying for

any breakage or the like and sharing tips with other employees.

Although, based on petitioner's testimony, these payments might

not account for the complete difference in the amounts determined

by respondent and the amounts that petitioner reported, they

would account for a substantial amount of the difference.

     Respondent recognizes that it was customary for waitresses

to share tips with other employees and also to pay for breakage,

walkouts, and misordered food, and that petitioner did use part

of her tips for this purpose.   However, it is respondent's

position that these items do not reduce petitioner's gross income

in arriving at adjusted gross income, but are itemized deductions

which petitioner is not entitled to take, since she used the

standard deduction in computing her income.   Respondent claims

that these amounts are employee business expenses that are not

deductible because of the provisions of section 62(a) in arriving

at adjusted gross income, but are itemized deductions subject to

certain limitations and not deductible when the taxpayer uses the

standard deduction.

     Section 62(a) provides for the deduction by an individual

taxpayer of trade or business expenses of that taxpayer "if such
                               - 8 -


trade or business does not consist of the performance of services

by the taxpayer as an employee."3

     Respondent does not deny that it was customary for

waitresses to share tips with busboys, bartenders, cooks, and

sometimes other waitresses, and that they were required to pay

for any breakage and food that was misordered, or for bills not

     3
         SEC. 62. ADJUSTED GROSS INCOME DEFINED.

          (a) General Rule.--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) Certain trade and business deductions of
           employees.--

                     (A) Reimbursed expenses of employees.--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. The fact that the
                reimbursement may be provided by a third party
                shall not be determinative of whether or not the
                preceding sentence applies.

                     (B) Certain expenses of performing artists.--
                The deductions allowed by sec. 162 which consist
                of expenses paid or incurred by a qualified
                performing artist in connection with the
                performances by him of services in the performing
                arts as an employee.
                                 - 9 -


paid by walkouts, or mistakes they made on the bills, but

contends that these items are deductions and not an offset that

results in a reduction in the gross income received from tips.

At the conclusion of the evidence, the Court called the attention

of respondent's counsel to the fact that many cases had allowed a

waitress's tips to be reduced by "payouts" to busboys and

bartenders in determining her gross income from tips, and

requested a memorandum explaining any distinction between those

cases and this case.   The memorandum filed discusses none of

these cases.

     In Meneguzzo v. Commissioner, 43 T.C. 824, 829 (1965),

respondent in computing tip income of a waiter at Whyte's

Restaurant in New York City, reduced the tips computed on the

charge payment or left in cash by 15 percent "paid out" to

busboys.   In approving the formula, we specifically referred to

the reduction of the income from tips by 15 percent for sharing

by the waiter of tips with busboys.      Meneguzzo v. Commissioner,

43 T.C. at 833.   This same type reduction has been used by this

Court in numerous other cases.    Some of the cases in which tip

income was reduced by an amount shared by the waitress with

busboys are the following:   Guadron v. Commissioner, T.C. Memo.

1994-553; Nika v. Commissioner, T.C. Memo. 1991-335; Butler v.

Commissioner, T.C. Memo. 1991-118; Williams v. Commissioner, T.C.

Memo. 1985-476; McLeod v. Commissioner, T.C. Memo. 1984-658;
                               - 10 -


Zibilich v. Commissioner, T.C. Memo. 1972-92; and Chippi v.

Commissioner, T.C. Memo. 1971-236.

     In Chippi v. Commissioner, T.C. Memo. 1971-236, we found

that the tip income of certain waiters should be reduced by 20

percent for tips to busboys.

     These cases do not specifically state whether the taxpayer

used the standard deduction or itemized deductions.   No such

statement was necessary, since the reduction was in the gross

income required to be reported and, therefore, would not affect

itemized deductions or the taking of the standard deduction.

     The law with respect to expenses that an employee may deduct

from gross income to arrive at adjusted gross income has not

changed since 1954 in a way to affect the issue here.   Since the

enactment of the 1954 Revenue Code, an employee has been entitled

to claim business expense deductions, except those in specified

categories, only as itemized deductions and not as deductions

from gross income in arriving at adjusted gross income.4

     4
         The Revenue Code of 1954 as originally enacted provided--

     SEC. 62.   ADJUSTED GROSS INCOME DEFINED.

          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
                             - 11 -


     It is clear, therefore, that both respondent and this Court

have for many years consistently reduced computed tip income by

the amount of the tips a waiter or waitress shared with busboys,

bartenders, and similar employees.    There is no specific

discussion in any case we have found of why this is a necessary

adjustment to the amount of tips placed on charge slips or left



          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 part 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 IV (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.
                                - 12 -


on a table in cash to arrive at the gross tip income of a waiter

or waitress.   However, the inference from the cases is that the

tip is left to be shared by all who have served the customer.

     Clearly, when more than one waitress works at a table and

one waitress receives the tip, the tip is intended for all

waitresses who served that table.    Unquestionably, where

petitioner shared her tip with another waitress who helped her,

the tip she shared was really intended in part for the other

waitress, and the other waitress's part is not income to

petitioner.    Whether the person leaving a tip intended a pass-

through for the busboys, bartenders, and cooks is not as clear.

The testimony in this record shows that the busboys stood in full

view and helped in various ways with serving and clearing the

table.   The bartender might not be directly in sight, but people

who ordered drinks were certainly aware of the work of the

bartender.    Therefore, in our view, the sharing by a waitress of

tips with busboys, bartenders, and cooks is merely to carry out

the pass-through intent of the customer, and the gross amount of

the tip is not intended to be hers to keep in its entirety.    For

over 30 years this has been the rationale of respondent in

determining tip income and of this Court in approving or

modifying that determination.    In this case, even though

respondent's counsel was requested to explain the change in

position from prior cases, no such explanation has been
                                - 13 -


forthcoming.   Under these circumstances, we do not consider this

an appropriate case to discuss in further detail the correctness

of the long-standing method of computing gross income from tips

by reducing the tips left on a waitress's table by the "payout"

she makes to busboys, bartenders, and other waitresses.

     Respondent apparently does not dispute petitioner's

testimony that on the average she "paid out" $10 a day to

busboys, bartenders, cooks, and other waitresses.    This amount is

in line with the 20 to 25 percent of tips allowed as "payouts" to

other employees in some recent cases.    We, therefore, hold that

the amount of tip income of petitioner as determined by

respondent should be reduced in each year by $10 a day for

"payouts" to other employees.

     The situation with respect to the cash payments to the

restaurant for breakage, misordered food, walkouts, and similar

items is different.   We did not find nearly as many cases dealing

with this question as we did cases dealing with "payouts" to

busboys and similar employees.    Also, we found no case making a

specific adjustment for these items, although some cases referred

in general to a consideration of the items.5   In this case

     5
        For instance,   in Applegate v. Commissioner, T.C. Memo.
1980-497, we stated:    "We also hold that the petitioner failed to
sustain her burden of   proving that she is entitled to deductions
for the 'walkouts'".    In Sanders v. Commissioner, T.C. Memo.
1979-352, we stated:

          Finally, petitioner argues that respondent has not
                             - 14 -


petitioner's testimony is very imprecise as to the amount she

might have been required to pay in either year here in issue for

misordered food, breakage, or walkouts.   Since petitioner claimed

the standard deduction on her income tax returns, she is not

entitled to itemized deductions.   Therefore, if her payment for

misordered food, breakage, and walkouts is an employee business

expense, the amount is immaterial unless it would exceed the

standard deduction, which clearly it would not.

     The evidence in this case does not show enough of the nature

of the payments for breakage, misordered food, and walkouts for

us to determine whether these payments are itemized business

expense deductions for petitioner or whether some other

adjustment for these amounts would be necessary if petitioner had

shown with any exactitude the amount of such payments.

     Since the evidence does not show the amounts, if any,

petitioner paid in the years here in issue for breakage,

misordered food, and walkouts, we need not decide whether such




     allowed enough of an offset for amounts paid to busboys and
     amounts she had to pay for breakages and checks that her
     customers did not pay. Respondent allowed 10 percent as
     paid to busboys. This amount computes to be larger than the
     fifty cents daily she paid the busboys and thus leaves a
     margin for breakages and unpaid checks. Petitioner has not
     shown, nor is there anything in the record from which we can
     estimate, the amount of breakage or unpaid checks. We must,
     therefore, find for respondent on the amount of offset to be
     made to gross tips.
                              - 15 -


payments would be itemized deductions or some other type of

adjustment if they had been proven.

     The testimony shows that, except for failing to reduce

petitioner's tips for "payouts" to busboys and other employees,

respondent's computation of petitioner's tip income is

reasonable.   In fact, petitioner, though not stating that she

accepted it, did not truly question the amounts respondent showed

for various items.   She, herself, thought the difference in her

records and respondent's computation was due to the amount of the

tips she passed on to others in the restaurant who also served

the customers and amounts she paid for breakage and other items.

Certainly these differences in method of computation of tip

income account for a substantial portion of the difference in

petitioner's and respondent's computations.

     In our view, petitioner has shown that she should not be

held liable in either year here in issue for the accuracy-related

penalty under section 6662.   Although respondent did not state

what subsection of section 6662 she contended required the

penalty, it is apparent that the penalty must have been intended

as one for negligence.   Petitioner had her tax returns prepared

by a preparer she considered competent.   She kept records in a

way she believed to be in accordance with the instructions from

her return preparer.   Certainly for someone with petitioner's

lack of tax knowledge, it would be normal to expect that her tips
                              - 16 -


were the amount received, less what she had "paid out" to other

employees and had paid for breakage and the like.   The difference

in what she showed on her records and the amounts determined by

respondent with only these adjustments is difficult to determine

from this record.   However, if petitioner had kept the records to

substantiate all items she paid from tips, the difference might

have been relatively small.   For a person of petitioner's

understanding of bookkeeping, she kept a reasonable set of books.

Petitioner explained that she now kept better records showing all

items separately.   She stated that she now accounts for the total

amount which comes into her hands as tips.   From her testimony,

apparently she started her new system after the revenue agent

called her attention to inaccuracies in the system she was using.

However, in our view, petitioner followed what she understood the
                             - 17 -


instructions to be as to the records she should keep, and we,

therefore, conclude that she should not be charged with the

accuracy-related penalty.



                                        Decision will be entered

                                   under Rule 155.
