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SIMS v. UNITED STATES

February 20, 1991

SAM SIMS, JR., Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant



The opinion of the court was delivered by: WISEMAN

 THOMAS A. WISEMAN, JR., CHIEF UNITED STATES DISTRICT JUDGE

 This action was brought by Sims for refund of withholding taxes paid on gambling winnings in the amount of $ 4,018.99 pursuant to 26 U.S.C. § 3402(q)(1). The government counterclaimed for the unpaid balance of the assessments against Sims in the amount of $ 959,790.83, plus statutory additions. Sims also seeks preliminary and permanent injunctions restraining the Internal Revenue Service ("IRS") from collecting the balance of the taxes, penalty, and interest.

 This Court held a bench trial on December 11, 1990. Pursuant to the Court's direction at the close of the trial, the parties have filed proposed findings of fact and conclusions of law. For the reasons stated below, the Court grants all relief requested by Sam Sims, Jr. and dismisses the government's counterclaim.

 I. Facts

 Sims seeks a refund of withholding taxes, applicable to the years 1982, 1983, and 1984. The payments were made pursuant to the provisions of 26 U.S.C. § 3402(q), *fn1" which impose a withholding obligation upon persons who make payments of gambling winnings in excess of $ 1,000.

 During the federal tax years 1982, 1983, and 1984, Sims was a "numbers banker" in Davidson County, Tennessee. As a banker of a gambling operation, Sims provided money to "runners," or "pick-up men," to pay winning bettors. The runners had no designated territory. They could obtain customers from wherever they found them, and they had the choice of taking their bets and betting slips to other numbers bankers instead of to Sims. Sims accepted business from virtually any runner who had an honest reputation. Sims generally did not know where the runners operated or the identities of their customers.

 The runners wrote the customers' bets on a piece of paper, often leaving with the customer a duplicate copy of the betting slip. The slip identified the customer by a code name or initials. The runners would take the betting slips and the customers' bets to S & S Discount House every day, or in some instances, Sims made arrangements to pick up the slips.

 Sims exercised no control over how the runners conducted their businesses, how long or hard they worked, or how many bets they placed. If a runner proved to be dishonest in his dealings with his customers or with Sims, Sims would cease doing business with the runner, but the nature and extent of the runner's efforts would otherwise be his own affair.

 Sims picked a daily winning number from various sources, such as the Dow Jones Average. Because the winning number had to contain three random digits, the odds of winning were necessarily 1000 to 1. The pay-off for a winning number was 700 to 1.

 An employee of Sims would check all the bets against the winning number. Sims would then pay the runner who had brought in the winning bet. No one other than Sims or his brother ever paid the runners. Once the runners were paid the winning bets, the runners would deliver the winnings in cash to the customer.

 Sims paid the runners in cash a percentage commission of the bets they collected, usually 10 to 20 percent, on a daily or weekly basis depending on the agreement between Sims and the runners. Alternatively, some runners would deduct their commission from the dollar amount of their bets prior to delivering the money to Sims.

 Runners sometimes, in essence, "ran a tab" with Sims by turning in betting slips unaccompanied by cash. When this occurred, the runner's account would be debited accordingly and the amount of the debit would be deducted from any payment of winnings Sims subsequently made to the runner. To the extent such payments did not cover winnings, the runner would supply the deficiency from his or her own funds.

 Sims recognized no responsibility to the bettors. If a bettor complained to Sims about not being paid for a winning number, he would inform the runner of the complaint, but not make the payment himself.

 Sims recorded the total "take" from bets each day and the aggregate winnings. He did not keep records of the amount of individual bets, nor did he record the individual winnings. He threw the betting slips away after a few days.

 Sometime in the mid 1970's, but prior to 1976, Sims was approached by an Alcohol, Tobacco, and Firearms ("ATF") agent and an IRS agent regarding the manner in which he should maintain gambling records to insure compliance with federal excise and income tax laws. The agents advised him to maintain daily totals of receipts and disbursements, for purposes of paying federal gambling excise taxes. They further advised him to discard records of individual betting transactions, presumably in order to avoid state gambling prosecutions. Sims thereafter maintained records only of aggregate daily receipts and winnings, and not of individual transactions.

 Sims never withheld any money from the winnings paid to bettors, nor filed a return with the IRS reporting any withholding on gambling winnings. In 1985 the IRS conducted an audit of Sims' income tax returns. During the course of the audit, the auditor, Stephanie Borop, determined that Sims was liable under the withholding provisions of 26 U.S.C. § 3402(q). The records Sims had kept were not sufficient for purposes of imposing the withholding and reporting obligations of § 3402(q). Because Sims' books and records listed the amounts of winnings in daily totals, rather than broken down by individual winnings, Ms. Borop determined that Sims was liable for withholding on winnings on each day in which the aggregate winnings exceeded $ 1,000.

 Sims has paid a portion of the assessment for each quarter, and timely filed a claim for refund. The IRS disallowed the claim. Sims timely filed this suit for refund of taxes pursuant to 26 U.S.C. § 7422. The ...


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