Former President Donald J. Trump vowed to eliminate taxation of income from tips if he were to win a second term in the White House. During a recent rally in Nevada, Trump stated, “For those hotel workers and people that get tips, you’re going to be very happy. Because when I get to office, we are going to not charge taxes on tips.”
Interestingly, on February 11, 1975, Judge Thomas W. Clary addressed the issue of whether monies or “tokes” received by a craps dealer from casino patrons were taxable income or gifts.
The plaintiff, Wendell Olk, worked as a craps dealer in two Las Vegas casinos, the Horseshoe Club and the Sahara Hotel. The basic services performed by dealers involved managing the craps game, including collecting dice and facilitating play.
Plaintiff Olk contended that the monies were not income but rather gifts from casino patrons, specifically excluded from gross income under the Internal Revenue Code (IRC). The relevant code section states that gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.
Unfortunately, Judge Clary ruled that the monies received by Olk were indeed taxable income. While the term “tokes” was used colloquially, the Court considered them equivalent to tips. And based upon IRS rules and regulations, tips are explicitly included in gross income, Tip income is taxable and must be reported | Internal Revenue Service (irs.gov).
BUT the Supreme Court has held that Treasury regulations cannot add anything to the statute that is not expressly provided for by Congress. In other words, the Court gives no weight to regulations that attempt to expand the scope of a statute beyond its plain meaning. However, in 1974, Congress passed the Federal Insurance Contributions Act (FICA) to include tips in the definition of wages for Social Security and Medicare tax purposes; Congress did NOT state that tips were also to be considered taxable income for federal income tax purposes.
According to the Supreme Court, “every word within a statute is there for a purpose and should be given its due significance. This fact only underscores our duty to refrain from reading a phrase into the statute when Congress has left it out. ‘[W]here Congress includes particular language in one section of a statute [, e.g., tips are taxable for FICA purposes] but omits it in another [, e.g., tips are Not included for federal income tax purposes,] …, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion’.” Russello v. United States, 464 US 16, 23, 78 L Ed 2d 17, 104 S Ct 296 (1983) and Keene Corp. v. United States, 508 U.S. 200 (1993)
Therefore, there appears to be a strong legal argument for not taxing tips! According to Black’s Law Dictionary, Gifts are defined as “The voluntary transfer of property [, e.g., money,] to another without compensation.” When it comes to tips, they are generally considered money beyond the cost of the bill given to an employee by a customer for the service provided. Tips are voluntary in nature made by customers to service providers as a token of appreciation for good service. Unlike wages or salaries, tips are not mandatory, nor guaranteed.
While there isn’t a specific court case where tips have been explicitly ruled as gifts, there have been discussions and controversies surrounding the acceptance of gifts by Supreme Court justices. According to a report by Fix the Court, U.S. Supreme Court justices have accepted numerous gifts over the last two decades. The data suggests that SCOTUS justices have received 445 gifts valued at $4,780,720 during this period. Justice Clarence Thomas—who I extremely respect and agree with most of his opinions—received the largest portion of gifts (193), followed by the late Sandra Day O’Connor (73), who was the first woman appointed to the Supreme Court. And the late Antonin Scalia and Ruth Bader Ginsburg also received identified gifts during their tenure on the Court.
If highly paid Supreme Court Justices can accept non-taxable gifts, then it would make perfect sense that waitstaff, bartenders, craps dealers, etc. ought to be able to accept tips as non-taxable gifts. Remember, Congress specifically excluded tips from federal taxable income when they passed the FICA legislation. Therefore, according to the Supreme Court, tips should not be taxable to the recipient.
To be honest, the administration and collection of the individual income tax violates our right to be left alone, our Fourth Amendment right to be secure in our papers and effects, and our Fifth Amendment right to not be compelled to be a witness against ourselves. Furthermore, a tax on the wages of labor represents a direct tax on property and a capitation tax; and such taxes must be apportioned in accordance with the census. Since there is no apportionment requirement, the taxation of salaries, wages, and self-employment income should be ruled unconstitutional. THE U.S. INDIVIDUAL INCOME TAX IS INCOMPATIBLE WITH A FREE SOCIETY - Kindle edition by Beard Jr., Robert G.. Professional & Technical Kindle eBooks @ Amazon.com. Help us get the word out… feel free to forward this blog to family, friends, neighbors, and associates.
President Trump is on the right track! If you want your taxes lowered—including the insidious inflationary tax—vote for Trump and ALL Republicans on November 5, 2024. We must Make America Great Again and restore the American Dream for our children and grandchildren.
Dum Spiro Spero—While I breathe, I hope.
Slàinte mhath,
Robert (Mike) G. Beard Jr., C.P.A., C.G.M.A., J.D., LL.M.