In this case, the U.S. District Court for the District of Nevada ruled in favor of Wendell Olk, a craps dealer, determining that tokes are not taxable income to dealers but rather non-taxable “tributes to the gods of fortune.”
Introduction: Setting the Stage
As the 2024 presidential election looms, an unexpected issue has resurfaced in the political arena: the taxation of tip income. Both leading candidates are advocating for an end to this taxation, sparking interest in a debate that has far-reaching implications for millions of American workers. However, this is not a new debate; the battle over the taxation of tips has deep roots, particularly in the Las Vegas casino industry, where a small “civil war” over this issue has been simmering since the 1970s. This battle, driven by casino dealers seeking to end the taxation of their “toke” receipts, is a fascinating and ongoing chapter in tax history.
In the casino industry, “tokes” are distinct from the conventional tips received by service employees. Dealers in casinos are not allowed to favor or provide enhanced services based on tipping by players at the tables. This characteristic separates tokes from traditional gratuities, complicating their status under tax law and leading to heated disputes with the IRS over the years. Dealers were emphatic that tokes are distinct from tips as they are not a direct payment for services rendered, but rather a superstitious gesture made by patrons in the gaming world. At least one U.S. District Court judge agreed with the dealers.
Background and Early Battles
The conflict began in earnest in the 1970s, fueled by the unique nature of the Las Vegas casino environment and the cultural significance of tokes. In this setting, casino patrons regularly give tokes to dealers, often in the form of chips or cash, with the understanding that these offerings are gestures of goodwill or luck, rather than payment for services. The amounts at issue were not trivial. According to IRS studies at the time, “Nevada casino employees, including waiters and other tip-earners, reported $31 million in tips in 1970 but actually received about $226 million in tips.” See Casino Chips Given to Dealers are Focus of a Tax Dispute, The New York Times (Nov. 29, 1981).
The turning point came with an unexpected 1975 court ruling in Olk v. United States, 388 F. Supp. 1108 (D. Nev. 1975). In that case, the U.S. District Court for the District of Nevada ruled in favor of Wendell Olk, a craps dealer, determining that tokes are not taxable income to dealers but rather non-taxable “tributes to the gods of fortune.” This ruling momentarily changed the landscape, allowing dealers to exclude tokes from their taxable income.
Interestingly, the district court did not base its decision on a whimsical dismissal of tax law. Rather, it relied on existing legal standards, including IRS regulations and precedent. The court examined IRS regulation 26 C.F.R. § 1.61-2(a), which generally includes tips in the definition of gross income. However, the court questioned whether tokes, given their unique nature, should be classified differently. The court turned to the Supreme Court decision in Commissioner v. Duberstein, 363 U.S. 278 (1960), which provided a framework for distinguishing gifts from compensation based on the transferor’s intention. Applying Duberstein, the court found that unlike tips, tokes arise from “impulsive generosity or superstition” rather than an intention to compensate dealers, aligning tokes more with nontaxable gifts. Olk, 388 F. Supp. at 1113.
However, this reprieve for casino dealers was short-lived. In 1976, the U.S. Court of Appeals for the Ninth Circuit reversed the district court’s decision, holding that tokes are indeed taxable income. See Olk v. United States, 536 F.2d 876 (9th Cir. 1976). The appellate court rejected the district court’s factual findings, concluding that even a “[t]ribute to the gods of fortune . . . can only be described as an ‘involved and intensely interested’ act.” Id. at 879. The court further reasoned that since tokes are received in the context of the dealers’ employment and derived from the casino’s operations, they constitute income. This reversal marked the beginning of a protracted struggle between casino dealers and the IRS over the taxability of tokes, setting the stage for more aggressive enforcement measures.
IRS’s Aggressive Enforcement and Industry Response
With the Ninth Circuit’s decision as a backdrop, the IRS initiated a series of aggressive measures to enforce the taxation of tokes and tips. One of the most notorious examples involved the IRS stationing armed guards at casino tables at the end of each shift to collect the tokes for delivery to the casino “cages” for proper accounting. See Casino Dealers at Odds with IRS Proposal to Levy Taxes on Tips, L.A. Times (Jan. 6, 1988) (“the dealers refused to hand over the money on Monday, [and] the agents promised to be back with a court order”). This practice ensured that the toke income was counted and taxes were withheld, a strategy designed to crack down on underreporting and non-compliance. See also Petrie v. Commissioner, 686 F. Supp. 1407 (D. Nev. 1988) (noting that after the Caesar Palace “Toke Committee” refused to comply with the IRS levy, the court issued a “Warrant for Entry” permitting IRS agents to enter the casino and forcibly seize tokes belonging to the blackjack dealer).
One dealer offers the following vivid recollection of the IRS seizing “toke boxes” at his casino:
And you got envelopes then; every day, you got an envelope. Like if you got an envelope the next morning you went in, the toke committee had cut up your tokes, and you got your envelope, and it was great because you didn’t have to claim it all. And I did that from ’83 until I went on the floor. After the IRS came in, it was Memorial Day weekend, I’m pretty sure it was Memorial Day weekend, maybe it was Labor Day weekend. . . .
They came in in ’91, I think, and they took our boxes out. I believe it was ’91, it might’ve been, it had to have been ’90 or ’91. And every day, they came in and they sealed our boxes and they took them out. And they counted all the money up. . . .
But then when the IRS came in and decided everything had to go through the cage, that’s when they decided you needed to have like a bank account in the cage, and everything was going to go on paychecks. I believe it was a deal they made with the hotel because the hotel could be fined for not making us, back then, file correctly. Even though it was up to us individually, I guess there was some type of, I’m not real positive about corporate law and all that, but I imagined there was some type of thing, because it’s strange to have IRS agents come in and just take your boxes out with the police, and that’s it, you see your money walk out the door, that’s it. . . .
Schwartz, Tales from the Pit: Casino Table Games Managers in Their Own Words, UNLV Gaming Press Books, 230 (2016).
The IRS didn’t stop there. In response to ongoing resistance from dealers and casinos, it began issuing new directives and implementing expansive compliance programs. These IRS enforcement actions included criminal prosecutions of dealers who attempted to evade the payment of tax on toke income. One of the most notable enforcement actions was the 2002 criminal prosecution of several casino dealers and a former casino executive at the Virgin River Casino in Mesquite, Nevada. Upon conviction, the criminal defendants were sentenced to prison for conspiring to underreport their toke income. The U.S. Attorney’s Office for the District of Nevada stated, “This case is not simply about Nevada casino workers who fail to report tip income. These defendants pleaded guilty to a conspiracy to deliver false documents to the IRS.” USDOJ Press Release, Former Virgin River Casino Executive and Dealers Sentenced for Conspiracy to Defraud the IRS (Sep. 23, 2002). These prosecutions demonstrated the IRS’s resolve to address non-compliance and were intended to serve as a warning to all tipped employees nationwide. Id.
In an early effort to address the underreporting of toke income, the IRS proposed an amnesty program in the 1980s. The program would have provided amnesty from civil penalties and criminal prosecution for dealers who voluntarily reported 100% of their toke income. However, negotiations between the IRS and the dealers fell apart when the government refused to sign a “closing agreement,” which would have legally bound the IRS to honor the terms of the amnesty. Without this agreement, dealers were reluctant to participate, fearing that they would still face future enforcement actions. See Casino Chips Given to Dealers are Focus of a Tax Dispute, The New York Times (Nov. 29, 1981); see also Lamb v. Commissioner, 53 T.C.M. (CCH) 704 (1987) (“[a]ssuming, without deciding,” that the revenue agent misled the taxpayer about the amnesty program requirements, Caesar’s Palace baccarat dealer was not entitled to amnesty due to failure to report 100% of toke income).
In a later effort to bring some order to the situation, the IRS introduced the Gaming Industry Tip Compliance Agreement (GITCA) program, outlined in IRS Publication 4932 (Rev. 2-2016) Catalog No. 57822U. The GITCA program was a partnership between the IRS and the gaming industry, aimed at promoting tax compliance among casino employees. Through GITCA, casinos could establish agreed-upon tip rates for different categories of employees. In exchange for complying with these rates and reporting requirements, participating employees and casinos were protected from IRS tip audits. As described in the publication, “GITCA is a voluntary compliance agreement designed specifically for the gaming industry to promote tax compliance among tipped employees and establish tip rates for all participating employees.” This voluntary compliance program marked a shift in IRS strategy, moving from purely punitive measures to cooperative agreements with the industry.
The Continuing Struggle: Casino Dealers’ Resistance
Despite the IRS’s “carrot and stick” approach to enforcing tip taxation, casino dealers in Las Vegas continued to resist the government’s attempts to collect taxes on their tokes. This resistance was not limited to court battles but extended into the public sphere, where dealers openly challenged IRS proposals and enforcement methods. As the IRS tightened its grip, dealers expressed frustration over what they perceived as an encroachment on their income and autonomy. Consistent with the district court’s original ruling in Olk, dealers continued to argue that tokes were not compensation but rather gestures of goodwill or superstition from players. See, e.g, Casino Dealers at Odds with IRS Proposal to Levy Taxes on Tips, L.A. Times (Jan. 6, 1988).
Casino dealers also pursued civil actions seeking to recharacterize the tax treatment of their toke receipts. For example, in Allen v. U.S. Department of Treasury, 976 F.2d 975 (5th Cir. 1992), Allen, a casino dealer, sought to characterize his tokes, not as ordinary income, but as gains from wagering transactions. If characterized as gains from gambling, then dealers could subtract the losses that they incurred while gambling as casino patrons from the tokes that they received while working in their roles as casino dealers. Relying on the Ninth Circuit’s decision in Olk, the court rejected Allen’s asserted characterization of toke income, ruling that tokes were properly treated as ordinary income.
This ongoing dispute reached new heights when the IRS adopted more pervasive methods for assessing tip income. Adhering to guidance from from its Chief Counsel, the IRS employed a variety of strategies, including the use of statistical data and surveillance, to reconstruct tip income when records were incomplete. See IRS National Office Field Service Advice Memorandum (Aug. 17, 2001) (“Subject: Tip Rate Review”). Historically, the IRS had relied on its revenue agents to audit dealers’ individual income records and special agents to conduct direct surveillance of casino floors, observing tips in action. However, as resources became more constrained, the IRS began using statistical data from previous casino rate reviews, applying this data to individual dealers and broader job classifications. Id. (statistical reconstruction is permissible “as long as its method is reasonable in light of all the surrounding facts and circumstances”).
The courts were largely receptive to the IRS’s indirect methods of reconstructing dealers’ toke income. For example, in Keogh v. Commissioner, 713 F.2d 496 (9th Cir. 1983), the IRS used statistical analyses to reconstruct unreported toke income for a dealer at the Dunes Hotel. Lacking comprehensive records, the IRS relied on diary entries from another dealer, applying the data across the dealer pool to estimate unreported income. Despite issues with the reliability of the diary and gaps in the data, the Ninth Circuit upheld both the tax court’s acceptance of the IRS’s methodology as well as the tax court’s 20% reduction of the tax liability due to the limitations of the statistical modeling. Id. at 500-02 (also upholding admission of the diary as a “business record” under Fed. R. Evid. 803(6)).
These actions only intensified the dealers’ opposition. Many viewed these measures as a violation of their privacy and an overreach of government authority. Adding to the controversy, some public figures voiced their concerns about the IRS’s approach. Representative Jack Kemp famously criticized the agency’s tactics, describing them as “heavy-handed” and questioning the fairness of its treatment of casino workers. Kemp Calls IRS Heavy-Handed, UPI (Jan. 14, 1988). His remarks echoed a broader public sentiment that questioned the government’s role in regulating tip income and the rights of service employees. Reflecting those sentiments, bipartisan legislation such as the “Tip Tax Fairness Act,” was proposed to eliminate an employer’s responsibility to act as the “tip police” in reporting its employees’ tip income. See National Restaurant Association Views on Tip Tax Fairness, Tax Notes (Sep. 23, 2002).
Impact on Casino Dealers and Industry Practices
The IRS’s enforcement measures and the subsequent dealer resistance had significant ramifications for casino operations and the practices of dealers. In response to the IRS crackdown, casinos implemented stricter controls and record-keeping practices for tokes. Dealers were often required to pool their tokes, which were then counted, recorded, and distributed after income tax was withheld. This system aimed to ensure transparency and compliance with IRS regulations but came at the cost of dealers’ autonomy over their tip income.
The nationwide push by the IRS for tip compliance has continued into recent years, reflecting the agency’s enduring commitment to taxing tip income. At the same time, legislative and regulatory reforms also targeted the conduct of casino patrons and their potential roles in tax evasion and money laundering schemes. See generally Rose, What Happens in Vegas . . . Is Reported to the IRS, Gambling and the Law (2017); Chiang, Kuang & Dong, Tax Reform Law Deals Pro Gamblers a Losing Hand, Journal of Accountancy (Oct. 1, 2018).
The Modern Debate and Its Implications
As the 2024 presidential election approaches, the taxation of tip income has resurfaced as a significant issue. Both leading presidential candidates, Republican nominee Donald Trump and Democratic nominee Kamala Harris, have proposed ending federal income tax on tips, a policy that has garnered bipartisan support among Americans. See Proposed Policy to End Federal Income Tax on Tips Has Bipartisan Support, Ipsos (Aug. 22, 2024) (“Ipsos”). Over 70% of Republicans, Democrats, and independents back the proposal, indicating a shared sentiment that taxing tips places an undue burden on workers who rely on gratuities. Id.
However, this potential shift in tax policy raises important questions about its broader implications. According to estimates by the Committee for a Responsible Federal Budget, exempting tip income from federal taxes would cost the government between $150 and $250 billion over the next ten years. See Donald Trump’s Proposal to Exempt Tip Income from Federal Taxes, U.S. Budget Watch 2024 (Jun. 16, 2024). This figure could climb even higher if behavioral effects come into play, such as workers and employers reclassifying ordinary income as tip income to take advantage of the exemption.
From the workers’ perspective, the policy could mean a significant boost in take-home pay, as tips currently constitute a substantial portion of income for millions of service employees. The proposed tax exemption would allow them to retain more of their income, potentially enhancing their financial security.
However, the situation is not without its complexities. While 54% of Americans believe workers receiving tipped wages would become more financially secure under this policy, 43% express concern that employers might respond by reducing base pay, thereby offsetting the benefits of tax-free tips. See Ipsos. This concern is not unfounded; if employers adjust wage structures in light of the tax exemption, workers might not experience the full advantage of the policy change.
The debate reflects a broader tension between promoting economic relief for wage earners and managing the fiscal health of the government. The potential cost to federal revenue underscores the policy’s trade-offs. Conversely, the prospect of putting more money into the hands of workers aligns with efforts to address the needs of working families—a key priority for many policymakers.
In this context, the modern debate over the taxation of tip income echoes the historical “civil war” that played out in Las Vegas decades ago. The current proposals reflect an ongoing struggle to define fair treatment of tipped income, balancing workers’ financial needs with broader economic and fiscal considerations.
Conclusion: The Issue Comes Full Circle
As the political discussions continue, it remains to be seen how this policy, if enacted, will affect service workers, employers, and the federal government’s bottom line. One thing is certain: the fate of tip income taxation, which once sparked disputes between casino dealers and the IRS, has now returned to the national stage. And so, resolution of this issue may soon be shaped, not by “the gods of fortune,” but instead by an Act of Congress, signed by the President.
**During the 1990s, the author of this article was a Trial Attorney in the U.S. Department of Justice, Tax Division, Western Criminal Enforcement Section, and for an extended period, served on the front lines of tax enforcement in Las Vegas.
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