## Facts

- Mark D. Collins worked in 1988 as a ticket seller at an off-track betting (OTB) parlor in Auburn, New York, processing patrons’ horse-race wagers through a computer terminal.
- Collins placed unauthorized bets for himself through his terminal, using employer funds and intending to keep any net winnings while knowing he would be responsible for any resulting shortage.
- On July 17, 1988, Collins placed escalating bets across multiple races, suffering substantial losses before a late winning bet reduced, but did not eliminate, the day’s net deficit.
- Collins’s total wagers for the day were $80,280; his shift ended with a large cash shortage reflecting the net loss from the unauthorized betting.
- Collins reported the incident to his supervisor, was taken into custody, and signed an affidavit admitting his actions; he faced state criminal charges.
- The IRS determined a 1988 income tax deficiency of $9,376 and asserted additions to tax for negligence under I.R.C. § 6653(a)(1) and substantial understatement under I.R.C. § 6661.
- The IRS treated the entire $80,280 wagered as unreported income from theft or gambling; Collins contended any taxable amount, if any, should be limited to net proceeds rather than gross betting volume.

## Issues

1. Whether Collins had taxable unreported income in 1988 arising from unauthorized wagering and/or theft from his employer, and, if so, in what amount.
2. Whether Collins was liable for additions to tax for negligence under I.R.C. § 6653(a)(1).
3. Whether Collins was liable for an addition to tax for substantial understatement under I.R.C. § 6661.

## Decision

- Collins had unreported gross income for 1988 attributable to his unauthorized use of employer funds in connection with wagering activity.
- The court rejected the Commissioner’s position that the full $80,280 of wagers constituted taxable income to Collins.
- Collins’s includible amount was limited to the net economic benefit he appropriated for himself, rather than the gross dollars cycled through the betting transactions.
- Collins was not liable for the negligence addition under § 6653(a)(1).
- Collins was not liable for the substantial-understatement addition under § 6661.

## Legal Principles

- Gross income under I.R.C. § 61 includes illegal receipts, including embezzled or misappropriated funds.
- For illegal or unauthorized transactions, includible income depends on net economic gain and dominion or control, not on gross transaction volume that does not reflect a retained benefit.
- The characterization of proceeds as “gambling” or “theft” does not prevent inclusion in gross income where the taxpayer realizes an economic benefit.
- Additions to tax for negligence require a showing that the underpayment resulted from negligent or rule-disregarding tax conduct; misconduct in the underlying event does not by itself establish tax negligence.
- Substantial-understatement additions are not automatic where circumstances show reasonable cause or good faith, including uncertainty about the proper tax treatment of atypical facts.

## Conclusion

The Tax Court held that Collins realized taxable income from his unauthorized betting activity only to the extent of net economic gain rather than the gross amount wagered, and it declined to impose negligence and substantial-understatement additions to tax.


Collins v. Commissioner, T.C. Memo. 1992-478 (1992)