*59 Decision will be entered under Rule 50.
Petitioner Albert McGrath operated an illegal bookmaking business during the years 1948, 1949, and 1950. In his income tax returns for those years, the gross profits reported amounted to 6.39 per cent, 5.56 per cent, and 7.86 per cent, respectively, of the total bets reported as received. There was no way in which the entries in petitioner's books and records could be substantiated or verified. Respondent did not question the amount of gross receipts and expenses as reported, but in his determination of gross profits disallowed the amounts claimed as "pay outs" to winning bettors by $ 17,093.56 for 1948, $ 12,786.65 for 1949, and $ 15,948.59 for 1950. In determining net income, he disallowed deductions for wages and rent, the payment of which had been in violation of the criminal statutes of the State of Illinois.
1. The amounts paid to winning bettors determined.
2. Held, that payments for wages and rent violated clearly defined public policy of the State of Illinois, and are accordingly not deductible as ordinary and necessary business expenses under section 23 (a) (1) (A) of the Internal Revenue Code of 1939.
*118 Respondent determined deficiencies in income tax against petitioners for the taxable years 1948, 1949, and 1950 in the amounts of $ 7,643.84, $ 6,549.72, and $ 8,790.80, respectively, and additions to tax under section 293 (a) of the Internal Revenue Code of 1939 for the years 1948 and 1950 in the amounts of $ 382.19 and $ 439.54, respectively, under section 294 (d) (1) (A) for the years 1948 and 1949 in the amounts of $ 858.78 and $ 829.40, respectively, and under section 294 (d) (2) for the years 1948, 1949, and 1950 in the respective amounts of $ 478.49, $ 497.64, and $ 588.93.
The questions for decision are (1) whether respondent was correct in decreasing the amounts claimed by petitioner Albert D. McGrath to have been paid to winning bettors in the operation of his bookmaking business, and (2) whether expenses incurred for rent and wages in the conduct of such business are deductible as ordinary and necessary business expenses under section 23 (a) (1) (A) of the 1939 Code. Petitioners have presented no evidence and made no argument on brief with respect to the additions to tax as set forth above. We, therefore, consider that they concede liability*62 for these additions in such amounts as may be indicated by the decision herein as to deficiencies in tax.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
Petitioners are husband and wife and reside in Chicago, Illinois. They filed their income tax returns for the years 1948, 1949, and 1950 with the collector of internal revenue for the first district of Illinois.
In 1944, Albert D. McGrath, sometimes referred to as petitioner, commenced an illegal bookmaking operation for the acceptance of bets on horse races in a store located at 461 Belmont Avenue, Chicago, Illinois. The type of operation carried on at that location is commonly known as an "open room" operation, in that the establishment is open to the public. Bettors desiring to place bets on horses indicated to petitioner *119 or one of his employees at the above location their selection of horses and the amount and nature of their bets, and these were noted on receipts given to the wagerers; after the race was run the results were announced over a loud-speaker and the winning bettors turned in their receipts and received their winnings from petitioner. Petitioner continued to operate*63 this bookmaking establishment from 1944 until September 1947, when, acting upon instructions of the political committeeman for his ward, he closed it down.
In January 1948, petitioner rented the basement of a greeting card shop located at 859 Belmont Avenue, two doors from the location of the former bookmaking establishment. Several telephones were installed shortly before March 1948, under the name of the greeting card shop. The lessor, and operator of the greeting card shop, Emil Johnson, was informed by petitioner that he intended to carry on a bookmaking enterprise on the premises, and Johnson consented to have the phones listed under the name of the greeting card shop. Petitioner began to operate this second bookmaking business in March 1948.
The new operation differed from the former in that the individual bettors did not come into the premises to place their bets. Wagers in the new operation were received in three ways: Some of the bets received were picked up by petitioner each morning on his way to his place of business; other bets were picked up by Walter Hitchler, an employee, who worked outside petitioner's business premises and whose duties consisted of soliciting*64 bets, recording these bets, and transmitting them by telephone to petitioner's place of business; and the balance of the wagers received were telephoned directly to the business premises by the bettor and were received either by petitioner or another employee, Phillip Zis, who assisted petitioner in taking and transcribing bets received by telephone. At times, various individuals would place a deposit with petitioner or Hitchler against which they could telephone bets directly to petitioner's place of business. Petitioner would also receive bets directly by telephone where a bettor would have a credit balance as the result of a "win" in an earlier race. Very few, if any, bets were accepted unless the money was paid either to petitioner or Hitchler at the time the bet was made, or the bettor had previously made a deposit or had a credit balance from an earlier race.
A portion of the bettors of the new business were individuals who had formerly placed bets with petitioner at this open room two doors away; others were persons who had been around the neighborhood a number of years and whom petitioner had known to be horse players.
Petitioner accepted wagers on horse races being held*65 at tracks in various parts of the country. Information with respect to names of the horses running each day at the various tracks, the type of race, and *120 in some instances the name of the jockey was supplied each day to petitioner by a service, the information being set forth on large cardboard sheets, commonly known as "hard cards." Petitioner, in accepting bets, agreed to pay the bettor, if he won, the same odds as were shown by the parimutuel machines of the various tracks where the races were run, except that in no event would he pay more than $ 30 to $ 1 with respect to a win; $ 12 to $ 1 with respect to a place, and $ 6 to $ 1 with respect to a show. Additional limitations were 100 to 1 odds on daily double bets, and 15 to 1 on bets wagered on parlay bets, with an over-all limitation of 100 to 1. For a bettor to win a win bet the horse wagered on must come in first; for a bettor to win a place bet the horse wagered on must come in first or second; and to win a show bet the horse wagered on must come in first, second, or third. To win a daily double bet the bettor must select in advance the winning horse in each of two races at a particular track, usually the first*66 and second races. Parlay bets are similar to daily double wagers, except that they may be made to win, place, or show, and may be made on two or more horses at the same or different tracks. Like daily double bets, the horses must be selected in advance and all must win, place, or show, depending on how they were bet to finish.
A "scratch" occurs when a horse entered in a race is withdrawn shortly before the running of the race. Scratches of horses upon which petitioner had accepted wagers did not occur in any substantial number during the course of a year. In the case of a scratch the wager was returned to the bettor; such repayment was designated on petitioner's records as an "out" and was identical to the amount of the wager.
Wagers received from petitioner's customers were recorded on so-called 20-line sheets. These sheets contained space for entering twenty bets. The entries covering each bet would be on a single line. In the first column would be the names, nicknames, initials, or other symbols by which the bettors were identified, except that bets received by telephone from Walter Hitchler would be identified under his name only, usually, if not always, by the name "Walter." *67 The second column would show the number, as shown by the hard card, of the horse on which the bet was placed. The amount of a bet to win would be entered in the third column; that of a bet to place, in the fourth column; and that of a bet to show, in the fifth column. In the sixth column amounts purportedly paid out to winners were entered. If the entries in a line reflected a loss by the bettor, a horizontal line would be drawn across the sixth column. The entries made under the name of Walter would cover several 20-line sheets and on most such sheets there would be an entry on each of the 20 lines. In some other instances, all of the bets recorded on a single sheet *121 would appear to be those of a single customer and at times varying portions of a second sheet would be required. In other instances, the 20 lines on a single sheet would be divided between two or more customers, and when the final entries were made on such sheets unused lines were likely to be as numerous as those which had been used. The sheets were not numbered and were not kept in any sequence or order. The entries were made both in ink and by pencil, the penciled entries being interspersed among *68 the entries in ink according to no apparent pattern.
At the close of each day, and by sheets, a total of the amounts shown as having been wagered would be entered, as would the total of the amounts shown as paid or payable to winning bettors. The amounts received as bets were referred to as ins and the amounts paid to winners as outs. The amounts shown by the sheets as the totals of the ins and of the outs, together with the totals of the amounts shown as the day's expenses for wages, stationery, and other such items, were entered on a specially designed printed sheet, referred to as the daily report. The daily report was written up in duplicate, one copy being sent to petitioner's accountant and the other being retained by petitioner. From such daily reports, the accountant, or some one under his supervision, entered the amounts shown on journal-type sheets, one for each month. As of the end of the month, the amounts in the various columns would be totaled. So far as appears, these journal-like sheets, which also insofar as appears were kept by the accountant at his office, constituted the only permanent-type books of account prepared or maintained in behalf of petitioner. *69 It was from these daily reports and from the monthly summaries made by the accountant that the accountant prepared petitioner's income tax returns. The accountant at no time attempted an actual audit of petitioner's records or business. Purportedly he did on some occasions spot check some of petitioner's 20-line sheets to determine their mathematical accuracy, but there was no check beyond petitioner's word or possibly that of Zis as to the accuracy or completeness of the entries made thereon.
Petitioner did not keep, maintain, or have any receipts, check stubs, or records other than the 20-line sheets which would evidence the fact of the payments claimed to have been made to winners, the identity of the winners, or supply any basis for their verification, and the names, nicknames, initials, or other symbols on the 20-line sheets were not sufficient for anyone outside the operation to ascertain the identity of the persons to whom the alleged wins were paid.
The total ins, total outs, the gross profits, and percentage of gross profits to ins for each of the said years were, according to the above summarizations, as follows: *122
| Year | Total ins | Total outs | Gross profits | Percentage |
| 1948 | $ 225,321.10 | $ 210,918.65 | $ 14,402.45 | 6.39 |
| 1949 | 287,970.50 | 271,960.10 | 16,010.40 | 5.56 |
| 1950 | 259,864.50 | 239,426.60 | 20,437.90 | 7.86 |
*70 Of the total ins shown for 1948, the bets placed through Hitchler accounted for $ 110,580.50, and of the total outs shown for that year, $ 90,217.05 was attributed to the bets so placed through him, indicating a gross profit to petitioner on the Hitchler bets of $ 20,363.45. Of the total ins shown for 1950, the bets placed through Hitchler accounted for $ 128,690.50, and of the total outs shown for that year, $ 107,983 was attributed to the bets placed through him, indicating a gross profit to petitioner on the Hitchler bets of $ 20,707.50. In contrast with the productivity of the business brought in by Hitchler, the results from all other bets, representing the bets received by petitioner in person and all bets placed over the telephone by persons other than Hitchler, and which in the aggregate were some greater than those placed through Hitchler, were, if the entries on the sheets are to be accepted as true, losses to petitioner of $ 5,961 in 1948 and $ 269.60 in 1950. 1
*71 Of the wagers made in 1948, other than those made through Hitchler, 17 people accounted for 89 per cent of such bets placed and listed. The names or other designation of the individuals referred to, the totals of their reported wagers, the totals of their winnings as recorded, and the total number of operating days of the year on which bets were placed were as follows:
| Number of | |||
| Total amount | Total amount | days of | |
| 1948 | of recorded | of recorded | 10 months |
| wagers placed | winnings paid | bets placed | |
| Harry (3 Mo. -- Mar., | |||
| Apr., and May) | $ 32,625.00 | $ 31,557.60 | 44 |
| J. L. | 10,776.00 | 16,489.25 | 78 |
| Gil | 9,344.00 | 8,027.85 | 56 |
| Otter | 7,679.00 | 8,161.40 | 128 |
| Cunn | 6,243.00 | 7,248.10 | 249 |
| Ed H | 5,609.00 | 4,384.40 | 48 |
| E. J. | 5,300.50 | 4,460.05 | 130 |
| Hank T | 3,426.50 | 3,209.70 | 74 |
| Duffy | 3,321.00 | 3,463.15 | 28 |
| Well | 3,254.00 | 3,832.15 | 176 |
| Char | 2,670.00 | 2,786.35 | 91 |
| Till | 2,499.00 | 2,903.75 | 124 |
| Nick | 2,480.00 | 2,153.80 | 210 |
| Bob | 2,219.00 | 2,123.30 | 87 |
| Hack | 1,618.00 | 2,487.10 | 68 |
| Bob L | 1,503.00 | 1,475.15 | 141 |
| Flo | 1,325.50 | 1,348.40 | 61 |
| Total | $ 101,892.50 | $ 106,111.50 |
*123 In 1950, 22 people accounted for 98 per cent of the total bets placed and listed*72 under names and symbols other than Hitchler's. The names or other designation of the individuals referred to, the totals of their recorded wagers, the totals of their winnings as recorded, and the total number of operating days of the year on which bets were placed were as follows:
| Total amount | Total amount | Number days | |
| 1950 | of recorded | of recorded | of year bets |
| wagers placed | winnings paid | were placed | |
| Cliff | $ 42,799.00 | $ 43,890.30 | 182 |
| Hank | 31,724.00 | 29,892.35 | 221 |
| J. L. | 18,410.00 | 19,371.15 | 102 |
| Cunn | 6,077.00 | 6,491.30 | 259 |
| Nick | 3,703.50 | 3,260.50 | 247 |
| E. J. | 3,330.00 | 3,078.75 | 149 |
| Bob L | 3,095.00 | 3,197.15 | 233 |
| Well | 3,017.00 | 2,705.65 | 163 |
| Bob | 2,674.00 | 2,297.00 | 114 |
| Andy | 1,559.00 | 1,234.25 | 97 |
| Ernie | 1,410.00 | 1,126.50 | 77 |
| Sill | 1,132.00 | 1,263.95 | 219 |
| Ing | 1,255.00 | 1,767.85 | 24 |
| Kir | 1,759.00 | 1,335.70 | 34 |
| J. D. J. | 1,018.00 | 678.15 | 81 |
| Duff | 1,378.50 | 2,211.35 | 104 |
| Paul | 772.00 | 1,378.25 | 46 |
| Flo | 761.50 | 1,189.30 | 125 |
| Geo | 745.00 | 730.00 | 5 |
| G. E. | 729.00 | 626.45 | 79 |
| Tom | 525.00 | 335.45 | 38 |
| Jerry | 487.00 | 436.25 | 6 |
| Total | $ 128,360.50 | $ 128,497.60 |
The bettor designated on petitioner's 20-line sheets as "E. J." was Emil Johnson, from whom petitioner*73 rented the basement for his bookmaking operation.
Petitioner paid Walter Hitchler and Phillip Zis as compensation for their services rendered during the years 1948, 1949, and 1950, total wages in the respective amounts of $ 4,112, $ 5,088, and $ 4,992, for which he claimed deductions on his income tax returns for those years. Petitioner paid Emil Johnson as rent for the leased premises during the years 1948, 1949, and 1950, the respective amounts of $ 1,960, $ 620.85, and $ 480. Petitioner on his income tax returns for each of those years claimed deductions in the respective amounts shown, as rental payments to Emil Johnson.
The acts performed by petitioner's employees and by Emil Johnson, the lessor, in return for the wages received by the former and the rent received by the latter, constituted violations of section 336 of the Criminal Code of the State of Illinois. Such payments of wages and rent also constituted a violation of section 582 of the said code.
At parimutuel racing tracks throughout the United States, 10 to 17 per cent of all bets placed is deducted for the racing association and the taxing authorities. The remaining 83 to 90 per cent is distributed to winning bettors.
*74 *124 Under the laws of the State of Illinois for the years 1948, 1949, and 1950, approximately 13 per cent of each dollar bet at the race tracks was deducted from the mutuel, part of which was retained by the racing association and part of which was paid to the State. In addition to the part retained by the racing association, it also received and retained breakage to the dime, which amounted to approximately 1 1/2 per cent of the totals wagered. The remaining 85 1/2 per cent was distributed to the winning bettors.
Of the amounts claimed by petitioner to have been paid out to winning bettors, the respondent has disallowed $ 17,093.56 for 1948, $ 12,786.65 for 1949, and $ 15,948.59 for 1950.
Petitioner's books and records were inadequate to reflect the results of his operations for the years herein, and the amounts shown as having been paid to winning bettors were padded and substantially overstated.
The amounts shown by petitioner on his returns as having been paid out to winning bettors were overstated by at least $ 17,093.56 for 1948, $ 12,786.65 for 1949, and $ 15,984.59 for 1950.
OPINION.
This is another of those cases wherein the primary question is as to the amount of*75 gross income, namely, the ins less the outs, realized by an individual engaged in an illegal business of soliciting and accepting bets on horse racing. The respondent, in his determination, has accepted as petitioner's gross recipts from bets the amounts which were reported by him in his income tax returns, and petitioner makes no claim that they were in error. Respondent has not agreed, however, that the petitioner has correctly reported the amounts disbursed to winning bettors, namely, the outs, and in his said determination has disallowed the amounts claimed by $ 17,093.56 for 1948, $ 12,786.65 for 1949, and $ 15,948.59 for 1950.
The only available records relating to the years in question which purport to be records of original entry reflecting petitioner's gross profits from his bookmaking business, are the so-called 20-line sheets. Mathematically, the gross income reported by petitioner from bets for the taxable years was as reflected in the 20-line sheets, and if they are to be accepted as a complete and true recording of petitioner's operations, as petitioner contends they should be, the respondent's determinations of deficiency were in error.
Our first inquiry, accordingly, *76 is as to the authenticity, accuracy, and completeness of the 20-line sheets as reflecting the business done. *125 See sec. 54, I. R. C. of 1939, and sec. 29.54-1, Regs. 111. 2 That they were not susceptible of substantiation or verification by audit, inquiry, or investigation is apparent of record, a fact assented to rather than denied by petitioner. All of the entries appearing on the sheets were made by petitioner or Zis, and any and all original slips and memoranda with respect thereto were destroyed. Except for the bets received by petitioner in person, and possibly some of the bets placed by the landlord, Emil Johnson, all bets, including those placed through Hitchler, are represented as having been received by telephone. It would also appear that, except possibly for some of Johnson's bets, the entries made by Zis were limited to bets he received in answering the telephone. And while the testimony with respect to bets received by telephone was that all such bets, except those telephoned in by Hitchler under his own name, were made against deposits of money previously made with petitioner or Hitchler, or the winnings of the bettor in a prior race, it further appears*77 that no records were maintained or kept covering any such deposits, the amount of money so handled, the amount thereof absorbed by bets which were entered on the 20-line sheets, or the disposition of any balances not entered as bets on the 20-line sheets, and that any and all memoranda with respect thereto were destroyed. It accordingly follows that not only did petitioner fail to keep complete and adequate records covering his operations, but that the entries on the 20-line sheets are no better than the word of petitioner and Zis and, to some extent, that of Hitchler.
*78 Aside from any questions we may have as to the credibility of Zis and Hitchler, and we are not in doubt, after observing and listening to them in the course of their testimony, that they knowingly disavowed and denied knowledge which they did have of some facts about which they were questioned, it is reasonable to conclude, we think, that *126 the record on the 20-line sheets of the bets telephoned in by Hitchler was substantially as Hitchler had given them over the telephone. According to the daily reports prepared and submitted to petitioner's accountant, both Hitchler and Zis were compensated at a flat rate of $ 48 per week, and there is no apparent reason whereby either would be influenced to report or record bets placed through Hitchler in any manner other than they were actually given to him. Hitchler was required to transmit by telephone the fact that he had the bets, prior to the starting time of the races on which the bets were made. Furthermore, since Hitchler would have to answer to any and all of the customers served by him who had picked winners and similarly would have to account to petitioner for the full amount of the bets which he did call in before post time, *79 regardless of whether the bet was thereafter won or lost, it follows, we think, that he would not only report the bets accurately and in advance, but would insist that they be correctly recorded, so as to avoid having to account personally to those who had bet on winning horses but which bets had not been so entered on the 20-line sheets, or to petitioner for bets which he did not receive or call in. And at the end of the day, Hitchler would come in and check his memoranda of the bets he had received against the bets shown on the 20-line sheets under his name and would settle up with petitioner on the basis of such check. In short, regardless of any question generally as to the credibility of Hitchler and Zis, who recorded some, if not most, of the bets called in by him, there would appear to have been little, if any, likelihood that the business which he brought to petitioner was not generally recorded as it actually was, not only as to the bets themselves but as to the winners and the amounts of the winnings as well.
As to the remainder of petitioner's business, there is not only an absence of persuasive or convincing support in the evidence that the 20-line sheets are accurate*80 and complete and that they reasonably reflect such business, but on the record before us, we are satisfied that they do not. The 20-line sheets had no sequence or order. They are not self-proving of the truth of the entries made thereon, as petitioner would seemingly have us believe, but, to the contrary, were easily susceptible of manipulation so as to distort and overstate the outs for any day. By the belated entry, after a race was run and the results known, of a losing bet or an entirely fictitious one as a winning bet, the 20-line sheets could, with ease, be made to indicate and show gross income in a lesser amount than it actually was, and petitioner was at all times in a position to make such false entries.
In that connection, the results shown by the 20-line sheets for 1948 and 1950 are quite significant. For 1948, the business produced by Hitchler, namely, $ 110,580.50 of the $ 225,321.10 shown as the total bets by the 20-line sheets, produced a gross profit for petitioner of *127 $ 20,363.45, whereas, according to the said entries, the remaining $ 114,740.60 of business purportedly covering the bets received by petitioner in person and by him and Zis by telephone, *81 but exclusive of the business produced by Hitchler, resulted in a net loss of $ 5,961. However remote, it is at least within the realm of possibility that for the year 1948 the bettors served by petitioner personally and who telephoned their bets to petitioner and Zis were more "skillful," "smarter," or "luckier" in their choice of horses than the bettors served by Hitchler, but the probability that as a group they were consistently and so substantially so is another matter. And yet, according to the 20-line sheets for 1950, petitioner was again net loser to those bettors, although by a lesser amount. For that year, the business produced by Hitchler, namely, $ 128,690.50 of the $ 259,864.50 shown as the total bets by the 20-line sheets, produced a gross profit for petitioner of $ 20,707.50, whereas the remaining $ 131,174, purportedly covering the bets received by petitioner in person and by him and Zis by telephone, but exclusive of the bets called in by Hitchler, again resulted in a net loss to petitioner, this time in the amount of $ 269.60. The record does not contain a similar breakdown for 1949, but we do know that according to the entries on the 20-line sheets petitioner's*82 gross profits were only 5.56 per cent of the ins, as against 6.39 per cent for 1948 and 7.86 per cent for 1950.
We do have petitioner's word, given under oath, that the entries on the 20-line sheets are accurate and complete. But having observed him closely while he was testifying, and the record being as it is, we do not find his word, even under oath, deserving of belief, unless we can find credible supporting evidence therefor.
It is patent of record that petitioner has not hesitated to give false testimony when it has suited him to do so. He admits that he had known by sight a great number, if not a majority, of his customers for several years. To all appearances, they had lived or worked in his same neighborhood, and occasionally he had cashed checks for some of them. From the beginning of his testimony, however, and repeatedly therein, he disavowed any and all knowledge as to the real name and identity of each and every one of the individuals who ever placed bets with him, asserting that his knowledge in all instances was limited to the initials, nicknames, or symbols under which the bets were recorded. At one point, he was asked specifically, "is what you said this, that*83 you do not know the names of any of these individuals other than the way which they are listed on your sheet?" To which he replied, "that is correct." He was then queried, "Not any at all?" To which he answered, "Not any." Subsequently, while being questioned as to whether horse players ever came in person into his second establishment as they did in the first, he testified that no one came into the second establishment at all but, except for those picked up by him on his way to his place of business, all wagers were negotiated either by *128 telephone or by the runner Hitchler. Upon further questioning, he admitted that the landlord, in person, had "made a bet once in a while," and it was next disclosed that the landlord, Emil Johnson, was "E. J." on the 20-line sheets. It further appears that Johnson was not such an occasional bettor that petitioner might inadvertently have overlooked him, for the record indicates that on 130 days in 1948, beginning with the month of March, "E. J." placed wagers with petitioner in the total amount of $ 5,300.50, which accounted for nearly 5 per cent of the bets purportedly received other than those brought in by Hitchler. Winnings in the*84 amount of $ 4,460.05 were shown as paid to "E. J." during that year. During 1950 the record indicates that "E. J." placed bets on 149 days, for a total of $ 3,330, comprising 2 1/2 per cent of the bets shown as purportedly received other than those brought in by Hitchler. On those bets, according to the 20-line sheets, "E. J." had winnings of $ 3,078.75.
Also in the course of his testimony, petitioner contradicted statements subscribed and sworn to in a protest previously filed with the respondent for 1949. He was asked if it was his practice to "lay off" portions of large bets received with other bookmakers, and testified that he had not indulged in that practice. In the protest he had sworn to the contrary, and when confronted therewith, it was his explanation that the protest had been prepared by his accountant and, having confidence in his accountant, he executed the protest without knowing what it contained. This latter incident further indicates the complete disregard and lack of concern for truth which permeates petitioner's entire case, including even the work done by and testimony of his accountant. The accountant, being faced with petitioner's testimony, offered the*85 explanation first that the information that petitioner did lay off bets was received in conversations with petitioner, then, that the conversations may have related to the prior open room operations, next, that the protest may have followed the form he had used in the cases of other bookmakers, and then, that the information was from petitioner or the records he had received, but upon examination, while on the witness stand, of some of the daily reports which had come to him, he stated that they did not show layoff bets. These incidents are illustrative of the type and character of petitioner's evidence offered in support of the truth and accuracy of his records. We think they speak for themselves.
The record being as it is, and after careful consideration of such credible evidence as we do have, we have concluded and found that petitioner's books and records were inadequate to reflect the results of his operations and that the amounts shown and claimed as having been paid to winning bettors were padded and substantially overstated.
As indicated by his notice of deficiency, the respondent in his determinations herein has disallowed $ 17,093.56 for 1948, $ 12,786.65 for *129 *86 1949, and $ 15,948.59 for 1950 of the outs reported and claimed by petitioner in his returns. Although not spelled out, the disallowances reduced the outs as claimed for 1948 and 1950 to within a few dollars of 86 per cent of the ins for those years, and for 1949, to exactly 90 per cent of the ins. The deficiency notice offers no explanation as to how the amounts allowed or disallowed were arrived at beyond the statement that gross income for the said years had been increased in the amounts stated "in accordance with the provisions of Sections 22 (a) and 41 of the Internal Revenue Code." It was the testimony of the revenue agent who made the examination of petitioner's records, however, that the winning bettors at parimutuel tracks in the State of Illinois, where petitioner operated, received 86 per cent of the bets made in a given race, and being unable to verify the outs actually paid by petitioner and since petitioner was paying the same odds as were paid at the tracks subject to specified limitations on the particularly high odds, he proposed in his report that the petitioner be allowed as his outs 86 per cent of the ins, 3 being, according to the witness, the same percentage*87 of total bets paid to winning bettors at parimutuel tracks in Illinois.
Rather obviously, some possibilities, if not probabilities, seemingly tend to support the proposition that the operations of a bookmaker should show a better margin of profit than the percentages of total bets taken or retained by the management at the parimutuel track, and there are other possibilities which would appear to support the contrary view. Petitioner, for instance, as in the case of bookmakers in other decided cases, paid the track odds to winning bettors only up to a certain point. Furthermore, he, as a taker of bets, was a player of the horses himself, and there was no skimming off or taking from total bets any flat or fixed percentages by any third*88 party, as is true in a parimutuel track operation, and if there were no winning bettors or under the odds paid by him where there were, his outs did not, percentagewise, equal the percentage of the total bets going to the winning bettors at the track. He not only stood in the place of a participant in the winning pool at the track but also realized as additional profit the percentage which the parimutuel tracks took or exacted from total bets in arriving at the amount of the winning pool. On the other hand, in an operation such as that of petitioner, the betting on any given day was not restricted to the races of a single track but covered and included races at most, if not all, of the tracks where a meet was currently going on, and there would seem to have been little likelihood that the spread of bets received by petitioner *130 on any given race would have been ratably comparable to the bets placed on such race at the track, particularly when it is to be noted that the number of his customers was extremely small when compared with the total number of bettors which might reasonably be expected to be in attendance at the various tracks where the individual races were run. *89 Under such circumstances, it could be that the bookmaker might have received only one bet and that a winning bet on a given race, which would mean that he not only had no profit on the race, but a loss, which in turn would mean that his profits on other races would be absorbed to the extent of such loss. It could be, however, and probably is not unlikely, that on numerous races there would be no winner at all, in which case the bookmaker, petitioner in this instance, would have as his profit the entire betting pool and, unlike the situation at the tracks, the winning pool would be the total of the bets placed, without any reduction such as occurs under the parimutuel operation. 4
*90 In the face of such possible or probable variances between the overall results in the operations of an individual bookmaker and that of a parimutuel operation at the track, we have heretofore concluded that the experiences of winning bettors at parimutuel tracks, when related to the total bets made, do not supply an objective measure for determining the outs paid to winning bettors of an illegal bookmaking business, and in the cases coming before us, we have reached our conclusions and made our findings as to such outs according to the evidence in the individual case. In Morris Nemmo, 24 T. C. 583, and H. T. Rainwater, 23 T.C. 450">23 T. C. 450, we were satisfied from the evidence that the records which were maintained had been relied upon at arm's length by outside participants in the business and that they did on the proof reasonably and satisfactorily reflect the results thereof, and on the basis of such proof, concluded and held that the taxpayer had overcome the Commissioner's determination. In Sam Mesi, 25 T. C. 513, we concluded that while the evidence did show a lack of relation between the percentage*91 of profits to total bets in Mesi's bookmaking business and the percentage of total bets retained in a parimutuel *131 operation at the track and that there was insufficient reason on the record to justify approval of the Commissioner's determination as to the amount of Mesi's profits, the evidence did show that his profits exceeded the amount reported, and on the evidence a determination of the amount shown was made.
Being satisfied, as above indicated, that on the evidence here petitioner's books and records were inadequate to reflect the results of his operations and that the amounts shown and claimed as having been paid to winning bettors were padded and substantially overstated, the question is as to the amount of such overstatement. And while there is no way of knowing the true profits with exactitude, we do know from petitioner's own records that in 1948 and 1950 he realized gross profits of $ 20,363.45 and $ 20,707.50, respectively, on the business produced by Hitchler, whereas on his total business for the said years, which in each instance was more than twice the business produced by Hitchler, the total reported profits were only $ 14,402.45 for 1948 and $ 20,437.90*92 for 1950. We also know that at the rate of profits produced by Hitchler's business petitioner's total gross profits would have been $ 41,588.61 for 1948 and $ 41,695.34 for 1950 and that, as determined by respondent, were $ 31,496.01 for 1948 and $ 35,386.49 for 1950. Granting that the bettors placing their bets with petitioner personally and with petitioner and Zis by telephone could have been more "skillful," "smarter," or "luckier" in their choice of horses than the bettors served by Hitchler and individually could have placed larger bets and, upon winning, their winnings, when compared with total bets, could have been ratably larger than the winnings of Hitchler's customers, we are not convinced, and we find no evidence of record for concluding that such variances justify the view that they resulted in net losses to petitioner for 1948 and 1950, as his records indicate, or that his gross profits on bets received for any one of the 3 years herein were less than respondent has determined. We so conclude and hold. For 1949, there might even be some grounds for the view that the gross profits as determined by respondent not only were not overstated, but that they were actually*93 greater than determined. For reasons not shown, respondent allowed as the outs for that year 90 per cent of the ins, as against approximately 86 per cent for 1948 and 1950. What the basis was for the more liberal treatment for 1949 than for the other 2 years is not explained, but, by amended answer, the respondent has now alleged that the disallowance should be increased to compare with the disallowances made for 1948 and 1950. Such being the case, it was his burden to prove supporting facts for the additional claim, and this he has not done. His claim for increased disallowance for outs for 1949 is accordingly denied.
The final question for decision is whether petitioner is entitled to deduct as ordinary and necessary business expenses wages paid during *132 1948, 1949, and 1950 in the respective amounts of $ 4,112, $ 5,088, and $ 4,992, which he paid to Hitchler and Zis to perform services for him in the conduct of his illegal bookmaking business, and rent for those years in the respective amounts of $ 1,960, $ 620.85, and $ 480, paid to Emil Johnson for the leased premises where petitioner operated his bookmaking business. 5
*94 Section 336 of the Criminal Code of Illinois not only makes the conduct of a bookmaking establishment illegal, but provides that employees who assist in the conduct of such business by recording bets and the owner or lessor who knowingly permits his premises to be used or occupied for the conduct of such business are guilty of an illegal act. With respect to wages, the identical issue was before us, and decided, in Sam Mesi, supra. Here, as in that case, the payment of the wages in question was to procure the direct aid of Hitchler and Zis in the perpetration of an illegal act, namely, the operation of a bookmaking establishment. We held in the Mesi case that it would be a clear violation of public policy to permit the deduction of an expenditure the making of which itself constitutes an illegal act. There was no issue in the Mesi case as to the deduction of rent. However, we are of the opinion that the principles announced in that case are equally applicable to the rental payments in the instant case. Both of the petitioner's employees and his lessor were fully aware of the illegal nature of the bookmaking enterprise which was being carried*95 on and in which they were participating. Moreover, the employees were not merely engaged in keeping records for the petitioner, but were actively engaged in the acquisition of wagers on horses in the various races run each day. We accordingly hold that the respondent did not err in his disallowance of the deductions for wages and rents.
In so holding, we have not overlooked the decision of the United States Court of Appeals for the Seventh Circuit, in Commissioner v. Doyle, 231 F. 2d 635, but, with due respect to that court, we feel that the views expressed in our opinion in the Mesi case are sound and that we should adhere to them. We realize, as the Court of Appeals pointed out, that the wages and rents herein did represent a part of the costs of carrying on the business being conducted and of earning the income being taxed, and that under the literal provisions of section 23 of the Code, they would be deductible. We feel, however, that it is established law that where the allowance of expenditures such as we have here as deductions would be "to frustrate sharply defined * * * policies" of a State, in this instance Illinois, they are not*96 within the intent of the statute. See Sam Mesi, supra, and the cases cited therein. And in that connection, see the discussion and rationalization of the question *133 in the opinion of the Supreme Court of the United States in Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467. See also Anthony Cornero Stralla, 9 T. C. 801, 820-822. Also, it may be noted that in this case the guilt of the parties, namely, petitioner, Zis, Hitchler, and Johnson, under Illinois law is an accepted fact, and under the statute the payments in question were parts of the commission of the illegal acts, thus the open question of guilt conjectured in the opinion in the Doyle case is not present here. See, however, Murray Humphreys, 42 B. T. A. 857, affd. (C. A. 7) 125 F.2d 340">125 F. 2d 340, certiorari denied 317 U.S. 637">317 U.S. 637.
Decision will be entered under Rule 50.
Footnotes
1. The breakdown of the bets placed through Hitchler and the results therefrom were made by respondent's agents from the 20-line sheets in petitioner's possession, and though the totals of the ins and outs from which the breakdown was made vary by a few dollars from the totals stipulated, and found above, petitioner has not disputed the accuracy of the figures covering the business attributed to Hitchler. No similar breakdown for 1949 was introduced.↩
2. SEC. 54. RECORDS AND SPECIAL RETURNS.
(a) By Taxpayer. -- Every person liable to any tax imposed by this chapter or for the collection thereof, shall keep such records, render under oath such statements, make such returns, and comply with such rules and regulations, as the Commissioner, with the approval of the Secretary, may from time to time prescribe.
Regulations 111.
Sec. 29.54-1. Records and Income Tax Forms. -- Every person subject to the tax, except persons whose gross income (1) consists solely of salary, wages, or similar compensation for personal services rendered * * * shall, for the purpose of enabling the Commissioner to determine the correct amount of income subject to the tax, keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of the gross income and the deductions, credits, and other matters required to be shown in any return under chapter 1. Such books or records shall be kept at all times available for inspection by internal-revenue officers, and shall be retained so long as the contents thereof may become material in the administration of any internal-revenue law.
Income-tax forms shall be prescribed by the Commissioner and shall be executed and filed in accordance with these regulations and the instructions on the form or issued therewith.↩
3. The parties have stipulated that at parimutuel racing tracks throughout the United States 83 to 90 per cent of all bets is distributed by the tracks to the winning bettors and that in the State of Illinois approximately 85 1/2 per cent of all bets is distributed to winning bettors.↩
4. In connection with the discussion just concluded, it may be of interest to note that as shown by the 20-line sheets the gross profits on the business produced by Hitchler for 1948 amounted to 18.4 per cent of $ 110,580.50, which was the total of the bets received by him, and that the outs to the winning bettors absorbed only 81.6 per cent of such total bets. This, in turn, means that the effect of respondent's determination for 1948 was that the gross profits on the remainder of petitioner's business for such year amounted to only 9.7 per cent of $ 114,740.60, said amount being the total of the bets received by petitioner personally and by him and Zis by telephone. And as to 1950, that as shown by the 20-line sheets the gross profits on the business produced by Hitchler amounted to 16 per cent of $ 128,690.50, which was the total of the bets received by him, and that the outs to the winning bettors on such business absorbed 84 per cent of such total bets, which, in turn, means that the effect of respondent's determination for 1950 was that the gross profits on the remainder of petitioner's business for such year amounted to only 11.2 per cent of $ 131,174, being the total of the bets received by petitioner personally and by him and Zis by telephone.↩
5. There is no explanation for the decline in each succeeding year in the amount of rent paid. Whether it had any connection with Johnson's placing of bets with petitioner, is not shown.↩