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Thursday, Feb. 28, 2008 | 2 a.m.
Sun Archives
- Beyond the velvet rope (12-30-2005)
- John Katsilometes on Pure Management’s plan to bring some glitter to the Gutter (3-13-2007)
- Tipping the scales of fair play by IRS (10-24-2005)
The burgeoning nightclub scene has brought a new kind of money to Las Vegas — and an old kind of trouble. The scene is awash in cash to an extent reminiscent of Las Vegas’ early days.
An IRS investigation into two of the Strip’s hottest clubs, Pure at Caesars Palace and LAX at Luxor, has demonstrated the potential for abuse by employees and managers. But of greater worry to casino executives and state gaming regulators is damage the case could do to the carefully guarded reputation that modern Las Vegas’ casinos and resorts have for running transparent and legitimate businesses.
Gaming Control Board Chairman Dennis Neilander said Wednesday he doesn’t recall the IRS conducting a raid inside a casino since the waning days of the mob in Las Vegas in the 1980s. His agency, he said, will be watching the IRS investigation closely and is prepared to take action over any alleged violations.
Several major casinos already have informed the Control Board that they are conducting internal reviews of the cash practices at the nightclubs operating on their properties.
Pure and LAX are both operated by Pure Management Group as a partner of the casinos. Pure Management, which manages more than 10 restaurants and clubs at casinos along the Strip, is run by two innovators of the nightclub scene, Robert Frey and Steve Davidovici.
Pure opened on New Year’s Eve in 2004 next to the sports book at Caesars Palace, which is owned by Harrah’s Entertainment. The $14 million club quickly became a haven for jet-setters and big-name celebrities. Accommodating more than 1,500 people, Pure claims to be the nation’s top revenue-producing nightclub.
LAX, inside MGM Mirage’s Luxor, reportedly cost $20 million to develop.
Pure Management’s revenues have grown sharply. In August, Davidovici told the Los Angeles Times annual revenues had jumped in the past five years from $25 million to more than $120 million.
Neither the IRS nor the company would discuss the IRS action, although Pure Management issued a statement last week saying it is “fully cooperating with this IRS investigation and looks forward to a quick and satisfactory resolution.”
The probe has shaken executives at the MGM Mirage.
“The issue is a big concern to us,” said Alan Feldman, a senior vice president. “The IRS and the Department of Treasury raiding the offices of one of our partners is not something we take lightly. This is a circumstance where the responsible thing to do is to monitor things very closely.
“We should not need to remind any one of our partners about our expectations of them and of their compliance with all rules and regulations,” Feldman said.
Gary Thompson, a spokesman for Harrah’s Entertainment, said: “If there was something illegal going on that would obviously be of great concern to us. But we don’t know if there was any such activity going on.”
Nightclub insiders say the investigation is focusing on the common practice of employees’ soliciting tips from patrons to get inside the crowded clubs and whether all of those tips have been reported to the IRS.
Many of the tens of thousands of patrons who go to Pure, LAX and other clubs along the Strip each week learn quickly that they must wait for hours in line to get inside — unless they slip the doorman some cash.
Inside, hosts and waitresses also can signal that they expect money up front for services normally included in the cover charge.
“It’s a sophisticated tourist shakedown,” an experienced nightclubber says. “You pay to skip the line at the door. Then you pay a host to take you to a table. Then you pay up to $1,000 for a bottle of alcohol. And at the end of your stay, you tip the waitress for all of the great fun you’ve had.”
At some nightclubs, the cash payments are pooled and distributed each night up the management chain in a process those familiar with the nightclub scene call “breaking the bank.”
The practice of paying doormen to get inside a club is not unique to Las Vegas, but it does have urgency here.
“You only have a certain amount of time in Las Vegas,” said Xania Woodman, a former independent club VIP host who edits the nightlife section of Las Vegas Weekly and covers the industry. “Next in line does not necessarily mean next in the club. You can either spend time or spend money; I always suggested you spend money.”
The IRS investigation, she said, has stunned the city’s club industry.
“This has been done so long that it’s become the way,” Woodman said. “It’s talked about so openly that everyone is completely shocked. It’s our vocabulary. Whatever paradigm shift comes, it’s clear there will be a new way of doing things.”
Nightclubs have become major cash cows for casinos. Some clubs share revenue with the casino. But even properties that collect rent from clubs benefit by attracting hordes of spendthrift clubgoers who spend money elsewhere in the resort.
Operators say a successful club can generate from $10 million to $50 million a year in revenue. But the most intriguing feature about Las Vegas nightclubs isn’t the revenue but their huge profit margins. Most of the money is made on liquor, which can have profit margins as high as 95 percent. Many clubs make the bulk of their money on “bottle service.” Typically, customers will pay hundreds of dollars per bottle for the privilege of sitting at a VIP table — and they may be required to buy more bottles, depending on the size of their group.
At Pure and other high-end clubs, many tables are reserved for customers paying for bottle service, which includes the services of a cocktail waitress who pours and serves drinks to the group.
On a typical night, club operators say, hundreds of thousands of dollars could be moving through any given club in the form of tips to doormen, VIP hosts, servers and bartenders, as well as payments for bottle service.
Unlike casino cashiers, who are accustomed to handling large sums and are subject to criminal background checks, employers say many nightclub workers are young and relatively inexperienced in money-handling. Much of the cash they touch is being slipped from hand to hand in the dark.
“It’s like running a casino without cash cages, cameras, people wearing jumpsuits without pockets and controlled access,” said one casino executive who declined to be named. “Or more like running a bank without regulatory oversight. It’s an accounting nightmare.”
Doormen often walk up and down the line to make it easier for those waiting to offer money to skip ahead. Women often can jump ahead for free, but it can cost a man $100 or more to jump the line.
The IRS visits to Pure and LAX weren’t the only sign of trouble with this tipping practice.
In October 2006 a former Pure patron, Ira Kiener, filed suit in District Court against the club, Davidovici and Caesars Palace following a 2005 altercation with Davidovici over an “entry fee” the patron and his party of 12 paid to jump in front of the line.
After paying $30 apiece to move up, Kleiner and his lawyer, Michael Koning, allege, the group discovered that some of its members weren’t let inside. A dispute erupted with Davidovici. Eventually, Kleiner and others were kicked out of the club but did not get their money back.
Kleiner alleges he was wrongfully detained by Caesars Palace security officers after the altercation. The case is set for trial in July.
Although regulators were caught off guard by the IRS visits to Pure and LAX, Jerry Markling, chief of the Control Board’s Enforcement Division, said regulators are well aware of the growing problem nightclubs have brought to the Strip.
In February 2006, the Nevada Gaming Control Board distributed an industrywide memorandum warning the casinos that they would be held accountable for any trouble occurring in those clubs — even if most of the clubs are run by independent operators.
Among the concerns of regulators at the time were incidents of violence, public drunkenness and drug distribution at the clubs.
Agents with the Control Board’s Enforcement Division met with executives of the casinos and the clubs to explain the potential repercussions of allowing the activities to continue.
In the wake of the IRS raid, Markling said he wanted to again remind the casinos that they are “responsible for the activities that take place on their properties.”
Sun reporter Mary Manning contributed to this story.
Anyone who has been to a LV casino night club has seen this happening for the last few years they have existed. Unless your a scantily clad woman, you will wait in line for hours on end unless you give the doorman a BIG "tip". Eveyone knows that tip is not being recorded anywhere for taxes to be taken off it. The worst part is most of the time you still have to pay a cover charge on top of the doorman tip.
As well the casino's themselves seem to have been turning a blind eye. How you tell me that a casino with security, and video everywhere has not been watching the exchange of money going on inline for a club, and never questioned it before.
These new clubs are also the cause, in my opinion, of the violence that is happening in the casino's. I have seen it in person, spill out into the casino floor from the club. I'm pretty sure the "incident" at Caesars with a shooting is not going to be the casino patrons, but club related customers.
Let's now put all the blame on the clubs and the casinos. How about the people willing to pay $500 or more for a $50 bottle of booze? Trying to show off, be something they are not. Who is really impressed by some stupid enough to make a big tip to get to the head of the line, a cover charge then Ten times what a bottle is worth.
The clubs are there to entertain and make money. They are doing their job. Who are the ones being stupid enough to cough up all that money?
Business as usual.Exactly the reason I was happy to move from Las Vegas in 1976. Bell Captains, Maitre D's and now night club bouncers and waitresses with no college educations shaking down tourists for hundreds of thousands of dollars and not reporting their income to the IRS. They should all be arrested for extortion, put in shackles and marched down Las Vegas Blvd on their way to the Nevada State penitentiary. In August.
RE: Vegaslees's comments "Let's now put all the blame on the clubs and the casinos....willing to pay $500 or more....stupid enough to make a big tip to get to the head of the line"
I don't think most of the people that go to Las Vegas for a vacation, and want to have a fun night that includes going out to a club WANT to have to tip the doorman, or pay a stupid amount for a bottle, and are only going out just to show off.
Personally I think the current system is a complete scam. HOWEVER it's often not a case of WANTING to do the above you pretty much HAVE to if you want a night out.
Most nights you WILL NOT even get in the door without tipping the doorman, you WILL NOT be able to sit down anywhere as only bottle service is given the privilege of seating, and if the clubs did not price the bottle at 10 times it's price, it would not be considered showing off.
It is the club that is driving the bottle price, letting $ set who gets in, and and not allowing a regular mid range Las Vegas tourist to go out and enjoy a drink in a club.
The problems with Vegas nightclubs is that they are not regulated by anyone. They do what the casinos ask and try to get away with whatever else the can get away with. Alot of the things going on in nightclubs should be enough to get the places shut down, but there is no one to regulate them. Nightclubs are the biggest waste of money in this town. All you do is throw away money in a club, you pay to get in, you pay for watered down-iced filled drinks, and all you get is loud music and maybe a drink spilled on you. Clubs charge $300 to $1000 for bottles of alcohol that can be bought at a store for $30-$150. Let's not forget about the tipping. First you have to tip the Door guy to get in, then you have to tip the host if you want a table to sit down, then you have to tip a different host for getting your drink order, then you have to tip the guys that bring the drink order. It's like a never ending tip jar. I think every club should be investigated because they are the biggest crooks on the planet.
With the increasing popularity of poker and other gambling, the IRS wants in on the action. When they see a chance to go after a casino, or a gambler, they do it..
Folks working for the IRS are rewarded for funds gathered --- regardless of whether any common sense is applied. The IRS responds that the law requires them to take inappropriate actions, but in reality they take such actions through a stretch of interpretation of poorly written laws. In fact, they do not specify or explain their interpretation. They just specify how you should fill out your check if you want to avoid tax court --- a court which you attend at your own cost and they attend with taxpayer funding of their salaries and expenses. In reality, as a taxpayer, you are paying the expenses of both sides of a case in tax court.
I have no sympathy for the hustlers that the casinos allow to work on their premises and I would never tip them. However, I pay a whole lot of tax on my income and if I choose to tip heavily to a hard-working individual, I sincerely hope this individual does not give any portion this money to the IRS. I know it is law that they do it, but I feel the taxes have already been paid.
If you think someone is a scumbag for not reporting tips to the IRS, maybe you also think your grandparents are scumbags. Maybe your grandparents sit in the park all day betting each other (for real money) on which pigeon will be flying off first. Suppose your grandparents make twenty $100 bets a day for 300 days of the year. They take a break after each bet, so each bet is a gambling session. At the end of the year, they are each exactly even with no profit and no loss. The IRS considers it unlawful for these gambling sessions not to be reported. If they are reported, the IRS may scrutinize the details of the losing sessions. For example, the records should contain names of other folks in park, etc. If the IRS finds any petty fault with the records, then the IRS is required by law to collect taxes on the winning sessions, and ignore the poorly documented, offsetting losing sessions. Each grandparent will owe taxes on $300,000 of gambling income (despite having no net gambling income). Now suppose this gambling activity is reported and the records are absolutely immaculate. You would hope that since there was no profit for the year, the IRS would agree that there is no additional tax resulting from the gambling. They may agree, but they are still in on the action. Because the combined adjusted gross income of the grandparents is now $600,000 higher than it otherwise would have been, there will be no tax deductions for personal exemptions and there will be no Schedule A tax deductions for mortgage interest or for dividend income. In reality, the IRS rake for the gambling activity could easily be over $10,000.
Re: Anonymous
I'm really not sure what your point on gameing taxation has to do with the night club issue.
As for tip's being taxed, it is income. You are providing a payment or "cash bonus" for a service you are recieving. Just as a office worker might recieve a bonus during the year.
What is the difference. It is still income for the worker that is getting the tip, and I can't see any company giveing a bonus out and not reporting it to the IRS and taxing it.
Why should the tipping be any different. If you don't like the fact that tips are taxed, then it should apply to all, ie someone who recieves a bonus check. Then while your at it why not let eveyone say that all money you recieve for your work should be considered tip and be tax free.
Why should'nt eveyone have to pull their weight and pay their fair share to support the county.
Re: VegasVipDoor comments....
If there are other high level people in the casino / pure that are letting things happen they SHOULD be looked at as well. No one should be exempt.
As for the fact that you feel the door cashiers & doormen are being unfairly targeted, all I can say is ask themselves this honestly.
Did they report what they made in tips, just as say a cocktail waitress on the casino floor has to, or say as a office worker has to when they get a bonus check.
Do they actually treat and provided equal service to eveyone with the same fairness and respect, reguardless if they tipped.
If you favored and gave special treatment only the people that gave you money, and did not report your tips, then your doing exactly what the article said so why should'nt you take the blame.
I guess Steve and Mike are going to have to give up that Ferrari now. Aren't these the same guys who ran C2K where those kids died from a drug overdoses? Guess its time to go to the bahamas and retire.....
am I the only one who thinks the idea of "tipping" in and of itself is terrible? I mean, consumers are being asked to subsidize the incomes of "service" industry workers. The "service" industry have always been the biggest scams anyway, whether it take the shape of waiters, etc. or say, mechanics and the like.
I think it's time we turned against this practice of subsidizing incomes for employees that aren't paid a fair wage to start with. Sure, the cost will eventually be passed down to the consumer, but honestly, I'd rather go ahead and just pay extra for my meal and not worry about having to tip for a service that should be included anyway. If I were given the option of bringing out my own food and not tip? I'd do it every time.
I used to work as a waiter, and sure I enjoyed tips, but I'd have much rather enjoyed a regular paycheck. Why is it that waiters, bellhops, bartenders, etc. are being rewarded for doing their jobs? Do you tip the dude working at Best Buy? And so what happens to those workers? Many of them use the jobs as placeholders whilst they receive educations to get better jobs and better themselves and society. Man, that'd be terrible if people wanted to better themselves and their lives through education and advancement.
Instead, there are "career" waiters and doormen, and why not? It's a pretty profitable gig.
It's about time the clubs were busted for this ludicrous practice of having to tip a doorman for entry to these venues. The Corporate parent companies that allowed these clubowners to get away with this should also be punished and fined heavily.