Challenge to tax assessment based on IRS aggregate-tip reporting.

• Author: Bakale, Anthony

Under Sec. 45B, an employer for a food and beverage establishment may take a tax credit for FICA tax paid on reported tips in excess of those treated as wages for the purposes of satisfying the minimum wage. The credit applies to tips received from customers in connection with the delivery or serving of food or beverages, regardless of whether the food or beverages are for consumption on the establishment's premises.

Overview

Last year, the Ninth Circuit, in Fior D'Italia, Inc., 3/7/01, held that the IRS could not assess employer FICA taxes based on the aggregate-tip reporting method. The Supreme Court granted certiorari on Jan. 11, 2002, because Fior conflicts with 330 West Hubbard Restaurant Corp., 203 F3d 990 (7th Cir. 2000), Bubble Room Inc., 159 F3d (Fed Cir. 1998), and Morrison Restaurants Inc., 118 F3d 1526 (11th Cir. 1997). The issue was whether an assessment can be made based on a reasonable estimate of the aggregate tip amounts received by employees or whether it must be based on the accumulated results of individual employee audits.

Facts

Fior operated a restaurant that employed waiters, bartenders and others whose earnings came in part from tips. It computed and paid its share of FICA taxes for each employee, based on each employee's salary and tip reports. Each year Fior filed Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips.

In 1994, the Service sent Fior a notice to pay its share of FICA taxes due on tips not reported by its employees for 1991 and 1992. The IRS computed the amount by first using the information on Forms 8027 that Fior had submitted. Second, it determined the percentage of tips on the food and services charged on credit cards, by dividing the total amount of tips charged on credit cards by the total credit card charges. It then estimated the total tips received by all employees, by multiplying that percentage by Fior's total receipts. The tips reported to the Service on Forms 8027 were then subtracted from that amount to determine the estimate of total unreported tips. That figure was then multiplied by the employer's 7.65% FICA tax rate to determine what the IRS said Fior should have owed. The Service did not attempt to identify the amount of each employee's unreported tips. Instead, it used a formula for all of Fior's employees in the aggregate. Fior's position is that the aggregate-tip reporting method employed by the IRS does not identify the individuals who received wages...