United States v. Fior D'Italia, Inc.

Decision Date17 June 2002
Docket NumberNo. 01-463.,01-463.
Citation536 U.S. 238
PartiesUNITED STATES <I>v.</I> FIOR D'ITALIA, INC.
CourtU.S. Supreme Court

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Employers must pay Federal Insurance Contributions Act (FICA) taxes, calculated as a percentage of the wages, including tips, that their employees receive. 26 U. S. C. §§ 3101, 3111, 3121(q). An employee reports the tip amount to the employer, who sends copies of the reports to the Internal Revenue Service (IRS). 26 CFR § 31.6011(a)-1(a). In 1991 and 1992, respondent Fior D'Italia restaurant paid FICA taxes based on the tip amount its employees reported, but the reports also showed that the tips listed on customers' credit card slips far exceeded the reported amount. The IRS made a compliance check and assessed additional FICA taxes using an "aggregate estimation" method, under which it examined the credit card slips; found the average percentage tip paid by those customers; assumed that cash-paying customers paid at same rate; calculated total tips by multiplying the tip rates by Fior D'Italia's total receipts; subtracted the tips already reported; applied the FICA tax rate to the remainder; and assessed additional taxes owed. After paying a portion of the taxes, Fior D'Italia filed this refund suit, claiming that the tax statutes did not authorize the IRS to use the aggregate estimation method, but required it to first determine the tips that each individual employee received and then use that information to calculate the employer's total FICA tax liability. Fior D'Italia agreed that it would not dispute the accuracy of the particular calculation in this case. The District Court ruled for Fior D'Italia, and the Ninth Circuit affirmed.

Held: The tax law authorizes the IRS to use the aggregate estimation method. Pp. 242-252.

(a) An assessment is entitled to a legal presumption of correctness. By granting the IRS assessment authority, 26 U. S. C. § 6201(a) must simultaneously grant it power to decide how to make that assessment within certain limits, which are not exceeded when the IRS estimates tax liability using a reasonable method. Pp. 242-244.

(b) The FICA statute's language, taken as a whole, does not prevent using an aggregate estimation method. Fior D'Italia claims that, because § 3121(q) speaks in the singular — "tips received by an employee in the course of his employment" — an employer's liability attaches to each individual payment, not when the payments are later summed and reported. However, § 3121(q) is a definitional section. Sections 3111(a) and (b), which impose the tax, speak in the plural — "wages" paid to "individuals" by the employer "with respect to employment" — and thus impose liability for the totality of the "wages" paid, which totality, says the definitional section, includes each individual employee's tips. Pp. 244-245.

(c) Contrary to the Ninth Circuit's view, there is no reason to read § 446(b) — which authorizes the IRS to use estimation methods for determining income tax liability — or § 6205(a)(1) — which authorizes the Secretary to adopt regulations prescribing mechanisms for employers to adjust FICA tax liability — as limiting the IRS' authority to use an aggregate estimation method to compute in computing FICA tax liability. Pp. 245-246.

(d) Certain features of an aggregate estimate — that it includes tips that should not count in calculating FICA tax, e. g., tips amounting to less than $20 per month; and that a calculation based on credit card slips can overstate the aggregate amount because, e. g., cash-paying customers tend to leave a lower percentage tip — do not show that the method is so unreasonable as to violate the law. Absent Fior D'Italia's stipulation that it would not challenge the IRS calculation's accuracy, a taxpayer would be free and able to present evidence that the assessment is inaccurate in a particular case. Pp. 246-248.

(e) The fact that the employer is placed in an awkward position by the requirement that it pay taxes only on tips reported by its employees, even when it knows those reports are inaccurate, does not make aggregate estimation unlawful. Section 3121(q) makes clear that penalties will not attach and interest will not accrue unless the IRS actually demands the money and the restaurant refuses to pay the amount demanded in a timely fashion. Pp. 248-249.

(f) Finally, even assuming that an improper motive on the IRS' part could render unlawful its use of a statutorily permissible enforcement method in certain circumstances, Fior D'Italia has not shown that the IRS has acted illegally in this case. It has presented a general claim that the aggregate estimation method lends itself to abusive agency action. But agency action cannot be found unreasonable in all cases simply because of a general possibility of abuse, which exists in respect to many discretionary enforcement powers. Pp. 250-252.

242 F. 3d 844, reversed.

BREYER, J., delivered the opinion of the Court, in which REHNQUIST, C. J., and STEVENS, O'CONNOR, KENNEDY, and GINSBURG, JJ., joined. SOUTER, J., filed a dissenting opinion, in which SCALIA and THOMAS, JJ., joined, post, p. 252.

Assistant Attorney General O'Connor argued the cause for the United States. With her on the briefs were Solicitor General Olson, Deputy Solicitor General Wallace, Kent L. Jones, Bruce R. Ellisen, and Jeffrey R. Meyer.

Tracy J. Power argued the cause for respondent. With her on the brief were Thomas W. Power, Donald B. Ayer, and Elizabeth Rees.*

JUSTICE BREYER delivered the opinion of the Court.

Employers must pay Federal Insurance Contributions Act taxes (popularly known as Social Security taxes or FICA taxes), calculated as a percentage of the wages — including the tips — that their employees receive. 26 U. S. C. §§ 3101, 3111, 3121(q). This case focuses upon the Government's efforts to assess a restaurant for FICA taxes based upon tips that its employees may have received but did not report. We must decide whether the law authorizes the Internal Revenue Service (IRS) to base that assessment upon its aggregate estimate of all the tips that the restaurant's customers paid its employees, or whether the law requires the IRS instead to determine total tip income by estimating each individual employee's tip income separately, then adding individual estimates together to create a total. In our view, the law authorizes the IRS to use the aggregate estimation method.

I

The tax law imposes, not only on employees, but also "on every employer," an "excise tax," i. e., a FICA tax, in an amount equal to a percentage "of the wages ... paid by him with respect to employment." § 3111(a) (setting forth basic Social Security tax); § 3111(b) (using identical language to set forth additional hospital insurance tax). It specifies that "tips received by an employee in the course of his employment shall be considered remuneration" and "deemed to have been paid by the employer" for purposes of the FICA tax sections. § 3121(q). It also requires an employee who receives wages in the form of tips to report the amount of those tips to the employer, who must send copies of those reports to the IRS. 26 CFR § 31.6011(a)-1(a) (2001).

In 1991 and 1992 the reports provided to San Francisco's Fior D'Italia restaurant (and ultimately to the IRS) by the restaurant's employees showed that total tip income amounted to $247,181 and $220,845, in each year respectively. And Fior D'Italia calculated and paid its FICA tax based on these amounts. The same reports, however, also showed that customers had listed tips on their credit card slips amounting to far more than the amount reported by the employees ($364,786 in 1991 and $338,161 in 1992). Not surprisingly, this discrepancy led the IRS to conduct a compliance check. And that check led the IRS to issue an assessment against Fior D'Italia for additional FICA tax.

To calculate the added tax it found owing, the IRS used what it calls an "aggregate estimation" method. That method was a very simple one. The IRS examined the restaurant's credit card slips for the years in question, finding that customers had tipped, on average, 14.49% of their bills in 1991 and 14.29% in 1992. Assuming that cash-paying customers on average tipped at those rates also, the IRS calculated total tips by multiplying the tip rates by the restaurant's total receipts. It then subtracted tips already reported and applied the FICA tax rate to the remainder. The results for 1991 showed total tips amounting to $403,726 and unreported tips amounting to $156,545. The same figures for 1992 showed $368,374 and $147,529. The IRS issued an assessment against Fior D'Italia for additional FICA taxes owed, amounting to $11,976 for 1991 and $11,286 for 1992.

After paying a portion of the taxes assessed, the restaurant brought this refund suit, while the IRS filed a counterclaim for the remainder. The restaurant argued that the tax statutes did not authorize the IRS to use its "aggregate estimation" method; rather, they required the IRS first to determine the tips that each individual employee received and then to use that information to calculate the employer's total FICA tax liability. Simplifying the case, the restaurant agreed that "[f]or purpose[s] of this litigation," it would "not dispute the facts, estimates and/or determinations" that the IRS had "used ... as a basis for its calculation" of the employees' "aggregate unreported tip income." App. 35. And the District Court decided the sole remaining legal question — the question of the statutory authority to estimate tip income in the aggregate — in Fior D'Italia's favor.

The Court of Appeals affirmed the District Court by a vote of 2 to 1, the majority concluding that the IRS is not legally authorized to use its aggregate estimation method, at least not without first adopting its own authorizing regulation. In light of differences among...

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