Foodservice and Lodging Institute, Inc. v. Regan

• Decision Date: 05 April 1984
• Docket Number: Civ. A. No. 84-0184.
• Citation: 583 F. Supp. 1018
• Parties: FOODSERVICE AND LODGING INSTITUTE, INC., Plaintiff, v. Donald T. REGAN, Secretary of the Treasury and Roscoe L. Egger, Commissioner of Internal Revenue, Defendants.
• Court: U.S. District Court — District of Columbia

583 F. Supp. 1018

FOODSERVICE AND LODGING INSTITUTE, INC., Plaintiff, v. Donald T. REGAN, Secretary of the Treasury and Roscoe L. Egger, Commissioner of Internal Revenue, Defendants.

Civ. A. No. 84-0184.

United States District Court, District of Columbia.

April 5, 1984.

Thomas W. Power, Robert D. McDonald, Thomas A. Cocciardi, Power & McDonald, Washington, D.C., for plaintiff.

Robert L. Gordon, Tax Div., Civil Trial Section, U.S. Dept. of Justice, Washington, D.C., for defendants.

MEMORANDUM OPINION

THOMAS F. HOGAN, District Judge.

I. INTRODUCTION

This matter is before the Court on plaintiff Foodservice and Lodging Institute, Inc.'s ("Foodservice") motion for preliminary injunction, defendants' motion to dismiss, and the respective oppositions thereto. At the hearing of these matters on February 27, 1984, the parties agreed and the Court orally ordered sua sponte that the parties' pleadings be treated as cross-motions for summary judgment. Fed.R. Civ.P. 65(a)(2). Upon consideration of the parties' pleadings, including the parties' supplemental briefs on the effect of the Supreme Court's decision in South Carolina v. Regan, ___ U.S. ___, 104 S.Ct. 1107, 79 L.Ed.2d 372 (1984), the complaint, the parties' oral argument and the entire record, the Court entered an order on February 29, 1984, denying defendants' motion to dismiss, denying plaintiff's motion for preliminary injunction and entering summary judgment for defendants. This opinion is issued pursuant to that order.

This case involves a controversy over the proper way to implement an annual information tax return relating to tip income. By this action, Foodservice, a trade association of forty-two (42) multi-unit food service and/or lodging companies, attacks four regulations promulgated by defendants to implement this return. In particular, Foodservice seeks a declaration, pursuant to the Administrative Procedures Act, that the contested regulations are "arbitrary, capricious, ... not in accordance with law" and "in excess of statutory authority" and asks this Court to enjoin defendants from enforcing the regulations. Defendants move to dismiss the action, arguing that this Court is divested of jurisdiction by virtue of the Anti-Injunction Act, 26 U.S.C. § 7421(a), and the Declaratory Judgment Act, 28 U.S.C. §§ 2201, 2202.

In light of the Supreme Court's decision in South Carolina v. Regan, supra, and since this Court finds that Foodservice has no alternative avenue to litigate its claims on its members' behalf, defendants' motion to dismiss must be denied. Further, since the contested regulations are not arbitrary, irrational, unconstitutional or contrary to statute, and there being no material issue of fact, summary judgment must be entered for defendants. Accordingly, plaintiff's motion for preliminary injunction is mooted and must be denied.

II. FACTUAL BACKGROUND

Section 6053(a) of the Internal Revenue Code ("I.R.C.") requires employees who receive tips in the course of their employment to periodically report their tip income to their employers, who, on the basis of these reports, withhold income and social security taxes from the employees' wages. I.R.C. § 3402(f). In September of 1982, in an effort to eliminate widespread underreporting of tip income, Congress amended Section 6053 by imposing tip income reporting requirements on "large food and beverage establishments."¹ P.L. 97-248, Sec. 314(a), 96 Stat. 603-05. (See S.Rep. 97-494, 97th Cong., 2d Sess. (1982) at 251, reprinted in 1982 U.S.Code Cong. & Ad. News hereinafter "News" 781, 1003, for a statement that an estimated 84 percent of the taxes on tip income goes unpaid.) An employer's duties under this amendment are threefold. First, each such employer is required to report to the Secretary of the Treasury ("the Secretary"), for each calendar year, several items of information, including the aggregate amount of charge receipts and the aggregate amount of charged tips shown on such charge receipts. I.R.C. § 6053(c)(1). Second, such establishments are required to determine, for each payroll period, whether the aggregate amount of tips reported by all its employees pursuant to Section 6053(a) total at least 8% of the gross receipts. If not, the employer is required to allocate the difference between the aggregate amount reported and 8% of the establishment's gross receipts ("the shortfall") among its tipped employees. I.R.C. § 6053(c)(3)(A). If the employer has negotiated a "good faith agreement" with its employees as to how the shortfall should be allocated, the allocation is to be done on the basis of this agreement. I.R.C. § 6053(c)(3)(B)(i). In the absence of such an agreement, the employer must allocate on the basis of regulations promulgated by the Secretary. I.R.C. § 6053(c)(3)(B)(ii). The amount allocated to each employee under these provisions must then be reported on an annual basis by the employer to both the Internal Revenue Service ("the Service") and the employee. I.R.C. § 6053(c)(2).

In enacting Section 6053(c), Congress directed the Secretary to promulgate regulations to implement several facets of the provision.² On December 8, 1982, the Service published a set of temporary regulations (47 Fed.Reg. 55215) and proposed amendments to the Employment Tax Regulations, 26 C.F.R. Part 31 (47 Fed.Reg. 55248). Following consideration of public comments, the regulations were revised and published in final on August 15, 1983. 48 Fed.Reg. 36807.

On January 18, 1984 Foodservice brought the instant action, asking this Court to declare three of these regulations unlawful and enjoin their enforcement. In addition, Foodservice challenges a regulation that has been in effect since 1969 which deals with withholding priorities. These regulations and Foodservice's respective complaints with each are dealt with below.

A) Segregation of Charge Receipts

I.R.C. §§ 6053(c)(1)(B) and (C) require employers to report "the aggregate amount of charge receipts" and "the aggregate amount of charged tips shown on such charge receipts." The regulations require reporting of "the aggregate amount of charge receipts ... on which there were charged tips" and "the aggregate amount of charged tips shown on such charge receipts." 26 CFR §§ 31.6053-3(a)(1)(iv) and (a)(1)(v), 48 Fed.Reg. at 36809.

Plaintiff complains that this regulation is burdensome because it will require its members to institute new recordkeeping procedures to separately account for charge receipts with tips. Foodservice further asserts that the regulation is not in accordance with the Code and is of no administrative value as the information it requires "would in no way help the Internal Revenue Service more accurately ascertain the income of any individual." In particular, Foodservice asserts that the statute was promulgated to reflect the tip rate, and that in order for the regulation to adequately reflect this rate, it should require reporting of the total charge sales as otherwise the "stiff" rate (i.e., where no tip is left) is ignored.

B) Allocation Formula

Section 6053(c)(3)(B)(ii) of the Code directs the Secretary to devise a formula for allocation of the "shortfall" among tipped employees where employers have not negotiated a good faith agreement with their employees as to how the shortfall should be allocated. The formula devised by the Secretary, 26 CFR § 31.5053-3(f), 48 Fed. Reg. at 36811-36813, allocates the shortfall solely among directly tipped employees.³

Plaintiff alleges that this provision — by excluding indirectly tipped employees and thus tip-splitting arrangements (i.e., where "directly tipped" employees such as waiters share their tips with employees such as busboys who aid in service) from the scope of the allocation formula — is not in accordance with the statute; requires plaintiff to allocate more to directly tipped employees than "should lawfully be allocated pursuant to the statute"; and, that its members are experiencing "severe employee relations problems" as a result of the "misallocation."

C) Definition Of "Large Food or Beverage Establishment

I.R.C. § 6053(c)(4) defines a "large food or beverage establishment" as a business providing food or beverages, where tipping is customary, and "which normally employed more than 10 employees on a typical business day during the preceding calendar year." The Code directs the Secretary to promulgate regulations to define the scope of this last phrase.

The regulation promulgated by the Secretary pursuant to this directive, 26 CFR § 31.6053-3(j)(9), 48 Fed.Reg. at 36815, provides in pertinent part:

The employees of an employer shall include all employees at all food or beverage operations who, along with the employees of such employer, would be treated as employees of a single employer under section 52(a) or (b) (as in effect on September 3, 1982) and the regulations thereunder.

Foodservice asserts that this regulation is beyond the reach of the Code because it includes within its scope all establishments operated by an employer so long as the separate establishments taken together employ more than ten employees on a typical business day.

D) Withholding Priorities

I.R.C. § 3402(k)⁴ provides that income tax for tips reported to an employer under Section 6053(a) can be withheld from wages paid to that employee, to the extent that the employer has funds of that employee (excluding tips) in his control.

Treasury Regulation 26 CFR 31.3402(k)-1(c), promulgated pursuant to Section 3402(k) in 1969, provides that collection of taxes on tips shall take priority over other non-federal tax claims, including State taxes and union dues. See id., Example (1). Plaintiff asserts that this regulation is in excess of statutory authority as it provides a potential for a "negative paycheck" and will impair an employer's interest in its employees' wages for debts due it (i.e., an employer may be legally obligated under ERISA to pay out funds for a pension plan and this,...