February 01, 2002
Contact: Sue Hensley 202-331-5964, Erica Bohm (858) 541-2049

(Washington, DC) Saying the outcome will effect not only the more than 200,000 restaurants with tipped employees but also every other business across the country with tipped employees, the National Restaurant Association announced today it is contributing $100,000 to help one small businessman, California restaurateur Bob Larive, continue his battle against the IRS – this time, before the U.S. Supreme Court.

"For over five years, Fior d'Italia has fought the IRS through the judicial system of the United States. Small businesses such as this one are the cornerstone of the National Restaurant Association and the restaurant industry. To have the IRS continue to exert pressure on a single restaurant and casually extract funds without performing a thorough audit of employees' records in order to determine the amount of tips that allegedly were not reported by employees and base the FICA tax assessment on guesswork is unconscionable," said Association President and Chief Executive Officer Steven C. Anderson.

"It is for this reason, and because this case has tremendous ramifications for so many other businesses across the country that the National Restaurant Association is proud to help Bob Larive and his restaurant, Fior d'Italia. We salute Bob for his extraordinary courage in leading the industry on this vital issue," Anderson said.

At issue is whether the IRS has the right to assess employers a tax bill for their share of FICA taxes on tips the IRS says employees earned but failed to report — without ever determining the exact amount or which employees failed to report their tips or without crediting employer FICA tax payments to those employees' Social Security accounts. The case is significant as it affects the tip practices of more than 200,000 restaurants and their employees, as well as every other business that has tipped employees.

"As the Supreme Court takes up this issue, the IRS for the first time will be forced to look at how unfair its policy is toward restaurant operators with tipped employees.

It is our hope that the high court will agree that the IRS lacks authority to present the employer with one huge tax bill for alleged underreported employee tip estimates rather than making an appropriate determination based on an exact amount," said Peter Kilgore, the Association's senior vice president of Operations and general counsel.

The recent announcement by the U.S. Supreme Court earlier this month that it will consider the case follows a restaurant industry victory last year when the U.S. Court of
Appeals for the Ninth Circuit determined that the IRS could not target restaurants through "employer-only" audits and assessments as a means of determining whether employees underreport tips.

The National Restaurant Association assisted the California restaurant financially and by filing an "amicias curiae" brief in its other court battle before the appellate court in California. The Association has long maintained that holding only employers liable when workers fail to report tips pits restaurateurs against their own employees, turning them into "tip police."

The decision to help the restaurant finance the case before the Supreme Court was made by the National Restaurant Association's SAFE Committee during its recent Winter Board meeting. SAFE was created to protect the vitality of the industry and preserve the principles of the free enterprise system. Since 1996, the SAFE Fund has provided more than $2.6 million to state restaurant associations, restaurateurs and coalitions working to ensure the strength of the restaurant industry.

Fior d'Italia Inc. v. United States involves a claimed $23,262 underpayment of tip taxes for 1991 and 1992 by the San Francisco-based Fior d'Italia restaurant. After a subsequent ruling in favor of the industry by both the district court and the court of appeals, the U.S. Department of Justice petitioned the Supreme Court to review the case.

The U.S. Supreme Court ruling, due by June, could decide how the IRS collects from employers the 7.65 percent tax on an estimated $60 billion a year in meal tips, much of which the government alleges goes unreported. It also could significantly impact TRAC agreements if it declares "employer-only" assessments illegal. Under TRAC, an employer agrees to educate employees on proper tip reporting and receives protection against the IRS doing employer-only assessments against the restaurant.

Regardless of the Supreme Court outcome, either side may petition Congress because the case involves congressional intent.