March 28, 2002
Contact: Sue Hensley 202-331-5964, Erica Bohm (858) 541-2049

(Washington, DC) Stressing that the case has tremendous ramifications for the nation's 200,000 restaurants with tipped employees, the National Restaurant Association today filed an amicus curiae or "friend of the court" brief in support of the restaurant Fior d'Italia in its tip reporting battle before the U.S. Supreme Court.

"We are filing this brief in United States of America v. Fior d'Italia because we strongly believe that Congress never intended to give the IRS the authority to take aim at employers without determining whether employees underreported their tips. Clearly, the responsibility for reporting tips lies with the employee who receives them. By holding only employers liable when employees fail to report all of their tips, the IRS's attacks put restaurant operators in an untenable position. It is the IRS's responsibility – not a restaurant operator's – to determine which employees failed to report tips before assessing the employer," said Association Senior Vice President of Operations and General Counsel Peter Kilgore, who authored the brief.

"As the Supreme Court takes up this issue, the IRS could finally be forced to look at how inappropriate and wrong its policy is toward restaurant operators – and other small businesses – with tipped employees. It is our hope that the Supreme Court will agree that the IRS does not have the authority to give an employer one huge tax bill for alleged underreported employee tip estimates without first determining which employees failed to report and the amount," he said.

The case involves a claimed underpayment of tip taxes for 1991 and 1992 by the San Francisco-based Fior d'Italia restaurant. The Association has long maintained that holding only employers liable when the IRS fails to determine which workers failed to report tips pits restaurateurs against their own employees, turning them into "tip police." In addition to impacting the nation's 200,000 restaurants with tipped employees – the vast majority of which are small businesses – the outcome will have ramifications for any business with tipped employees. The U.S. Supreme Court will hear oral arguments in the case in April, and a ruling is expected by June.

For five years, Fior d'Italia fought the IRS through the U.S. judicial system. 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 all employees allegedly earned but failed to report – without ever determining the exact amount or which employees failed to report their tips, or without crediting the employer's FICA tax payments to those employees' Social Security accounts.

Kilgore said the National Restaurant Association questions where the money goes when it is assessed on employers. By not determining which employees underreported, the FICA payments assessed on the employer are not credited to the employees' Social Security accounts – which is the sole purpose employers and employees pay FICA taxes.

The recent announcement by the U.S. Supreme Court that it will take up 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 amicus curiae brief in its other court battle before the appellate court in California. The Association is also supporting the case financially by making a contribution from the National Restaurant Association's Save American Free Enterprise (SAFE) Fund. The SAFE Fund was created to protect the vitality of the industry and preserve the principles of the free enterprise system, and since 1996 has provided more than $2.6 million to state restaurant associations, restaurateurs and coalitions working to ensure the strength of the restaurant industry.

The U.S. Supreme Court ruling could decide how the IRS collects from employers and employees the 7.65 percent tax on meal tips. It also could significantly impact TRAC tip agreements with the IRS 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 a restaurant.

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