OCTOBER TERM, 2001
Syllabus
UNITED STATES
v. FIOR D'ITALIA, INC.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH
CIRCUIT
No. 01-463. Argued April 22, 2002-Decided June 17,2002
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'ltalia
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'ltalia'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'ltalia
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'ltalia agreed that it
would not dispute the accuracy of the particular calculation in
this case. The District Court ruled for Fior D'ltalia, 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'ltalia 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
239
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.
240
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
*Briefs of
amici curiae urging affirmance were filed for
the American Gaming Association by
Robert H. Kapp, John G.
Roberts, Jr., and
Frank J. Fahrenkopf,
Jr.; for the National Restaurant Association by
Peter G.
Kilgore; and for Patricia R. Guancial by
Lawrence R.
Jones, Jr.
241
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.
242
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 the Circuits, compare
242 F.3d
844 (CA9 2001) (case below) with
330 West Hubbard
Restaurant Corp. v.
United States, 203
F.3d 990, 997
(CA7 2000), Bubble Room, Inc. v.
United
States, 159 F.3d
553, 568
(CA Fed. 1998), and
Morrison Restaurants,
Inc. v.
United States, 118 F.3d
1526,1530
(CA111997), we granted the Government's
petition for certiorari. We now reverse.
II
An "assessment" amounts to an IRS determination that a taxpayer
owes the Federal Government a certain amount of unpaid taxes. It is
well established in the tax law that an assessment is entitled to a
legal presumption of correctness-a presumption that can help the
Government prove its case against a taxpayer in court. See,
e.
g., United States v.
Janis, 428 U. S. 433, 440
(1976);
Palmer v.
IRS, 116 F.3d
1309, 1312
(CA9 1997);
Psaty v.
United
States, 442 F.2d
1154,
243
1160 (CA3 1971);
United States v.
Lease,
346 F.2d
696, 700
(CA2 1965). We consider here the Government's
authority to make an assessment in a particular way, namely, by
directly estimating the aggregate tips that a restaurant's
employees have received rather than estimating (and then summing)
the tips received by each individual employee.
The Internal Revenue Code says that the IRS, as delegate
of the Secretary of Treasury,
"is authorized and required to make the inquiries,
determinations, and assessments of all taxes ... which have
not been duly paid .... " 26 U. S. C. § 6201(a) (emphasis
added).
This provision, by granting the IRS assessment authority, must
simultaneously grant the IRS power to decide
how to make
that assessment-at least within certain limits. And the courts have
consistently held that those limits are not exceeded when the IRS
estimates an individual's tax liability-as long as the
method used to make the estimate is a "reasonable" one. See,
e.
g., Erickson v.
Commissioner, 937 F. 2d 1548, 1551 (CAlO
1991) (estimate made with reference to taxpayer's purchasing record
was "presumptively correct" when based on "reasonable foundation").
See also
Janis, supra, at 437 (upholding estimate of tax
liability over 77 -day period made by extrapolating information
based on gross proceeds from 5-day period);
Dodge v.
Commissioner, 981 F.2d
350, 353-354
(CA8 1992) (upholding estimate using bank
deposits by taxpayer);
Pollard v.
Commissioner,
786 F.2d
1063, 1066 (CAll 1986) (upholding estimate using statistical
tables reflecting cost of living where taxpayer lived);
Gerardo v.
Commissioner, 552 F.2d
549, 551-552
(CA3 1977) (upholding estimate using
extrapolation of income over i-year period based on gross receipts
from two days);
Mendelson v.
Commissioner, 305 F.2d
519, 521-522
(CA7 1962) (upholding estimate of waitress'
tip income based on restaurant's gross receipts and average tips
earned by all wait-
244
resses employed by restaurant);
McQuatters v.
Commissioner, 32 TCM 1122 (1973), ~ 73,240 P-H Memo TC
(same).
Fior D'Italia does not challenge this basic principle of
law.
Rather, it seeks to explain why this principle should not apply
here, or why it should not determine the outcome of this case in
the Government's favor.
A
Fior D'Italia's primary argument rests upon the statute that
imposes the FICA tax. It points out that the tax law says there is
"imposed on every employer" an "excise tax" calculated on the basis
of "wages ... paid by him" as those "wages" are "defined in" §
3121. §§ 3111(a), (b). It adds that the subsection of § 3121 which
specifies that "wages" includes tips (subsection q) refers to
"tips" as those "received by
an employee in the course of
his employment," i.
e., to tips received by each
employee individually. (Emphasis added.) Fior D'Italia emphasizes §
3121(q)'s reference to the employee in the singular to conclude
that the "employer's liability for FICA taxes therefore attaches to
each of these individual payments, not when they are later
summed and reported." Brief for Respondent 28 (emphasis in
original).
In our view Fior D'Italia's linguistic argument makes too much
out of too little. The language it finds key, the words "tips
received by an employee," is contained in a definitional section, §
3121(q), not in the sections that impose the tax, §§ 3111(a), (b).
The definitional section speaks in the singular. It says that an
employee's (singular) tips "shall be considered remuneration" for
purposes of the latter, tax imposing sections. § 3121(q). But the
latter operational sections speak in the plural. They impose on
employers a FICA tax calculated as a percentage of the "wages"
(plural) paid to "individuals" (plural) by the employer "with
respect to employment." §§ 3111(a), (b). The operational sections
consequently impose liability for the
totality of the
"wages" that the employer pays, which totality of "wages," says the
defi-
245
nitional section, shall include the tips that each individual
employee earns. It is as if a tax were imposed on "all of a
restaurant's dishes," with a definitional section specifying that
"dishes" shall "include each customer's silverware." We simply do
not see how this kind of language, taken as a whole, argues against
use of an aggregate estimation method that seeks to determine the
restaurant's total FICA tax liability.
B
The Ninth Circuit relied in part upon two other statutory
provisions. The first, 26 U. S. C. § 446(b), has been interpreted
to authorize the IRS to use methods of estimation for determining
income tax liability. See,
e. g.,
Mendelson, supra, at 521-522 (authorizing estimate of
waitress' gross receipts). The court felt this provision negatively
implies a lack of IRS authority to use the aggregate estimation
method in respect to other taxes, such as employer FICA taxes,
where no such provision applies. 242 F. 3d, at 849. The second, 26
U. S. C. § 6205(a)(1), authorizes the Secretary to adopt
regulations that prescribe mechanisms for employers to adjust FICA
tax liability. The court felt this provision negatively implies a
lack of IRS authority to use an aggregate estimation method in the
absence of a regulation. 242 F. 3d, at 851.
After examining the statutes, however, we cannot find any
negative implication. The first says that, where a taxpayer has
used "a method of accounting" that "does not clearly reflect
income," or has used "no method of accounting" at all, "the
computation of taxable income shall be made under such method as,
in the opinion of the Secretary, does clearly reflect income." §
446(b). This provision applies to only one corner of income tax
law, and even within that corner it says nothing about any
particular method of calculation. To read it negatively would
significantly limit IRS authority in that respect both within and
outside the field of income tax law.
246
And there is simply no reason to believe that Congress intended
any such limitation.
Section 6205(a)(1) refers to certain employment taxes, including
FICA taxes, and says that when an employer initially pays "less
than the correct amount of tax," then "proper adjustments ... shall
be made, without interest," in accordance with "regulations." The
IRS has made clear that this provision refers to an employer's
"adjustments," say, in an initially underreported tax liability,
made
before the IRS has assessed an underpayment. See
generally 26 CFR § 31.6205-1 (2001). Again, there is simply no
reason to believe that Congress, in writing this provision
applicable to a small corner of tax law, intended, through negative
implication, to limit the IRS' general power to assess tax
deficiencies. Indeed, Fior D'Italia has not advanced in this Court
either "negative implication" argument relied on by the Ninth
Circuit.
C
Fior D'Italia next points to several features of an "aggregate"
estimate that, in its view, make it "unreasonable" (and therefore
contrary to law) for the IRS to use that method. First, it notes
that an aggregate estimate will sometimes include tips that should
not count in calculating the FICA tax the employer owes. The law
excludes an employee's tips from the FICA wages base insofar as
those tips amount to less than $20 in a month. 26 U. S. C. §
3121(a)(12)(B). It also excludes the portion of tips and other
wages (including fixed salary) an employee receives that rises
above a certain annual level-$53,400 in 1991 and $55,500 in 1992. §
3121(a)(1); 242 F. 3d, at 846, n. 4. These ceilings mean that if a
waiter earns, say, $36,000 in fixed salary, reports $20,000 in
tips, and fails to report $10,000 in tips, the restaurant would
not owe additional taxes, because the waiter's reported
income ($56,000) already exceeds the FICA ceiling. But if that
waiter earns $36,000 in fixed salary, reports $10,000 in tips, and
fails to report another $10,000 in tips,
247
the restaurant
would owe additional taxes on the
unreported amount, because the waiter's reported income of $46,000
falls below the FICA ceiling.
Second, Fior D'Italia points out that an aggregate calculation
based on credit card slips can overstate the aggregate amount of
tips because it fails to account for the possibilities that: (1)
customers who pay cash tend to leave a lower percentage of the bill
as a tip; (2) some customers "stiff" the waiter, leaving no tip at
all; (3) some customers write a high tip on the credit card slip,
but ask for some cash back, leaving a net lower amount; and (4)
some restaurants deduct the credit card company fee from the tip,
leaving the employees with a lower net amount.
Fior D'Italia adds that these potential errors can make an
enormous difference to a restaurant, for restaurant profits are
often low, while the tax is high. Brief for Respondent 9-10, n. 6
(asserting that an assessment for unreported tips for all years
since employer FICA tax provision was enacted would amount to two
years' total profits). Indeed, the restaurant must pay this tax on
the basis of amounts that the restaurant itself cannot control, for
the restaurant's customers, not the restaurant itself, determine
the level of tips. Fior D'Italia concludes that the IRS should
avoid these problems by resting its assessment upon individual
calculations of employee tip earnings, and argues that the IRS'
failure to do so will always result in an overstatement of tax
liability, rendering any assessment that results from aggregate
estimates unreasonable and outside the limits of any delegated IRS
authority.
In our view, these considerations do not show that the IRS'
aggregate estimating method falls outside the bounds of what is
reasonable. It bears repeating that in this litigation, Fior
D'Italia stipulated that it would not challenge the particular IRS
calculation as inaccurate. Absent such a stipulation, a taxpayer
would remain free to present evidence that an assessment is
inaccurate in a particular case. And we do
248
not accept Fior D'Italia's claim that restaurants are unable to
do so-that they "simply do not have the information to dispute" the
IRS assessment. Tr. of Oral Arg. 36. Why does a restaurant owner
not know, or why is that owner unable to find out: how many busboys
or other personnel work for only a day or two-thereby likely
earning less than $20 in tips; how many employees were likely to
have earned more than $55,000 or so in 1992; how much less
cash-paying customers tip; how often they "stiff" waiters or ask
for a cash refund; and whether the restaurant owner deducts a
credit card charge of, say 3%, from employee tips? After all, the
restaurant need not prove these matters with precision. It need
only demonstrate that use of the aggregate method in the particular
case has likely produced an inaccurate result. And in doing so, it
may well be able to convince a judge to insist upon a more accurate
formula. See,
e. g., Erickson, 937 F. 2d, at
1551
("Some reasonable foundation for the assessment is
necessary to preserve the presumption of correctness" (emphasis in
original)).
Nor has Fior D'Italia convinced us that individualized employee
assessments will inevitably lead to a more "reasonable" assessment
of employer liability than an aggregate estimate. After all,
individual audits will be plagued by some of the same inaccuracies
Fior D'Italia attributes to the aggregate estimation method,
because they are, of course,
based on estimates themselves.
See,
e. g., Mendelson, 305 F. 2d, at 521-522;
McQuatters v.
Commissioner, 32 TCM 1122 (1973), ~
73,240 P-H Memo TC. Consequently, we cannot find that the aggregate
method is, as a general matter, so unreasonable as to violate the
law.
D
Fior D'Italia also mentions an IRS regulation that it believes
creates a special problem of fairness when taken together with the
"aggregate" assessment method. That regulation says that an
employer, when calculating its FICA
249
tax, must "include wages received by an employee in the form of
tips
only to the extent of the tips reported ... to the
employer." 26 CFR § 31.6011(a)-1(a) (2001) (emphasis added).
How, then, asks Fior D'Italia, could the employer have calculated
tax on a different amount, namely: (1) the amount of tips
"reported"; plus (2) the amount of tips
received but not
reported? Indeed, Fior D'Italia itself did not do so initially,
presumably because this regulation said it should not do so. See
Brief for Respondent 16-17. And, if it should not do so, is it not
seriously unfair for the IRS later to assess against it a tax
deficiency based on this latter figure? "[T]here is no practical or
legally authorized way," Fior D'Italia complains, for the
restaurant to include the additional amount of tips for which the
IRS might later seek tax payment.
Id., at 16.
The statute itself, however, responds to this concern. It says
that, insofar as tips were received but not reported to the
employer,
that remuneration (i.
e., the unreported
tips) shall not be deemed to have been paid by the employer until
"the date on which notice and demand for such taxes is made to the
employer by the Secretary." 26 U. S. C. § 3121(q). This provision
makes clear that it is not unfair or illegal to assess a tax
deficiency on the unreported tips, for penalties will not attach
and interest will not accrue unless the IRS actually demands the
money
and the restaurant refuses subsequently to pay the
amount demanded in a timely fashion. See generally Rev. Rul. 95-7,
1995-4 1. R. B. 44. Indeed, the statute (and its accompanying
Revenue Ruling) contemplates both a restaurant that does not police
employee tip reporting and a later assessment based on unreported
tips. It makes clear that, at most, such a restaurant would have to
create a reserve for potential later tax liability. Although the
reporting scheme may place restaurants in an awkward position, the
Tax Code seems to contemplate that position; and its bookkeeping
awkwardness consequently fails to support the argument that
aggregate estimation is unlawful.
250
E
Finally, Fior D'Italia suggests that the IRS is putting its
"aggregate estimate" method to improper use. It traces a lengthy
history of disagreement among restaurant workers, restaurant
owners, and the IRS as to how best to enforce the restaurants'
legal obligation to pay FICA taxes on unreported tip income. It
notes that the IRS has agreed to create a special program, called
the "Tip Reporting Alternative Commitment," whereby a restaurant
promises to establish accurate tip reporting procedures in return
for an IRS promise to base FICA tax liability on reported tips
alone. It adds that any coercion used to force a restaurant to
enter such a program (often unpopular with employees) would
conflict with the views of Members of Congress and IRS officials,
who have said that a restaurant should not be held responsible for
its employees' failure to report all their tips as income. See,
e. g., Letter of Members of Congress to Secretary of
Treasury Lloyd Bentsen, 32 Tax Analysts' Daily Tax Highlights &
Documents 3913 (Mar. 4, 1994); App. 106, 107. It adds that Congress
has enacted this view into two special laws: the first of which
gives restaurants a nonrefundable tax credit on FICA taxes paid, i.
e., permits restaurants to offset any FICA it pays on
employee tips on a dollar for dollar basis against its own income
tax liability, 26 U. S. C. § 45B; and the second of which prohibits
the IRS from "threaten[ing] to audit" a restaurant in order to
"coerce" it into entering the special tip-reporting program.
Internal Revenue Service Restructuring and Reform Act of 1998, 112
Stat. 755.
Fior D'Italia says that the IRS' recent use of an "aggregate
estimate" approach runs contrary to the understanding that
underlies this second statute, for it "effectively forces the
employer into ... verifying, investigating, monitoring, and
policing compliance by its employees-responsibilities which
Congress and the Courts have considered, evaluated, and steadfastly
refused to transfer from IRS to the em-
251
ployer." Brief for Respondent 9. And it suggests that the IRS
intends to use a legal victory here as a "threat," say, to reopen
back tax years, in order to require restaurant owners "to force"
their "employees to report" all tips.
Id., at 14. Why else,
asks Fior D'Italia, would the IRS bring this case? After all, given
the dollar for dollar FICA/income tax setoff, this case may not
even produce revenue for the Government.
Fior D'Italia's "abuse of power" argument, however, does not
constitute a ground for holding unlawful the IRS' use of aggregate
estimates. Even if we assume, for argument's sake, that an improper
motive could render unlawful the use of a statutorily permissible
enforcement method in certain circumstances, cf.
United
States v.
Powell, 379 U. S. 48, 58 (1964),
we note that Fior D'Italia has not demonstrated that the IRS has
acted illegally
in this case. Instead it has presented a
general claim to the effect that the aggregate estimation method
lends itself to abusive agency action. But we cannot find agency
action unreasonable in all cases simply because of a general
possibility of abuse-a possibility that exists in respect to
many discretionary enforcement powers. Cf.
Heckler v.
Chaney, 470 U.
S. 821, 831 (1985).
The statutes and congressional documents that protect
restaurants from onerous monitoring requirements consequently do
not support Fior D'Italia's argument that aggregate estimates are
statutorily prohibited. For example, the Internal Revenue Service
Restructuring and Reform Act prohibits the IRS from "threaten[ing]
to audit" restaurants as a means to "coerce" them into policing
employee tip reporting,
supra, at 250, but Fior D'Italia
does not claim that the IRS has violated this statute. Nor, for
that matter, has Fior D'Italia presented evidence that this
particular litigation would fail to yield revenue to the Government
(due to the availability of the FICA tax credit), or convincingly
explained, even if so, why that fact, while making the case
unremunerative, would automatically make it improper. And while
other documents show that Congress has expressed
252
concern regarding a restaurant's difficulty in trying to
supervise its employees' reporting of their tips, they do not
suggest that the aggregate estimate method is an unreasonable way
of ascertaining unpaid FICA taxes for which the employer is
indisputably liable (particularly when one recalls that the
taxpayer generally remains free to challenge the accuracy of the
calculation at issue, even though this taxpayer has waived its
right to do so). Rather, as we have shown, the relevant Code
provisions and case law support the use of aggregate estimates. See
supra, at 242244, 248-249.
We conclude that Fior D'Italia's discussion of IRS "abuse" is
insufficient to show that the agency's use of aggregate estimates
is prohibited by law. In saying this, we recognize that Fior
D'Italia remains free to make its policy-related arguments to
Congress.
III
For these reasons, and because Fior D'Italia has stipulated that
it does not challenge the accuracy of the IRS assessment in this
case, the judgment of the Court of Appeals is
Reversed.
JUSTICE SOUTER, with whom JUSTICE SCALIA and JusTICE THOMAS
join, dissenting.
The Court holds that the Internal Revenue Service's statutory
authorization to make assessments for unpaid taxes is reasonably
read to cover a restaurateur's FICA taxes based on an aggregate
estimate of all unreported employee tips. I believe that reading
the statute so broadly saddles employers with a burden unintended
by Congress, and I respectfully dissent.
I
Taxes on earned income imposed by the Federal Insurance
Contributions Act (FICA) pay for employees' benefits under the
Social Security Act, 49 Stat. 622, as amended, 42 U. S. C.
253
§ 401
et seq. (1994 ed. and Supp. V). In the simplest
case, the employee is taxed on what he receives, and the employer
is taxed on what he pays. See 26 U. S. C. §§ 3101, 3111. For a long
time, an employee's income from tips was not recognized as
remuneration paid by the employer, and the corresponding FICA tax
was imposed only on the employee. See Social Security Amendments of
1965, § 313(c), 79 Stat. 382. In 1987, however, the Internal
Revenue Code was amended to treat tip income within the
remuneration on which the employer, too, is taxed, 26 U. S. C. §
3121(q), and that is the present law.
The scheme is simple. The tips are includible in the employee's
wages. The employee must report the amount of taxable tip income to
the employer. § 6053(a). "[L]arge food or beverage
establishment[s]" must pass on that information to the Internal
Revenue Service, § 6053(c)(1), and must also report the total
amount of tips shown on credit card slips,
ibid. The
employer is subject to tax on the same amount of tip income listed
on an employee's report to him and in turn reported by him to the
IRS. For both the employer and the employee, however, taxable tip
income is limited to income within what is known as the "wage
band"; there is no tax on tips that amount to less than $20 in a
given month, or on total remuneration in excess of the Social
Security wage base ($53,400 and $55,500, respectively, in the years
relevant to this case).
Because many employees report less tip income than they receive,
their FICA taxes and their employers' matching amounts are less
than they would be in a world of complete reporting. The IRS has
chosen to counter dishonesty on the part of restaurant employees
not by moving directly against them, but by going against their
employers with assessments of unpaid FICA taxes based on an
estimate of all tip income paid to all employees aggregated
together. The Court finds these aggregated assessments authorized
by the general provision for assessments of unpaid taxes, § 6201,
which benefits
254
the Government with a presumption of correctness. See
United
States v.
Janis, 428 U. S. 433, 440
(1976).1 The practice of assessing FICA taxes against an employer
on estimated aggregate tip income, however, raises anomaly after
anomaly, to the point that one has to suspect that the Government's
practice is wrong. An appreciation of these consequences, in fact,
calls for a reading of the crucial provision, 26 U. S. C. §
3121(q), in a straightforward way, which bars aggregate assessments
and the anomalies that go with them.
II A
The Social Security scheme of benefits and the FICA tax funding
it have been characterized as a kind of "social insurance,"
Flemming v.
Nestor, 363 U. S. 603, 609
(1960), in which employers and employees contribute matching
amounts. Compare 26 U. S. C. § 3101 with § 3111. The payments that
beneficiaries are entitled to receive are determined by the records
of their wages earned.
Nestor, supra, at 608.
Notwithstanding this basic structure, the IRS's aggregate
estimation method creates a disjunction between amounts
presumptively owed by an employer and those owed by an employee. It
creates a comparable disproportion between the employer's tax and
the employee's ultimate benefits, since an aggregate assessment
does nothing to revise the earnings records of the individual
employees for whose benefit the taxes are purportedly collected.2
Thus, from the outset, the aggregate assessment fits poorly with
the design of the system.
1 In 1998, Congress altered the burdens of proof for tax cases,
but the changes do not implicate FICA. See 26 U. S. C. §
7491(a).
2 Although the scheme does not create a vested right to benefits
in any employee, see
Flemming v.
Nestor, 363 U. S. 603, 608-611
(1960), the legislative choice to tie benefits to earnings history
evinces a general intent to create a rough parity between taxes
paid and benefits received.
255
B
As the majority acknowledges, the next problem is that the
aggregate estimation necessarily requires the use of generalized
assumptions for calculating such estimates, and the assumptions
actually used tend to inflate liability. In the first place, while
the IRS's assumption that many employees are underreporting is
indisputably sound, the assumption that every patron is not only
tipping, but tipping 14.49% in 1991 and 14.29% in 1992, is probably
not. Those percentages are based on two further assumptions: that
patrons who pay with credit cards tip at the same rate as patrons
who pay in cash, and that all patrons use the tip line of the
credit card slip for tips, rather than to obtain cash. But what is
most significant is that the IRS's method of aggregate estimation
ignores the wage band entirely, assuming that all tips are subject
to FICA tax, although this is not true in law, and certainly not
always the case in fact.
C
The tendency of the Government's aggregation method to
overestimate liability might not count much against it if it were
fair to expect employers to keep the reports that would carry their
burden to refute any contested assessment based on an aggregate
estimate. But it is not fair.
Obviously, the only wayan employer can refute probable inflation
by estimate is to keep track of every employee's tips,
ante,
at 248, and at first blush, there might seem nothing unusual about
expecting employers to do this.3 The Code
3 Of course, even the IRS has not explained the precise manner
in which the employer is expected to generate such records. Before
the Court of Appeals, the IRS argued that the employer could
require employees to pool all tips, and thereby keep track of them.
See
242 F.3d
844, 848, n. 6 (CA9 2001). The court properly rejected this
contention as "alter[ing] the way a restaurant does business ....
It would be akin to saying that a restaurant must charge a fixed
service charge in lieu of tips."
Ibid. Before this Court,
the IRS instead argued that "every employer should
256
imposes a general obligation upon all taxpayers to keep records
relevant to their liability according to regulations promulgated by
the Secretary, 26 U. S. C. § 6001, and, for the most part, the
courts have viewed the burden on taxpayers to maintain such records
as reasonable and, hence, as the justification for requiring
taxpayers to disprove IRS estimates; the taxpayer who fails to
attend to § 6001 has only himself to blame. See,
e. g.,
Kikalos v.
Commissioner, 190 F. 3d 791, 792, n. 1
(CA7 1999);
Cracchiola v.
Commissioner,
643 F.2d
1383, 1385
(CA9 1981);
Meneguzzo v.
Commissioner, 43 T. C. 824, 831 (1965).4 But the first blush
ignores the one feature of § 6001 relevant here. The provision
states a single, glaring exception: employers need not keep records
"in connection with charged tips" other than "charge receipts,
records necessary to comply with section 6053(c), and copies of
statements furnished by employees under section 6053(a)."
Ibid. Employers are expressly excused from any effort to
determine whether employees are properly reporting their tips; the
Code tells them that they need not keep the information specific to
each employee that would be necessary to determine if any tips fell
short of the estimates or outside the wage band.5 Presumably
because of this statu-
hire reliable people who they can trust to follow the rules."
The official transcript records "Laughter." Tr. of Oral Arg.
27.
4 Such is in keeping with the general rule that burdens shift to
those with peculiar knowledge of the relevant facts.
Campbell v.
United States, 365 U. S. 85, 96 (1961)
("[T]he ordinary rule ... does not place the burden upon a litigant
of establishing facts peculiarly within the knowledge of his
adversary");
National Communications Assn. v.
AT&T
Corp., 238 F.3d
124, 130
(CA2 2001) ("[A]ll else being equal, the burden
is better placed on the party with easier access to relevant
information"); 9 J. Wigmore, Evidence § 2486, p. 290 (J. Chadbourn
rev. ed. 1981) ("[T]he burden of proving a fact is said to be put
on the party who presumably has peculiar means of knowledge"
(emphasis deleted)).
5 The statute refers only to charged tips, rather than cash
tips, but the IRS does not dispute that the employer has no
obligation to keep any records beyond those specifically required
under 26 U. S. C. § 6053, and the IRS's regulations on the subject
do not impose any requirements with
257
tory exception, the Secretary's regulations regarding employer
recordkeeping do not impose any obligations beyond those mentioned
in § 6001. See 26 CFR § 31.6001-5 (2001) (describing required
records). This absolution from recordkeeping is mirrored by the
fact that tips are uniquely excepted from the general rule that
remuneration must be reported in W-2 statements. See 26 U. S. C. §
6041(e). The upshot is that Congress has enacted a singular
exception to the duty to keep records that would allow any ready
wage band determinations or other checks on estimates, while the
aggregate assessment practice of the IRS virtually reads the
exception out of the Code.
The majority doubts that there is any practical difference
between determining the liability of one employee, very possibly
with an estimation similar to the one used here, and estimating the
aggregate amount for an employer.
Ante, at 248. But
determinations limited to an individual employee will necessarily
be more tailored, if only by taking the wage band into account. In
fact, any such determination would occur in consequence of some
audit of the employee, who would have an incentive to divulge
information to contest the IRS's figures where possible, and
generate the very paper trail an employer would need to contest
liability while availing himself of the exception in § 6001.
D
The strangeness of combining a statute excusing employers from
recordkeeping with an administrative practice of
respect to cash tips. See 26 CFR § 31.6001-5 (2001). Moreover,
it would be irrational to read 26 U. S. C. § 6001 to require an
employer to keep detailed records only of cash tips, while, for
example, being relieved of the burden to record which employees
received which charged tips, or whether the tip space was used for
something other than tips, or how employees allocated charged tips
amongst themselves via the process of "tipping out" (sharing tips
with supporting waitstaff who do not receive their own tips, such
as bartenders and hosts).
258
making probably inflated assessments stands out even more
starkly in light of the eccentric route the Government has to
follow in a case like this in order to benefit from the presumption
of correctness that an aggregate assessment carries. Under the
general authorization to make assessments, 26 U. S. C. § 6201, on
which the Government relies, any assessment is preceded by
liability for taxes. § 6201(a) ("The Secretary is authorized ... to
make the inquiries, determinations, and assessments of all taxes
... which have not been duly paid ... ");
ante, at 242 ("An
'assessment' amounts to an IRS determination that a taxpayer owes
the Federal Government a certain amount of unpaid taxes"). After,
but only after, assessment can the IRS take the further step of
issuing notice and demand for the unpaid taxes assessed, § 6303, so
as to authorize the IRS to levy upon the taxpayer's property, or
impose liens, §§ 6321, 6331.
In the case of an employer's liability for FICA taxes on tips,
however, this sequence cannot be followed if the employee does not
report the tips to the employer in the first place, for it is the
report, not the employee's receipt of the tips, that raises the
employer's liability to pay the FICA tax. The employer may know
from the credit slips that the employees' reports are egregiously
inaccurate (wage band or no wage band), but the employer is still
liable only on what the employee declares. In fact, the effect of §
6053(c) is such that employers cannot help but know when
underreporting is severe, since they are required to give the IRS a
summary of the amount of reported tips and the amount of charged
tips. Nonetheless, the employer remains liable solely for taxes on
the reported tips.6
6 In fact, the obligation to report charged tips was imposed
before employers had any FICA tax obligation beyond tips that
substituted for minimum wage, and the reporting obligations of §
6053(c) were devised to assist the IRS in its collections efforts
against employees, despite the IRS's use of it here as a basis for
auditing Fior D'Italia.
259
Indeed, even if the employer, seeing a disparity, paid extra
FICA taxes on the assumption that the employees had underreported
tips, the extra payment would be treated as an overpayment. See Tr.
of Oral Arg. 8;
Jones v.
Liberty Glass Co.,
332 U. S. 524,
531 (1947) (overpayment is "any payment in excess of that which is
properly due"). The overall implication is that employers are meant
to pay taxes based on specific information provided by others. As a
practical matter, the tips themselves are not the true basis for
liability; instead, it is an employee report that creates the
obligation.
Some event must therefore trigger liability for taxes on
unreported tips before the IRS can make the assessment, and this
event turns out to be the notice and demand for which § 3121(q)
makes special provision in such a case.7 Only after notice and
demand can the Government proceed to assessment under § 6201.
Whereas the usual sequence is assessment, then notice and demand,
see § 6303, here it is notice and demand, then assessment.
The IRS does not dispute this. It concedes that it does not rely
upon § 6201 before issuing the notice, see Reply Brief for United
States 15-16, but instead performs a "preassessment" estimate (for
which, incidentally, no statutory authorization exists). Then it
issues notice and (liability having now attached) uses the same
estimate for the official assessment under § 6201.
Again, at first blush, it is tempting to say that the sequence
of events may be unusual, but under the aggregate assessment
practice the employer-taxpayer ends up in the same position he
would have been in if he failed to pay FICA taxes on reported tips.
But there are two very significant
7 The majority takes note of this unusual scheme, but finds
significance only in the fact that until notice issues (and
liability arises), interest does not run.
Ante, at 249. But
to interpret the statute as nothing more than a method of
preventing the running of interest avoids the significance of §
3121(q), because there is already a statute that prevents interest
running on unpaid FICA taxes. § 6205(a)(1).
260
differences. It is true that the employer who is delinquent as
to reported tips ends up subject to liability on the basis of
third-party action (the employee's report) which assessment invests
with a presumption of correctness, and which notice and demand then
make a basis for possible liens and levies. But in that case the
employer's liability, and exposure to collection mechanisms, is
subject to the important safeguard of the employee's report.
Whatever the employee may do, it will not be in his interest to
report more tips than he received, exposing himself (and,
incidentally, his employer) to extra taxation. But this safeguard
is entirely lost to the employer, through no fault of his own, if
the Government can make aggregate assessments. The innocent
employer has few records and no protection derived from the
employee's interest. Yet without any such protection he is, on the
Government's theory, immediately liable for the consequences of
notice and demand at the very instant liability arises.
The second difference goes to the authority for estimating
liability. The IRS finds this authority implicit in § 6201, which
authorizes assessments.
Ante, at 243. In the usual case, the
estimate is thus made in calculating the assessment, which occurs
after the event that creates the liability being estimated and
assessed. But in the case of the tips unreported by the employee,
there would be no liability until notice and demand is made under §
3121(q), and it is consequently at this point that the estimate is
required. The upshot is that the estimate has to occur before the
statute claimed to authorize it, § 6201, is even applicable. That
is, the IRS says it can estimate because it can assess, and it can
assess because it can previously estimate. Reasoning this circular
may warrant suspicion.
E
There is one more source of suspicion. In 1993, Congress enacted
an income tax credit for certain employers in the amount of FICA
taxes paid on tips in excess of the minimum
261
wage. 26 U. S. C. § 45B. The existence of the credit creates a
peculiar scheme, for unless we are to assume that restaurateurs are
constantly operating on the knife-edge of solvency, never able to
use the credit (even with its 20-year carryforward, see § 39), the
IRS has little reason to expect to gain much from the
employer-taxpayer; the collection effort will probably result in no
net benefit to the Government (except, perhaps, as an interest-free
loan).8 And because, as noted, the aggregate method chosen by the
IRS will not affect individual employees' wage-earning records, the
estimates do not even play much of a bookkeeping role. There is
something suspect, then, in the IRS's insistence on conducting
audits of employers, without corresponding audits of employees, for
the purpose of collecting FICA taxes that will ultimately be
refunded, that do not increase the accuracy of individual earnings
records, and probably overestimate the true amount of taxable
earnings.
In fact, the only real advantage to the IRS seems to be that the
threat of audit, litigation, and immediate liability may well force
employers to assume the job of monitoring their employees' tips to
ensure accurate reporting. But if that explanation for the
Government's practice makes sense of it, it also flips the
Government from the frying pan into the fire. Congress has
previously stymied every attempt the IRS has made to impose such a
burden on employers. In the days when employers were responsible
only for withholding the employee's share of the FICA tax, the IRS
attempted to force employers to include tip income on W-2 forms;
this effort was blocked when Congress modified 26 U. S. C. § 6041
to exclude tip income expressly from the W-2 requirements. See
Revenue Act of 1978, § 501(b), 92 Stat. 2878. When the IRS
interpreted the credit available under
8 At oral argument, the Government contended that the payment of
the FICA tax, coupled with the § 45B credit, benefited its
accounting by permitting payments to be appropriately allocated
between the Social Security trust fund and general revenue. See Tr.
of Oral Arg. 20-21.
262
§ 45B to apply only to tips reported by the employee pursuant to
26 U. S. C. § 6053(a), Congress overruled the IRS and clarified
that the credit would apply to all FICA taxes paid on tips above
those used to satisfy the employer's minimum wage obligations. See
Small Business Job Protection Act of 1996, Pub. L. 104-188, §
1112(a), 110 Stat. 1759. Finally, when the IRS developed its Tip
Reporting Alternative Commitment (TRAC) program,
ante, at
250, Congress forbade the IRS from "threaten[ing] to audit any
taxpayer in an attempt to coerce the taxpayer" into participating.
Internal Revenue Service Restructuring and Reform Act of 1998, §
3414, 112 Stat. 755.9 And although the use of a threatened
aggregate estimate (after an audit) to induce monitoring of
employee tips may not technically run afoul of that statute, it is
difficult to imagine that Congress would allow the aggregation
practice as a lever on employers, when it forbade the use of an
audit for the same purpose.
9 To some extent, the modification of the § 45B credit and TRAC
may be taken as congressional awareness of the IRS's practice of
making aggregate assessments. After all, there is no need to
clarify that § 45B is available for taxes on unreported tips unless
such taxes are, in fact, being paid, and the TRAC program itself
depends on the existence of aggregate assessments, because the
"carrot" offered to employers to encourage participation is the
IRS's promise to refrain from such assessments.
With respect to § 45B, however, prior to Congress's
modifications, the IRS regulations did not allow for the credit
even when an individual employee was assessed and corresponding
notice and demand issued to the employer. See 58 Fed. Reg. 68033
(1993) (temporary regulation § 1.45B1 T). Thus, Congress's
clarification did not depend on the existence of aggregate
assessments. As for TRAC, at the time that Congress prohibited the
IRS from coercing participation, the IRS had actually halted the
aggregate assessment practice. See Director, Office of Employment
Tax Administration and Compliance, Memorandum for Regional Chief
Compliance Officers (June 16, 1998), App. 106-107. Moreover, the
simple (and realistic) answer is just that Congress did as asked;
restaurateurs complained about a specific practice, i.
e.,
threatened audits, and Congress responded with a targeted
statute.
263
III
Consider an alternative. I have noted already that even the
Government tacitly acknowledges the crucial role of § 3121(q), the
source of its authority to issue notice and demand, without which
there is no liability on the employer's part for FICA taxes on
unreported tips and thus no possibility of assessment under § 6201.
It makes sense, then, to understand the scope of authority to make
the assessment as being limited by the scope of the authority to
issue notice and demand, and it likewise makes sense to pay close
attention to the text of that authorization.
The special provision in § 3121(q) for notice and demand against
an employer says nothing and suggests nothing about aggregate
assessments. It reads that when an employer was furnished "no
statement including such tips" or was given an "inaccurate or
incomplete" one, the remuneration in the form of "such tips" shall
be treated as if paid on the date notice and demand is made to the
employer. "[S]uch tips" are described as "tips received by an
employee in the course of his employment."
Ibid. Thus, by
its terms, the statute provides for notice and demand for the tax
on the tips of "an employee," not on the tips of "employees" or
"all employees" aggregated together. And, of course, if notice and
demand is limited to taxes on tips of "an employee," that is the
end of aggregate estimates.
It is true that under the Dictionary Act, 1 U. S. C. § 1, a
statutory provision in the singular may include the plural where
that would work in the context. "[A]n employee" could cover
"employees" and the notice and demand could cover tips received
during "their employment," "unless the context indicates
otherwise,"
ibid. But here the context does indicate
otherwise. The anomalies I have pointed out occur when the singular
"employee" in § 3121(q) is read to include the plural, which in
turn is crucial to allowing aggregate notice, demand, and
assessment; and it turns out that
264
reading the statute to refer only to a particular employee's
tips and limiting notice, demand, and assessment accordingly, goes
far to abridge the catalog of oddities that come with the
Government's position.
First, sticking to the singular means that the employer will not
be assessed more tax than the employee himself should pay; whether
or not the employee is sued for a like amount, the respective
liabilities of employer and employee will be restored to parity.
And by keying the employer's liability to a particular employee,
the near certainty of overassessment will be replaced with a
likelihood of an accurate assessment taking into consideration the
wage band of taxability under FICA.
Second, the fact that the employer has exercised his express,
statutory option to decline to keep tipping records on his work
force will no longer place him at such an immediate disadvantage.
It will be relatively easy to discover the basis for the tax
calculation in a particular instance.
Third, if indeed the Government first establishes the employee's
liability for unreported tips, notice and demand under § 3121(q)
will then serve what on its face seems to be its obvious purpose,
to provide the employer with reliable information, like the
employee tip reports that similarly trigger liability, so that the
employer will have no further need for keeping track of employee
tips. Although this is not the time to decide whether the IRS must
formally audit the employee's own tax liability first, there is at
least one reason to think Congress assumed that it would. There is
no statute of limitations on an employer's FICA tax liability for
unreported tips (because the statute does not run until after
liability attaches, and no time limits are imposed upon the
issuance of the notice that triggers liability). But there is a
statute of limitations for assessments against employees. 26 U. S.
C. § 6501. Conditioning the employer's liability on a parallel
obligation of the employee would in effect place a limitation
period on the employer's exposure.
265
Finally, of course, the tension with Congress's admonition that
the IRS not "threaten to audit any taxpayer in an attempt to coerce
the taxpayer" into participating in TRAC, 112 Stat. 755, will be
eliminated. If the employer is liable only after an individual
employee's delinquency has been calculated, the use of mass
assessments to force an employer, in self-defense, to institute
TRAC will simply vanish.
Thus, the context establishes that a singular reading is the one
that makes sense by eliminating the eccentricities entailed by the
aggregate reading, some of which seem unfair to employer taxpayers.
Of course, this means that the problem of underreporting tips will
be harder to solve, but it seems clear that Congress did not mean
to solve it by allowing the IRS to use its assessment power to
shift the problem to employers. I would therefore affirm the
judgment of the Ninth Circuit.
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