UNITED STATES v. FIOR D‘ITALIA, INC.
No. 01-463
SUPREME COURT OF THE UNITED STATES
Argued April 22, 2002—Decided June 17, 2002
536 U.S. 238
Tracy J. Power argued the cause for respondent. With her on the brief were Thomas W. Power, Donald B. Ayer, and Elizabeth Rees.*
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.
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.”
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.
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 (CA11 1997), 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, 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 (CA10 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 (CA11 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 1-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 waitresses
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”
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,
B
The Ninth Circuit relied in part upon two other statutory provisions. The first,
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.”
Section
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 lаw excludes an employee‘s tips from the FICA wages base insofar as those tips amount to less than $20 in a month.
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 tеnd 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 calсulations 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
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
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.”
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,
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-
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” thеm 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
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,
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.
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,
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
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 employeе. 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.
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 way an 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
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 employeе, 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
D
The strangeness of combining a statute excusing employers from recordkeeping with an administrative practice of
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
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
The IRS does not dispute this. It concedes that it does not rely upon
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
The second difference goes to the authority for estimating liability. The IRS finds this authority implicit in
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
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 рreviously 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
Consider an alternative. I have noted already that even the Government tacitly acknowledges the crucial role of
The special provision in
It is true that under the Dictionary Act,
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 thе 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
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 clеar 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.