- WASHINGTON (Reuters) - The
U.S. Supreme Court ruled on Monday the Internal Revenue Service may use
aggregate estimates to calculate taxes that thousands of restaurants or
other businesses owe from billions of dollars in customer tips each year.
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- The high court voted by 6-3 that a company's share of
Social Security taxes on its employee tip income may be based on a reasonable
estimate of total tips received by all employees.
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- The Justice Department argued the IRS should be allowed
to use estimates. It said the issue affected tens of thousands of businesses
whose employees receive tip income. Reported tips from the restaurant industry
alone hit $14 billion in 1999.
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- The ruling was a defeat for Fior D'Italia, one of the
nation's oldest Italian restaurants, in San Francisco. Founded in 1886,
it employs waiters, table bussers, bartenders and others whose earnings
come partly from tips.
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- Bob Larive, Fior d'Italia's president, expressed disappointment
in the ruling. He said the issue affected the entire service industry.
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- "We hoped a decision in our favor would force the
IRS to do their job the right way and not resort to threats and guesses
to coerce taxes out of restaurants and employees," Larive said in
a statement.
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- BATTLE OVER LAW TO SHIFT TO CONGRESS
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- He said restaurants and others businesses would probably
have to go to Congress for clarification of its original intent and for
relief from the IRS' "draconian methods."
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- In 1991 and 1992, Fior D'Italia filed forms that showed
its employees reported total tips that were significantly less than the
tips that appeared on its credit card charge slips. The company based its
share of the tax on the lesser amount.
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- Due to the discrepancy of the two tip amounts, the IRS
conducted a compliance check of the restaurant's business and found the
credit slip information showed a tip rate of slightly more than 14 percent.
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- The IRS applied those rates to the restaurant's gross
receipts to get a presumed tip total for the year. It calculated the restaurant
owed more than $23,000 in additional taxes for 1991 and 1992.
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- The restaurant sued, saying the IRS lacked authority
to assess taxes by using a total tip income estimate.
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- A U.S. appeals court agreed with Fior D'Italia, saying
the IRS method of estimating had serious flaws and likely overstated the
cash tips received. The IRS used the tip rate from credit cards even though
charged tips generally exceed cash tips, the appeals court said.
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- The Supreme Court said the appeals court was wrong.
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- Justice Stephen Breyer said for the court majority that
the tax law authorized the IRS to use the aggregate estimation method.
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- Justices David Souter, Antonin Scalia and Clarence Thomas
dissented. Souter said reading the law so broadly saddled employers with
a burden unintended by Congress.
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