Facts of the Case

Employers must pay Federal Insurance Contribution Act (FICA) taxes, calculated as a percentage of the wages, including tips, that their employees receive. In 1991 and 1992, Fior D'Italia 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'Italia's total receipts; subtracted the tips already reported; applied the FICA tax rate to the remainder; and assessed additional taxes owed. Fior D'Italia filed a refund suit, claiming that the tax statutes did not authorize the IRS to use the aggregate estimation method. The District Court ruled for Fior D'Italia, and the Court of Appeals affirmed.

Question

Does the law, under which the Federal Insurance Contribution Act taxes are paid, authorize the IRS to assess a restaurant for FICA taxes based upon its aggregate estimate of all the tips that the restaurant's customers paid its employees?

Conclusion

Yes. In a 6-3 opinion delivered by Justice Stephen G. Breyer, the Court held that the law authorizes the IRS to use the aggregate estimation method. The Court reasoned that the law, by granting the IRS assessment authority, necessarily granted it the power to decide how to make that assessment within certain limits. In rejecting Fior D'Italia's reasonability arguments, the Court said the law does not require the IRS to determine total tip income by estimating each individual employee's tip income separately, then adding individual estimates together to create a total. Justice David H. Souter, with whom Justices Antonin Scalia and Clarence Thomas joined, dissented. The IRS's method "raises anomaly after anomaly, to the point that one has to suspect that the Government's practice is wrong," argued Justice Souter.