March 13, 2001
Contact: Sue Hensley 202-331-5964, Sue Hensley (703) 582-8679

(Washington, DC) In a major legal victory for the restaurant industry, the U.S. Court of Appeals for the Ninth Circuit sided with restaurateurs in finding that the Internal Revenue Service (IRS) may not target restaurant owners through "employer-only" audits and aggregate tip assessments when determining if restaurant employees underreported their tips.

The favorable ruling in the case Fior D'Italia Inc. v. United States is the first court of appeals victory for the industry. The National Restaurant Association filed an amicus curiae or "friend of the court" brief in Fior d'Italia.

The issue of whether the IRS can target employers instead of first determining whether employees underreported their tips is not new. Other court rulings on the issue include Morrison Restaurants, Inc. vs. United States and The Bubble Room, Inc. vs. United States.

"This is a significant and long overdue victory for restaurants," said National Restaurant Association President and Chief Executive Officer Steven C. Anderson. "We have long maintained that by holding only employers liable when workers fail to report tips, restaurateurs are pitted against their own employees, turning them into tip police."

National Restaurant Association Senior Vice President and General Counsel Peter Kilgore said the court agreed with the Association's view that the IRS lacks authority to present the employer with aggregate assessments based on combined employee estimates rather than examine the records of individual employees. The court ruled that such aggregate estimates are not authorized for collecting FICA taxes.

Last October, after a five-year, self-imposed moratorium on employer-only audits and assessments, the IRS has resumed such audits on alleged underreported tips and assessments for Federal Insurance Contribution Act (FICA) taxes.

The IRS "is likely" to file for a rehearing by the full California court or seek review in the United States Supreme Court, according to Kilgore.