June 17, 2002
Contact: Sue Hensley (703) 582-8679, Erica Bohm (858) 541-2049

(Washington, DC) The U.S. Supreme Court, in a 6-3 decision, struck a heavy blow against the restaurant industry and many other small businesses today in its ruling in the case of Fior d'Italia v. United States. By its ruling, the high court determined that the IRS could present business owners with an arbitrary tax bill if they believe employees underreported their tips.

"We are deeply disappointed by the Supreme Court's decision, which basically condones the IRS's unfair and unjust tactics to pit restaurateurs against their own employees, turning them into ‘tip police,'" said Peter Kilgore, general counsel and senior vice president of operations of the National Restaurant Association. "Seven out of 10 restaurants are small businesses, many of which operate with slim margins. Quite frankly, this decision could mean the difference between a restaurant staying in business or closing its doors."

"Furthermore, this could have a huge negative impact on the economy if the IRS now sends out tax bills to restaurants that have tipped employees. We do not believe that Congress ever intended for restaurateurs and other business owners to do the IRS's job or for the IRS to conduct employer-only audits against businesses. This issue is far from over, and we will most certainly be making our case on Capitol Hill," added Kilgore.

"This is sad news for the restaurant industry," said Bob Larive, owner of Fior d'Italia. "Hopefully, this won't open up a Pandora's Box of audits, whereby the IRS can come in and decide what they think the proper number is for tips, and therefore assess FICA taxes on some random number they have invented."

The case of Fior d'Italia v. United States involved a claimed underpayment of tip taxes for 1991 and 1992 by the San Francisco-based restaurant. For years, Fior d'Italia fought the IRS through the U.S. judicial system. After a federal district court and then a federal appeals court ruled in the restaurant's favor, government lawyers petitioned the U.S. Supreme Court to take up the case. At issue was whether the IRS has the right to assess employers a tax bill for their share of Social Security

(FICA) taxes on tips the IRS says all employees allegedly earned but didn't report – without ever determining the exact amount of those tips or which employees failed to report their tips, and without crediting the employer's FICA tax payments to those employees' Social Security accounts.

The Association has long maintained that holding employers liable when the IRS fails to determine which workers failed to report tips pits restaurateurs against their own employees, putting restaurants in an untenable position. In addition to impacting the nation's 200,000 restaurants with tipped employees – the vast majority of which are small businesses – the outcome will significantly impact any business with tipped employees.

The National Restaurant Association has long assisted the California restaurant on this issue, most recently providing financial support by making a contribution from the National Restaurant Association's Save American Free Enterprise (SAFE) Fund and filing an amicus curiae brief in its U.S. Supreme Court battle.

The Association's SAFE Fund was created to protect the vitality of the industry and preserve the principles of the free enterprise system, and since 1996 has provided more than $2.6 million to state restaurant associations, restaurateurs and coalitions working to ensure the strength of the restaurant industry.