Section of Taxation Publications
  VOL. 53
NO. 3
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

Assessing Employer FICA Tax on the Estimated Aggregate Unreported Tips of Employees: Quietwater Entertainment, Inc. v. United States
Jonathan H. Lehr


In Quietwater Entertainment, Inc. v. United States, the U.S. District Court for the Northern District of Florida held that the Service is not authorized to assess an employer’s share of FICA taxes based on an estimate of employees’ aggregate unreported tips. The court distinguished a recent Eleventh Circuit decision, Morrison Restaurants, Inc. v. United States, which held that the Service did have statutory authority to make such an assessment. The district court ruled that an employer-only FICA tax assessment was inconsistent with the purpose of the Social Security Act, that the assessment overestimated tip income subject to taxation, and that section 6053(c)(3) capped employer FICA taxes on unreported tip income at eight percent.

Part I of this Note reviews the Code provisions at issue and summarizes the facts of Quietwater. Part II outlines the parties’ arguments and the court’s reasoning. Part III analyzes the decision and argues that the Service is authorized to use a modified formula to estimate aggregate unreported tips, and that such a formula does not exaggerate unreported tip income.



Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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