Section of Taxation Publications
 VOL. 55
NO. 4
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.
Supreme Court Tips the Balance in Favor of the Service by Authorizing Aggregate Assessment of Unreported Employee Tips: United States v. Fior d'Italia, Inc.
Stephen P. Goldberg

In United States v. Fior d'Italia, the Supreme Court held that the Service is authorized to impose a Federal Insurance Contributions Act (FICA) tax on a restaurant based on an aggregate estimate of the unreported tips of the restaurant's tipped employees. The Court reasoned that because section 6201(a) grants the Service authority to assess the amount of tax owed, section 6201(a) "must simultaneously grant the [Service] power to decide how to make that assessment-at least within certain limits."

The Court reversed the Ninth Circuit and resolved a circuit split that had divided the Ninth Circuit from three other circuits. The Seventh, Eleventh, and Federal Circuits had each considered similar cases and each had held that because the Code does not prohibit an aggregate assessment, the Service may estimate unreported employee tips in order to determine employer FICA tax liability. The Court's ruling buttresses those holdings, and specifies that the Service's broad authority to make aggregate assessments stems from section 6201(a).

Because the restaurant taxpayer in Fior d'Italia stipulated to the accuracy of the Service's estimate, the Court did not reach the issue of which aggregate methods constitute a "reasonable" estimate. The Court's opinion seemed to invite future taxpayers who feel the Service has overestimated their FICA tax burden to challenge the accuracy of the estimate. Specifically, the Court noted that if a restaurant did not stipulate that it would not challenge the Service's estimate, "a taxpayer would remain free to present evidence that an assessment is inaccurate in a particular case."

Part I of this Note provides a brief history of statutory tip reporting requirements. Part II presents the facts of Fior d'Italia. Part III summarizes the Court's decision, with subpart A discussing Justice Breyer's majority opinion and subpart B discussing Justice Souter's dissent. Part IV analyzes the Court's opinion and its possible implications for employers and employees in industries where tips comprise a share of the employee's wages (such as cab drivers, valet parking attendants, hairdressers, and casino workers), as well as implications for the Service itself. Finally, Part V considers the implications of the case for restaurants, the Service, and, potentially, Congress.


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


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