Supreme Court Weighs Tips

Restaurant owners may be facing a tab that will set them back a bit.

The Internal Revenue Service wants restaurants to pay the 7.65% Social Security tax on the wages, including tips, that are paid to their waiters and bartenders. The tax collectors rely on credit card receipts to figure how much the waiters are receiving.

But the restaurant owners prefer to rely on notably unreliable reports from the waiters themselves.

The Supreme Court justices took up the issue Monday and seemed to side with the IRS during the oral argument. The government has a “strong legal position” since it relies on the more accurate figures, said Justice Stephen G. Breyer.

His colleagues agreed and said the tax law favored the government’s view. In 1999, the IRS said reported tips from restaurants were $14.3 billion, an increase of nearly $6 billion since tax collectors began relying on credit card slips.

Last year, the U.S. 9th Circuit Court of Appeals sided with the owners of San Francisco’s oldest Italian restaurant, Fior d’Italia. Its judges said the IRS exceeded its authority by using estimates of cash tips along with the credit card receipts to calculate the total amount of tips received.

But the Supreme Court took up the government’s appeal in the case of U.S. vs. Fior d’Italia, 01-463.

This case concerns only the tax paid by the restaurants, not taxes on tips to be paid by the waiters.

Fior d’Italia is challenging an extra $23,000 Social Security tax that was calculated on estimates. The intricate case hinges on an IRS policy in which the agency levied Social Security taxes on audited restaurants based on assumptions of the tips earned rather than the actual amount.

“We’re not fighting over $23,000,” said Bob Larive, co-owner of the restaurant. “We’re fighting something that is wrong.”

Larive and his supporters said the taxes should be based on individual audits of the employees, not speculation.

Federal officials declined to comment. But in briefs to the high court, the federal government said the IRS was authorized to estimate the amount of Social Security taxes.

Associated Press was used in compiling this report.