Morrison Restaurants, Inc. v. United States

United States Court of Appeals,

Eleventh Circuit.

No. 96-6415.

MORRISON RESTAURANTS, INC., Plaintiff-Appellee,

v.

UNITED STATES of America, Defendant-Appellant.

Aug. 12, 1997.

Appeal from the United States District Court for the Southern District of Alabama. (No. 94-0786-
AH-M), Alex T. Howard, Jr., Judge.

Before BIRCH and DUBINA, Circuit Judges, and RAFEEDIE*, Senior District Judge.

BIRCH, Circuit Judge:

This appeal presents the issue of whether the Internal Revenue Service (IRS) has authority

under 26 U.S.C. § 3121(q) to assess the employer's share of Federal Insurance Contribution Action

("FICA") taxes on the unreported tips of its restaurant employees on an aggregate basis without

determining the underreporting by the individual employees and crediting their wage history

accounts. The district court granted summary judgment in favor of Morrison Restaurants and held

that the assessment of the employer's share of FICA taxes on unreported tips in the aggregate was

invalid because the taxes did not relate to individual employees. We vacate the summary judgment

and remand for further proceedings.
I. BACKGROUND

Morrison Restaurants operates 290 full-service restaurants under various trade names,

including Ruby Tuesday. At these restaurants, tipping is customary and the employees receive a

portion of the tips either directly or indirectly through tip sharing. Morrison Restaurants routinely

informs its restaurant employees that they are required to report all tips. Based on the employees'

tip reports, Morrison Restaurants withholds the employees' shares of FICA taxes and then pays the

employees' and employer's shares to the IRS as required by the Internal Revenue Code, 26 U.S.C.

*
Honorable Edward Rafeedie, Senior U.S. District Judge for the Central District of California,
sitting by designation.
§§ 3102, 3111, 3401, 6051, and 6053.

In 1993, the IRS notified Morrison Restaurants that one of its Ruby Tuesday restaurants,

Unit 2607, would be investigated to assess compliance in tip reporting. Following a review of the

records and returns of Unit 2607, the IRS assessed Morrison Restaurants an additional $10,124 in

employer FICA taxes for unreported tips in 1990 and 1991.1 The amount of the assessment was

based on a modified McQuatters formula for estimating unreported tips.2 See McQuatters v.

Commissioner, 32 T.C.M. (CCH) 1122 (1973) (setting forth a method of estimating the amount of

tips for the purpose of collecting individual income tax on unreported tips). The IRS neither

credited the individual employees' wage history accounts nor determined the amount of unreported

tip income for each employee.3

Morrison Restaurants paid a portion of the assessed amount and then filed suit in the district

court for a refund of $3,110.71 and for abatement of the additional balance. The government filed

1
Morrison Restaurants did not challenge before the district court the facts or methods of
estimation used by the IRS to calculate the aggregate unreported tips. We do not address the
issue here because to do so "would tend to encourage piecemeal litigation of claims of error in
the appellate courts and undercut the policy of achieving prompt and final judgments." United
States v. Scallion, 548 F.2d 1168, 1174 (5th Cir.1977).
2
The district court described the IRS's use of the McQuatters formula:

[T]he charge tip rate [wa]s first determined on the basis of the total charged tips
and charged sales reported on Form 8027. Next, the cash tip rate [wa]s
determined by subtracting four percentage points from the charge tip rate, to
account for the differential between cash and charge tipping. The cash tip rate
[wa]s then multiplied by the total sales subject to cash tipping to determine the
aggregate amount of cash tips received by all employees in the aggregate.
Unreported tips [we]re then determined by subtracting total tips reported by all
employees from the total cash and charged tips received. The unreported tips
[we]re then subject[ed] to the FICA tip rate of 7.65% to determine the employer's
FICA tax adjustment.

Morrison Restaurants, Inc. v. United States, 918 F.Supp. 1506, 1508 (1996).
3
The government contends that the IRS agent, using records from Unit 2067, attempted to
determine the tax liability of the individual employees but found the records insufficient for that
purpose. For example, the hours worked by the tipped employees were available only for those
employed on the last day of each year and not for those employed at other times during the year.
In view of the agent's inability to determine individual employee's unreported tips based on the
employer's records, the IRS decided that it was not cost effective to audit each individual
employee.
a counterclaim for the unpaid balance of FICA taxes in the amount of $7,013.29. Each party moved

for summary judgment. The district court granted the motion of Morrison Restaurants.4 The court

held that the IRS lacked the authority to assess employer FICA taxes on unreported tips in the

aggregate without determining the individual employees' underreporting and without crediting the

employees for the employer's share of the assessed FICA taxes.5 The government appeals the

summary judgment.

II. DISCUSSION

We review de novo a district court's grant of summary judgment and affirm the judgment

if " "there is no genuine issue as to any material fact and ... the moving party is entitled to a

judgment as a matter of law.' " Redwing Carriers, Inc. v. Saraland Apartments, 94 F.3d 1489, 1495-

96 (11th Cir.1996) (quoting Fed.R.Civ.P. 56(c)). The material facts in this case are undisputed. The

sole issue is one of statutory interpretation. "We ... review an administrative agency's statutory

interpretation de novo, but defer to an agency's interpretation if it is reasonable." Alabama v. United

States Dep't of Interior, 84 F.3d 410, 412 n. 2 (11th Cir.1996).

The government argues that the IRS has statutory authority to assess Morrison Restaurants

for the employer's share of unreported tips for Unit 2067 employees. The IRS "is authorized and

required to make the inquiries, determinations, and assessments of all taxes ... imposed by [Title

26]." 26 U.S.C. § 6201(a). Section 3111 "impose[s] on every employer as excise tax, with respect

4
The complaint filed by Morrison Restaurants named as defendants several government
officials and included a second claim for declaratory judgment. Upon a motion by the
government, the district court ruled that the named officials were improper parties and dismissed
the second claim for lack of subject matter jurisdiction. Morrison Restaurants does not appeal
this ruling.
5
The parties characterize differently the holding of the district court. Morrison Restaurants
suggests that the holding is limited. Specifically, it suggests that the district court held that the
IRS should have made reasonable attempts to determine the employees' individual unreported
tips and to credit the employees with the employer's shares of the FICA taxes. The government,
on the other hand, reads the district court's opinion to preclude the IRS from collecting the
employer's share on unreported tips in the aggregate without first assessing and crediting the
individual employees for their shares of the FICA taxes. We agree with the government. Both
Morrison Restaurants's brief and the district court's opinion stand for the proposition that the IRS
is barred from imposing employer FICA taxes in the absence of individual tip determinations
and Social Security accounting adjustments.
to having individuals in his employ, equal to [specified] percentages of the wages ... paid by him

with respect to employment." 26 U.S.C. §§ 3111(a) (imposing FICA taxes for Social Security) and

3111(b) (imposing FICA taxes for Medicare). Tips, by statutory definition, are included as "wages"

for purposes of both the employees' and employers' shares of FICA taxes. 26 U.S.C. § 3121(q).

According to the government, these statutory provisions give the IRS the authority to assess

Morrison Restaurants for the employer's share of the unreported tips in the aggregate, and nothing

in either the Internal Revenue Code, 26 U.S.C. §§ 1-9806, or the Social Security Act, 42 U.S.C. §

301-1397e, prohibits such an assessment in the absence of a determination of the employees'

individual shares.

Morrison Restaurants contends that, in view of Congress's silence, the IRS lacks statutory

authority to assess the employer's share of FICA taxes without determining the individual

employees' unreported tips and crediting the employees with the employer's share of the tax.

According to Morrison Restaurants, an assessment of the employer's share of FICA taxes on

unreported tips in the aggregate without Social Security benefits to the tipped employees is contrary

to the legislative purpose of the Social Security Act, which is to provide benefits correlating with

the amount of FICA taxes6 credited to the individual employee.7 The district court agreed and

reasoned that "[t]he entire statutory scheme related to tips and FICA taxes on such tips is aimed at

the individual .... because .... [b]enefits are paid to an individual taxpayer according to the amount
contributed to FICA by the individual and his employer(s) over his working lifetime." Morrison

Restaurants, 918 F.Supp. at 1513.

"The statutory language is the starting point for interpreting the meaning of a statute. In

interpreting the language of a statute, however, we do not look at one word or one provision in

isolation, but rather look to the statutory scheme for clarification and contextual reference." United

6
The government notes that an employee's future Social Security benefits are not based on the
FICA taxes paid by the employee and employer but, rather, on the employee's Social Security
earnings record. See Flemming v. Nestor, 363 U.S. 603, 609, 80 S.Ct. 1367, 1371-72, 4 L.Ed.2d
1435 (1960).
7
Morrison Restaurants raises additional arguments on appeal. We determine these arguments
to be meritless.
States v. McLemore, 28 F.3d 1160, 1162 (11th Cir.1994) (citations omitted). We, thus, begin our

analysis with the language and structure of the Internal Revenue Code and the Social Security Act.

Section 3121(q) provides that tips are "deemed to have been paid by the employer" and that the IRS

can issue a notice and demand for the employer's share of FICA taxes when an employee fails to

accurately and completely report all tips. 26 U.S.C. § 3121(q). This provision clearly states that an

employer can be assessed for its share of FICA taxes on employee tips even if the employee fails

to report all tips. It also suggests that the employer can be assessed its share of FICA taxes even

when the individual employee's share is not determined.

In the Internal Revenue Code, Congress imposed the employee's share of FICA taxes in a

provision separate from the provision imposing the employer's share. Specifically, § 3101 imposes

the employee's share and § 3111 imposes the employer's share. These provisions are located,

respectively, in Subchapter A, entitled Tax on Employees, and Subchapter B, entitled Tax on

Employers. The separation of the provisions into different, parallel subchapters suggests that

Congress contemplated that employees' and employer's shares could be imposed separately. Given

the structure of the Internal Revenue Code, we are unconvinced that Congress's silence can be

construed to mean that an employer cannot be assessed its share of FICA taxes based on employees'

unreported tips in the aggregate without determining the underreporting by the individual employees

and crediting the individual employees' wage history accounts.

Under the Internal Revenue Code, an employee is responsible for reporting tips either to his

employer for withholding of the employee's share of FICA taxes or directly to the IRS. 26 U.S.C.

§ 6053. Appropriate reporting and payment of the employee's share means that the employee's wage

history account will be properly credited. When the employee fails to report tips, neither the

employee nor the employer can then complain that the employer's share of FICA taxes is not

similarly credited. The employee, by failing to report the tips as wages, waives his right to be

credited for the employer's share on the unreported tips in the aggregate. The employer is not

injured by the employee's failure to report properly all tips. Thus, Morrison Restaurants's argument

that payment of the employer's share on tips in the aggregate unfairly results in a failure to credit the
individual employees is without merit.

Furthermore, the Social Security Act explicitly states that the purpose of the Act is to

encourage the states "to furnish financial assistance to aged needy individuals." 42 U.S.C. § 301.

The assistance is not for the limited purpose of providing benefits equivalent to FICA taxes paid by

the individual and his employer, and FICA taxes are not held in trust for that same individual. See

Flemming, 363 U.S. at 609, 80 S.Ct. at 1372 ("The Social Security system may be accurately

described as a form of social insurance ... whereby persons gainfully employed, and those who

employ them, are taxed to permit the payments of benefits to the retired and disabled, and their

dependants.") Thus, we decide that the structure and purpose of the Social Security Act is not

inconsistent with a payment of an employer's share of FICA taxes on unreported tips in the

aggregate.

We also reject Morrison Restaurants's policy arguments. Morrison Restaurants contends

that employers should not be required to police the tips reported by its employees and, therefore, the

employer's FICA tax obligation should be based exclusively on the employees' reports. We agree

that it is the employee's responsibility to insure that he is properly credited for all his wages by

accurately and completely reporting tips. We are concerned, however, that basing the employer's

share of FICA taxes exclusively on employees' reported tips would provide incentive to the

employer to discourage accurate reporting or ignore blatantly inaccurate reporting by the employees

so that the employer could pay less FICA tax. Moreover, the statute itself envisions that employees

may not report their tips and provides that employers are "deemed to have been paid by the

employer," nonetheless. 26 U.S.C. § 3121(q).

In view of the statutory and policy arguments in favor of the government's position, we

conclude the statutory interpretation of the IRS is reasonable. We defer to an agency's reasonable

statutory interpretation. Alabama, 84 F.3d at 412 n. 2. Thus, we determine that the district court

erred in granting summary judgment in favor of Morrison Restaurants.

III. CONCLUSION

In this appeal of the summary judgment granted in favor of Morrison Restaurants, the
government argues that the IRS has statutory authority to assess Morrison Restaurants for the

employer's share of FICA taxes on unreported tips in the aggregate even if the individual employee

shares are not determined and credited to the employees' wage history accounts. We conclude that

this IRS's statutory interpretation is consistent with the structure and language of the Internal

Revenue Code, the explicit purpose of the Social Security Act, and the policy of promoting accurate

tip reporting. Because the interpretation of the IRS is reasonable, we defer to the agency's statutory

interpretation. Accordingly, we VACATE and REMAND for proceedings consistent with this

opinion.