United States v. Fior D'Italia, Inc.

Background

A San Francisco restaurant and the IRS disputed how the agency could calculate unpaid Social Security (FICA) taxes on tips its employees failed to report. Employees had reported much less tip income than credit-card slips suggested, prompting an IRS compliance check and an assessment using an "aggregate estimation" method that multiplied average credit-card tip percentages by total receipts. The restaurant sued, agreeing not to contest the IRS's numerical estimates, and lower courts split on whether the IRS may use aggregate estimates.

Reasoning

The Court considered whether the tax statute and related rules allow the IRS to estimate total unreported tips by aggregating data, rather than estimating each employee’s tips individually and adding them up. The majority said the statute authorizes reasonable estimation methods and upheld the IRS aggregate approach, noting existing case law that lets the IRS use reasonable estimates. The Court reversed the Ninth Circuit because the restaurant waived challenges to the IRS's specific calculations.

Real world impact

The ruling lets the IRS assess employers for unreported tips using restaurant-level averages, which can increase short-term tax bills for restaurants when reported tips look low. Restaurants remain able to contest an assessment’s accuracy in court, but must carry the burden of doing so; here Fior D'Italia had agreed not to dispute the numbers. Congress and the IRS have other programs and credits that affect how such assessments play out in practice.

Dissents or concurrances

Justice Souter dissented, warning that aggregate assessments can unfairly burden employers who lack individual tip records. He argued the statute’s language and exceptions for recordkeeping suggest the IRS should determine each employee’s unpaid tips before assessing employers, to avoid overestimation and shifting enforcement costs to restaurants.