Supreme Court Rules in Tip Taxation Controversy
In United States v. Fior D'Italia, a San Francisco restaurateur argued that the IRS improperly assessed tax on tip income based on estimates of tips recorded on credit card charge slips. The plaintiff argued that the only way to accurately know how much tip income has been received is to rely on reporting by employees. Tips on credit card slips, Fior D'Italia argued, may be more generous than cash tips because people leaving cash tips are limited by the amount of cash in their wallets.
"We are deeply disappointed by the Supreme Court's decision, which basically condones the IRS's unfair and unjust tactics to pit restaurateurs against their own employees, turning them into 'tip police,'" said  Peter Kilgore, general counsel and senior vice president of operations of the National Restaurant Association. "This decision could mean the difference between a restaurant staying in business or closing its doors."
"We hoped a decision in our favor would force the IRS to do their job the right way and not resort to threats and guesses to coerce taxes out of restaurants and employees," said  Fior d’Italia president Bob Larive in a statement.
IRS Commissioner Charles O. Rossotti said  the decision "upholds our ability to make sure all Americans pay a fair share of taxes."
The Supreme Court voted 6-3 to uphold the IRS's right to assess the tax. The ruling complements the Court's 1973 decision that the IRS can make an educated guess about tip receipts where written records are inadequate. That case related to taxes paid by workers, where the present case relates to taxes paid by employers. Justices David Souter, Antonin Scalia, and Clarence Thomas dissented in the Fior D'Italia decision.