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September 18, 1998

FIOR D'ITALIA, INC., Plaintiff,

The opinion of the court was delivered by: LEGGE


 The plaintiff taxpayer challenges the Internal Revenue Service's use of a so-called "aggregate" method to determine, assess and collect an employer's share of FICA taxes on the tips received by its restaurant employees. Plaintiff has moved for summary judgment on this issue, and the government has filed a cross-motion for summary judgment on its counterclaim for the payment of the IRS's assessment. The motions were argued and submitted for decision. The court has reviewed the moving and opposing papers, the record and the applicable authorities.


 Plaintiff Fior D'Italia operates a restaurant in which its employees receive tips. It computes and pays its share of Federal Insurance Contribution Act ("FICA") taxes for each employee, based on each employee's salary and tip reports. Each year it files a Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips.

 In 1994 the Internal Revenue Service ("IRS") sent plaintiff a Notice and Demand to pay its share of FICA taxes allegedly due on tips not reported by its employees for the years 1991 and 1992. The IRS computed the alleged amount of plaintiff's share by using the information on plaintiff's Forms 8027. Specifically, the IRS determined the percentage of tips on the food and services that were charged on credit cards, by dividing the total amount of tips charged by the total charges. It then estimated the total tips received by all employees, by multiplying that percentage by plaintiff's total receipts. The tips that had been actually reported to the IRS were then subtracted from that amount, to determine the estimate of un reported tips. That figure was then subjected to the employers' FICA tax rate of 7.65% to determine plaintiff's alleged FICA tax liability.

 The IRS did not attempt to identify the amount of unreported tips of each employee. It instead used the above formula as to all of plaintiff's employees in the aggregate.

 The IRS thus calculated that plaintiff owed additional FICA taxes on the aggregate unreported tips of all employees, in the amounts of $ 11,976 in 1991 and $ 11,286 in 1992. Plaintiff paid a small portion of those taxes under protest, and then brought this suit for a refund. For purposes of this litigation, plaintiff does not dispute the facts or determinations used by the IRS to assess the aggregate unreported tip income. However, plaintiff challenges the use of the above aggregate method to determine its share of FICA taxes. It argues that the statutes governing FICA taxes, particularly 26 U.S.C. § 3121(q), require the IRS to determine FICA taxes for each employee individually in order to assess the employer's share. The government argues that the statute allows the IRS to use its aggregate method to determine the employer's share.


 These cross-motions for summary judgment do not dispute any facts. The parties agree that the motions turn solely on questions of statutory interpretation. The motions are therefore appropriate for resolution under Fed.R.Civ.P. 56.

 A plaintiff in a tax refund action bears the ultimate burden of proving an overpayment of its taxes and the amount that it is entitled to recover. United States v. Janis, 428 U.S. 433, 440, 49 L. Ed. 2d 1046, 96 S. Ct. 3021 (1976). The IRS's determination of a tax deficiency is presumed to be correct, and the taxpayer bears the burden of overcoming that presumption. United States v. Barretto, 708 F. Supp. 577, 579 (S.D.N.Y. 1989).

 Here, the plaintiff taxpayer objects to the government's interpretation of Section 3121(q). As will be discussed below, the language of the statute does not directly answer the issue. And the IRS has not promulgated a regulation on the issue. It has enforced its interpretation only by making assessments against certain restaurant employers.

 This court's analysis of the issue is governed by the following requirements:

When a court reviews an agency's construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress had directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.

 Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984). The deference given to an administrative agency's interpretation of a statute applies even if no formal regulation exists. Alexander v. Glickman, 139 F.3d 733, 736 (9th Cir. 1998).

 Principles of statutory construction require courts to interpret a statute as a whole. Beecham v. United States, 511 U.S. 368, 372, 128 L. Ed. 2d 383, 114 S. Ct. 1669 (1994). "In expounding a statute, we must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy." Mastro Plastics Corp. v. NLRB, 350 U.S. 270, 285, 100 L. Ed. 309, 76 S. Ct. 349 (1956) (quoting United States v. Boisdore Heirs, 49 U.S. 113, 8 HOW 113, 122, 12 L. Ed. 1009). And a court may also examine the legislative history if the meaning of the statute is not plain on its face.


 FICA tax payments come from two sources: (1) the employee's share, which is usually paid by deductions from an employee's wages, and (2) the employer's contribution, usually equal to the employee's share. Subchapter A of the Federal Insurance Contributions Act governs the tax on employees. 26 U.S.C. § 3101 ("there is hereby imposed on the income of every individual a tax equal to the following percentages of the wages (as defined in section 3121(a)) received by him with respect to employment (as defined in section 3121(b)) . . ."). The tax on employers is governed by Subchapter B. 26 U.S.C. § 3111 ("there is hereby imposed on every employer an excise tax, with respect to having individuals in his employ, equal to the following percentages of the wages (as defined in section 3121(a)) paid by him with respect to employment (as defined in section 3121(b)) . . .").

 The dispute here concerns the interpretation of Section 3121(q), which states:

(q) Tips included for both employee and employer taxes.--For purposes of this chapter, tips received by an employee in the course of his employment shall be considered remuneration for such employment (and deemed to have been paid by the employer for purposes of subsections (a) and (b) of section 3111). Such remuneration shall be deemed to be paid at the time a written statement including such tips is furnished to the employer pursuant to section 6053(a) or (if no statement including such tips is so furnished) at the time received; except that, in determining the employer's liability in connection with the taxes imposed by section 3111 with respect to such tips in any case where no statement including such tips was so furnished (or to the extent that the statement so furnished was inaccurate or incomplete), such remuneration shall be deemed for purposes of subtitle F to be paid on the date on which notice and demand for such taxes is made to the employer by the Secretary.

 Plaintiff contends that this section, when read in conjunction with the rest of the code dealing with FICA taxes, does not permit an aggregate assessment of unreported tips to determine the employer's share, but requires an individual determination of the unreported tips for each employee. The government contends that nothing in the statute prohibits the use of an aggregate method, and that the IRS's method is a reasonable interpretation of the section.

 Only two cases have ever addressed this question. In Morrison Restaurants, Inc. v. United States, 918 F. Supp. 1506 (S.D. Ala. 1996), the district court adopted the interpretation advanced by plaintiff. That decision was vacated and remanded by the Eleventh Circuit in Morrison Restaurants, Inc. v. United States, 118 F.3d 1526 (11th Cir. 1997), which court decided that an aggregate assessment is permitted by the statute. However, in The Bubble Room, Inc. v. United States, 36 Fed. Cl. 659 (1996), ...

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