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LIR MANAGEMENT CORP. v. U.S.

February 25, 2000

LIR MANAGEMENT CORP. D/B/A PETE SMITH'S, ARRYL OPERATING, INC. D/B/A TOOTS SHOR, SPORTS GARDEN REST, INC., D/B/A CHARLEY'O, 729 7TH AVE. HOULIHAN'S OPERATING, INC. D/B/A HOULIHAN'S RIVER RESTAURANT, INC. D/B/A HOULIHAN'S, 380 LEXINGTON OPERATIONS, INC. D/B/A HOULIHAN'S, CHICAGO RESTAURANT, INC., AND COMPLEX MANAGEMENT, INC., PLAINTIFFS,
V.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Sprizzo, District Judge.

MEMORANDUM OPINION AND ORDER

Plaintiffs LIR Management Co. ("LIR Management"), Arryl Operating, Inc. ("Arryl"), Sports Garden Rest, Inc. ("Sports Garden"), 729 7th Avenue Houlihan's Operating, Inc. ("7th Avenue Houlihan's"), River Restaurant, Inc. ("River Restaurant"), 380 Lexington Operations, Inc. ("380 Lexington"), Chicago Restaurant, Inc. ("Chicago Restaurant"), and Complex Management, Inc. ("Complex Management") (collectively, "Taxpayers") bring this suit against defendant United States of America (the "government") challenging defendant's assessment, pursuant to 26 U.S.C. § 3121(q), of plaintiffs' portion (the "employer-only portion") of Federal Insurance Contribution Act ("FICA") taxes assessed against and collected from plaintiffs on unreported tips of plaintiffs' employees in the aggregate as estimated by the Internal Revenue Service ("IRS") for the years 1989, 1990, 1992, and 1993. Pursuant to Rule 56 of the Federal Rules of Civil Procedure, the parties cross-move for summary judgment. For the reasons set forth below, defendant's motion for summary judgment is granted and plaintiffs' motions for summary judgment are denied.

BACKGROUND

Plaintiffs operate restaurants that employ workers, such as waiters, bartenders, and other restaurant staff who receive tip income. See Complaint at ¶ 5; Answer and Counterclaim ("Answer") at ¶ 4. Under the Internal Revenue Code ("IRC" or "Code"), plaintiffs are obligated to pay the employer-only portion of the FICA tax based upon each employee's wage income. This wage income includes both wages paid by the restaurant to each employee and the employee's tip income. The dispute in this case involves unreported tip income in 1989 and 1990 for plaintiffs Chicago Restaurant and Complex Management, and in 1992 and 1993 for the remaining plaintiff corporations. See Complaint at ¶¶ 4, 7, 10; Answer at ¶¶ 4, 7, 10. The forms filed by plaintiffs to the IRS for each of these years on their face reveal underreporting of tip income by plaintiffs' employees. See Declaration of Gerald Werkman ("Werkman Decl.") at ¶ 10.

Following the determination of underreporting of tip income by plaintiffs' employees, the IRS employed two methods for calculating the employer portion of the FICA taxes owed by plaintiffs' restaurants. See Plaintiffs' Motion for Summary Judgment ("Pl.Mem") at 4-5; Werkman Decl. at ¶¶ 14-20. One method employed by the IRS simply assessed the discrepancy between the total tips reported by plaintiffs Chicago Restaurant and Complex Management's employees and the amount of tips reported by plaintiffs on their credit card receipts (hereinafter referred to as "total charged tips") that appeared on the face of their reports to the IRS. See id.

The other method employed by the IRS assessed plaintiffs LIR Management, Arryl, Sports Garden, 7th Avenue Houlihans, River Restaurant, and 380 Lexington for the tax years 1992 and 1993. See id. The IRS computed the employers' share of unpaid FICA taxes on unreported tips on Form 8027s and the "McQuatters Formula" which is derived from McQuatters v. Commissioner, 32 CCD Tax Ct. Mem. 1122, 42 P-H Tax Ct. Mem. 1078 (1973). See id. Essentially, the IRS compared the total charged tips for each restaurant with the total tips reported by the restaurants' employees. See id. Where it was determined that the employees' total reported tips were less than the reported charged tips, the IRS computed a "Charged Tip Ratio" by dividing the total charged tips by the total charged receipts. See id. The Charged Tip Ratio was then reduced by 2% to determine the "Estimated Cash Tip Rate." The restaurant's total cash receipts were determined by subtracting the total charge card receipts from the restaurants' total gross receipts. See id. The Estimated Cash Tip Rate was then applied to the restaurants' total cash receipts, resulting in the "Estimated Total Cash Tips." See id. This amount was then added to the total charged tips amount to determine the "Total Charged and Cash Tips." See id. The total reported tip income was then subtracted from the Total Charged and Cash Tip amount, resulting in the "Total Unreported Tip Income," which was used as the basis for assessing in the aggregate the total amount of tips unreported by plaintiffs' employees and subject to the 7.65% employer paid portion of FICA. See id.

By letters dated April 17, 1995, the IRS, pursuant to IRC § 3121(q), served plaintiffs with Notice and Demand for the employer share of FICA taxes allegedly due on tips unreported by plaintiffs' employees. See Complaint at ¶¶ 10, 12; Werkman Decl. at ¶ 13-14. The IRS determined that the above plaintiffs owed the following:

TAXPAYER 1992 1993
LIR Management $9,445.00 $10,027.00 Arryl $5,676.00 $6,240.00 Sports Garden $8,453.00 $8,810.00 7th Avenue Houlihans $9,013.00 $11,151.00 River Restaurant $10,443.00 $9,961.00 380 Lexington $9,543.00 $5,746.00

The plaintiffs did not pay the full amount of taxes assessed, but remitted $1.53 representing partial payment under protest of the entire amounts assessed for the employer share of FICA taxes as provided for by Flora v. United States, 362 U.S. 145, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960) and Steele v. United States, 280 F.2d 89 (8th Cir. 1960). On August 14, 1995, the plaintiffs filed claims for refund of the $1.53 partial payment made by each plaintiff and abatement of the full amount of the taxes assessed on the April 17, 1995 Notice and Demand.

TAXPAYERS 1989 1990 TOTAL
Chicago Restaurant $3,609.16 $3,663.13 $7,272.29 Complex Management $5,315.58 $4,487.26 $9,802.84

On December 16, 1995, Chicago Restaurant and Complex Management paid the full amounts assessed. See Complaint at ΒΆ 18. On July 26, 1995, plaintiffs Chicago Restaurant and Complex Management filed claims for refund of the full amounts paid pursuant to ...


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