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
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:
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 ¶ 18. On July
26, 1995, plaintiffs Chicago Restaurant and Complex Management
filed claims for refund of the full amounts paid pursuant to ...