Court Opinion

ID: 9491611
Source: CourtListenerOpinion
Date Created: 2023-08-05 14:18:47.869722+00
Date Added: 2024-06-11T17:54:50.791029
License: Public Domain

PLAGER, Circuit Judge,
dissenting.
I agree with the trial court that the Government had no business making this tax assessment; and, thus, I respectfully dissent from the panel’s reversal of the trial court.1
My colleagues and I do not disagree about “the law.” We all agree that there is not a statute or a controlling regulation that specifically authorizes the Internal Revenue Service to make the kind of aggregate assessment it has made here. The panel majority sets out to find a way for the Government to do what it wants to do, and, finding nothing else, stretches a general “taxpayers, be good citizens or else” section of the Internal Revenue Code to cover. All the rest of the majority opinion is a well-written, if lengthy, exegesis generally on the Code accompanied by a valiant effort to explain away the obvious inconsistencies between the statutes and the Government’s conduct.
I confess I come at the problem from the other end. I assume that the IRS is a government agency whose powers and duties are defined by law, and, when challenged, must be able to show that its conduct is expressly authorized by law, or, if not expressly authorized, is at least clearly necessary to carrying out some express duty. See, e.g., Bob Jones Univ. v. United States, 461 U.S. 574, 596-99, 103 S.Ct. 2017, 76 L.Ed.2d 157 (1983); United States v. Euge, 444 U.S. 707, 100 S.Ct. 874, 63 L.Ed.2d 141 (1980). Certainly, it is clear that the Congress and the President have expressed that the policy of the Treasury should be to approach its tax gathering responsibilities in a user-friendly way, see Internal Revenue Service Restructuring and Reform Act of 1998, Pub.L. No. 105-206, Title I, Subtitle A, § 1002 (July 22, 1998). The fact that this case arose before Congress made clear its dissatisfaction with the IRS’s sometimes heavy-handed and arbitrary ways does not excuse us from testing the behavior of the agency in this ease *569against its statutory authority and ascertaining whether that behavior is consistent with basic rights of the taxpaying public.
The duty of an employer to pay FICA taxes on tips received by employees was established in the Social Security Amendments of 1977. See Social Security Amendments of 1977, Pub.L. No. 95-216, Title III, § 315(a), 91 Stat. 1509, 1536-37 (1977), repealed by Pub.L. No. 100-203, Title IX, § 9006(b)(2), 101 Stat. 1330-289 (1987). However, because the employer was made hable for FICA taxes only on a portion of the employee’s tips, calculated on the basis of the federal minimum wage, while the employee’s share of the tax was not so limited, Congress in 1987 imposed on employers the duty to match the amounts paid by and credited to employees. See Omnibus Budget Reconciliation Act of 1987, Pub.L. No. 100-203, § 9006, 101 Stat. 1330-288-289 (1987) (“OBRA 1987”); S. Print. No. 63, at 203 (1987); 133 Cong. Rec. S34,826 (1987).
Thus, under the law in effect at the time of the assessment against Bubble Room, the Social Security system provided that all wages paid to employees are subject to FICA taxes imposed on the employer and the employee. The amount of tax is determined by multiplying the wages earned by the applicable tax rate. See I.R.C. § 3101. The rate is the same for the employer and the employee. Compare I.R.C. § 3011 with § 3111. For purposes of the Social Security Act, an employee’s income derived from tips is treated as if it were wages paid by the employer. See I.R.C. § 3121(q).
The system is designed to integrate the Social Security System’s premise of providing wage history credits to employees for wages earned and reported by the individual employees, on which history the employee’s future benefits will be based, with the Internal Revenue Code’s purpose of raising the funds to pay for these future benefits. This integration is accomplished by imposing the cost of benefits upon the wages currently paid employees and upon the employers who have the benefit of the employees’ current labor.
All agree that the central issue in the case is one purely of statutory construction. All agree that a straightforward reading of the relevant sections of the Code does not reveal any express grant of the authority the IRS seeks. However, it does reveal inconsistencies between the specific provisions of the Code and the impact of an assessment based on an aggregate estimate.
Specifically, there is the fact that “wages” subject to FICA tax does not include cash tips received by an employee in any calendar month unless the amount of such cash tips is $20 or more, § 3121(a)(12)(B), nor does it include that part of an employee’s received remuneration, including tips, which exceeds the annual contribution and benefit base determined under § 230 of the Social Security Act, § 3121(a)(1). Any assessment of FICA taxes against an employee, and derivatively against the employer, that is outside this “wages band” would be unlawful. Therefore, in the absence of information about the tip income of individual employees, the IRS cannot know whether the wages being assessed áre within the wages band.
Since the IRS based its estimate of Bubble Room’s unpaid taxes on an aggregate of all tips received by its employees, there .is no way for the IRS to represent, much less establish, that the assessment was based on received “wages” lawfully subject to the tax. Though it may be that the excess taxes assessed in this manner against the employer amount to a relatively small amount, a Government demand for taxes that are not owed is unlawful on its face and. remains unlawful regardless of the amount at issue. Cf. Camps Newfound/Owatonna, Inc. v. Towm of Harrison, Me., 520 U.S. 564, 117 S.Ct. 1590, 1601 n. 15, 137 L.Ed.2d 852 (1997) (unconstitutional tax must be struck down even though it may be only de minimus). At the least, the existence of the “wages band” suggests that Congress did not intend that FICA taxes would be raised in a manner that would ignore the band.
Putting aside such inconsistencies, in the absence of a grant of express authority, do other provisions of the Code support the Government’s case? The parties focus on the 1987 amendment and § 3121(q), from which they seek to derive the answer to *570whether the IRS was given authority by Congress to assess against an employer such as Bubble Room a FICA tax liability unrelated to the employee’s individually reportable or creditable wages. For the reasons, among others, stated by the panel majority, the answer cannot be found in § 3121(q). Given that, can the authority to make aggregate estimates be found to reside elsewhere in the interstices of the Code?
Faced with the absence of any express authorization for the result it chooses to reach, the panel majority cobbles together an argument based on the “Purpose of the Social Security System,” and a singular provision found in an entirely different part of the Code. As far as the purpose of the Social Security system is concerned, the panel majority concludes that an employee who fails to report tips as required by law cannot complain that social security taxes assessed against the employer are not properly credited to the employee’s earnings account. From this, the panel majority concludes that it is, therefore, the purpose of the Social Security system to support assessments against employers unrelated to the individual earnings of the employees.
That of course stands the policy of the law on its head. The policy issue is not whether employees have a claim for wage credits they do not report and for which they do not contribute FICA taxes - of course they do not. The issue is whether the Social Security system is intended to generate tax income to the Treasury unrelated to the actual (or properly estimated) tip income of an employee, and for which no employee receives wage credits. The answer to that is also no.
The bill that became OBRA 1987, and which contained the 1987 version of § 3121(q), was accompanied by a Report of the Senate Committee on Finance discussing the Senate’s intentions regarding the several provisions in the bill. With regard to § 3121(q), after noting that under the then current law employees paid FICA tax on all tips received (up to the Social Security wage base), while employers only paid on a portion of those tips, the Senate Report concluded that “[i]t is believed that to apportion the costs of Social Security benefits more accurately, employers should be subject to tax on all tips which are credited for benefit purposes.” S. Print. No. 63, at 203 (1987) (emphasis added); 133 Cong. Rec. S34,826 (1987). This language reflects the widely shared understanding that, unlike many other taxes levied, the FICA tax is not intended to raise money generally for the Treasury, but is keyed to the costs and benefits of the Social Security system.
It is clear that Congress has long viewed the taxes raised under FICA to be related directly to the costs and benefits of the Social Security system. See Weinberger v. Wiesenfeld, 420 U.S. 636, 647, 95 S.Ct. 1225, 43 L.Ed.2d 514 (1975) (“But the fact remains that the statutory right to benefits is directly related to years worked and amount earned by* a covered employee, and not to the need of the beneficiaries directly.” (footnote omitted)); Nancy J. Altman, The Reconciliation of Retirement Security and Tax Policies: A Response to Professor Graetz, 136 U. Pa. L.Rev. 1419, 1428 (1988) (“Consistent with its origins, Social Security requires that all workers contribute some wage-related amount for their benefits and that the longer workers are employed and the higher their covered earnings, the greater their cash benefits.” (footnotes omitted)). It should be further noted that both the 1965 and the 1977 amendments to the tip income provisions of the I.R.C. were included as part of amendments to the Social Security Act. To read the Social Security law as requiring an employer to pay into the Treasury funds that are unrelated to producing a corresponding benefit for employees, on whose earnings the tax is based, violates the symmetry that Congress set up between the FICA tax provisions and Social Security benefits.
Recognizing that none of the FICA statutes cited by the Government directly support its claim for authority to make the aggregate estimate involved here, and that the Government’s policy arguments are at best shaky, the majority seeks support for its support of the Government in two statutory provisions from entirely unrelated sections of the Code. The first is I.R.C. § 6201, which recites a general power of the Commissioner to make the inquiries and determinations *571necessary for collecting taxes. After stating the existence of this section, the majority opinion simply announces that this section “implicitly authorizes the IRS to use an indirect formula” in the manner here done. That is akin to saying that a statute that authorizes the Commissioner to adopt rules and regulations implicitly authorizes whatever regulations the Commissioner adopts, regardless of their scope or content.
The second cited Code section is I.R.C. § 446(b). The opinion calls this section “informative.” It is difficult to know exactly how that section is informative with regard to the specific issue before us. That section of the Code on its face applies to taxpayers who fail to keep adequate records. In the ease before us, the only taxpayers who failed to keep adequate records were the employees. It is certainly true that when a taxpayer fails to keep adequate books or otherwise fails to provide the Government with a valid basis upon which the taxpayer’s income can be determined, the tax code specifically authorizes the IRS to use indirect methods to determine what, in the Commissioner’s opinion, does clearly reflect the actual income. See Meneguzzo v. Commissioner, 43 T.C. 824, 831, 1965 WL 1240 (1965). That authority is the basis for the so-called McQuatters formula, under which the IRS can make a FICA tax assessment against an individual service employee based on an estimate of how much that employee received in unreported tips. See McQuatters v. Commissioner, 32 T.C.M. (CCH) 1122, 1973 WL 2419 (1973). But the taxpayer involved here is not the employee who has underreported, but the employer who, it is undisputed, has done everything the statute and the regulations require of it.
The question before us - whether the IRS has authority to assess FICA taxes against an employer in the manner it did here - recently came before one of our sister circuits. In Morrison Restaurants, Inc. v. United States, 118 F.3d 1526 (11th Cir.1997), the trial court on summary judgment had held, as did the trial court in the present case, that the IRS was without authority to assess FICA taxes on allegedly unreported tip income based on an aggregate total without determining the underreporting of the individual restaurant employees. In addition, as in this case, the IRS had neither credited the individual employees’ wage history accounts nor determined the amount of unreported tip income for each employee. See Morrison, 118 F.3d at 1528.
Our sister circuit vacated the judgment of the district court, and remanded for further proceedings. Our sister circuit adjudged that, because the provisions establishing employee and employer liability for FICA taxes are in different subparts of the Code, one entitled “Tax on Employees” and one “Tax on Employers,” “[t]he separation of the provisions into different, parallel subchapters suggests that Congress contemplated that employees’ and employer’s shares could be imposed separately.” Id. at 1529. From this the court concluded that “[w]hen the employee fails to report tips, neither the employee nor the employer can then complain that the employer’s share of FICA taxes is not similarly credited.” Id. at 1530. The court rejected Morrison Restaurant’s policy argument that it should not be the duty of the employer to police the tip reporting of its employees. Though the court agreed that “it is the employee’s responsibility to insure that he is properly credited for all his wages by accurately and completely reporting tips,” the court expressed concern that “basing the employer’s share of FICA taxes exclusively on employees’ reported tips would provide incentive to the employer to discourage accurate reporting or ignore blatantly inaccurate reporting by the employees so that the employer could pay less FICA tax.” Id.
With due respect, I do not agree with the Eleventh Circuit’s reasoning in this ease. In the first place, the fact that Congress organized the particular provisions addressing employee and employer liability for the specific FICA taxes into logically separate sub-parts of the same chapter does not carry convincing weight when placed against the overall symmetry and interconnectedness of the Social Security and FICA tax provisions.
With regard to the court’s second point, the employer is not here complaining that there was a failure to credit the employee with wages allegedly earned, which failure I *572agree is the employee’s sole fault. Rather, the employer is arguing that in the absence of charging the employee with the supposed wages, and consequently crediting the employee with the earnings, the IRS should not, indeed cannot, tax the employer to pay for non-existent benefits attributable to those wages.
Finally, the concern that basing the employer’s share of FICA taxes exclusively on employees’ reported tips will lead to fraudulent behavior by employers, is unsupported, if not misplaced. In the first place, Bubble Room is not arguing that its FICA tax liability must be limited only to reported tips. Rather, it acknowledges, as it must, that its liability for FICA taxes is keyed to the amount of wages earned by its employees, including both reported and unreported tips (the latter being determined in accordance with established IRS procedures). In the second place, there is nothing to suggest that the rule argued for by Bubble Room will induce employers to support or encourage inaccurate reporting by employees in violation of law. The record of Bubble Room’s efforts to obtain accurate reporting undercuts any such assumption.
Perhaps that concern reflects the Eleventh Circuit’s sense regarding the conduct of the employer in its case. The court noted that the only effort the employer Morrison Restaurants made to see that its employees fulfilled their obligation to report cash tips was “routinely informing its restaurant employees that they are required to report all tips.” Id. at 1527. In contrast, the record in this case indicates that Bubble Room has exerted substantial efforts to comply with the letter and spirit of the tax code.
Bubble Room informed all its tipped employees that the I.R.C. and its implementing regulations required that restaurant employees report tip income to the employer no later than ten days after the end of the preceding month, on special forms provided. Employees were informed that they were required to report all tip income received on them annual tax return. In 1989, Bubble Room distributed an “Employee Policy Manual” to its employees which outlined the employees’ responsibilities for complying with IRS income reporting rules. The Employee Policy Manual informed employees that tips were taxable wages and that it was the employer’s policy to require both its directly and indirectly tipped employees to comply with I.R.C. § 6053(a) by reporting one hundred percent of their tip income to the employer. Then in February 1989, Bubble Room management sent correspondence to its employees requesting that they acknowledge in writing their obligation to report all of their tip income to management and to the IRS. Subsequently, as part of management’s computerized check-out process, Bubble Room implemented a procedure requiring tipped employees to report their tip income to the employer on a daily basis. The daily information provided by the employees was reviewed on a weekly basis by Bubble Room’s managers to ensure compliance.
The only thing Bubble Room failed to do was to police individually the handling by its employees of any tips received, and to audit their personal records to ensure that cash tips were being fully reported. I agree with the Eleventh Circuit that the responsibility to accurately report tip income lies with the employee. Efforts by the employer to engage in policing of individual employee’s personal financial affairs could only lead to unseemly conflicts between employees and employers, with attendant questions involving labor-management issues. If tax reporting is to be policed, it is the Government’s job to do it, consistent with law. As the trial court here so well stated: “Even a substantially low reporting of cash tips, however, does not justify allowing the IRS to shift its responsibility to the employer for policing the acknowledged problem of underre-porting of tips by employees.... If the IRS wishes to shift its duty to employers to ensure proper compliance, it should do so through a congressional enactment and continued cooperation between restaurants and the IRS.” Bubble Room, Inc. v. United States, 36 Fed. Cl. 659, 678 (1996).
In sum, I agree with the Court of Federal Claims, and the district court in Morrison, that the employer’s FICA tax liability is directly dependent on, and derivative of, its employees’. This is not a case in which a *573taxpayer cavalierly disregarded its obligation to the Government, or in some other way evidenced a disregard for or lack of support for the Government’s tax-raising efforts. On the contrary, the employer here did everything that could be asked of it, and more, falling short only in not volunteering to pay a tax that under the law it was not obligated to pay. If the Government establishes the amount of unreported income earned by individual Bubble Room employees, under the MeQuatters formula or otherwise, and properly assesses that income against the employees (with the consequence that their social security earnings records will be credited accordingly), the statute requires the employer to pay its share of the FICA tax. But nothing in the law permits the Government to extract from the employer that which it has not determined is due from the employee, who, in the first instance, is the taxpayer and recipient of the income on which the employer’s liability is based.
I do not slight the problem that the IRS has in obtaining accurate data on tip income of employees in the restaurant industry. See Tip Income Study: A Study of Tipping Practices in the Food Industry for 198k, I.R.S. Pub. No. 1530 (1990). The IRS has put in place new programs, in- cooperation with the restaurant industry, to increase the accuracy of employee reporting of tip income. See Jody L. Spencer, Bubble Room, Inc. v. United States: The Court of Federal Claims Says No To Aggregate Income Estimates for Employer-Only FICA Taxes, 31 Ga. L.Rev. 1259,1285 (1997).
Perhaps in the Treasury’s view for fiscal reasons and in order to maintain the overall health of the Social Security system it is necessary for the Government to increase overall assets attributed to the Social Security system. Whether that should be done by imposing a generic additional liability on employers in the manner here done, or by a more broadly based tax is a matter of basic fiscal policy, to be decided by Congressional enactment. In the absence of such Congressional enactment, however, it is not for this court to grant such authority in contravention of existing law. The Court of Federal Claims correctly determined that the Government’s assessment of additional FICA taxes from Bubble Room, in the manner undertaken here, was not authorized by law. The summary judgment in plaintiffs favor should be affirmed.

. Assuming that, as the majority holds, the aggregate assessment is lawful, I join the majority in remanding the case to determine whether the IRS’s calculation of the tax due was correct.