published a set of temporary regulations (47 Fed. Reg. 55215) and proposed amendments to the Employment Tax Regulations, 26 C.F.R. Part 31 (47 Fed. Reg. 55248). Following consideration of public comments, the regulations were revised and published in final on August 15, 1983. 48 Fed. Reg. 36807.
On January 18, 1984 Foodservice brought the instant action, asking this Court to declare three of these regulations unlawful and enjoin their enforcement. In addition, Foodservice challenges a regulation that has been in effect since 1969 which deals with withholding priorities. These regulations and Foodservice's respective complaints with each are dealt with below.
(A) Segregation of Charge Receipts
I.R.C. §§ 6053(c) (1) (B) and (C) require employers to report "the aggregate amount of charge receipts" and "the aggregate amount of charged tips shown on such charge receipts." The regulations require reporting of "the aggregate amount of charge receipts . . . on which there were charged tips" and "the aggregate amount of charged tips shown on such charge receipts." 26 CFR §§ 31.6053-3(a) (1) (iv) and (a) (1) (v), 48 Fed. Reg. at 36809.
Plaintiff complains that this regulation is burdensome because it will require its members to institute new record-keeping procedures to separately account for charge receipts with tips. Foodservice further asserts that the regulation is not in accordance with the Code and is of no administrative value as the information it requires "would in no way help the Internal Revenue Service more accurately ascertain the income of any individual." In particular, Foodservice asserts that the statute was promulgated to reflect the tip rate, and that in order for the regulation to adequately reflect this rate, it should require reporting of the total charge sales as otherwise the "stiff" rate (i.e., where no tip is left) is ignored.
(B) Allocation Formula
Section 6053(c) (3) (B) (ii) of the Code directs the Secretary to devise a formula for allocation of the "shortfall" among tipped employees where employers have not negotiated a good faith agreement with their employees as to how the shortfall should be allocated. The formula devised by the Secretary, 26 CFR § 31.5053-3(f), 48 Fed. Reg. at 36811-36813, allocates the shortfall solely among directly tipped employees.
Plaintiff alleges that this provision -- by excluding indirectly tipped employees and thus tip-splitting arrangements (i.e., where "directly tipped" employees such as waiters share their tips with employees such as busboys who aid in service) from the scope of the allocation formula -- is not in accordance with the statute; requires plaintiff to allocate more to directly tipped employees than "should lawfully be allocated pursuant to the statute"; and that its members are experiencing "severe employee relations problems" as a result of the "misallocation."
(C) Definition of "Large Food or Beverage Establishment "
I.R.C. § 6053(c) (4) defines a "large food or beverage establishment" as a business providing food or beverages, where tipping is customary, and "which normally employed more than 10 employees on a typical business day during the preceding calendar year." The Code directs the Secretary to promulgate regulations to define the scope of this last phrase.
The regulation promulgated by the Secretary pursuant to this directive, 26 CFR § 31.6053-3(j) (9), 48 Fed. Reg. at 36815, provides in pertinent part:
The employees of an employer shall include all employees at all food or beverage operations who, along with the employees of such employer, would be treated as employees of a single employer under section 52(a) or (b) (as in effect on September 3, 1982) and the regulations thereunder.
Foodservice asserts that this regulation is beyond the reach of the code because it includes within its scope all establishments operated by an employer so long as the separate establishments taken together employ more than ten employees on a typical business day.
(D) Withholding Priorities
I.R.C. § 3402(k)
provides that income tax for tips reported to an employer under Section 6053(a) can be withheld from wages paid to that employee, to the extent that the employer has funds of that employee (excluding tips) in his control.
Treasury Regulation 26 CFR 31.3402(k)-1(c), promulgated pursuant to Section 3402(k) in 1969, provides that collection of taxes on tips shall take priority over other non-federal tax claims, including State taxes and union dues. See id., Example (1). Plaintiff asserts that this regulation is in excess of statutory authority as it provides a potential for a "negative paycheck" and will impair an employer's interest in its employees' wages for debts due it (i.e., an employer may be legally obligated under ERISA to pay out funds for a pension plan and this, taken together with taxes due on tips, may exceed the amount of wages paid on an hourly rate, since the employer never has control of the tip income).
Defendant's principal response to these attacks is that the Anti-Injunction Act, 26 U.S.C. § 7421(a), bars this action. The Act provides, in pertinent part, that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court, by any person, whether or not such person is the person against whom such tax was assessed." Defendants contend that this suit falls within the Act as it will prevent the implementation of a regulatory scheme, the information from which it will ultimately use to make tax assessments. Defendants further assert that this case falls outside the judicially-created exceptions to the Act established by South Carolina v. Regan, 465 U.S. 367, 84-1 USTC P9241, 79 L. Ed. 2d 372, 104 S. Ct. 1107, (1984), and Enochs v. Williams Packing & Navigation Co., [62-2 USTC P9545], 370 U.S. 1, 8 L. Ed. 2d 292, 82 S. Ct. 1125 (1962). Accordingly, they seek dismissal.
(A) The Applicability of the Anti-Injunction Act.
In South Carolina v. Regan, 465 U.S. 367, the Supreme Court held that the Anti-Injunction Act does not bar a suit where Congress has not provided an aggrieved party with an alternative avenue to litigate its claims on its own behalf. Slip op. at 12. There, the State of South Carolina invoked the Court's original jurisdiction and asked leave to file a complaint against the Secretary of the Treasury in order to challenge the constitutionality of § 310(b) (1) of TEFRA which amended I.R.C. § 103. Like here, the Secretary argued that the Anti-Injunction Act barred the action. The Court disagreed, stressing the unavailability of a refund action: since South Carolina incurred no tax liability under the contested provision, it was unable to utilize any statutory procedure to contest its constitutionality and accordingly the Act could not bar the action. Slip op. at 11. The Court further held that the possibility of convincing a third party to raise the claim was an insufficient remedy:
Here, the indicia of congressional intent -- the Act's purposes and the circumstances of its enactment -- demonstrate that Congress did not intend the Act to apply where an aggrieved party would be required to depend on the mere possibility of persuading a third party to assert his claims. Rather, the Act was intended to apply only when Congress has provided an alternative avenue for an aggrieved party to litigate its claim on its own behalf.
Slip op. at 12. In the instant case, Foodservice is unable to raise its claims in a refund suit as the injuries it complains of, over-burdensome reporting requirements, other administrative costs and adverse employee relations, arise from informational requirements, not overpayment of taxes. Defendants proffer, however, that unlike the State of South Carolina, Foodservice does have an alternative remedy for each of its claims.
With respect to each of the three TEFRA regulations, the government suggests that one of Foodservice's members could fail to file a reporting item required by the Code; pay the respective penalty added to the Code by TEFRA for failing to file that reporting;
file a claim for a refund; and, ultimately file a refund suit.
An almost identical suggestion was rejected by Judge Bryant in National Restaurant Association v. Simon, 411 F. Supp. 993, 996 (D.C.D.C. 1976). There, a trade association representing primarily restaurant operators contested a Revenue Ruling requiring employers to report certain tip information, in addition to the hourly wage information, on their employees' W-2 forms. Judge Bryant held the Anti-Injunction Act inapplicable due to lack of alternative judicial review. See id. at 996. Like here, the government suggested that one employer could pay a $1 penalty under § 6652 and then file for a refund. Judge Bryant did not agree:
Under that section the plaintiff can test the validity of the ruling only by refusing to file the required information, and contesting a possible government assessment of a fine under § 6652. This is obviously not the "refund" action contemplated by the Act. It puts the plaintiffs in the untenable position of either complying, with no judicial review, or of defying the government's interpretation of their legal obligations under the Code, of being in essence a lawbreaker. The Court cannot imagine that the Congress intended such an anomalous result in a system which depends for its very existence on the principle of voluntary compliance. Nor does the Court believe that Congress intended to condition access to any judicial review of such a revenue ruling on subjecting oneself to a fine