PROCEDURES ARE EXPLAINED FOR MAKING TIP RATE REDUCTION REQUESTS

Rev. Proc. 85-4

SECTION 1. PURPOSE

The purpose of this revenue procedure is to provide guidelines for employers and employees for certain large food or beverage establishments who wish to apply to the district director for the district in which the establishment is located to have the percentage of gross receipts required to be allocated as tips under section 6053(c)(3)(A) of the Internal Revenue Code reduced from 8 percent to a lower percentage (not below 2 percent).

SECTION 2. BACKGROUND

01 Under section 6053(c)(3)(A) of the Code, as added by section 314(a) of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462, 562 (TEFRA), an employer of a large food or beverage establishment must allocate as tips among employees performing services during any payroll period, and who customarily receive tip income, an amount equal to the excess of:

(1) 8 percent of the gross receipts (other than nonallocable receipts) of the establishment for the payroll period, over

(2) the total amount reported by the employees to the employer for the period.

02 Under section 6053(c)(3)(B) of the Code, the employer must allocate the amount under a good faith agreement by the employer and the employees or, in the absence of such an agreement, in the manner determined by regulations.

03 As originally enacted by TEFRA, section 6053(c)(3)(C) of the Code permitted the Secretary to reduce (but not below 5 percent) the percentage of gross receipts required to be allocated when the Secretary determined that the percentage of gross receipts constituting tips was less than 8 percent. Section 1072 of the Tax Reform Act of 1984, Pub. L. No. 98-369, 98 Stat. 494, amended section 6053(c)(3)(C), effective July 18, 1984, to provide that, upon the petition of either the employer or a majority of employees of such employer, the Secretary may reduce (but not below 2 percent) the percentage of gross receipts required to be allocated when the Secretary determines that the percentage of gross receipts constituting tips is less than 8 percent.

04 Section 6053(c)(4) of the Code defines a "large food or beverage establishment" as meaning any trade or business which (1) provides food or beverages, (2) for which the tipping of employees serving food or beverages is customary, and (3) which normally employed more than 10 employees on a typical business day during the preceding calendar year.

05 Under section 31.6053-3(h) of the Employment Tax Regulations, application may be made to the district director for the internal revenue district in which the establishment is located to have the percentage of the gross receipts used to determine the amount allocated to tips reduced. The application must be in writing and include sufficient information to allow the district director to determine the actual tip rate of the establishment. For example, such information might include the charged tip rate, the type of establishment, menu prices, location, the amount of "self-service" required, the days and hours open for business, and whether the customer receives the check from or pays the server for the meal. An employer making application must also attach to the application copies of Form 8027 (if any), Employer's Annual Return of Tip Income and Allocated Tips, filed for the establishment for the three immediately preceding calendar years.

06 Under section 31.6053-3(h)(3) of the regulations, 8 percent of the gross receipts must continue to be used for purposes of complying with section 6053(c) of the Code until the district director makes notification in writing of approval of a reduction of the percentage, and the effective date of the reduction.

07 Under section 31.6053-3(h)(4) of the regulations a single application may be made for 2 or more establishments if they are essentially the same type of business, are located in the same internal revenue region, and a good faith determination has been made by the applicant(s) that the tip rates of the various establishments are essentially the same. A single application for multi-establishments located in the same internal revenue region must be filed with the district director for the internal revenue district in which the greatest number of establishments included in the application are located. If two or more districts share the greatest number equally, the applicant(s) may choose among those districts.

SECTION 3. PROCEDURES

01 Employers and employees making application must clearly demonstrate that a rate less than 8 percent should apply. The application must contain the information listed below. If this information is not applicable, the application should so state and, if necessary, explain why.

1 The employer's name, address, and employer identification number.

2 The establishment's name, address, and establishment identification number.

3 Detailed description of the establishment. This description should include any information the employer (or employees) believe would assist in determining the tip rate, such as:

(a) Type of restaurant, i.e., lounge, sandwich shop, coffee shop.

(b) Days and hours of operation,

(c) A general description of the operation of the establishment, including the type of service provided by the staff, and the type of self-service, if any,

(d) To whom the customer pays the check, waiter or waitress, cashier etc; whether the check is paid before or after the meal,

(e) Whether alcoholic beverages are available,

(f) The past year's:

(1) total gross sales

(2) total amount of charge sales

(3) total amount of charge sales with charge tips

(4) total amount of charge tips

(5) total reported tips

(6) total carry-out sales

(7) percentage of sales representing breakfast, lunch, and dinner business

(8) the average dollar amount of the guest check,

(9) the service charge, if any, added to the check,

(10) the percentage of sales with a service charge.

(g) Type of clientele.

02 A copy of a representative menu for each meal must be attached to the application.

03 A majority (more than one-half) of all the tipped employees must consent to an employee-originated application. For multi-establishment employers the employee majority is more than one-half of the total number of tipped employees of all the establishments at the time the application is filed.

04 The employees' application must state the total number of tipped employees employed by the establishment, and the total number of tipped employees consenting to the application. The employees must supply all necessary information that is available to them. Where the employer possess relevant information, the employer should provide it to the district director upon either the employees' or the district director's request.

05 The application must contain the following statement. In the case of an employer application, it should be signed by a responsible person who is duly authorized to make and sign a return, statement, or other document. An employee application must be signed by each employee making application.

"Under penalties of perjury, I/we declare that I/we have examined this application, including accompanying documents and to the best of my/our knowledge and belief, the facts presented in support of this application are true, correct, and complete."

06 If an employer (or employee) file separate applications in more than one district in the same region for establishments that are not essentially the same type of business, or do not have the same tip rate, each application filed must indicate the name of any other district in which an application has been submitted.

07 Employers or employees of large establishments that may request rate reductions in 2 or more regions must state in each application the name of any other Service region and district in which they have also submitted an application so that consistent treatment may be obtained.

SECTION 4. APPEAL RIGHTS

01 Employers and employees who disagree with the district director's decision may file an administrative appeal with the director of Appeals for the district stating the reasons for disagreement with the district director's decision.

02 Employers or employees have no judicial appeal rights should the district director deny in whole, or in part, the request for a rate reduction.

SECTION 5. EFFECTIVE DATE

This revenue procedure is effective on January 28, 1985, the date of its publication.