GUIDANCE FOR EMPLOYERS AND EMPLOYEES TO PETITION DISTRICT DIRECTOR FOR REDUCTION IN TIP RATE ALLOCATION FIGURE TO NOT LESS THAN TWO PERCENT

Rev. Proc. 86-21

SECTION 1. PURPOSE

This revenue procedure pertains to employers and employees of certain large food or beverage establishments. It provides guidelines for such employers and employees who wish to petition the district director for the district in which the establishment is located regarding the percentage of gross receipts required under section 6053(c)(3)(A) of the Internal Revenue Code to be either reported by employees or allocated as tips. They may petition to reduce that percentage from 8 percent to a lower percentage (not below 2 percent). This revenue procedure amplifies and supersedes Rev. Proc. 85-4, 1985-1 C.B. 493, as modified by Rev. Proc. 85-10, 1985-1 C.B. 499. Those revenue procedures together provided guidance to employers for submitting petitions for a tip rate reduction to the district director and stated that additional guidance for employees would be issued upon publication of regulations.

SEC. 2. BACKGROUND

01 Section 6053(c)(1) of the Code requires an employer of a large food or beverage establishment to report the following information to the Secretary for each calendar year at the time and manner prescribed by regulations:

(a) The gross receipts of the establishment from the provision of food and beverages (other than nonallocable receipts).

(b) The aggregate amount of charged receipts (other than nonallocable receipts).

(c) The aggregate amount of charged tips shown on the charge receipts.

(d) The sum of:

(1) the aggregate amount reported by employees to the employer under section 6053(a), plus

(2) the amount the employer is required to report under section 6051 with respect to service charges of less than 10 percent.

(e) The amount allocated to each employee under section 6053(c)(3).

02 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 (TEFRA), 1982-2 C.B. 462, 562, an employer of a large food or beverage establishment, for purposes of that reporting, must allocate as tips among employees who perform 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.

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

04 As originally enacted by TEFRA, section 6053(c)(3)(C) of the Code permitted the Secretary, upon petition of the employer, 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. The Tax Reform Act of 1984, section 1072, 1984-3 (Vol. 1) C.B. 1,560, amended section 6053(c)(3)(C), effective July 18, 1984, to include a majority of employees in one petitioning process and to allow reduction in the appropriate percentage as low as 2 percent. As amended, section 6053(c)(3)(C) provides 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.

05 Section 6053(c)(4) of the Code defines the term "large food or beverage establishment" to mean any trade or business (1) which 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.

06 Under section 31.6053-3T(h)(1) and (2) of the Temporary Employment Tax Regulations, an employee or a majority of employees of an employer may petition the district director for the internal revenue district in which the establishment is located to have the percentage of the gross receipts that is used to determine the amount to be allocated under section 6053(c)(3)(A) of the Code reduced from 8 percent to a percentage that the petitioning employer or employees believe to be the actual percentage of the gross receipts that reflects the amount of tips for the establishment. The district director may thereafter reduce the percentage to the percentage the district director determines to be the proper estimate of the actual percentage of gross receipts constituting tips for the establishment, but not below 2 percent. The petition must be in writing and must include sufficient information to allow the district director to determine with reasonable accuracy the actual tip rate of the establishment.

07 Under section 31.6053-3T(h)(3) of the temporary 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 notifies the employer in writing both of approval of a reduction of the percentage and of the term for which the reduced percentage is effective.

08 Under section 31.6053-3T(h)(4) of the temporary regulations, a single petition may be made for 2 or more establishments if they are essentially the same type of business, they are located in the same internal revenue region, and a good faith determination has been made by the petitioner that the tip rates of the various establishments are essentially the same. Single petitions shall include the names and locations of the establishments for which a reduction is requested and the information required by section 3 for a typical establishment. A single petition 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 petition are located. If two or more districts have the same number of establishments and no other district has more, the petitioner may choose among those districts.

SEC. 3. PROCEDURES

REQUIREMENTS FOR ALL PETITIONS

01 Employers and employees submitting a petition must clearly demonstrate that a rate less than 8 percent should apply. The petition must be in writing and contain the information listed below. If this information is not applicable or available, the petition should so state and, if necessary, explain why. The following must be contained in, or attached to, the petition:

(a) The employer's name, address, and employer identification number.

(b) The establishment's name, address, and establishment identification number.

(c) A 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:

(1) The type of restaurant, for example, lounge, sandwich shop, coffee shop,

(2) The days and hours of operation,

(3) 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,

(4) The person to whom the customer pays the check (waiter or waitress, cashier, etc.) and whether the check is paid before or after the meal,

(5) Whether alcoholic beverages are available,

(6) The past year's:

(A) total gross sales,

(B) total amount of charge sales,

(C) total amount of charge sales with charge tips,

(D) total amount of charge tips,

(E) total reported tips,

(F) total carry-out sales,

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

(H) average dollar amount of the guest check,

(I) service charge, if any, added to the check, and

(J) percentage of sales with a service charge.

(7) Type of clientele.

(d) A copy of a representative menu for each meal.

02 If an employer or employee files separate petitions 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 petition filed must indicate the name of any other district in which a petition has been submitted.

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

04 The petition must contain the following statement:

"Under penalties of perjury, I/we declare that I/we have examined this petition, including accompanying documents and to the best of my/our knowledge and belief, the facts presented in support of this petition are true, correct, and complete." In the case of an employer petition, it should be signed by a responsible person who is duly authorized to make and sign a return, statement, or other document. An employee petition must be signed by each employee submitting the petition.

EMPLOYER PETITIONS

05 In addition to the requirements of section 3.01, there must also be attached to employer petitions copies of any Form 8027, Employer's Annual Return of Tip Income and Allocated Tips, filed for the establishment for the three immediately preceding calendar years.

EMPLOYEE PETITIONS

06 A majority (more than one-half) of all the directly tipped employees must consent to an employee-originated petition. For multi- establishment employers, the employee majority is more than one-half of the total number of directly tipped employees of all the establishments at the time the petition is filed. See section 31.6053-3T(h)(2)(iii) of the temporary regulations.

07 In addition to the requirements of section 3.01, employee petitions must also state both the total number of directly tipped employees employed by the establishment and the total number of directly tipped employees consenting to the application. The employees must supply all necessary information that is available to them. Employees must promptly notify their employer of the petition. Upon receipt of the notification, the employer must promptly submit to the district director copies of any Form 8027 filed for the 3 immediately preceding calendar years. If the employer possesses relevant information, the employer should provide it to the district director upon either the employees' or the district director's request. Any information supplied by the employer during the petitioning process will not be disclosed by the Internal Revenue Service to any employees of the employer nor to representatives of such employees. Section 31.6053-3T(h)(2)(iii)(B) of the temporary regulations.

SEC. 4. APPEAL RIGHTS

01 Employers or employees who disagree with the district director's decision may file an administrative appeal stating the reason(s) for disagreement. The Appeals office will consider the appeal and advise the employer (employee) of its determination.

02 Neither section 6053 of the Code nor any other section provides for administrative or judicial review of Appeals' determination.

SEC. 5. EFFECTIVE DATE

This revenue procedure is effective on April 28, 1986, the date of its publication.

SEC. 6. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 85-4, as modified by Rev. Proc. 85-10, is amplified and, as amplified, is superseded.