Bartender could reduce reported tips when boss's method faulty.

Ed Savage worked as a bartender in a Legal Sea Foods restaurant. He did not report any tip income on his 1986 tax return and kept no records of his tips. The IRS reconstructed his tip income using employee tip amounts reported by the restaurant.

Legal Sea Foods, which was subject to the tip-reporting requirements for "large food or beverage establishments," reported to the IRS that Ed received $9,000 in tips during 1986. Under Internal Revenue Code section 6053(c), a large food or beverage establishment-generally, a bar or restaurant with more than 10 employees and where tipping is customary-must report tips received by employees. This generally means 8% of the restaurant's gross receipts must be allocated among tipped employees, with a reduction for tips employees actually report on their returns.

Savage worked the day shift. Usually, about one-third of his workday passed before customers began coming into the restaurant. He argued Legal Sea Foods' allocation method didn't take into account that some employees worked before or after hours, or employees who worked during the day got fewer tips than those working at night.

Result: For Savage. The taxpayer successfully pointed out ways the employer's reporting method was faulty. The Tax Court allowed Savage to reduce his tip income for 1986 to $6,000.

* Savage, Jr. (TCMemo 1992-83).