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The IRS Demanding $31.4 million in Retroactive Taxes from Nation's 2nd Largest
 Casual Dining Restaurateur; At Issue Is Reported Tips Made by Cash
 Customers, Compared with Tips Reported by
 Credit Card Paying Customers

By Suzanne Marta, The Dallas Morning News
Knight Ridder/Tribune Business News

Oct. 5, 2004 - The U.S. Internal Revenue Service has revoked Brinker International Inc.'s contract on tip reporting, saying the operator of casual dining restaurants underreported how much its servers are paid in cash gratuities.

The IRS said the Dallas-based company didn't comply with the requirements of a 1996 agreement and demanded $31.4 million in retroactive taxes based on the agency's estimate of unreported tips between 2000 and 2002, Brinker said Monday.

Brinker said it complied with terms of the agreement and plans to contest the agency's findings.

"We believe this is unjustifiable," said Louis Adams, a Brinker spokesman.

"We believe our employees are properly reporting their cash tips."

The IRS contract required Brinker, parent of the Chili's Grill & Bar chain, to initiate programs to train hourly restaurant employees on how to report tips. Brinker is also required to establish tip-reporting procedures.

At issue is how much Brinker, the nation's second-largest casual dining restaurateur, reported in tips made by customers who paid in cash, compared with those who paid on credit cards.

Brinker said in a filing with the U.S. Securities and Exchange Commission that the IRS assumes the rate used for tips paid in cash should be no more than 2 percentage points lower than the tip rate on credit cards.

The IRS also said some portion of those unreported tips should have been treated as service charges and subject to employment taxes, according to Brinker's filing.

Brinker officials said they would "vigorously" contest both assumptions and the government's ability to make those employer tax assessments retroactively.

A spokesman for the IRS said the agency doesn't comment on individual taxpayer issues.

Lynne Collier, an analyst with Stephens Inc., said the issue didn't represent a significant setback for the company.

Shares in Brinker gained 28 cents, closing at $31.33.

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