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«I. INTRODUCTION The value of a meal provided in kind by an employer to its employee on its business premises and for the employer’s convenience is ...»

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INTERNAL REVENUE SERVICE TRAINING MATERIALS

FOR EMPLOYEE MEALS

IN THE HOSPITALITY INDUSTRY

TABLE OF CONTENTS

I. INTRODUCTION

II. OVERVIEW OF EMPLOYEE MEALS

A. INCOME TAX CONSEQUENCES TO EMPLOYEES

B. INCOME TAX CONSEQUENCES TO EMPLOYERS

C. EMPLOYMENT TAX CONSEQUENCES TO EMPLOYEES AND EMPLOYERS

III. SECTION 119

A. RESTAURANT AND FOOD SERVICE EMPLOYEES

B. INABILITY TO OBTAIN A MEAL

C. RESTRICTED MEAL PERIOD

D. EMERGENCY CALL EMPLOYEES

IV. CONCLUSION

ADDENDUM--BOYD GAMING CORP. V. COMMISSIONER

A. BACKGROUND

B. SPECIFIC HOLDINGS

I. INTRODUCTION The value of a meal provided in kind by an employer to its employee on its business premises and for the employer’s convenience is excludable from the employee’s income under section 119.1 In addition, the value of the meal is excludable from wages for purposes of the Federal Insurance Contributions Act (FICA) tax, Federal Unemployment Tax Act (FUTA) tax, and income tax withholding under sections 3121(a), 3306(b), and 3401(a), respectively.

Any employer providing a meal to an employee must comply with the legal standards under section 119 in order to exclude the value of the meal from the employee’s income and wages under section 119. These training materials specifically apply the legal standards of section 119 to facts typically present in the hospitality industry (e.g., casinos, hotels, resorts, etc.).

These training materials first provide an overview of the statutory and regulatory framework applicable to employee meals, including the change made by recently enacted legislation. They then discuss the specific requirements under section 119. In particular, the training materials analyze the four business All references are to the Internal Revenue Code of 1986, as amended ("Code").

-2reasons provided as examples in the regulations for satisfying the convenience of the employer requirement of section 119.

Finally, the training materials discuss a recent Tax Court case applying section 119 to the hospitality industry.

II. OVERVIEW OF EMPLOYEE MEALS

A. INCOME TAX CONSEQUENCES TO THE EMPLOYEE

! Employee meals are includible in the employee’s income unless an exclusion applies.

Section 61(a) of the Code provides that, unless otherwise provided, gross income includes compensation for services, including fringe benefits. See also section 1.61-21(a)(1) of the Income Tax Regulations. Taxable fringe benefits include free or discounted meals provided to employees, unless an exclusion applies. See section 1.61-2(d)(3).

! Employee meals provided on the employer’s business premises for the convenience of the employer are excludable from the employee’s income.

Section 119(a) provides that the gross income of an employee does not include the value of any meal furnished in kind to him by or on behalf of his employer for the convenience of the employer, but only if the meal is furnished on the employer’s business premises. See also section 1.119-1(a)(1) of the regulations.

Thus, in order for the value of a meal to be excluded from income under section 119, three requirements must be met. The

meal must be furnished:

(1) in kind, (2) on the employer’s business premises, and (3) for the employer’s convenience.

The application of section 119(a) is on a meal-by-meal and employee-by-employee basis.2

1. In kind requirement The section 119 exclusion only applies to a meal furnished in kind by or on behalf of an employer to the employee. If the employee has an option to receive additional compensation in lieu

–  –  –

of a meal in kind, the value of the meal is not excludable from gross income under section 119. However, the mere fact that an employee, at his option, may decline to accept a meal tendered in kind will not of itself require inclusion of the value thereof in gross income. Section 1.119-1(e).

2. Business premises requirement The term "business premises of the employer" generally means the place of employment of the employee. Section 1.119-1(c)(1).

Employer’s convenience requirement3 3.

In Kowalski v. Commissioner, 434 U.S. 77, 93 (1977), the Supreme Court concluded that the "convenience of the employer" standard in section 119 requires that the "employee must accept.

.. [the] meals... in order properly to perform his duties" (quoting S.Rep. No. 1622, 83rd Cong., 2d Sess. 190 (1954)).

The question of whether a meal is furnished for the convenience of the employer is one of fact to be determined by analysis of all the facts and circumstances in each case.

Section 1.119-1(a)(1).

A meal furnished by an employer to an employee is furnished for the convenience of the employer if the meal is furnished for a substantial noncompensatory business reason of the employer.





If the employer furnishes a meal to an employee for a substantial noncompensatory business reason, the meal is furnished for the convenience of the employer, even though the meal is also furnished for a compensatory reason. Section 1.119-1(a)(2)(i).

! The regulations provide four examples of providing meals for the convenience of the employer.

The regulations specifically provide examples of four frequently occurring substantial noncompensatory business reasons in which a meal is considered furnished for the convenience of the employer. Section 1.119-1(a)(2)(i). The reasons are the

following:

(1) restaurant and food service employees;

(2) inability to obtain a meal within a reasonable period (such as insufficient eating facilities);

(3) restricted meal period; and Whether the meal is provided in-kind and on the employer’s business premises are not usually contested issues in applying section 119 to the hospitality industry; consequently, these training materials focus on the third requirement: whether the meal is provide for the employer’s convenience.

-4

–  –  –

See Part III, "Section 119," for a further discussion of each of these examples of a substantial noncompensatory business reason.

! The statute and regulations discuss factors that, standing alone, do not indicate whether the meal is provided for the convenience of the employer.

In determining whether a meal is furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment are not determinative of whether the meal is intended as compensation.

Section 119(b)(1). The fact that a charge is made for the meal, and the fact that the employee may accept or decline the meal, are not taken into account in determining whether the meal is furnished for the convenience of the employer. Section 119(b)(2).4 In determining an employer’s reason for furnishing a meal, the mere declaration that the meal is furnished for a noncompensatory business reason is not sufficient to prove that the meal is furnished for the convenience of the employer. The determination will be based upon an examination of all the surrounding facts and circumstances. Section 1.119-1(a)(2)(i).

If an employer furnishes a meal as a means of providing additional compensation to an employee (and not for a substantial noncompensatory business reason of the employer), the meal will not be furnished for the convenience of the employer. Section 1.119-1(a)(2)(i). A meal is furnished for a compensatory business reason of the employer when the meal is furnished to an employee to promote the morale or goodwill of the employee, or to attract prospective employees. Section 1.119-1(a)(2)(iii).

Generally, a meal furnished before or after the working hours of the employee is not furnished for the convenience of the employer. (But see the exceptions provided in section 1.119If (i) an employee is required to pay on a periodic basis a fixed charge for his meals, and (ii) such meals are furnished by the employer for the convenience of the employer, the employee’s gross income does not include an amount equal to such fixed meal charge. This rule applies (i) whether the employee pays the fixed charge out of his stated compensation or out of his own funds, and (ii) only if the employee is required to make the payment whether he accepts or declines the meals. Section 119(b)(3).

-5a)(2)(ii)(d)5 and (f)6.) Similarly, a meal furnished on a nonworking day does not qualify for the exclusion under section

119. Section 1.119-1(a)(2)(i).

4. Special Statutory Rule When a Majority of Employees are Covered by Section 119 All meals furnished on the business premises of an employer to the employer’s employees shall be treated as furnished for the convenience of the employer if, without regard to this paragraph, more than half of the employees to whom such meals are furnished on such premises are furnished such meals for the convenience of the employer. Section 119(b)(4).7 In applying the section 119(b)(4) rule, the determination of whether the majority of the employees are furnished meals for the convenience of the employer must be made on an employee-byemployee basis and based on an analysis of each meal provided to each employee.8 Furthermore, the determination must be made separately for each of the employer’s "business premises."9 A meal furnished to a restaurant employee or other food service employee for each meal period in which the employee works will be regarded as furnished for a substantial noncompensatory business reason of the employer, irrespective of whether the meal is furnished during, immediately before, or immediately after the working hours of the employee. Section 1.119-1(a)(2)(ii)(d).

See discussion infra under Restaurant or Food Service Employee.

If an employer would have furnished a meal to an employee during his working hours for a substantial noncompensatory business reason, a meal furnished to the employee immediately after his working hours because his duties prevented him from obtaining a meal during his working hours will be regarded as furnished for a substantial noncompensatory business reason.

Section 1.119-1(a)(2)(ii)(f).

Section 119(b)(4) was added by section 5002 of the Internal Revenue Service Restructuring and Reform Act of 1998, P.L. 105-206, and is effective for all taxable years beginning before, on, or after July 22, 1998 (the date of enactment).

For administrative purposes, in determining whether the section 119(b)(4) rule applies to an employer’s workforce, an analysis based on the positions and shifts the employees work may be considered.

See section 1.119-1(c)(1) of the regulations. See also H.R. Conf. Rep. No. 599, 105th Cong., 2d Sess. 333 (1998) (referencing "all meals furnished to employees at a place of business").

-6The rule provided in section 119(b)(4) effectively replaces the "substantially all" rule provided in section 1.119-1(a)(2)(e) of the regulations. Section 1.119-1(a)(2)(e) provides, if the employer furnishes meals to employees at a place of business and the reason for furnishing the meals to each of substantially all of the employees who are furnished the meals is a substantial noncompensatory business reason of the employer, the meals furnished each other employee will also be regarded as furnished for a substantial noncompensatory business reason of the employer.10

B. INCOME TAX CONSEQUENCES TO THE EMPLOYER

! The employer may only partially deduct employee meal expenses (including meals provided for the convenience of the employer) unless an exception applies.

Section 162(a) allows a deduction for all ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered.

Section 274(n)(1) provides that the amount allowable as a deduction for any expense for food or beverages shall not exceed 50 percent of the amount of the expense which would otherwise be allowable as a deduction.

! Two exceptions allow the employer to fully deduct employee

meal expenses:

(1) Meal expenses treated as compensation to the employee Section 274(n)(2) provides certain exceptions to the Section 274(n)(1) partial deduction disallowance. First, an expense for meals is not subject to the section 274(n)(1) limitation to the extent that the expense is treated by the taxpayer, with respect to the recipient of the meals, (1) as compensation to an employee on the taxpayer’s return and (2) as wages to such employee for purposes of income tax withholding. Section 274(n)(2)(A) and section 274(e)(2). To meet the first requirement, the taxpayer must treat the expense as compensation paid to an employee on the Example (9) of section 1.119-1(f) illustrates this rule.

In the example, an employer provides meals for a substantial noncompensatory business reason to 210 of 230 employees (approximately 90 percent). Under the regulation, this constitutes substantially all of the employees.



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