IRS National Office Addresses Tax Treatment of Employer-Provided Meals and Snacks

(Parker Tax Publishing March 2019)

The IRS National Office determined that meals furnished to employees in order for them to be available to respond to regularly-occurring emergencies were furnished for a substantial noncompensatory business reason where the employer substantiated the business reason with policy documents and employee declarations. However, the taxpayer failed to show a substantial noncompensatory purpose for providing meals for other stated business reasons including protecting proprietary information, fostering collaboration, and providing employees with healthy eating options. TAM 201903017.

Facts

The IRS National Office was asked whether the value of meals and snacks that a taxpayer provided to its employees in the headquarters' offices was includable in employees' income and subject to employment taxes. Specifically, some of the questions the National Office was asked included the following:

(1) Whether, for purposes of applying Code Sec. 119, Boyd Gaming Corp. v. Comm'r, 177 F.3d 1096 (9th Cir. 1999), A.O.D. 1999-010, and Jacobs v. Comm'r, 148 T.C. No. 24 (2017), precluded the IRS from substituting its judgment for the business decisions of the taxpayer as to the taxpayer's business needs and/or concerns and what specific business policies or practices are best suited to addressing the taxpayer's business needs and/or concerns;

(2) Whether employees' ability to bring food from home or have food delivered was relevant to assessing whether there were insufficient eating facilities in the vicinity of the employer's business premises under Reg. Sec. 1.119-1(a)(2)(ii)(C);

(3) Whether the value of the meals furnished to the employees was excludable from gross income under Code Sec. 119 as furnished for the employer's convenience where the stated reasons for furnishing the meals included (a) protecting proprietary information, (b) fostering collaboration, (c) protecting employees from unsafe conditions surrounding the taxpayer's business premises, (d) providing employees with healthy eating options, (e) the fact that employees could not secure a meal within a reasonable meal period due to the taxpayer's location, (f) providing meals where the employees' job functions allowed them to take only a short meal break, and (g) providing meals so that employees were available to handle regularly-occurring emergency outages;

(5) Whether the taxpayer satisfied Code Sec. 119(b)(4) by showing that at least half of its employees were furnished meals that were excludable from income under Code Sec. 119;

(6) Whether the value of meals furnished to employees was excludable from income under Code Sec. 132(e)(2) and Reg. Sec. 1.132-7;

(7) Whether the value of snacks provided to employees in designated areas for the same stated reasons as the taxpayer provided for furnishing meals were excludable from income under Code Sec. 119 or Code Sec. 132(e)(1) and Reg. Sec. 1.132-6;

(8) Whether the taxpayer's snack areas met the definition of an eating facility under Reg. Sec. 1.132-7 such that the value of the snacks was excludable from income under Code Sec. 132(e)(2) and Reg. Sec. 1.132-7; and if not, were the snacks considered meals such that their value had to be determined using the 150 percent multiplier in Reg. Sec. 1.61-21(j);

(9) Whether the value of meals and snacks furnished to employees was excludable from income under Code Sec. 119 by virtue of the "reasonable belief" test whereby the taxpayer claimed it was reasonable to believe that the value of the meals and snacks was excludable from income under a statutory exemption; and

(10) If the value of the meal and snacks was includable in the employees' wages, what method should be used to determine the amount of employment taxes owed.

Conclusions

In response to the questions asked, the National Office provided the following answers:

(1) Boyd Gaming and Jacobs preclude the IRS from substituting its judgment as to the taxpayer's business needs and concerns and what specific policies or practices are best suited to addressing these needs and concerns. However, the IRS may determine whether an employer actually follows and enforces its stated policies and whether they qualify as substantial noncompensatory business reasons for furnishing meals under Code Sec. 119. Employers who claim the Code Sec. 119 exclusion must substantiate the business reasons supporting its claim of furnishing meals for the convenience of the employer. Employers who provide specific business policies as substantial noncompensatory business reasons must be able to demonstrate that the policies exist in substance, not just in form, by showing that they are enforced on the employees for whom the employer claims the policies apply.

(2) Existing "convenience of the employer" analysis under Code Sec. 119 does not include bringing food from home as a factor in determining whether an employee could not otherwise secure meals within a reasonable meal period; however, meal delivery should be considered in determining whether an employer qualifies under Reg. Sec. 1.119-1(a)(2)(ii)(C), especially in situations where delivery options are limited.

(3) The taxpayer had no policies related to protecting proprietary information, collaboration, employee health, or meal periods for salaried employees, and thus, those stated business objectives did not qualify as substantial noncompensatory business reasons under Code Sec. 119. Further, employees had access to many nearby eating facilities, so the meals provided for the stated reason that employees could not otherwise secure a proper meal were not excludable from income under Code Sec. 119. However, the taxpayer did demonstrate through policy documents and employee declarations that it had policies requiring certain employees to respond to emergencies. The taxpayer showed that certain employees were designated as on-call to respond to these emergencies during their meal periods. Accordingly, meals provided to those employees were excludable from income for this reason. The taxpayer also provided some evidence that certain employees were expected to be available to respond to emergencies when not on-call, although the taxpayer failed to substantiate which employees were expected to respond when not on-call, when and how often such employees were expected to be available, or the average number of employees that were reasonably expected to be available during a typical meal period. To the extent the taxpayer could provide this information, meals provided to these employees were provided for a substantial noncompensatory business reason and excludable from income.

(5) The taxpayer failed to demonstrate that at least half of all employees were furnished meals for the employer's convenience and therefore did not meet the requirement under Code Sec. 119(b)(4) that, for all meals provided on the premises to be treated as furnished for the employer's convenience, more than half of the employees to whom such meals are furnished on the premises are furnished meals for the employer's convenience.

(6) The snack areas and employees' desks at which meals were provided and consumed did not qualify as eating facilities under Code Sec. 132(e)(2) because they were not set aside only for meals, and no services were provided in the facilities related to preparing and serving food. In addition, because the taxpayer provided the meals free of charge, it did not derive any revenue from its facility and therefore, the facility revenue did not meet or exceed operating costs as required under Code Sec. 132(e)(2).

(7) The snacks the taxpayer provided to employees in designated snack areas were not meals prepared for consumption at a meal time therefore did not qualify as meals provided for the convenience of the employer under Code Sec. 119. However, the value of the snacks was excludable from income as a de minimis fringe benefit under Code Sec. 132(e)(1), given the administrative impracticality of valuing each snack portion.

(8) Because the taxpayer's snack areas were not eating facilities, the value of the snacks furnished to employees in these areas was not excludable from income under Code Sec. 132(e)(2). Since the snacks were not provided in an employer-operated eating facility, the snacks were not considered meals for which the value could be determined using the 150 percent multiplier in Reg. Sec. 1.61-21(j).

(9) The exclusion from wages of the value of meals based on a reasonable belief that the meals were excludable under Code Sec. 119 is measured using an objective standard. An employer must demonstrate that its belief that the exclusion applied was objectively reasonable, based on an understanding of the law and IRS guidance. With the exception of the meals provided to allow employees to respond to emergencies, the taxpayer did not demonstrate that its belief that its reasons for furnishing meals to its employees qualified the meals for the exclusion from income under Code Sec. 119 was an objectively reasonable belief.

(10) The snack areas and employee desks used for consuming meals did not qualify as an eating facility under Reg. Sec. 1.132-7, and therefore fair market value had to be used to in determining the amount to include for meals furnished to employees by the taxpayer. Either fair market value or Reg. Sec. 1.61-21(j) could be used to value meals furnished to employees; if Reg. Sec. 1.61-21(j) was used, methods supported by the regulations had to be used to value meals.

For a discussion the exclusion from income for employer-provided meals, see Parker Tax ¶123,505.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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