|November 1999 - The ultimate fringe benefit is one that
is fully deductible by the employer for income tax purposes, yet not taxable
as income to the employees.
In a significant victory for the hospitality industry, the recent opinion in Boyd Gaming Corp. v. Commissioner, confirmed that employer-provided meals, under the right circumstances, can be a “free lunch.”
In this case, a Nevada hotel and casino operator maintained a cafeteria for its employees, all of whom could eat for free during their shifts. For security and logistical reasons, employees were required to stay on the premises during their shifts (except for a small number to whom certain collective bargaining agreements applied) and were subject to discipline if they left without authorization.
Deductions for business meals are generally capped at 50 percent of the amount actually spent. This limitation does not apply if the employee is taxed on the value of the meal.
The 50 percent limitation also can be avoided, and a full deduction can be available, if the value of the meal is excludable from the employee’s gross income as a so-called “de minimis” fringe benefit. An employer’s operation of an employee eating facility on or near its business premises can qualify as a de minimis fringe benefit if the employees pay enough for their meals to roughly cover the employer’s direct cost of the program (among other requirements).
In Boyd Gaming, the employees paid nothing. So how can a free lunch qualify as a de minimis fringe benefit? Because employees can be treated as if they paid enough to cover the costs, so long as the meals are furnished for the “convenience of the employer.”
The law does not define the term “convenience of the employer,” but it does provide that all on-site meals are treated as supplied for the benefit of the employer if “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.” Thus, if meals provided to 51% of the employees meet the test, all of the meals do.
Under interpretive regulations, meals are treated as provided for the employer’s convenience if the employer has a significant business reason for furnishing the food, such as need for employees to be available for business emergencies during the meal period; or a short meal period in which the employee cannot be expected to eat elsewhere in the allowed time.
In Boyd Gaming, the employer alleged it fit within these examples. The IRS disagreed, stipulating that only 41% to 48% of the employees received meals for the convenience of the employer under these tests. It contended that few employees were actually ever interrupted during a meal, meal breaks generally were of a standard length, the business premises were surrounded by alternative dining sites and all employees were allowed to eat for free.
The 9th Circuit supported the employer’s right to make its own business judgment, citing the U.S. Supreme Court opinion in Commissioner v. Kowalski. The court found that the “convenience of the employer” is to be measured according to a “business-necessity” theory: a free meal is not income to an employee if the employee must accept the meal in order to “properly perform his [or her] duties.” Accordingly, once the employer adopted its closed campus policy, the employees had no choice but to eat on the premises.
The Tax Court applied Kowalski, requiring a closer connection and better documentation between the needs of the employer’s business and providing free meals. The Court of Appeals differed, finding that, although it was arguable whether the employer actually needed a closed campus to achieve its goals, the employer believed it was necessary, and operated accordingly.
Hospitality properties can capitalize on this perk, as meal service is often highly integrated with the employer’s premises. However, an employer must have an actual business reason to provide the meals. Employers considering adopting a meals program should seek the advice of their tax advisors to review the many other requirements for deductibility, including providing the meal on the employer’s business premises and furnishing only prepared foods.
Employers already providing meals who may have voluntarily limited their deductions, as well as employers facing tax assessments on the basis that they incorrectly did not subject their deductions should consider the case of Boyd Gaming.
For more information, please contact Mark Sieke at 310-201-3542 or email@example.com.
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|Also See:||Kleisner on the New Wyndham / Jim Butler Q & A|
|Special Reports / Jeffer, Mangels, Butler & Marmaro LLP|