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IRS provides guidance on income exclusion of employer-provided meals and snacks

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Tax Hot Topics newsletter The IRS has issued guidance (TAM 201903017) that employer-provided meals furnished to employees are includable in employee income and subject to employment tax, unless the meals are provided for substantial non-compensatory business reasons with adequate substantiation.

The memorandum addresses a situation where a taxpayer provided free meals and unlimited snacks to all of its employees at its corporate headquarters. The taxpayer argued that the meals and snacks were excludable from employee income under Sections 119 and 132, but the IRS found that the meals were not excludable because the taxpayer failed to meet the criteria and substantiation required for the meal exclusion under Section 119. However, the IRS held that the snacks were excludable from income as a de minimis fringe benefit under Section 132(e), even though the snacks were provided by the employer on a continual basis. The IRS also noted that there was no evidence that the snacks were offered in unusually large portions or were of an unusually high value.

The IRS further stated that pursuant to Boyd Gaming Corp. v. Commissioner, 177 F.3d 1096 (9th Cir. 1999), A.O.D. 1999-010 (Aug. 10, 1999), and Jacobs v. Commissioner, 148 T.C. No. 24 (2017), the IRS is generally precluded from substituting its judgment for the business decisions of the taxpayer. However, the IRS can determine if the taxpayer actually implements and enforces its own policies and whether those policies qualify as substantial non-compensatory business reasons for furnishing meals. Such policies also require substantiation. In addition to the memorandum, the IRS issued an action on decision (AOD 2019-01, 2019-8 IRB 569) stating that it would acquiesce to the Tax Court’s holding in Jacobs in result only due to the IRS’s disagreement with the court’s reasoning.

The IRS also noted that the recent expansion of meal delivery options due to online ordering and mobile phone applications may affect the application of Section 119 by reducing the need for providing meals for the convenience of the employer. The applicable regulations provide that meals may be considered furnished for a substantial non-compensatory business reason when the meals are furnished because the employees could not otherwise secure proper meals within a reasonable time period (e.g, when there are insufficient eating facilities in the vicinity of the employer’s premises). The IRS cautioned that the availability of meal delivery is not determinative in every analysis under Section 119, but indicated that meal delivery should be a consideration in determining whether an employer qualifies for the convenience of the employer meal exclusion.

Contacts:
Jeff Martin
Partner
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107

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