In Technical Advice Memorandum 201903017 (the TAM), the IRS concluded that the value of employer-provided meals will not be excludable from employee income as provided "for the convenience of the employer" under Section 119(a), unless the employer proves entitlement to the exclusion by (1) substantiating that it follows and enforces policies and practices that require the furnishing of meals, and (2) establishing that the business need underlying the policies constitutes a "substantial, noncompensatory business reason," as required by regulations. The TAM reflects the application of the framework set forth in a Chief Counsel Advice Memorandum released November 28, 2018 (AM 2018-004) (the 2018 CCA). (See Tax Alert 2018-2442.)

Background

Generally, an individual's gross income includes compensation for services, including fringe benefits, subject to certain exceptions. Two exceptions include meals provided for the "convenience of the employer" under Section 119 and de minimis fringe benefits under Section 132(e).

Section 119

Section 119(a)(1) excludes from employee income the value of meals provided "for the convenience of the employer" on the employer's business premises. Treasury regulations provide that a meal is furnished for the convenience of the employer if, considering all the facts and circumstances, it is provided for a "substantial noncompensatory business reason." The regulations set forth scenarios in which a meal is regarded as furnished for a substantial noncompensatory business reason, including:

1. Meals furnished to employees who must be available for emergency call during the meal period
2. Meals furnished because the business is such that the employee must be restricted to a short meal period, such as 30 or 45 minutes, and because the employee could not be expected to eat elsewhere in such a short meal period
3. Meals furnished because the employee could not otherwise secure a proper meal within a reasonable meal period because, for example, there are insufficient eating facilities in the vicinity of the employer's premises
4. Meals furnished to restaurant employees during, immediately before, or immediately after the employee's working hours

Section 119(b)(4) provides that, if more than half of the employees on the employer's business premises are furnished meals for the convenience of the employer, then all meals furnished to employees on the premises are treated as furnished for the convenience of the employer.

Section 132

Section 132(e)(1) excludes the value of de minimis fringe benefits from employee income. A de minimis fringe benefit is a property or service with a value so small that accounting for it is unreasonable or administratively impracticable. Additionally, Section 132(e)(2) treats an employer-operated eating facility as a de minimis fringe benefit. To qualify, the facility must be located on or near the employer's business premises and its revenue must equal or exceed its direct operating costs. For these purposes, the cost and revenue of a meal furnished for the convenience of the employer may be disregarded.

TAM 201903017

In the 2018 CCA, the IRS articulated its view on determining substantial noncompensatory business reasons under Section 119. The IRS concluded that it may not substitute its judgment for the business decisions of an employer as to its business needs, but may examine whether an employer maintains, communicates, and enforces a specific policy, and whether the business needs necessitate the furnishing of meals.

The TAM applies this framework to an employer program that provided free meals and snacks to all employees, contractors, and visitors, without distinction as to position, specific job duties, ongoing responsibilities, or other facts and circumstances. Employees were provided meals in snack areas, at employee desks, and in cafeterias. While there was no meal-length policy in place for salaried employees, hourly employees were allotted 30 minutes a day for a meal break. The employer's business justifications for providing the free meals to its employees included:

1. To foster collaboration and innovation by encouraging employees to stay on-premises
2. To protect the employer's confidential and proprietary information, including its intellectual property by providing a secure environment for business discussions on its premises
3. To protect employees due to unsafe conditions surrounding the employer's business premises
4. To provide healthful eating options for employees to improve employee health
5. To ensure employees can get a meal within their break time
6. To accommodate the demands of the employees' jobs, which allow them to take only short meal breaks
7. To ensure that employees are available to handle emergencies that regularly occur

Boyd Gaming

The TAM first addresses the application of Boyd Gaming Corp. v. Commissioner, 177 F.3d 1096 (9th Cir. 1999), primarily repeating the CCA's conclusion that the IRS may not substitute its judgment for the employer's business decisions but may determine whether the employer actually follows its stated policies and whether those policies are substantial noncompensatory business reasons. That is, the IRS will not decide how to run the employer's business, but need not take the employer at its word and may consider whether those business reasons satisfy the regulatory standard under Section 119. In applying this standard to the employer at issue, the IRS accepts the "legitimacy" of the proffered business reasons but notes that legitimacy does not guarantee a substantial noncompensatory business reason.

Burden of proof

The TAM focuses heavily on whether the employer carried its burden to prove the employees' entitlement to income exclusion, separately analyzing the viability of each of the business reasons in light of the employer's substantiation and factual evidence. General business goals or objectives will not suffice. Instead, the IRS expects the employer to demonstrate that specific employer policies exist and relate to the furnishing of meals to employees. Written policies may provide adequate substantiation. Alternatively, disciplinary records showing violations of a policy or a record of requests for waivers from a policy may also be adequate.

Meal delivery services

Before analyzing the employer's proffered business justifications, the TAM addresses the relevance of meal delivery services to the Section 119(a) analysis. In the past several years, food delivery services, online ordering options, and mobile phone applications have made meal delivery increasingly prevalent. The TAM determines that delivery options may be considered. In particular, the existence of delivery options will generally undermine an assertion that employees are unable to secure a proper meal within a reasonable period. In contrast, the fact that an employee might have brought food from home should not be considered.

Analysis of business justifications

Ultimately, the TAM determines that most of the furnished meals are not excludable from income because the employer did not establish that the meals were furnished for substantial noncompensatory business reasons:

1. Protection of confidential information. The TAM rejects the justification of protecting confidential information, because the employer did not maintain policies that demonstrated efforts to prevent employees from discussing business information in public. Employees were permitted to leave the premises, eat lunch off-site, and socialize outside of work.
2. Fostering collaboration. The TAM rejects fostering collaboration as a justification. Employees were permitted to eat alone, on or off premises, and had many other spaces outside of the cafeteria that supported collaboration.
3. Unsafe conditions. The TAM rejects unsafe conditions as a justification, pointing to an absence of restrictions on employees leaving the premises before, during, or after work, or any security escorts or other measures. The TAM further observes that the employer did not demonstrate that obtaining meals off premises was not relatively safe under usual circumstances.
4. Healthful eating options. The TAM rejects providing healthful eating options as a justification because the employer had no specific policies that went beyond a general concern for maintaining a healthy and productive workforce. The TAM notes that the employer does not limit its employees from obtaining unhealthful food during the lunch hour in other ways — by bringing food, going off-premises, or having food delivered. Moreover, the TAM observes, employees are able to obtain healthful food without having it furnished by the employer.
5. Inability to secure a meal within a reasonable meal period. The TAM rejects inability to secure a meal within a reasonable meal period as a justification because the employer had nearby restaurants and employees could have meals delivered. The TAM notes that the regulatory provision allowing for meals to be furnished when meals could not be secured within a reasonable meal period had its origin in case law concerning truly remote locations, such as Greenland, Alaska, and an isolated ranch.
6. Short meal breaks. The TAM rejects short meal breaks as a justification, providing examples of how the employer might have shown that its business requires shortened meal periods, such as demonstrating increased customer count during meal hours, showing that employees actually take short lunches or were disciplined for failing to take short lunches. The TAM dismisses as insufficient the employer's statements that employees generally take 15- to 25-minute lunches and are needed to promptly respond.
7. Emergency outages. The TAM spends considerable time rejecting the employer's assertion that employees are needed to respond to emergency outages. The TAM notes that the regulations and case law accept the need to respond to emergencies as a substantial noncompensatory business reason but those authorities concerned emergency responders, such as hospital workers, firefighters, and state highway patrolmen. The TAM nevertheless allows that a business exigency may rise to the level of an emergency. Further, the TAM concludes that some of the employees were covered under policies requiring them to be on call for such emergencies, and that these meals were furnished for substantial noncompensatory business reason in the event that the particular employee was on call. Because the employer was unable to provide information concerning when or how often emergencies occurred, however, this basis for exclusion was ultimately dismissed. To qualify for the exclusion, the employer would have to provide data such as reports, schedules, or policy documents indicating which employees were on call and when, the TAM advises.

Snacks

The TAM separately considers whether the value of snacks provided to employees is excludable from income under Section 119. Rather than revisit the business reasons previously analyzed, the TAM relies on Tougher v. Commissioner, 441 F.2d 1148 (9th Cir. 1971), to determine that the snacks are not meals. Accordingly, a snack cannot be a meal furnished for the convenience of the employer. Nevertheless, the TAM does conclude that the value of the snacks is excludable from employee income as de minimis fringe benefits under Section 132(e)(1).

Exclusion from wages

After concluding that the value of meals and snacks provided by the employer was not excludable from employee income, the TAM further considers whether the value is nevertheless excludable from employee wages based on the employer's reasonable belief that the meals were excludable, as provided in Section 3121(a)(19). The TAM again analyzes each of the employer's business justifications for furnishing meals to employees under this standard, ultimately concluding that the employer's belief was reasonable only for the particular subset of employees who were on call during meal periods.

Meal valuation

Finally, the TAM addresses how to determine the amount to include in employee income. Generally, the fair market value of a taxable fringe benefit is the amount to be included in income. Alternatively, in some cases, Treas. Reg. Section  1.61-21 permits the value to be determined using special valuation rules. As relevant here, Treas. Reg. Section  1.61-21(j) provides a special valuation rule for meals provided at an employer-operated eating facility. In this case, the TAM determines that many of the meals provided by the employer were not provided at an employer-operated eating facility because the eating area was not a facility. For the remaining meals, the rule would permit the value of the meal to be determined by valuing all meals served at the facility at 150% of the facility's direct operating costs. If an employee is charged for particular meals, this value may be allocated as an individual meal subsidy. In this case, employees were not charged for meals. As a result, only the remaining option under the valuation rule — the total meal subsidy — is available. Under this method, the total meal subsidy (total meal value less the facility's gross receipts) is allocated among employees in a manner reasonable under the circumstances.

Implications

Although the TAM reaffirms that snacks may be considered de minimis fringe benefits, it also sounds a cautionary note for employers furnishing free meals to their employees, reminding employers that they should be prepared to substantiate a policy that necessitates employer-provided meals to enable employees to properly discharge their duties. In the absence of this evidence, employers may have great difficulty sustaining the Section 119 exclusion. Additionally, employers currently furnishing meals because the employees cannot secure proper meals within a reasonable meal period should consider whether the availability of meal delivery services affects eligibility for the Section 119 exclusion.

The TAM addresses only income exclusion for employer-provided meals and does not consider deductibility of the associated expenses. Currently, employers may deduct 50% of the cost of meals provided for the convenience of the employer. Beginning in 2026, however, Section 274(o) will prohibit deductions for expenses associated with meals provided for the convenience of the employer and meals provided at an employer-operated eating facility. Nonetheless, if the cost of meals provided to an employee is included in compensation, the employer may deduct 100% of the expense.

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