Question

Colbert has been a waiter at the Burger Report in Starkville, Mississippi for four years. The Burger Report treats its employees well, allowing them a 60 percent discount for any food that they buy and consume on the premises (e.g., a $10 meal will cost only $4). In 2019, the value of the discount for Colbert amounted to $2,500 for days on which he was working and $1,500 for days when he was not assigned to work but still stopped by during mealtimes. The average profit the Report earns on a meal is 25 percent (i.e., the cost of a $10 meal is about $8.00). There is no requirement that Colbert eat at the Report during his breaks and some days he does and others he does not. Fortunately, there are a number of other eating establishments near the Report that Colbert can walk to and still get back to his fryolator with plenty of time before his shift starts again. The Report is adequately staffed so it’s not as if Colbert needs to stay at the restaurant to be “on call,” after all, there is no such thing as a “burger emergency!” Prepare a tax research memorandum in good form that provides your conclusion on Colbert’s treatment of the meals provided by his employer at a discount in 2019 for federal tax purposes. Do not consider any reporting by the Report on Colbert’s W-2—focus on only Colbert’s responsibility. Therefore prepare a tax research memo

Answer 1

Answer :

To: Files

From: Great student

Date: Today

Subject: Exclusion from gross income of value of meals provided by employer

Facts:

Colbert is an employee at a fast food restaurant (BR) located in Mississippi. BR provides all employees with a 60 percent discount on all food consumed on the BR premises. Colbert received meals valued at $2,500 on days he worked at BR and meals valued at $1,500 on days he was not working at BR. BR earns an average profit of 25 percent of revenue on meals sold to typical customers. BR does not require that Colbert eat on the premises during breaks, and there are a number of other establishments reasonably convenient to the BR location.

  

Issue:

What amount (if any) may Colbert exclude from his gross income related to the value of the meals provided by his employer?

Analysis:

Meals provided by an employer can be excluded under three different provisions of the Internal Revenue Code: (1) meals or lodging furnished for the convenience of the employer under IRC § 119, (2) a qualified employee discount under IRC § 132(c), and (3) a de minimis fringe benefit under IRC § 132(e).

  

For the Convenience of the Employer

IRC § 119(a) states: “There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if in the case of meals, the meals are furnished on the business premises of the employer.”

IRC § 119(b)(2) states: “In determining whether meals are furnished for the convenience of the employer, the fact that a charge is made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account.”

Reg. § 1.119-1(a)(1) states: “In general, the value of meals furnished to an employee by his employer shall be excluded from the employee’s gross income if two tests are met: (i) The meals are furnished on the business premises of the employer, and (ii) the meals are furnished for the convenience of the employer. The question of whether meals are 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.”

The regulations to IRC § 119 parse employer provided meals into two classifications: (1) those furnished without a charge to the employee, and (2) those furnished with a charge. Specifically, Reg. § 1.119-1(a)(3)(i) states: “If an employer provides meals which an employee may or may not purchase, the meals will not be regarded as furnished for the convenience of the employer. Thus, meals for which a charge is made by the employer will not be regarded as furnished for the convenience of the employer if the employee has a choice of accepting the meals and paying for them or of not paying for them and providing his meals in another manner.”

However, these regulations have not been updated after revisions to § 119; specifically, IRC § 119(b)(2) presented earlier. Thus, despite the regulation describing two sets of rules to apply to the exclusion of meals, the guidance describing the treatment of meals furnished with a charge should be considered considering Congressional action to change this requirement.

Reg. § 1.119-1(a)(2)(i) states: “Meals furnished by an employer without charge to the employee will be regarded as furnished for the convenience of the employer if such meals are furnished for a substantial noncompensatory business reason of the employer,” and “if the employer furnishes meals to his employee for a substantial noncompensatory business reason, the meals so furnished will be regarded as furnished for the convenience of the employer.”

Reg. § 1.119-1(a)(2)(ii)(d) states: “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.”

In Boyd Gaming (Boyd Gaming Corp., et al. v. Commissioner, TC Memo 1997-445), the Tax Court held that the time for which the meal can be provided for a food service employee extends the time period to which the meal may be provided to a time during the working day for a meal period during which he or she works. Boyd also confirms that a meal “furnished to an employee for a meal period other than one during which he or she works is outside IRC § 119.”

Qualified Employee Discount

Under IRC § 132(a)(2), gross income will not include a qualified employee discount. IRC § 132(c)(1) defines qualified employee discount as “any employee discount with respect to qualified property or services to the extent such discount does not exceed, in the case of property, the gross profit percentage of the price at which the property is being offered by the employer to customers.”

IRC § 132(c)(2)(A) defines the term “gross profit percentage” to mean “the percent which the excess of the aggregate sales price of property sold by the employer to customers over the aggregate cost of such property to the employer is of the aggregate sale price of such property.”

IRC § 132(c)(2) states: “Gross profit percentage shall be determined on the basis of all property offered to customers in the ordinary course of the line of business of the employer in which the employee is performing services (or a reasonable classification of property selected by the employer), and the employer’s experience during a representative period.”

IRC § 132(c)(4) indicates that the qualified employee discount applies to property offered for sale to customers in the ordinary course of the line of business in which the employee is performing services.

  

De Minimis Fringe

IRC § 132(a)(4) provides an exclusion from gross income for de minimis fringe benefits. IRC § 132(e) defines a de minimis fringe as “any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.” IRC § 132(e)(2) discusses the treatment of an employer provided eating facilities as a de minimis fringe but does not apply to Colbert.

Conclusion:

IRC § 119 is designed to permit certain meals provided by an employer to an employee to be excluded from gross income. Under statute, two requirements must be met in order to exclude the value of meals from gross income: (1) the meals are for the convenience of the employer, and (2) the meals are provided on the employer’s premises. Because the meals are provided at the BR, qualification under the second test is assured, and thus, exclusion of the meals for Colbert hinges on the meals meeting the convenience of the employer standard under IRC § 119. The IRC remains silent on the precise definition of “for the convenience of the employer” but does provide that a charge for the meal or the employee’s option to accept the meal are not determinative with respect to whether the meal is for the convenience of the employer (IRC § 119(b)(2)).

The regulations (Reg. § 1.119-1) under IRC § 119 provide some assistance with the definition of for the convenience of the employer but are somewhat limited in that the regulations were issued prior to Congress amending IRC § 119 to add IRC § 119(b)(2) with respect to the charge for the meal. As a result, caution is warranted in interpreting the regulation’s differing definition of for the convenience of the employer as described in Regs. § 1.119-1(a)(3)(i) and (ii). However, the Boyd case helps resolve the issue as the Tax Court interprets the regulatory language favorably by relying on Reg. § 1.119-1(a)(2)(i) in construing the meaning of for the convenience of the employee with the provisions of the meals for a noncompensatory reason. Reg. § 1.119-1(a)(2)(ii)(d) and Boyd combine to provide that meals provided to a food service employee are furnished for a substantial noncompensatory business reason of provided on a working day of the employee.

Colbert is a food service employee and thus may exclude the $2,500 value of the meals provided by BR on his working days.

Boyd also confirms that meals provided to an employee on a nonworking day are not noncompensatory and thus not excludable under IRC § 119.

Because the balance of the meals (valued at $1,500) provided to Colbert were on nonworking days, these are not exempt under IRC § 119. However, because these meals were not provided free of charge to Colbert, they are instead provided at an employee discount.

Under IRC 132(c), the qualified employee discount amount on the sale of a meal is the gross profit to customers in the ordinary course of business. In other words, the employee discount is excluded only to the extent of the profit generated on similar sales. BR typically generates a 25 percent profit margin (i.e., 25 percent of revenues) and thus the average cost of a meal is 75 percent of the sales price of that meal. Colbert received meals that were valued at $1,500 and thus a reasonable estimate of costs is $1,125 ($1,500 × 75 percent). However, Colbert’s cost for those same meals reflects the 60 percent employee discount or $900 ($1,500 × 60 percent). As a result, Colbert can exclude the first $375 ($1,500 - $1,125) of discount as qualified employee discount under § 132(c) but must include the remaining $225 ($1,125 - $900) as compensation.

There is no evidence provided that would indicate that BR is unable to track the cost of the meals provided to Colbert (or any other employee) nor would the cost of doing so be administratively impractical. As a result, Colbert is not eligible to treat the meals as de minimis fringe benefits provided by BR.

Code sections 61

119

132

Regulations Reg. § 1.61-21(a)

Reg. § 1.119-1

Reg. § 1.132-2

Reg. § 1.132‑3(e)

Reg. § 1.132-7