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Alert: How Meals and Snacks Are Valued For Employers Via TAM

On January 18, 2019, Technical Advice Memorandum (TAM) 201903017 was released concluding that an employer cannot treat free employee meals as excludable under Code Section 119 “convenience of the employer” test. However, the TAM does state that snacks provided free to the tech company's employees are excludable as de minimis fringes.
 
Under Code Section 61(a)(1), an individual's gross income generally includes compensation for services, including fringe benefits, subject to certain exceptions. One exception is the value of any meals furnished by or on behalf of an individual's employer, which are excludable if the meals are furnished on the employer's business premises for the convenience of the employer (Code Section 119(a)) (is based on the facts and circumstances of each case). If a meal is furnished by an employer to an employee for free, it will be regarded as for the convenience of the employer if such meals are furnished for a “substantial noncompensatory business reason” (Reg §1.119-1(a)(2)(i)). Examples of “substantial noncompensatory business reasons” include the employer's business required the employee be restricted to a short meal period during which the employee couldn't be expected to eat elsewhere or the employee must be available for emergency calls during their meal period.
 
The facts of the TAM are as follows:
  • The taxpayer provided meals, without charge, to ALL employees, contractors and visitors
  • The taxpayer provided unlimited snacks and drinks in a designated snack area
  • There was no meal-length policy in place for salaried employees, but hourly employees got 30 minutes a day for a meal break
  • The taxpayer also excluded the value of the snacks as a de minimis fringe benefit under Code Section 132(e)
 
The taxpayer provided the following reasons for concluding the meals provided to employees were excludable under Code Section 119:
  • To foster collaboration and innovation by encouraging employees to stay on-premises
  • To protect the taxpayer's confidential and proprietary information, including its intellectual property by providing a secure environment for business discussions on its premises
  • To protect employees due to unsafe conditions surrounding the taxpayer's business premises
  • To provide healthy eating options for employees to improve employee health
  • Because employees cannot secure a meal within a reasonable meal period
  • Because the demands of the employees' job functions allow them to take only a short meal break
  • To provide meals so that employees are available to handle emergencies that regularly occur  
     
The TAM addresses a number of issues that any employer could face. The first issue is whether for purposes of applying Code Section 119, the IRS is precluded from substituting its judgment for the business decision of Taxpayer as to the taxpayer's business needs and/or concerns and what specific business policies or practices are best suited to addressing taxpayer's business needs and/or concerns. The TAM references Boyd Gaming Corp. v. Commissioner in their response. It is true that Boyd precludes the IRS from substituting judgment, however, the IRS concluded in Legal Advice Issued by Associate Chief Counsel 2018-004 that these cases do not prevent the IRS from determining whether an employer actually follows and enforces its stated policies and practices, and whether or not they qualify as substantial noncompensatory business reasons. The TAM says specific employer policies are necessary to connect a business goal to the business necessity for furnishing meals to employees in order to achieve that goal. The IRS must determine whether a policy to carry out a goal actually exists, and if so, whether the meals are necessary to achieve that goal.
 
The second issue the TAM discussed was whether the taxpayer can satisfy its burden of proof to demonstrate that it has a substantial noncompensatory business reason for providing meals in the absence of written policies or tracking data. —taxpayers are responsible for providing substantiation when they claim exclusions from income (no written policy is required). Specific business policies as substantial noncompensatory business reasons for furnishing meals to employees must exist in substance not just in form. They must be enforced on the specific employees for whom the employer claims these policies apply, and the taxpayer must demonstrate how these policies relate to the furnishing of meals.
 
If an employee provides the business reasons stated above (1-7), they do not qualify as a substantial noncompensatory business reason under the Code Section 199 regs, and therefore the meals furnished by the employer were not excludable (see TAM 201903017 for further details on why each reason is not qualified).
 
 In regards to snacks, the TAM cited Tougher v. Comm'r of Internal Revenue, which defined the word "meals" as food that is prepared for consumption at such recognized occasions as breakfast, lunch, and dinner. It was concluded however, that snacks provided to employees in the designated snack areas weren't meals and therefore do not qualify under Code Section 119.
 
Code Section 132(a)(4) excludes from gross income any de minimis fringe benefit (any property or service the value of which is so small as to make accounting for it unreasonable). Examples of de minimis fringe benefits include coffee, doughnuts, soft drinks, fruit, etc. The value of the snacks is considered a de minimis fringe benefit because it would be extremely difficult to quantify the value of snacks consumed by each employee that are stored in open access areas.
 
The last issue discussed in the TAM is if the value of the meals and snacks provided is includible in wages, how is the amount of employment taxes owed determined? The TAM's response was that food provided in snack areas and desks must be valued at FMV. For meals provided at a cafeteria at another location, meals may either be valued at FMV or the special methods provided in Reg. §1.61-21(j).
 
Overall, if an employer wants to exclude meals, they need to have a business goal and a corresponding policy for which the meal is a necessity to achieve. Also, the employer must be able to substantiate the exclusion by enforcing the policies and showing how the policies relate to the furnishing of meals. Employers may also continue to provide snacks to employees and classify them as excludable.


For more information contact Jeffrey G. Cohen, CPA at jcohen@grassicpas.com / (516) 336-2475, or Alyssa Popov, CPA at apopov@grassicpas.com / (516) 336-2472.