IRS Chief Counsel Advice AM 2018-004 (Oct. 23, 2018)
Available at https://www.irs.gov/pub/lanoa/am-2018-004.pdf
In this Chief Counsel Advice (CCA) memorandum, the IRS explains the applicable standard for determining whether employer-provided meals are furnished “for the convenience of the employer”—thus excludable from income under Code § 119—and discusses the substantiation that may be required by IRS examiners. As background, Code § 119 allows employer-provided meals to be excluded from an employee’s income for federal tax purposes if the meals are provided on the business premises of the employer and for the convenience of the employer. This CCA was prompted by IRS employment tax examinations in which some employers questioned the continued viability of the Supreme Court’s Kowalski test, under which meals are deemed provided for the convenience of the employer only if they are necessary for employees to properly perform their duties. These employers maintained that Congress statutorily overturned Kowalski when it enacted Code § 119(b)(2), which prohibits denial of the exclusion because an employer charges for the meals or allows employees to decline the meals. Some employers also argued that the IRS could not question or examine their meal policies because of the IRS’s acquiescence in the Ninth Circuit’s Boyd Gaming case, which held that the IRS could not second guess an employer’s reasons or business judgment for its “stay-on-premises” policy.
This CCA concludes that the Kowalski test (sometimes called the “business-necessity theory”) remains the applicable standard for determining whether meals are furnished for the convenience of the employer. The CCA finds no intent in the legislative history of Code § 119(b)(2) to change the business-necessity rationale of Kowalski, and the Boyd Gaming case relied heavily on Kowalski (although it avoided directly addressing Kowalski’s continued viability). The CCA acknowledges that, under Boyd Gaming, the IRS is precluded from substituting its judgment for that of an employer as to the specific business policies and practices that are best suited to address the employer’s business concerns. However, the CCA concludes that Boyd Gaming does not preclude the IRS from determining whether an employer has adopted, followed, and enforced policies related to its stated business needs and goals; and whether those policies “connect the employer’s stated needs and goals to the business necessity of furnishing meals to employees.” Employers must be able to substantiate that their policies exist in substance as well as in form by showing that they are enforced with respect to specific employees, and they must be able to demonstrate how their policies make it necessary to furnish meals. The form and quality of substantiation sufficient to support a particular business policy will vary based on the facts and circumstances, although the CCA includes examples of acceptable substantiation when an employer restricts employees to a short meal period and when employees must be available for emergencies during meals.
EBIA Comment: While CCAs cannot be used or cited as precedent, this CCA is a clear warning that the IRS will not accept claims of convenience to the employer without question. The CCA is also a roadmap, however, which employers should study carefully to anticipate and understand the challenges they could face in an IRS examination. For example, the IRS may try to deny the Code § 119 meal exclusion if—(1) the employer does not have a policy relating to employer-provided meals; (2) the employer has a meal-related policy, but it does not require the employer to provide meals so employees can properly discharge their duties; (3) the employer’s policy is not “reasonably related” to the employer’s business goals (the IRS reserved the right to this reduced scrutiny of an employer’s business decisions in its acquiescence to the Boyd Gaming case); (4) the policy was not communicated to employees; or (5) the policy is not actually implemented or enforced. Employers who rely on the Code § 119 meal exclusion should be prepared with substantiation sufficient to address each potential objection. For more information, see EBIA’s Fringe Benefits manual at Section XVI.B (“Code § 119: Meals for the Convenience of the Employer”).
Contributing Editors: EBIA Staff.