Employer-provided subsidized meals not excludible from income.

The Service recently ruled in Letter Ruling (TAM) 9602001 that an employer that provided subsidized meals to employees in on-site cafeterias failed to meet the tests set forth in Sec. 119, and that the value of meals was not excludible from the employees' gross income.

The employer maintained numerous subsidized eating facilities and contracted with an outside vendor to operate the facilities. The vendor purchased all food and related items and the price charged to employees was less than the aggregate costs of running the dining facilities. The office employees were allowed 45 minutes for lunch while the manufacturing employees were allowed 30 minutes. The IRS agent assigned to the taxpayer documented that there were numerous off-site restaurants close to all the employer's working locales.

Sec. 119 states that the value of meals furnished by an employer to an employee is excludible from the employee's income if the meals are furnished on the employer's premises and are furnished for the convenience of the employer. Meals are furnished for the convenience of the employer if there is a substantial non-compensatory business reason for the employer to furnish meals.

The employer argued that the short dining periods and the absence of off-site restaurants made the on-site dining facilities necessary under Sec. 119. Since there was sufficient evidence of off-site eating establishments, the Service's key focus shifted to the short meal period.

The employer stated the short meal periods were required to ensure adequate staffing at its manufacturing and office facilities. Since the employer was unable to substantiate a "peak workload" during its normal meal periods, the short meal period would not be sufficient to meet the exclusion tests set forth in Sec. 119. The IRS also dismissed the employer's arguments that short meal periods were industry practice in the community and served to attract more desirable employees. Regs. Sec. 1.119-1 (a) (2) (ii) (b) and -1 (a) (2) (iii) specifically state that short meal periods designed to shorten the workday are not furnished for a substantial noncompensatory business reason and meals furnished to promote employee morale and goodwill are furnished for a compensatory business reason. As a result, both arguments fail the Sec. 119 tests, and the value of the meals provided (less the amount charged for them) was income to the employees.