Announcement 98-78: employee meals settlement.
On August 24, 1998, the Internal Revenue Service issued Announcement 98-78, proposing a settlement initiative relating to the application of section 119 of the Internal Revenue Code to meals provided to employees in the hospitality industry, which includes casinos, hotels, resorts, and similar establishments. The announcement was published in the August 24, 1998, issue of the INTERNAL REVENUE BULLETIN (1998-34 I.R.B. 30).
As you know, Tax Executives Institute is the premier association of corporate tax executives in North America. The Institute's 5,000 members represent the largest 2,800 companies in the United States and Canada, and are dedicated to the development and implementation of sound tax policy, to the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of tax administration for the benefit of both taxpayers and the government. Because the settlement initiative has the potential for advancing these goals, we commend the Internal Revenue Service for developing the announcement. We believe that Announcement 98-78 represents a good first step to resolving the vexing issues surrounding the provision of employer-provided, on-premises meals. Because the employee-meals issue is not limited to the one industry, TEI urges the IRS to open the settlement initiative to all taxpayers.(1)
Section 119(a)(1) of the Code provides an exclusion from an employee's gross income for the value of any meals if they are furnished (i) for the convenience of the employer and (ii) on the business premises of the employer. Meals without charge will be regarded as furnished for the convenience of the employer if they are furnished for a substantial, noncompensatory business reason of the employer. Treas. Reg. [sections] 1.1191(a)(2)(ii)(e) sets forth a "substantially all" test: If the meals are furnished to substantially all of the employees for a substantial, noncompensatory business reason of the employer, then the meals furnished to all employees will be regarded as furnished for a substantial noncompensatory business reason of the employer. Expenditures for meals that meet this test are fully deductible by the employer and not includible in the gross income of the employee. In the absence of this or another exception, the employer may deduct only 50 percent of the cost of the employee meal (by virtue of the limitation in section 274) or the value of the meal is includible in the income of the employee and subject to withholding and employment taxes.
Earlier this year Congress replaced the "substantially all" test with a 50-percent safe harbor. Under new section 119(b)(4) of the Code, all meals furnished on the employer's business premises shall be treated as furnished for the convenience of the employer if more than half of the employees to whom such meals are provided are furnished such meals for the convenience of the employer. If these conditions are satisfied, the value of all such meals is excludable from the employee's income and fully deductible to the employer. The legislative history of the 1998 amendment provides that "[n]o inference is intended as to whether such meals are fully deductible under present law." H.R. Rep. No. 105-599, 105th Cong., 2d Sess. 333 (1998) (Conference Report on Public Law No. 105-206). This legislative change seems to be the impetus for the settlement initiative.
The Settlement Initiative Should Not Be Restricted to a Single Industry
In Announcement 98-78, the IRS proposed a settlement offer in respect of the employee meals provided in an employer-operated, on-premises eating facility. For taxable years beginning before January 1, 1995, section 274(n)(1)'s limitation on deductions applies to the expense of providing meals to the taxpayer's employees. For taxable years beginning after December 31, 1994, and before January 1, 1998, the taxpayer may deduct 70 percent of the expense. For taxable years beginning after January 1, 1998, and before December 31, 1998, the taxpayer may deduct 70 percent of the expense for the months preceding January 1, 1999. In addition, the taxpayer will not be liable for income tax withholding or employment taxes on meals provided to the taxpayer's employees for any tax period ending January 1, 1999. The settlement is limited, however, to taxpayers in the hospitality industry. No explanation is given for such a limitation.
Section 119 is a broad statute that applies across industry lines. Indeed, the Treasury Regulations recognize that the provision affects different classes of taxpayers by identifying several examples of business reasons that meet the "convenience of the employer" test and do not necessarily require service in the hospitality industry, including: (i) the inability to obtain a meal within an reasonable time period (such as insufficient eating facilities); (ii) restricted meal periods; and (iii) emergency call. Many taxpayers outside the hospitality industry are affected by the provision, whose complexity and recordkeeping requirements impose significant administrative burdens.
Because section 119 both before and after its 1998 amendment is not limited to taxpayers within a single industry, the settlement initiative should not be restricted. All taxpayers should be permitted the option of accepting the settlement terms. As stated in the Announcement, acceptance of the settlement offer "will eliminate the need for further potentially costly controversies for the periods covered by the settlement initiative." Expanding the reach of the Announcement will make the tax law simpler for all taxpayers to the benefit of taxpayers and the government alike. We urge the IRS to include all taxpayers in the settlement initiative.
Tax Executives Institute appreciates this opportunity to present our views on Announcement 98-78, relating to the provision of employee meals. If you have any questions, please do not hesitate to call Philip G. Cohen, chair of TEI's Federal Tax Committee, at (201) 871-5504, or Mary L. Fahey of the Institute's professional staff at (202) 638-5601.
(1) At the same time Announcement 98-78 was issued, the IRS issued Announcement 98-77, which provides a draft of training materials for employer-provided meals offered in the hospitality industry. TEI believes that these materials have ramifications outside the particular industry and is concerned that several statements set forth in the materials are either inaccurate or subject to misinterpretation by revenue agents. The Institute intends to file comments on the materials within the next few weeks.
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|Title Annotation:||IRS Announcement 98-78|
|Date:||Sep 1, 1998|
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