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IRS revokes ruling that employer-provided lunches are nontaxable to employees.

The IRS has issued a technical advice memorandum revoking an earlier, unspecified ruling that free, employer-provided lunches were nontaxable to the employees (Letter Ruling (TAM) 9143003). The ruling provides that the lunches are taxable to the employees because the company did not establish a valid noncompensatory business reason for providing free lunches.


Company was a nationwide business that operated from a single location. Company limited its employee lunch periods to 30 minutes and provided free lunches to employees on its business premises. Company's peak business hours were between 11:00 a.m. and 1:00 p.m.; Company required most of its employees to be at their desks to answer telephone calls and to keep operations running smoothly. Company claimed that outside eating facilities were insufficient, and that employees would not be able to eat lunch at an outside facility within the 30-minute lunch period. (Company submitted a study by an outside consulting firm supporting its claim.) Company required all employees to remain on the premises for the entire workday because in many cases employees would be called while at lunch to attend to Company business. In certain cases, employees were called away from lunch as many as three times a week.

Convenience of the employer

Sec. 119(a) provides that meals furnished to employees for the convenience of the employer are excludible from the employee's income if the meals are furnished on the employer's premises. In determining whether meals are furnished for the convenience of the employer, each case must be analyzed based on its particular facts and circumstances (Regs. Sec. 1.119-1(a)(2)). Circumstances that justify the conclusion that meals are being provided for the employer's convenience include the following.

* The need to have employees available for emergency calls during meal periods.

* The fact that the employer's business requires that the employees be restricted to a shorter meal period, such as 30 minutes, and that the employee cannot be expected to eat elsewhere in such a short period.

* There are insufficient eating facilities in the vicinity of the employer's premises.

* The existence of a genuine noncompensatory business reason for providing meals to each of substantially all the employees.

Meals are taxable

In revoking its earlier ruling, the Service stated that Company had not established a valid business reason for the shortened lunch period and did not prove that there were insufficient eating facilities in the area. It also stated that Company did not have a genuine noncompensatory business reason for furnishing meals because it did not meet the "each of substantially all employees" standard: The facts indicated that less than 65% of Company's work force required the shortened lunch period; Company could have met its lunchtime business demands by having fewer, more extended lunch periods.

The IRS and Company could not agree on the relevant facts in determining whether adequate eating facilities were available. However, the Service did note that the published precedents applying the inadequate eating facilities exclusion usually involved remote work sites or night employees.

The IRS then reviewed the volume of work taking place during lunch hours and compared it to the volume of work during other hours. it found no significant difference; contrary to Company's claim, the volume of work did not peak during the lunch period. Therefore, on the basis of all the facts and circumstances the Service concluded that the meals Company provided to its employees were not for the convenience of the employer, and should be included in their income.

This ruling is helpful in understanding which facts and business reasons should be analyzed when reviewing the use of a free employee lunch program.
COPYRIGHT 1992 American Institute of CPA's
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Article Details
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Author:Patterson, Martha Priddy
Publication:The Tax Adviser
Date:Jun 1, 1992
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