Rev. Rul. 57-471

The Internal Revenue Service has been requested to determine whether the value of meals furnished by a company to certain of its employees constitutes "wages" for purposes of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954).

In the instant case, the company is engaged in the business of operating a chain of limited-price variety stores. In such stores, the company operates lunch counters and cafeterias for the purpose of serving food to its customers. Each of the company's lunch-counter or cafeteria employees is permitted to consume, during nonrush periods, one free meal for each meal period falling within the employee's work shift, but those employees who do not avail themselves of such meals have no right to the cash value thereof. The lunch-counter and cafeteria employees are required to wear special uniforms while on duty. Because of the brief meal period allowed the employees and a company regulation requiring an employee who leaves the premises for meals to change into street clothes and to change back into uniform upon return, the eating of meals on the store premises is a matter of general practice. The company states that the value of the meals is not taken into consideration in establishing the salary standard for its lunch-counter and cafeteria employees.

The term "wages" is defined in section 3121(a) of the Federal Insurance Contributions Act as "all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash," with certain exceptions not here material. Section 31.3121(a)-1(e) of the Employment Tax Regulations provides, in part, that remuneration for employment may be paid in cash or in something other than cash, as for example, goods, lodging, food, or clothing; and that remuneration paid in items other than cash is to be computed on the basis of the fair value of such items at the time of payment.

Section 31.3121(a)-1(f) of such regulations further provides as follows:

Ordinarily, facilities or privileges (such as entertainment, medical services, or so-called "courtesy" discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as remuneration for employment if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, good will, contentment, or efficiency of his employees. The term "facilities or privileges," however, does not ordinarily include the value of meals or lodging furnished, for example, to restaurant or hotel employees, or to seamen or other employees aboard vessels, since generally these items constitute an appreciable part of the total remuneration of such employees.

In S. S. T. 302, C. B. 1938-1, 456, it is held that the value of lunches furnished by the M company to its employees did not constitute "wages" for Federal employment tax purposes. In that case it was established that the company had for some time operated a lunch room for its employees; that the lunches had never been considered as remuneration for services performed nor had any reduction been made in the remuneration of employees when the luncheon facilities were first offered them; that provision for lunches formed no part of the contract of employment; and that the furnishing of free lunches to employees reduced the duration of the lunch period to a minimum; and that the practice was a strong force in unifying the employees and increasing their contentment, good will, and loyalty to their employer. S. S. T. 302 was not intended to apply to taxpayers engaged in the preparation and serving of food to customers. It has now been established by additional facts not appearing in S. S. T. 302 that the company in that case was performing functions of a bank or trust company and was not engaged in the preparation and serving of food to customers.

In the restaurant industry, however, it has long been customary for the employer to furnish each employee with a free meal for every meal period falling within his shift, whether or not such meals are negotiated for or expressly provided for in the employment contract. In view of this well-established custom in the restaurant industry (including lunch counters and cafeterias of the types in question), it is the opinion of the Internal Revenue Service that the furnishing of such meals is recognized as part of the general understanding of the parties to the employment contract, and that as a practical matter the value of such meals is generally regarded as part of the employees' remuneration. This concept of the practice of furnishing free meals to employees in the restaurant industry is in accord with the above-quoted provisions of the regulations specifying that the term "facilities or privileges" does not ordinarily include the value of meals or lodging furnished, for example, to restaurant or hotel employees "since generally these items constitute an appreciable part of the total remuneration of such employees." This concept is also in line with the history of the regulations for employment tax purposes as indicated by a comparison of the provisions in article 207 of Regulations 90 which are set forth in S. S. T. 302, supra, with the corresponding provisions of all subsequent regulations under the Federal Insurance Contributions Act, including those quoted herein. See also Mim. 5657, C. B. 1944, 550.

In view of the history and current provisions of the regulations referred to above, it is the position of the Internal Revenue Service that S. S. T. 302, supra, although still in full force and effect, cannot be regarded as controlling the treatment, for Federal employment tax purposes, of meals furnished to employees working in connection with the operation of hotel dining rooms, restaurants, lunch counters, or cafeterias. Accordingly, it is held that the fair value of meals furnished by the company, in the instant case, to its lunch-counter and cafeteria employees constitutes "wages" for purposes of the Federal Insurance Contributions Act.

The above conclusion is also applicable for purposes of the Federal Unemployment Tax Act (chapter 23, subtitle C, Internal Revenue Code of 1954). However, this Revenue Ruling should not be construed as being determinative of the taxability of these meals to the employees for Federal income tax purposes.