CASINO OPERATOR CAN'T DEDUCT MORE THAN 80 PERCENT OF EMPLOYER- PROVIDED MEALS.

             CALIFORNIA HOTEL & CASINO AND SUBSIDIARIES,

[1] LARO, JUDGE: The docketed cases are before the Court consolidated for purposes of trial, briefing, and opinion. California Hotel & Casino (CHC) petitioned the Court to redetermine respondent's determination of deficiencies of $81,761, $14,428, and $42,124 in its consolidated group's 1982, 1984, and 1987 Federal income tax, respectively. Boyd Gaming Corp. (Boyd) petitioned the Court to redetermine respondent's determination of a $152,346 deficiency in its consolidated group's 1988 Federal income tax.

[2] Following concessions by the parties, we must decide whether petitioners' deductions for food and beverages provided to their employees without charge on petitioners' business premises are limited by section 274(n)(1). In Boyd Gaming Corp. v. Commissioner, 106 T.C. 343, 344, 349 (1996), we held in summary adjudication that section 274(n)(1) does not limit petitioners' deductions if the food and beverages are a de minimis fringe benefit under section 274(n)(2), which, in turn, requires that petitioners provide the food and beverages to each of substantially all of their employees for the "convenience of the employer" under section 119. ¹ We hold herein that petitioners do not provide the food and beverages to each of substantially all of their employees for the convenience of the employer, and, hence, that petitioners, deductions are limited by section 274(n)(1) because the food and beverages are not a de minimis fringe benefit under section 274(n)(2)(B). Unless otherwise stated, section references are to the Internal Revenue Code in effect for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

[3] Some of the facts have been stipulated and are so found. The stipulated facts and the exhibits submitted therewith are incorporated herein by this reference. The record consists mainly of these stipulated facts and exhibits and the testimony of numerous witnesses, all of whom were called by petitioners. Petitioners' primary witnesses were: (1) Robert Boughner, petitioners' executive vice president during the subject years, (2) John Repetti, CHC's casino manager during the subject years, (3) Steve Thompson, the general manager of Fremont Hotel & Casino (Fremont) during the subject years, (4) Bruce Fraser, the assistant general manager of Sam's Town Hotel & Gambling Hall (Sam's Town) during the subject years, (5) John Miner, who joined the Stardust Hotel & Casino (Stardust) in July 1988 and served as its general manager throughout the remainder of the subject period, and (6) Mary Ann Burns, who joined the Stardust in October 1988 and served as its director of hotel operations throughout the remainder of the subject period.

[4] CHC and Boyd are Nevada corporations whose principal offices were in Las Vegas, Nevada, when they petitioned the Court. For its taxable year ended June 30, 1988 (the 1987 taxable year), CHC was the parent of an affiliated group of corporations that filed a consolidated Federal income tax return. CHC's affiliated group included: (1) Sam-Will, Inc., doing business as Fremont, and (2) Mare-Bear, Inc., doing business as Stardust. CHC also did business as Sam's Town. By virtue of a reorganization of the group, Boyd became the parent of the affiliated group beginning with the 1988 taxable year. Boyd's affiliated group included: (1) CHC, which sometimes did business as Sam's Town, (2) Sam-Will, Inc., doing business as Fremont, and (3) Mare-Bear, Inc., doing business as Stardust.

[5] Petitioners operate CHC, Fremont, Sam's Town, and Stardust (collectively, the Properties). Each of the Properties is a large resort or hotel complex located in Las Vegas, Nevada. CHC and Fremont are located downtown. Stardust is located a "stone's throw" away from CHC and Fremont, in an area commonly known as "the Strip". Sam's Town is located approximately 6 miles from the Strip and approximately 6 miles from downtown.

[6] Each of the Properties has casino, restaurant, and hotel facilities; the hotel rooms tend to run at close to full occupancy, and the hotel guests tend to "turn over" weekly. Some of the Properties also have convention and/or entertainment facilities. As of June 30, 1989, CHC had 635 hotel rooms, 222 R.V. parking spaces, four restaurants, two lounges, 35 gaming tables, 81 keno seats, 18 race and sports book seats, and 970 slot machines. Fremont had 450 hotel rooms, five restaurants, one lounge, 48 gaming tables, 58 keno seats, 142 race and sports book seats, and 952 slot machines. Stardust had 1,367 hotel rooms, 370 R.V. parking spaces, six restaurants, one showroom, one lounge, 84 gaming tables, 105 keno seats, 300 race and sports book seats, and 1,324 slot machines. Sam's Town had 204 hotel rooms, 508 R.V. parking spaces, eight restaurants, one lounge, 57 gaming tables, 166 keno seats, 193 race and sports book seats, and 1,892 slot machines. Sam's Town also had a 56-lane bowling alley and a 25,000-square-foot retail area called the Western Emporium.

[7] Each of the Properties is located in a heavily populated area of Las Vegas near numerous eating facilities, including fast food restaurants, competitor casino restaurants, ethnic restaurants, sandwich shops, pizza houses, food courts, and convenience stores. Many of these eating facilities serve meals 24 hours a day. The aggregate seating capacity of the eating facilities, exclusive of the casino restaurants, near Stardust and Sam's Town is in both cases more than 1,100 diners. The aggregate seating capacity of the eating facilities, exclusive of the casino restaurants, near CHC and Fremont is in both cases more than 650 diners. The record does not disclose the seating capacity of the casino restaurants near CHC, Fremont, Stardust, or Sam's Town. CHC and Fremont have 11 competitor casinos situated nearby, and these competitors house numerous restaurants offering an assortment of meals including fast food, ethnic food, buffet food, sandwiches, and pizza. The same assortment of restaurants is present in the 11 competitor casinos located near Stardust. Sam's Town has two competitor casinos nearby, one of which has a pasta buffet, a cafeteria, and a delicatessen.

[8] Most of the major casinos in Las Vegas provide meals to their employees at no charge in private eating facilities located on the casinos' premises. In order to attract and keep employees, petitioners offer compensation and benefits packages to their employees that are highly competitive with those of other similar employers. Included in these packages is the benefit of a meal or meals during, and/or in some cases before or after, an employee's shift. Petitioners opted before the subject years to provide meals to all of their employees after it was decided, by the management of the affiliated group's parent, that petitioners would generally require their employees to stay on the premises throughout their shifts and that it was unreasonable to require full-time employees to stay on the premises for an 8-hour shift without offering them meals. Management believed that it was essential to petitioners' operations that 75 to 80 percent of their employees (by name and not by number) stay on the premises throughout their shifts, and that these employees deserved meals for having to stay on the premises. Management also believed that it was not essential to petitioners' operation to keep the remaining 20 to 25 percent of the employees on the premises throughout their shifts, but petitioners would generally require these employees to stay on the premises, and offer them meals, as a matter of consistency. The meals that petitioners provide to their employees include hot meals, cold foods, and snacks (collectively referred to as the meals). Petitioners provide the meals to their employees as a form of compensation, and petitioners' provision of the meals is not discriminatory in favor of highly compensated employees.

[9] Petitioners provide the meals to the employees at each ,Property in a private employee cafeteria (the Cafeteria) that is located on the Property's premises. Each of the Properties owns and operates its Cafeteria, and each Cafeteria is separate from the public restaurants located on the Properties, which, in turn, are separate from the alcohol bars on the premises. Employees receive the meals without charge, and it is petitioners' policy to provide the meals in the Cafeterias only to employees. Petitioners occasionally serve in the Cafeterias the surplus food from their banquets or buffets. Petitioners do not quantify the amount of surplus food consumed in the Cafeterias, and they do not accurately account for any of the food served in the Cafeterias. Petitioners keep no records that identify how many meals are served in the Cafeterias, who eats in the Cafeterias, how many times an employee eats in the Cafeterias, or on what day an employee eats in the Cafeterias. Petitioners keep no records that show that an employee eats in the Cafeteria only on the days that he or she works. Petitioners' employees do not have to eat the meals served in the Cafeterias. Petitioners' employees may eat, in or outside of the Cafeterias, food brought onto the Properties.

[10] The Cafeterias seat approximately the following number of people:

      Cafeteria at CHC              65-90

[12] It is petitioners' policy that employees may enter the Cafeterias freely whenever they are open, and that employees need not sign in at a Cafeteria upon entrance or sign for food when received. It is petitioners' policy that employees may not eat in the Cafeterias on a nonworking day or bring guests to eat in the Cafeterias at all. It is petitioners' policy that employees who violate the policy of the Cafeterias are subject to dismissal. Petitioners do not formally monitor any of the policies for the Cafeterias. Petitioners oversee each employee's adherence to these policies through an honor system and an informal policing that is incidental to an employee's presence in the Cafeteria. Employees have been disciplined, suspended, and/or dismissed from employment for violating petitioners' policies for the Cafeterias.

[13] Petitioners employed the following numbers of people at the Properties in 1988 and 1989:

                               1988           1989

[Tables not suitable for online presentation.]

[14] The right of many of petitioners' employees to receive meals from petitioners without charge is set forth in numerous labor agreements; in the case of outside maintenance attendants, foremen, and laborers at Stardust, these agreements also provide that petitioners must pay them the cost of a meal in lieu of a meal. ² In some cases, these agreements allow an employee to receive two meals in a workday; most of these employees take advantage of both meals. In the case of dealers, who generally are entitled to a 20- minute break every hour, petitioners' practice is to allow the dealers to eat during all of their breaks, and the dealers tend to take advantage of this practice.

[15] The labor agreements, and the titles of the covered employees (exclusive of the employees in the category "Food and Beverage"), are as follows:

     COLLECTIVE BARGAINING AGREEMENT between STRIP HOTELS AND CASINOS

          14.01. MEALS FURNISHED BY EMPLOYER. For the convenience of

      Shift  1  (Graveyard)    Begins at or after  10 p.m.

[18] Meal breaks range in length from 30 to 60 minutes, and the length of an employee's break depends primarily on the Property where he or she works, as well as his or her job classification. Each department decides how its employees will take their breaks, and petitioners stagger the employees' breaks (and shifts) so that enough employees are working at all times. Some employees are cross-trained to fill in for employees who are on a break or otherwise to provide extra help when needed. Petitioners generally require that employees stay on the premises during their shifts (including breaks), and, under petitioners' policy, an employee who leaves during his or her shift, without authorization, is subject to disciplinary action up to and including dismissal. No employee was disciplined during the subject years for leaving the premises during a break. It is petitioners' stated policy that they may call an employee back to his or her job from a break in case of necessity. Petitioners do not typically do so. Typically, in case of necessity, an employee will postpone his or her break and take the break when the necessity subsides. Petitioners keep no records on the employees who have been called back to work from a break.

[19] In case of a fire, bomb threat, or similar crisis, petitioners' policy requires nonmanagerial employees who are at their work sites at the time of the crisis to secure their work areas and leave the building immediately, while, on their way out, advising patrons of the need to leave the building. Nonmanagerial employees who are on a break during a crisis are instructed not to return to their work areas but to leave the building immediately while, on their way out, advising patrons of the need to leave the building. Managers are mainly responsible during a crisis to oversee the evacuation of the building. Petitioners have not had to evacuate CHC during the period from 1976 to date, and the record does not indicate that any of the other Properties were evacuated during this same time period. CHC has had one bomb threat and one hostage situation from 1976 to date.

[20] Some employees wear uniforms while on duty. (The table lists these employees by job description.) A cocktail waitress, for example, wears a very short black dress, and a dealer wears a pair of black slacks and a Hawaiian-style shirt. Each employee's uniform is specific to the Property at which he or she works, and the uniform tends to identify the employee as an employee of that Property. Employees are allowed to wear their uniforms to and from work, or they may change into their uniforms at the Properties in a room provided by petitioners; petitioners also provide their employees with storage space for their clothing. Petitioners do not limit an employee's activities when he or she travels to or from work in uniform. The employees who travel from work in uniforms typically change their uniforms before going out on personal business after work, but some uniformed employees have gone out after work in uniform and eaten at a competitor's restaurant.

[21] Petitioners make no attempt to account for the actual cost of the meals that are served at the Cafeterias. In the case of Stardust, petitioners expense a flat charge per month, regardless of the number of meals served, based on an estimate of food costs that was made before the subject years. For the other Properties, petitioners multiply a fixed amount (ranging from $1.75 to $2) by the number of full-time employees on the rolls of each department in each month. In accordance with this expending policy, petitioners ascertained that their direct costs for the Cafeterias for the 1987 and 1988 taxable years were as follows:

                                   1987           1988

           CHC                  $68,044

                               1987        1988

OPINION

[23] We must decide whether the meals are a de minimis fringe benefit for purposes of section 274(n)(2)(B). ⁴ The meals are a de minimis fringe benefit if the meals meet the requirements of section 132(e)(2), which, in turn, requires that the meals meet the five- prong test (the Boyd test) set forth by the Court in Boyd Gaming Corp. v. Commissioner, 106 T.C. at 348. The outcome turns on whether petitioners furnished meals to each of substantially all of their employees for a substantial noncompensatory business reason within the meaning of section 119 and the regulations thereunder.

[24] We set forth our analysis as follows. First, we analyze the Boyd test and the general principles of law that relate thereto. Second, we analyze petitioners' reasons for furnishing the meals to their employees. Third, we analyze whether petitioners furnished the meals at each of the Properties to each of substantially all of their employees at the Property for the convenience of the employer. In other words, with respect to each year, we look at each employee and determine whether section 119 allows him or her to exclude the value of the meals from gross income, and we then determine whether the number of employees at each Property who may exclude their meals comprises substantially all of the employees at that Property. For purposes of this litigation, the parties have stipulated whether section 119 excludes the meals of employees in certain job descriptions. Respondent has conceded that the meals received by employees in the following job descriptions are excludable under section 119:

      CHC

     CHC

[27] The parties agree that section 119 allows some, but not all, of petitioners' employees to exclude from gross income the value of meals received from their employers. The parties dispute whether section 119 allows each of substantially all of the employees to exclude the value of the meals from gross income. If section 119 provides for such an allowance, section 1.119-1(a)(2)(ii)(e), Income Tax Regs., allows petitioners to deduct 100 percent of the costs incurred to provide the meals. ⁷ Boyd Gaming Corp. v. Commissioner, 106 T.C. 343 (1996); see also sec. 274(n)(2)(B); sec. 1.132-7(a)(2), Income Tax Regs. If section 119 does not provide for such an allowance, petitioners' deductions for the meals are limited by section 274(n)(1) to 80 percent of the cost of the meals.

[28] Petitioners argue that section 119 allows each of substantially all of the employees to exclude the value of the meals from gross income. According to petitioners, they had substantial noncompensatory business reasons for providing meals to each of substantially all of their employees, and petitioners determined reasonably that the meals were excludable from each employee's gross income under section 119. Respondent counters that petitioners cannot determine the number of meals excludable from gross income under section 119, which is a prerequisite to the application of section 1.132-7(a)(9), Income Tax Regs., because petitioners failed to keep the required documentation to establish, among other things, the number of meals eaten, by whom the meals were eaten, or at what time the meals were eaten. Respondent also argues that substantially all of petitioners' employees did not receive the meals for a substantial noncompensatory business reason because less than 90 percent of the employees qualified for the section 119 exclusion. Respondent relies on section 1.119-1(f), Example (2), Income Tax Regs., in asserting that the "substantially all" test of section 1.119-1(a)(2)(e), Income Tax Regs., requires that at least 90 percent of the meals received by the employees be excludable under section 119. Section 1.119-1(f), Example (9), Income Tax Regs., sets forth an example under which 91.3 percent of the taxpayer's employees is "substantially all" of the taxpayer's employees within the meaning of the regulations. This example states:

     A hospital maintains a cafeteria on its premises where all of

[30] Petitioners argue that substantially all of the meals are excludable from the gross income of the recipient employees under the exclusion of section 119. From the text of section 119, we understand that the gross income of an employee who meets a two-prong test does not include the value of a meal received from his or her employer. Under the first prong, the meal must be furnished by the employer on its business premises. Under the second prong, the meal must be furnished to the employee for the convenience of the employer. See also sec. 1.119-1(a)(1), Income Tax Regs. Since the parties do not dispute the first prong, we limit our focus to the second prong, deciding only the question of whether each employer at issue provided each meal to each of its employees for the convenience of the employer.

[31] Whether an employer provides a meal to an employee for the employer's convenience rests primarily on whether the meal is provided to the employee for a substantial noncompensatory business reason of the employer. See sec. 1.119-1(a)(2)(i) and (ii)(e), Income Tax Regs. Such a determination is factual, Jacob v. United States, 493 F.2d 1294, 1297 (3d Cir. 1974); Olkjer v. Commissioner, 32 T.C. 464, 468 (1959); sec. 1.119-1(a)(1), Income Tax Regs., and petitioners bear the burden of proof, Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Caratan v. Commissioner, 442 F.2d 606, 608 (9th Cir. 1971), revg. 52 T.C. 960 (1969); American Pipe & Steel Corp. v. Commissioner, 243 F.2d 125, 126-127 (9th Cir. 1957), affg. 25 T.C. 351 (1955); Olkjer v. Commissioner, supra at 468. A substantial noncompensatory business reason requires a business nexus under which the "employee must accept * * * [the] meals * * * in order properly to perform his duties." Commissioner v. Kowalski, supra at 93 (quoting S. Rept. 1622, 83d Cong., 2d Sess. 190 (1954)); see also Van Rosen v. Commissioner, 17 T.C. 834, 838 (1951). That the employer may characterize the meal as noncompensatory, or that the employer intends that the employee receive the meal without tax consequences, is of no relevance to the application of section 119. Commissioner v. Kowalski, supra at 88-95. The same is true with respect to whether the employee could perform his or her job absent the meal. A meal need not be indispensable to an employee's duties to be excludable under section 119. See Caratan v. Commissioner, supra at 609.

[32] We believe that certain factors are helpful in determining whether an employer provides a free meal to an employee for a substantial noncompensatory business reason of the employer. The presence of a substantial noncompensatory business reason establishes that a meal is provided for the convenience of the employer and makes unimportant whether the employer also provides the meal to the employee as a source of additional compensation. We use the following factors to aid us in our analysis: (1) Whether the employer furnishes a meal to an employee before, during, or after the employee's work period, (2) whether the employer requires an employee to live on the employer's business premises as a condition of employment, (3) whether the employer furnishes a meal to an employee during the employee's working hours so that he or she is available to respond to emergencies of the employer that arise during the meal period, (4) whether the employer furnishes a meal to an employee during the employee's working hours because the employer's business demands that the employee's meal period be short and the employee cannot be expected to eat elsewhere in such a short period of time, (5) whether the employer furnishes a meal to an employee during the employee's working hours because the employee cannot otherwise secure a proper meal within a reasonable meal period, (6) whether the employer furnishes a meal to a food service employee (e.g., a restaurant employee) for a meal period during which the employee works, (7) whether the employer furnishes a meal to an employee to promote the employee's morale or goodwill, (8) whether the employer furnishes a meal to an employee to attract prospective employees, and (9) whether the employer furnishes a meal to an employee under an employment contract or a statute that characterizes the meal as compensation. Some of these factors are dispositive, in and of themselves, and the weight given to each factor rests on the factor involved. In analyzing each factor, little weight is given to the unsupported declarations of witnesses, sec. 1.119-1(a)(2), Income Tax Regs.; see also Incorporated Trustees v. United States, 777 F.2d 1552, 1555 n.10 (Fed. Cir. 1985), and more weight is given to facts which are supported by the record as a whole. Section 119 is applied on a meal- by-meal basis.

1. TIMING OF MEAL

[33] A meal must be furnished to an employee on a working day in order to fall within section 119. Sec. 1.119-1(a)(2), Income Tax Regs.; see also Bob Jones Univ. v. United States, 229 Ct. Cl. 340, 670 F.2d 167, 178 (1982). The mere fact that a meal is furnished to an employee on a working day, however, does not mean that the meal meets the requirements of section 119. With two exceptions, a meal that is furnished on a working day is outside section 119 if the meal is furnished before or after the employee's working hours. Sec. 1.119-1(a)(2), Income Tax Regs.; see also Bob Jones Univ. v. United States, supra at 178. First, the fact that a food service employee receives a meal for each meal period during which he or she works will not disqualify a meal from section 119, as long as the meal is eaten by the employee on the working day. Sec. 1.119-1(a)(2)(i) and (ii)(d), Income Tax Regs. Second, the fact that a non-food-service employee receives a meal immediately before or immediately after his or her working hours will not remove the meal from section 119 if the employee's duties prevent him or her from eating the meal during working hours. Sec. 1.119-1(a)(2)(i) and (ii)(f), Income Tax Regs. In the case of both exceptions, however, the meal must be furnished to the employee for a meal period during which he or she works. A meal that is furnished to an employee for a meal period other than one during which he or she works is outside section 119. A meal furnished to an employee for a meal period during which he or she does not work is furnished solely as compensation; the meal is not needed to allow the employee to perform his or her duties. See Commissioner v. Kowalski, 434 U.S. at 93.

[34] Some of the employees in question receive at least two meals during an 8-hour shift. One of these meals is eaten up to 1 hour before the shift starts, and the second meal is eaten from 3 to 5 hours after the shift begins. The job descriptions of these employees are as follows:

     FREMONT

[36] Section 119 also does not reach any meal that is eaten by petitioners' employees on a nonworking day or by persons who do not work for petitioners. Although petitioners' policy is to preclude employees from eating meals in the Cafeterias on days off and to preclude nonemployees from eating in the Cafeterias at all, petitioners do not actively police or monitor this policy. We are unpersuaded that petitioners' policy on this subject is adhered to by the employees. We find in the record that petitioners' employees have access to the Cafeterias on their days off and that petitioners do not document the receipt of employee meals in the Cafeterias or the receipt of meals in the public restaurants by the employees who are allowed to eat there without charge. ¹⁰ We also find that nonemployees may easily enter the Cafeterias with employees, and that petitioners' lack of documentation on the meals similarly precludes us from finding that these nonemployees do not eat meals in the Cafeterias.

[37] Petitioners elicited testimony from Mr. Thompson to the effect that employees never ate two meals. Mr. Thompson stated that he had "general knowledge" that these employees generally did not eat two meals because: (1) He ate twice a day in the Cafeteria on his premises, seeing everyone who ate there, and (2) petitioners had used a punch card system in prior years to monitor the employees' receipt of meals, and these cards seldom had two punches. We find this testimony unpersuasive and do not rely on it. See Ruark v. Commissioner, 449 F.2d 311, 312 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-48; Clark v. Commissioner, 266 F.2d 698, 708-709 (9th Cir. 1959), affg. in part and remanding T.C. Memo. 1957-129; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). The punch card system preceded the subject years, and Mr. Thompson's testimony is contradicted directly by the testimony of Messrs. Miner and Fraser. Mr. Miner testified that his firsthand experience was that most of the employees who were entitled to two meals ate both meals. Mr. Fraser testified that petitioners had experienced problems with employees taking unauthorized meals. We also do not see how Mr. Thompson's mere presence in the Cafeteria for 2 hours at the most could allow him to monitor effectively the number of meals eaten there by each of the employees. In addition, Mr. Thompson admitted at trial that he ate two meals a day in the Cafeterias throughout the subject years, yet his job classification afforded him only one meal.

[38] With respect to the employees mentioned above who ate two meals a day, we hold that the first meals are not excludable under section 119.

[39] Nor does section 119 reach two meals that are eaten by a non-food-service employee during one 8-hour shift. In the case at hand, however, employees are allowed to enter the Cafeterias freely and inconspicuously during their shifts. Which employees eat more than one meal during their shifts we do not know. We do know, however, that employees have been disciplined, suspended, and/or dismissed for violating petitioners' policy on the Cafeterias. We also know that petitioners construe the word "meal" broadly to reach almost any food that is eaten by an employee during all breaks in a shift. With such a broad interpretation we do not agree. We construe the word "meal" to mean "The food served and eaten in one sitting", a definition which has existed since the 13th century. Webster's II New Riverside University Dictionary 735 (1994). Thus, an employee who eats a separate course during each of his or her three breaks is eating three meals, rather than the one that petitioners allege. Accordingly, two of these meals do not qualify for exclusion under section 119.

2. REQUIRED TO LIVE ON BUSINESS PREMISES

[40] A meal furnished without charge to an employee required to live on the employer's business premises as a condition of employment is within section 119 if the meal is furnished on the business premises. Sec. 1.119-1(a)(2), Income Tax Regs.

[41] The record does not disclose that any of petitioners' employees live on the Properties. Accordingly, we do not analyze this factor.

3. AVAILABLE FOR EMERGENCIES

[42] An employer furnishes a meal to an employee for a substantial noncompensatory business reason if the employer requires that the employee be available during meal periods to respond to emergencies. Sec. 1.119-1(a)(2)(ii)(a), Income Tax Regs. Critical to this factor is that: (1) Emergencies have occurred in the employer's business during the employee's meal period which have required the employer to call the employee back to his or her job during the period or (2) it is reasonable for the employer to expect that emergencies will occur in its business during the employee's meal period which will require the employer to call the employee back to his or her job during the period in order to respond to the emergency. Sec. 1.119-1(a)(2)(ii)(a), Income Tax Regs.; see also Jacob v. United States, 493 F.2d at 1298. The mere fact that corporate policy requires an employee to remain on the premises during meal breaks does not necessarily mean that a meal provided by the employer is provided for a noncompensatory business reason of the employer. See Commissioner v. Kowalski, 434 U.S. at 93 (quoting S. Rept. 1622, 83d Cong., 2d Sess. 190 (1954)) (meals are excludable only if the "employee must accept * * * [the] meals * * * in order properly to perform his duties"); Caratan v. Commissioner, 442 F.2d at 609 n.4; see also sec. 1.119-1(a)(2)(i), Income Tax Regs. (section 119 excludes from gross income the value of lodging that an employee must occupy on the premises only when the lodging is "required * * * as a condition of his employment").

[43] Petitioners argue that section 119 applies to most of the employees in question because petitioners require them to stay on the premises during meal periods to handle emergencies which may and do occur. Petitioners list the following happenings as emergencies of their business: Plumbing and electrical problems, backed-up hotel or restaurant lines, jackpot payouts, a surge in gambling, equipment failures, bomb threats, and fires. Petitioners argue that their management, through the exercise of their business judgment, have concluded that the exigencies of petitioners' business mandate that all employees in specified categories remain on the premises during their full shifts in order to respond to emergencies.

[44] We disagree with petitioners that those employees must stay on the premises to respond to emergencies that could occur during their meal breaks. Unlike petitioners, who for this purpose describe some fairly routine occurrences as emergencies, we read the word "emergency" more narrowly to mean an "unexpected, serious occurrence or situation urgently requiring prompt action." Webster's II New Riverside University Dictionary 427 (1994). The situations petitioners refer to as emergencies may in the eyes of petitioners' management demand a quick response by petitioners in order to keep their business profitable and competitive, but all these happenings are not emergencies within the meaning of the regulations. In any case, petitioners have not shown that they are required to furnish free meals to their employees in order to assure a prompt and orderly response to these situations.

[45] We do not substitute our judgment for the business judgment of petitioners' management to the effect that it was wise for petitioners to give their employees free meals. Instead, we look to the objective facts of this case and see that some, but far from all, of petitioners' employees must be available during their meal periods to respond to emergencies that could possibly arise in petitioners' business. We find from the objective facts of this case that petitioners' employees were hired mainly (if not solely) to perform duties concerning the operation of a casino in its regular course of business, and that petitioners' past experiences indicate that the occurrence of a true emergency, such as a fire or bomb scare, during petitioners' operations is a rarity. The duties of very few of the employees in dispute include responding to emergencies at the beck and call of management. ¹¹ To the contrary, some of the labor agreements state specifically that employees covered by those agreements are entitled to uninterrupted breaks for meals, and, as one of petitioners' witnesses admitted at trial, employees under the culinary workers' agreement are seldom called to work during a meal period. We also know that: (1) Petitioners do not routinely call an employee back to his or her job from a break in case of necessity, but that the employees tend to postpone their breaks until the necessity subsides, (2) petitioners began furnishing the meals to all of their employees because management believed it was unreasonable to require 75 to 80 percent of petitioners' workforce to remain on the premises during their full shifts without offering them a free meal, and (3) petitioners must furnish the meals to their employees free of charge to remain competitive in the industry. These facts add to our belief that either petitioners furnish the meals to their employees for the employees' convenience, or that petitioners furnish the meals to their employees to compensate them for remaining on the premises for their complete shifts.

[46] There may be senior managers who are so indispensable to the operation of the Properties that they would be personally consulted and called to duty when an emergency occurs. On the basis of the record, however, we are unable to determine which, if any, employees are within this category. Petitioners have addressed this factor from an all-or-nothing point of view, and the record does not otherwise allow us to determine who these senior managers are. We decline to sift through the long list of job titles at each Property and speculate as to which employees are within this group. Suffice it to say that this group is relatively small, and an identification of this group would not affect our holding herein.

[47] We conclude that none of petitioners' employees may exclude the meals from gross income on account of this factor.

4. SHORT LUNCH PERIOD WITH INABILITY TO EAT ELSEWHERE

[48] An employer furnishes a meal to an employee for a substantial noncompensatory business reason if the employer's business demands that the employee's meal period be short and the employee cannot be expected to eat elsewhere in such a short period of time. Sec. 1.119-1(a)(2)(ii)(b), Income Tax Regs. Such may be the case, for example, if the employer is engaged in a business in which the peak workload occurs during the normal meal periods. Id. Such is not the case when the employer limits the employee's meal period so that the employee may leave work earlier in the day. Id.

[49] Petitioners generally argue that the fact that many of their employees have meal periods of 45 minutes or less means that petitioners have a substantial noncompensatory business reason for furnishing meals to them. We disagree. The mere fact that a meal period is 45 minutes or less does not mean that the value of meals that an employee receives without charge at an employer cafeteria is excludable from gross income under section 119. What is critical to this factor is that the employer's business demand that the employee's meal period be short and that the employee cannot be expected to eat elsewhere in the short period of time allotted by the employer for a meal.

[50] Petitioners meet neither of these requirements. Varied eating facilities are located near the Properties, and petitioners' employees can receive a quick meal at many of these facilities. Nor does petitioners' business demand that petitioners limit their employees to a meal period of no more than 45 minutes; petitioners' peak workload also does not occur during the normal meal periods. Indeed, petitioners allot many of their employees a meal period of 60 minutes, and the length of the meal periods is not consistent among the Properties. Meal breaks among the Properties range in length from 30 to 60 minutes for employees in the same job classification, ¹² and we are unable to discern the need for an employee at one Property to have a shorter meal period than a similar employee at another Property. Insofar as the record discloses, petitioners could lengthen the work hours of an employee if he or she required a meal period longer than 45 minutes. ¹³ In the absence of persuasive evidence supporting petitioners' assertion that the requirements of their business demand that their employees be limited to a short meal period, we conclude that none of petitioners' employees may exclude the meals from gross income on account of this factor.

5. INADEQUATE EATING FACILITIES

[51] An employer furnishes a meal to an employee for a substantial noncompensatory business reason if the employee could not otherwise secure proper meals within a reasonable meal period. Sec. 1.119-1(a)(2)(ii)(c), Income Tax Regs. Such may be the case, for example, when there are insufficient eating facilities in the vicinity of the employer's premises because the employee works at a remote or isolated locale. See id.; see also Rowan Cos. v. United States, 452 U.S. 247 (1981)(workers on offshore oil rigs); Stone v. Commissioner, 32 T.C. 1021 (1959) (construction workers in Alaska); Olkjer v. Commissioner, 32 T.C. 464 (1959) (construction workers in Greenland). See generally Rev. Rul. 72-385, 1972-2 C.B. 536 (fishermen on schooner); Rev. Rul. 71-267, 1971-1 C.B. 37 (Navy personnel assigned to offshore islands).

[52] Petitioners contend that most of their employees qualify under section 119 because there are insufficient eating facilities near each Property to allow their employees to obtain proper meals during their breaks. Petitioners also contend that they prohibit their employees from leaving the premises during their shifts, except in case of dire emergency, and that petitioners prohibit their nonmanagerial employees from eating in the public restaurants located on the Properties. Petitioners elicited testimony from Mr. Thompson to the effect that no one, including the employees covered by the Teamsters' agreement, leaves the Properties during breaks.

[53] We are not persuaded by these arguments. First, we have found as a fact that there are adequate eating facilities around the Properties, and that these facilities are of varied types. The aggregate seating capacity of these facilities is far greater than the seating capacity of each Cafeteria. Although petitioners ask the Court to find as a fact that their employees cannot eat in the restaurants of other casinos because those restaurants are limited to "guests", we refuse to do so. We are unpersuaded that petitioners' employees cannot eat in those restaurants if they choose to.

[54] We also are not persuaded that most of petitioners' employees can never leave the Property during their shifts, except in case of dire emergency. In addition to the fact that no employee was disciplined for leaving the premises during the subject years, and that the Teamsters' agreement provides expressly that the covered employees may leave the premises during meal periods, we are mindful of the testimony of Ms. Burns. In response to a question asked by petitioners' counsel as to Ms. Burns' knowledge on the distance from Stardust to the Fashion Show Mall, Ms. Burns testified: "Yes, I've had to run from the Stardust to the Fashion Show Mall on errands before, and to be honest with you, I've had a difficult time getting back in an hour." Ms. Burns also testified that she did not recall any Stardust employee ever leaving the premises during their breaks, but, in the same breath, admitted that she has eaten at the Fashion Mall during a break, and that she has run errands at the mall during her breaks. We also note that the labor agreements refer to free meals but are silent on the requirement that employees stay on the premises. Why does not one of these agreements state clearly a prohibition against leaving the property if that was the driving force for the free meals? We conclude that the meals of none of the employees qualify under section 119 because of inadequate eating facilities.

6. FOOD SERVICE EMPLOYEES

[55] An employer furnishes a meal to an employee for a substantial noncompensatory business reason if the employee is a food service employee and the employee receives the meals for meal periods during which he or she works. Sec. 1.119-1(a)(2)(ii)(d), Income Tax Regs. That the meal is furnished during, immediately before, or immediately after the employee's working hours is irrelevant to this factor. Id.

[56] The parties agree that most of the food service employees, by job description, may exclude their meals under section 119. They disagree, however, that the cocktail waitresses, bartenders, and barbacks are "food service employees". Petitioners contend that these categories of employees are "food service employees" because they are part of petitioners' integrated food and beverage service operation. We disagree. None of these employees work in a restaurant or are connected therewith. The employees in these three job descriptions work mainly in petitioners' lounges or in the gambling area, supplying gamblers with free alcohol 24 hours a day. The question, therefore, is whether the serving of alcohol is the serving of food. We do not believe it is. We construe the word "food", for this purpose, to mean "Material, usu. of plant or animal origin, containing or consisting of essential body nutrients, as carbohydrates, fats, proteins, vitamins, or minerals, taken in and assimilated by an organism to maintain growth and life." Webster's II New Riverside University Dictionary 494 (1994). Alcohol is simply not within this definition. Indeed, in the case of bartenders, they are treated differently from the other "culinary workers" under the labor agreement that applies thereto. We conclude that petitioners' cocktail servers, bartenders, and barbacks are not food service employees, and, hence, that they are not entitled to exclude their meals on that account.

7. PROMOTE MORALE OR GOODWILL

[57] An employer furnishes a meal to an employee for a compensatory business reason if the employer furnishes the meal intending to promote the employee's morale or goodwill. Sec. 1.119- 1(a)(2)(iii), Income Tax Regs.

[58] Petitioners furnish the meals to their employees to retain them as employees. Accordingly, petitioners furnish the meals to promote employee morale and goodwill, and, hence, petitioners have a compensatory business reason in furnishing the meals. Absent a substantial noncompensatory business reason, meals furnished for a compensatory reason are not excludable from income under section 119.

8. ATTRACT PROSPECTIVE EMPLOYEES

[59] An employer furnishes a meal to an employee for a compensatory business reason if the employer furnishes the meal intending to attract prospective employees. Sec. 1.119-1(a)(2)(iii), Income Tax Regs.

[60] Petitioners furnish the meals to their employees to attract new employees. Accordingly, petitioners have a compensatory business reason in furnishing the meals and, absent a substantial noncompensatory business reason, the meals are not excludable from income under section 119.

9. COMPENSATION UNDER CONTRACT OR STATUTE

[61] The labor agreements at hand do not explicitly characterize the meals as employee compensation. Our characterization of the meals as compensation, however, is not bound to the language that the parties to an agreement utilize therein. We look to the facts and circumstances of this case to determine whether the actions of the parties to the agreements indicate that the parties intended that the meals be compensation. We answer this question in the affirmative.

[62] We read the record to indicate that one of petitioners' reasons for providing meals to their employees is to fulfill the unions' demand that petitioners provide union employees with meals during their working hours for the primary benefit of the employees. ¹⁴ Reading the specificity of the meal provisions in the labor agreements, we find that the unions painstakingly went to great lengths in those agreements to assure themselves that casino operators such as petitioners would furnish their union employees with healthful meals during their workday. Meals provided in such a setting are not furnished to allow an employee to perform his or her job properly.

[63] We also find relevant that the labor agreements provide specifically that all union employees will receive meals upon their completion of a minimum workday. We are unable to comprehend why a short shift employee covered by the Teamsters' agreement, who is allowed to receive a meal after working 3 hours, must receive that meal in order to perform his or her job properly. The same is true with respect to an employee who is covered by the operating engineers' agreement and who is summoned to work for 4 hours in an emergency, as well as the employee covered by the same agreement who works more than 2 hours of overtime. In both cases, the employee earns the right to a meal. Do these employees really need those meals in order to perform their jobs properly? We think not. We conclude that the meals are furnished for a compensatory business reason and, absent a substantial noncompensatory business reason, are not excludable from income under section 119.

10. MISCELLANEOUS

[64] Petitioners set forth three additional arguments to support their claim that they furnish the meals to their employees for a substantial noncompensatory business reason. First, petitioners argue, they have security concerns in that most of their employees have access to significant amounts of cash, chips, or guests' property as part of their job functions. In this regard, petitioners contend, they have a substantial noncompensatory business reason for furnishing these employees with meals on the premises because allowing them to leave the premises during their shifts will increase the probability and occurrences of theft. Petitioners also contend that they are concerned that employees who leave the premises for meals will not return timely, being distracted and tempted by the glitter and vices of Las Vegas. Second, petitioners argue, some of their employees wear uniforms at work; thus, petitioners have a substantial noncompensatory business reason for furnishing these employees with meals because the sight of a uniformed employee at the eating establishment of a competitor will tarnish the public's perception of the quality of food served on petitioners' premises. Third, petitioners argue, some of their employees work the graveyard shift; thus, petitioners have a substantial noncompensatory business reason for furnishing these employees with meals mainly because the climate of the late night does not allow these employees to receive a suitable meal elsewhere.

[65] None of these arguments persuades us that the relevant employees may exclude their meals under section 119. These contentions are not substantial noncompensatory business reasons within the meaning of the regulations. Petitioners' contentions about their security concerns, their employees' uniforms, and the timing of the graveyard shift fail to go to the heart of the convenience of the employer test; namely, that the "employee must accept * * * [the] meals * * * in order properly to perform his duties". ¹⁵ Commissioner v. Kowalski, 434 U.S. at 93 (quoting S. Rept. 83-1622, at 190 (1954)). Section 119 requires a closer and better documented connection between the necessities of the employer's business and the furnishing of free meals.

[66] We now turn our attention to whether each of substantially all of petitioners' employees receive meals excludable from gross income under section 119. Respondent asserts that the term "substantially all" means that at least 90 percent of the employees must be able to exclude their meals under section 119. Petitioners counter that the term requires a lower percent.

[67] The Court of Appeals for the Ninth Circuit has held in a different context that 68 percent is not "substantially all" as that term is used in a predecessor of section 368 relating to corporate reorganizations. See Pillar Rock Packing Co. v. Commissioner, 90 F.2d 949 (9th Cir. 1937), affg. 34 B.T.A. 571 (1936).

[68] We leave for another day the exact percentage of employees that constitutes "substantially all" within the meaning of section 1.119-1(a)(2)(ii)(e), Income Tax Regs. Petitioners have not established that even 50 percent of their employees received qualifying meals. This is not enough to be substantially all.

[69] Given our conclusion that none of the meals of the employees in question qualify for the section 119 exclusion, we look solely to the employees conceded by respondent to be within section 119 and determine what percentage of all employees at each Property they constitute. Respondent's concessions cover the following numbers of employees:

                                1987        1988

                                1987        1988

[71] To reflect the foregoing,

[72] Decisions will be entered under Rule 155.

² We are unable to find that these three classifications of employees do not also receive meals during their shifts. The record leads us to believe that they do.

³ The record discloses only that a majority of the custodians at the Stardust work an 8-hour shift beginning at either 12 a.m. or 1 a.m., and that a majority of the guest room attendants at the Stardust work during the day.

⁴ Sec. 274(n), which was added to the Code by sec. 142(b) of the Tax Reform Act of 1986 (TRA), Pub. L. 99-514, 100 Stat. 2085, 2118, provides in relevant part:

          (1) In general. -- The amount allowable as a deduction

     If an employer can reasonably determine the number of meals that

⁹ Although most of these employees are covered by the culinary workers' agreement, none of these employees is a "restaurant employee or other food service employee" within the meaning of sec. 1.119- 1(a)(2)(ii)(d), Income Tax Regs. See infra pp. 73-74, for our discussion on the inapplicability of this language to the barbacks and cocktail servers.

¹⁰ Contrary to the testimony of petitioners' management, we find it hard to believe that an employee would question the number of times that a manager ate in the Cafeterias or public restaurants on a given day.

¹¹ The record includes a list of the essential job functions for most of the employees at issue. Petitioners, however, prepared this list after the subject years; petitioners did not prepare or keep a contemporaneous written description of the duties of each job classification during the subject years. Given the additional fact that the record does not indicate the extent to which the employees in each job description performed these "essential job functions" during the subject years, or whether any of the employees performed duties that were outside these functions, we give limited regard to this list. We note, however, that the list states that only the Lead PBX Operator, PBX Operator, and Maintenance Engineer perform certain duties in the case of an "emergency".

¹² The table shows, for example, that parking attendants receive 60 minutes at Sam's Town and CHC and 30 to 40 minutes at Fremont; hotel clerks and phone operators receive 45 minutes at Stardust and 60 minutes at all other properties; slot floorpersons receive 60 minutes at Fremont and 30 minutes at Stardust and Sam's Town (the period at CHC is unknown).

¹³ We note, however, that 45 minutes was not shown to be insufficient time to eat a meal under the facts herein.

¹⁴ In this regard, we find unpersuasive the unsupported testimony of Mr. Thompson, that petitioners' provision of employee meals resulted in increased profits.

¹⁵ With respect to the uniforms and the graveyard shift, we have additional concerns. Petitioners allow their employees to travel to and from work in uniform, and employees have worn their uniforms while dining in the restaurants of petitioners' competitors. Moreover, petitioners provide their employees with dressing rooms and storage for safeguarding their nonbusiness attire, and the uniforms worn by most of the employees do not appear to be such that the employees cannot quickly change into nonbusiness attire. With respect to the graveyard shift, we are unable to determine which employees work this shift. Thus, even if we were to assume arguendo that these late night workers were entitled to exclude their meals because of the time of their shift, an assumption which we reject, we would not be able to ascertain which employees fall within this category.