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Food Delivery Services Help IRS Roast Employer’s Meal Plan

Posted on Feb. 19, 2019

The proliferation of meal delivery options is prompting new questions from the IRS about whether employers should be allowed to provide meals tax free.

The IRS largely rejected a taxpayer’s reasoning for providing free meals in a technical advice memorandum (TAM 201903017) released February 15, in part because of the ample delivery options available.

In the memo, the IRS said that while meal delivery options aren’t determinative in deciding whether employees can “secure proper meals within a reasonable meal period” under reg. section 1.119-1(a)(2)(ii)(c), “meal delivery should be a consideration in determining whether an employer qualifies under this regulation.”

The memo involves a corporate taxpayer that provided free meals to employees at its headquarters. Section 119 excludes meals from an employee’s income if they’re provided for the convenience of the employer, but only for a “substantial noncompensatory business reason.” Examples in the regulations include insufficient meal options in the vicinity.

“There is no specific discussion of meal delivery in section 119, related regulations, or in case law involving this provision,” the memo notes, but it adds that this may be because the proliferation of meal delivery services is so recent.

The IRS found that if employees have a “panoply of meal options that can be delivered to their place of work with just a phone call, through a website, or via a smart phone application, then the requirement in [reg. section] 1.119-1(a)(2)(ii)(c), that without the employer-provided meals an employee cannot secure a proper meal within a reasonable period, is not met.”

The agency added that delivery is an even more efficient option than visiting nearby restaurants because “the employee can continue to work while the food is being prepared and does not have to take time to travel to the eating facility location.”

Mere Aspirations

The IRS rejected several other reasons that the employer offered for providing meals in the 50-page memo, generally because the taxpayer failed to substantiate its policies or show that providing meals helped achieve its stated goals.

“There seems little reason to doubt that Taxpayer’s general business goals such as promoting collaboration and healthier employees, keeping employees safe, or protecting sensitive information and any related policies aimed at achieving these objectives are all legitimate,” the IRS said. But it argued that those legitimate goals don’t necessarily constitute substantial noncompensatory business reasons, adding, “Indeed, in several instances these goals are not much more than aspirations, since Taxpayer has no specific policies to implement them.”

For example, the taxpayer cited protecting confidential and proprietary information, but the IRS noted that “employees who did choose to go off-site for lunch were trusted enough to not discuss confidential business in public.” The taxpayer also provided crime statistics for the area, but the IRS said there was little evidence that employees couldn’t safely obtain meals nearby.

The IRS said that meals provided to employees who were on call for emergencies could be excludable under section 119 but that the taxpayer didn’t provide enough specifics about which employees were on call and when.

Action on Decision

The IRS also said that Boyd Gaming Corp. v. Commissioner, 177 F.3d 1096 (9th Cir. 1999), and Jacobs v. Commissioner, 148 T.C. No. 24 (2017), preclude the agency from substituting its judgment for the business decisions of the taxpayer. However, the IRS can still determine whether the taxpayer actually follows and enforces its own policies and whether those policies qualify as substantial noncompensatory business reasons.

A generic legal advice memorandum (AM 2018-004) issued in November 2018 reached the same conclusion regarding Boyd, but didn’t mention Jacobs, which involved the NHL’s Boston Bruins.

The IRS issued an action on decision (AOD 2019-01, 2019-8 IRB 569) February 15 stating that it would acquiesce to the Tax Court’s decision in Jacobs in result only. It says the IRS accepts the decision and will “follow it in disposing of cases with the same controlling facts,” but that it has “disagreement or concern” with some or all of the court’s reasoning.

Snacks Aren’t Meals

The IRS also said in the technical advice memo that snacks provided by the taxpayer aren’t meals and thus aren’t excludable under section 119. It cited a 50-year-old case, Tougher v. Commissioner51 T.C. 737 (1969), that held that “the word meals connotes to us food that is prepared for consumption at such recognized occasions as breakfast, lunch, dinner, or supper, or the equivalent thereof.”

“It does not ordinarily mean a bag of potatoes, a tin of coffee, a box of salt, a can of peas, 10 pounds of flour, a package of rice, a bottle of ketchup, a jar of mayonnaise, or an uncooked chicken,” the Tougher court said, adding that those items can be combined to produce meals, but aren’t normally considered meals in their “raw form.”

However, the IRS said in the memo that the snacks provided constituted an excludable de minimis fringe benefit under section 132(e)(1).

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