I have a
friend who lives and works on the north side of Cincinnati (or as we south-of-the-river-residents
call it: “Ohio”). He works for significant company, and one of the perks is a
company cafeteria. The cafeteria provides breakfast, should one choose, and of
course it provides lunch. Free.
I admit I am
a bit envious.
In this day
and age when just about everything is taxed – at least once – you may wonder
how this can happen. It has to do with Code Section 119:
(a) Meals and lodging furnished to employee, his spouse,
and his dependents, pursuant to employment
There shall be excluded from gross income of an employee the
value of any meals or lodging furnished to him, his spouse, or any of his
dependents by or on behalf of his employer for the convenience of the employer,
but only if—
How did this provision come to be?
It officially entered the Code in 1954,
although employers were already taking the deduction (and employees excluding
the income) under administrative and judicial decisions. Prior to 1954 there was some inconsistency on
what was required for the employee to omit the income. Sometimes the courts
focused exclusively on the convenience of the employer. Other times the courts
would look at whether there was a compensatory reason for the meal. Depending
on the focus, they could arrive at different answers, of course.
So Congress stepped-in in 1954 and gave
us Section 119. There were differences between the House and Senate bills (The
House did not want a convenience-of-the-employer test, but the Senate did).
Both House and Senate booted out the issue of “compensatory reason.” If it were
primarily for the convenience of the employer, then the meals were free.
Whether the employee considered it compensatory was beside the point.
Let’s use an extreme example to
understand what Congress was after. In Olkjer, for example, the taxpayer
was employed at a remote location in Greenland. The employer provided meals
(and, in this case, lodging also) because there was nowhere else to go.
And there any number of examples like
that. Think of emergency room personnel. Could they hypothetically get in a car
and go to a restaurant for lunch? Of course they could. It would not serve the
hospital’s needs, however, and hence they are required to stay on premises. The
same can be said for casino workers.
Fast forward a few decades and we now have
Silicon Valley. Take Google, for example. If you work at the Googleplex you can
eat breakfast, lunch and dinner for free. I recall that the personal chef for
the Grateful Dead was one of the early chefs at Google. These companies prey on
each other’s chefs, too. Facebook hired a chef away from Google, for example. Facebook
now serves Thai-spiced cilantro chicken and salmon with red curry sauce. Their
chef will also prepare a special meal as an employee award or recognition.
These meals can be quite upscale, featuring seven courses on white tablecloth.
No doubt Section 119 has come a long way
from what Congress was thinking back in 1954.
And there is the rub.
In 2013 the Wall Street Journal
published an article on these cafeterias, including the question whether the provision
of gourmet-level meals were intended to be tax-free. Spring forward a year or so and
the IRS has included the issue in their 2014-2015 Priority Guidance Plan.
It appears the IRS is shifting resources to develop tax lines-of-reasoning
requiring such benefits be reported as taxable compensation to employees.
How? Actually, the direction is fairly
straightforward. The IRS will challenge the perk as not being “primarily” for
the convenience of the employer. They cannot challenge whether there is a
“compensatory” reason, as the reports to the 1954 tax Code makes it clear that
Congress was not concerned with that issue.
The companies of course argue that such
perks are “primarily” for their convenience. How?
·
Encourage
employees to arrive early
·
Encourage
employees to stay late
·
Employees do not
waste time going out to eat
·
Maximize
collaboration opportunities, as employees eat together rather than taking
individual cars and dining alone elsewhere
·
Help retain
people and foster employee trust
·
Help attract prospective
employees
You must admit, the companies have a
point. My hunch is that the IRS will restrict the definition of “convenience”
to require a closer connection between the cafeteria perk and the alleged
convenience.
What do I think? I have been in tax
practice long enough to see provisions come into the tax Code, and then see practitioners
take said provisions into places and distances that Congress or the IRS never
intended. There is uproar, and Congress or the IRS then cracks-down. The practitioners
regroup, study tape, develop new game plans and all parties eventually take the
field again for the next game. It is just the wheel and rhythm of tax law and
practice.
I suspect the same will happen here.
I have over the years worked
unreasonable hours, and many (not all, mind you) CPA firms will make some
provision for their staff during busy season. These meals have been tax-free, as
the impetus for the meal was exclusively for the convenience of the CPA firm
(as far as I was concerned). There was nothing there that approached this level,
however.
But then, Google and Twitter and companies
like them have taken this provision into places and distances that Congress likely
never intended.
I admit I am
a bit envious.