Tax Court rules certain employer-provided meals fully deductible.

• Author: Barton, Peter C.

In a case of first impression, the Tax Court recently ruled in Boyd Gaming, 106 TC No. 19, that an employer could deduct 100% of the cost of meals it provided to employees in company cafeterias, even though the employees paid nothing for the meals. This decision may allow employers to avoid the 50% limitation on the deductibility of meals, under a broad interpretation of Regs. Sec. 1.132-7(a)(2) (relating to de minimis fringe benefits).

Sec. 274(n)(1) limits the deduction for"any expense for food or beverages" that is otherwise deductible to 50% of such expense (80% for tax years beginning after Dec. 31, 1986 and prior to Jan. 1, 1994). One of the exceptions is Sec. 274(n)(2)(B), which allows a 100% deduction for the cost of meals excludible from the recipients' gross incomes under Sec. 132(e).

Sec. 132(e) excludes employer-provided de minimis fringe benefits from employees' gross income. In general, de minimis fringe benefits are property or services whose value is "so small as to make accounting for it unreasonable or administratively impracticable" (Sec. 132(e)(1)). Sec. 132(e)(2) treats an eating facility operated by an employer for employees as a de minimis fringe benefit if it is located on or near the employer's business premises and the cafeteria's revenue equals or exceeds its direct operating costs. Direct operating costs include the costs of the meals and of the labor of the cafeteria workers. (Presumably, the rationale for this revenue/operating cost test is that any employer subsidy of a cafeteria in excess of this revenue target would be small on a per-employee basis.) The de minimis fringe benefit exception does not apply to highly compensated employees if the benefit is discriminatory in their favor.

In addition to these requirements, Regs. Sec. 1.132-7 (a) (2) requires the meals to be provided during, immediately before or immediately after the employees' workday. Also, this regulation contains the following important rule: the meals' revenues and costs can be disregarded for purposes of the revenue/operating cost test for all meals excludible from the employees' gross incomes under Sec. 119 if the employer can reasonably determine the number of meals so excluded.

Sec. 119(a) allows an exclusion from employees' gross incomes for the value of meals furnished to employees by the employer on the employer's business premises if the meals are provided for the employer's convenience. Sec. 119(b) specifies that whether employees...