"Convenience of the employer" after Boyd Gaming Corp.

• Author: Olson, Brian L.

The recent decision in Boyd Gaming Corp., TC Memo 1997-445, drastically affects an employer's ability to deduct the cost of meals provided to its employees. Although this decision is a direct blow to the gaming industry, its reasoning may be far-reaching to employers and employees alike in other businesses in which meals are provided to the employees during the workday.

The Law

Generally, an employer may deduct meals provided to employees if they are ordinary and necessary business expenses under Sec. 162; Sec. 274(n) generally limits meal expenses to 50%. A deduction is not limited if it qualifies as a de minimis fringe benefit under Sec. 132(e). Sec. 132(e)(2) provides that the value of meals received by an employee in a nondiscriminatory eating facility are a de minimis fringe if the facility is located on or near the employer's business premises and revenue derived from the facility equals or exceeds the direct operating costs. In determining whether the gross income equals or exceeds costs, the income attributable to meals taken by employees qualified under Sec. 119 is not counted; see Regs. Sec. 1.132-7(a)(2). For tax years beginning after 1997, meals furnished for the convenience of the employer that qualify for the exclusion from employee income under Sec. 119 are more likely to be deducted in full as a de minimis fringe.

Regs. Sec. 1.119-1(a)(2) states that meals are provided for the convenience of the employer if they are provided for a"substantial noncompensatory business reason." Substantially noncompensatory reasons include the need for the availability of employees for emergencies, whether the employer's business nature requires short meal periods, whether the employee can obtain a meal within the allotted time and whether the meal is provided to a food-service employee immediately before, during or after his shift. If substantially all employees who are furnished meals are furnished the meals for a substantial noncompensatory business reason, all employees will fall within the exclusion.

The Boyd Decision

It is the custom in the gaming industry to offer free meals to employees during working hours. Per this custom, Boyd Gaming offered free meals to its employees during their work shifts, in a special employee eating facility. Most employees were covered by union contracts, which regulated meal periods and rights to certain types of food. The Boyd properties did not keep any records showing who received meals, how many meals or when they were received. Although policies forbade the taking of more than the allotted meals, no security measures existed to prevent pilferage. Because of the poor record-keeping and because employees were not charged, Boyd could not argue that revenue equaled expense under Sec. 132(e). Therefore, it had to argue that substantially all employees qualified for exclusion under Sec. 119.

The IRS conceded that approximately 45% of employees, including food-service...