Name:

Rubing Sun

Course:

ACCT 6202 - Corporate Tax

Subject:

Research Paper

Date:

11/21/2015

Background
A large company provides free lunches to its employees. These lunches are
made and served on the companys property. The company is an internet
company with approximately 12,000 employees at its headquarters. Its
employees are not restricted from going out to lunch nor are they restricted
from bringing their lunches. As a matter of fact, they are encouraged to
leave the building during their breaks and do other activities, such as soccer,
basketball, and so on. The employees do not have set times that they work
with few exceptions. As long as the employees get their work done, they can
start work at any time before 10:00am. They are located in the middle of a
good sized city, within reasonable distance to several restaurants acceptable
for every day eating.
Issue
1. What are the tax implications of the free lunches?
2. What arguments, pros and cons, can the company use to justify the
free lunches?
Introduction
Today, thousands of companies like Google Inc., Yahoo Inc. and Facebook Inc.
are wording on provide their employees with free meals for convenience and
to keep them happy to work. Generally speaking, except as otherwise
provided in this subtitle, all income from whatever source derived should be
consider as gross income-IRC 61(a). But to be specific, employers may have
chance to deduct the costs of providing meals to employee as business

expenses while employees to exclude the cost of meals from income. That
really depends on the real situation and how to comply with legal standards.
Income tax consequence to the employee.
According to IRC 119 Meals or lodging furnished for the convenience of the
employer illustrate that the value of meals furnished to an employee by his
employer shall be excluded from the employee's gross income if two tests
are met: (i) the meals are furnished on the business premises of the
employer, or (ii) the employee is required to accept such lodging on the
business premises of his employer as a condition of his employment.
Based on the background described above, the lunches are providing during
the work at place where employee performs a significant portion of duties
which meet the business premises test (also see H-1767). Under IRC
119(b)(4), the code required that all meals furnished on the business
premises of an employer to the employers employees shall be treated as
furnished for the convenience of the employer if, without regard to this
paragraph, more than half of the employees to whom such meals are
furnished on such premises are furnished such meals for the convenience of
the employer. From what we know, the company with approximately 12,000
employees at its headquarters but no additional information about whether
the majority of their employees are accepting the free meals provided by
company.
Besides, the lunches are free for employees that is not required to pay on a
periodic basis a fixed charge for their meals which is not qualified the IRC
119-(b)(3).
Moreover, in order to properly apply IRC 119, the key phrase is for the
convenience of the employer, which employee seems to read on literally as
any benefit to the employer. One employee benefits lawyer arguing at WSJ
article that the meals provided by technology companies should not be

taxable because of the time savings that results from providing on-site
meals, the food provided is a lot healthier and such arrangements
minimize the risk of employees running around in other eateries talking
business.1 But under IRS regulations , 1.119-1 requires that the employer
must have substantial noncompensatory business reason for providing the
free meals, and provides examples (under 1.119) to illustrating that this
means the meals not be beneficial to the employer, but must be necessary
for employer to provide the meals to enable the employee to perform his or
her duties. Examples specified in the regulations of circumstances amounting
to substantial noncompensatory business reasons include furnishing meals
to employees during their working hours because the employees could not
otherwise secure proper meals within a reasonable meal period. Back to
the background, the employees are not restricted from going out to lunch nor
restricted form binging their lunches and they do not have any time limit
policies to have lunch. It thus seems unlikely that the meals offered by
technology companies qualify for exclusion under IRC 119.
Income tax consequences to the employer
In general, company may partially deduct employee meal expenses under
IRC 162(a), which allows a deduction for all ordinary and necessary business
expenses paid or incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered. Based on what we
discussed above, the free lunches are not qualifying for the ordinary and
necessary business expenses term because employees are free to have
lunch at restaurants outside the building and they have flexible time
schedule to set their own work and lunch time.
IRC 274(n)(1) provides that the amount allowable as a deduction for any
expense for food or beverages shall not exceed 50% of the amount of the
expense which would otherwise be allowable as a deduction. But, there are

two exceptions that allows employer to fully deduct employee meal

expenses. The first one is under 274(n)(2) that provides certain exceptions
to the 274(n)(1) partial deduction disallowance. (1) as compensation to an
employee on the taxpayers return and (2) as wages to such employee for
purposes of income tax withholding, 274(n)(2)(A) and 274(e)(2). To meet
the first requirement, the taxpayer must treat the expense as compensation
paid to an employee on the taxpayers income tax return as originally filed1.274-2(f)(2)(iii)(A)(1).
The second exception is under 132(e), which the rule allows company
exclude from taxation the value of employer-provided meals if the amount to
be excluded is either a discount at an employer-operated eating facility or if
the meal is a de minimis fringe benefit. According to the background
described, the lunches are made and served on the companys property and
it is likely that the free meals meet the employer-operated eating facility
exclusion even the company do not charge their employees. Also see Reg
1.132-7(a)(2) that listed specific conditions about employer-operated eating
facility for employees. The de minimis fringe benefits under132(e)(1)
defined as any property or service the value of which is (after taking into
account the frequency with which similar fringes are provided by the
employer to the employer's employees) so small as to make accounting for it
unreasonable or administratively impracticable. What this effectively means
is that if the cost of implementing an accounting system to track the value of
employees meals would exceed the revenue that any tax on these meals
would generate, the meals would not be taxable. Meals are unlikely to meet
this standard as the frequency with which employees accept them, and the
value of the meals themselves, increases. Examples of excludable fringe
benefits specified in the Reg 1.132-6 De minimis fringes include coffee,
doughnuts, and soft drinks and occasional cocktail parties, group meals, or
picnics for employees and their guests. It is difficult to see how one could fit
daily gourmet meals into this framework.

The preceding sentence shall apply with respect to any highly compensated
employee only if access to the facility is available on substantially the same
terms to each member of a group of employees which is defined under a
reasonable classification set up by the employer which does not discriminate
in favor of highly compensated employees. For purposes of subparagraph (B)
, an employee entitled under section 119 to exclude the value of a meal
provided at such facility shall be treated as having paid an amount for such
meal equal to the direct operating costs of the facility attributable to such
meal.
Pros and Cons of two provisions exclude the meal from wages:
Under 119,

Reference:
Mark Marmont (2014, September 01). " Silicon Valley Cafeterias Whet Appetite of
IRS." Wall Street Journal, A1, Retrieved from http://www.wsj.com/articles/siliconvalley-cafeterias-whet-appetite-of-irs-1409612488

References:
A. Need to site code/regulation properly, i.e. Pursuant to IRC 119
B. In the tax law section, show how your sites relate to the clients facts
and circumstances
C. In the tax law section, you need to show both sides of the argument
and how they relate to the clients facts and circumstances
D. Your conclusion needs to be clear as to what side of the argument you
believe will prevail and why. You are basically showing both sides of the
argument in the tax law section and now in the conclusions. You are
showing which side will prevail.
E. The conclusion is not here to express your personal opinion. You are
supposed to conclude which side of the argument will prevail and why.
F. You need the following sections in the tax memo
a. Background
b. Issues
c. Tax law give both sides of the argument and how each side
relates to the clients fact and circumstance
d. Conclusion conclude which side of the argument will prevail and
G.
H.
I.
J.

why
Where are sites
How you related the facts and circumstances to the laws is in question
Sites need to have authority i.e. case law, IRC, treasury regulations
You need to be more thorough in your research. You did not capture all
of the exceptions