by Roger A. McEowen
09/29/2014
Overview
Meals and lodging furnished in-kind to an employee (including the employee’s spouse and children) for the convenience of the employer on the employer’s business premises are excluded from the employee’s gross income[1] and are deductible by the employer (as a non-cash fringe benefit) if they are provided in-kind.[2] From the employer’s perspective, meals and lodging provided to employees are not considered to be compensation. They are deductible as an ordinary and necessary business expense.[3] With respect to employer-provided lodging, the employee must accept the lodging as a condition of employment.[4] In addition to being excluded from income, the value of meals and lodging furnished for the employer’s convenience is not wages for FICA and FUTA purposes.[5]
This article examines the details of the exclusion.
Exclusion of Employer-Provided Meals
On the business premises.
To be excluded from an employee’s income, the meals must be furnished on the employer’s business premises.[6] The “business premises” is the employee’s place of employment[7] where the employee performs a significant portion of his duties[8] or the employer conducts a significant portion of its business. Thus, the meals cannot be furnished at someplace that is merely near the place of employment or where significant duties are performed, but is a convenient place to provide the meals.[9]For the convenience of the employer.
The meals must also be provided for the convenience of the employer. If they are not, the value of the meals is subject to FICA and FUTA taxes.[10] The key is that the meals (or lodging) must not be intended as compensation. On this point, an employment contract that fixes the terms of employment isn’t controlling, by itself.[11] The same is true for a state statute.[12] In essence, why an employer provides meals and lodging to employees is based on objective facts and not on stated intentions. There must be some reasonable connection between providing employees with meals and lodging and the business interests of the employer.
Example: FarmCo operates on property that it leases from its shareholders/officers. Farmco requires the corporate officers to be on the farm premises at all times to monitor activities and deal with issues as they come up. Farmco reimburses the shareholders’ grocery expenses. In addition, the shareholders’ residence was on the farm and the groceries were cooked in the shareholders’ home.
Result: In Dobbe v. Comr.,[13] the Tax Court held that such an arrangement was for the shareholders’ own convenience and not for the convenience of the employer. While the shareholders were engaged in day-to-day farm operations, and may have eaten some meals while dealing with farm issues, the court held that they did so for their own convenience. In addition, the court pointed out that other employees weren’t treated similarly and the corporation failed to establish that the reimbursement was necessary to make sure that qualified employees would be available to address corporate unexpected issues of the farm corporation. Also, it was not proved that the lease covered the residence on the property.
Note: For leased residences, it is advisable to have a written lease detailing the amount of rent the corporation is to pay and detailing the corporation’s access right to the residence.
Cash meal allowances or reimbursements are includible in gross income to the extent the allowance constitutes compensation.[14] Likewise, meal allowances provided on a routine basis for overtime work are not “occasional meal money” for purposes of the de minimis rules,[15] and are treated as wages for FICA, and withholding purposes (and presumably for FUTA as well).[16]
Note: As to what can count as “meals,” the U.S. Court of Appeals for the Third Circuit, in a case involving employer-provided housing that met the test for excludability (discussed later), held that the cost of groceries (including such things as napkins, toilet tissue and soap) were excludible from the employees’ income.[17] The court reached this conclusion because the employee was required to live on the business premises as a condition of employment.[18]
Treatment of meals as a fringe benefit.
If more than one-half of the employees to whom meals are provided on an employer’s premises are provided for the convenience of the employer, then all of the meals are treated as furnished for the employer’s convenience.[19] If that test is met, the value of all meals is excludible from the employee’s income and is deductible by the employer.
Employee option.
If employees have the option of not purchasing meals provided by the employer at a cost, the IRS has taken the position that the excess of fair market value over the price of the meals is taxable income to the employees.[20]
Employer-Provided Lodging
In general.
For the value of lodging to be excluded, the employer must furnish the lodging to the employee and the employee must be required to accept the lodging on the premises as a condition of employment and for the convenience of the employer.[21] The term “lodging” includes such items as heat, electricity, gas, water and sewer service unless the employee contracts for the utilities directly from the supplier.[22] The term also includes household furnishings[23] and telephone services.[24]
Note: If the employee is required to pay for the utilities without reimbursement from the employer, the utilities are not furnished by the employer and are not excludible from income.[25] The lodging must be provided “in-kind.”[26] Cash allowances for lodging (and meals) are includible in gross income to the extent the allowance constitutes compensation.[27]
As a condition of employment.
The employee must accept the employer-provided lodging as a condition of employment. That can only occur if the employee’s acceptance of the lodging is necessary for the employee to property perform their job duties. Thus, it makes no difference if the employee is required to accept the employer-provided lodging. The key is whether the employer provided lodging is necessary for the performance of the employee’s duties. Thus, the standard is an objective one and it is immaterial, for example, that corporate documents (such as a board resolution) require the employee to live in corporate-provided lodging.[28]
Convenience of the employer.
With respect to employer-provided lodging, the “convenience of the employer test” is basically the same as the requirement that the lodging be provided as a condition of employment.[29] Thus, if the lodging meets the test as being provided as a condition of employment it will also be deemed to be provided for the convenience of the employer.[30]
On the business premises.
To be excluded from income, meals must be furnished “on the business premises” of the employer.[31] For lodging, the employees must be required to accept the “lodging on the business premises of his employer.”[32] Thus, both meals and lodging must be provided on the business premises.
Note: The regulations specify that “business premises of the employer” generally means the place of employment of the employee.[33] In addition, it is immaterial whether the meals and lodging are provided on premises that the corporation leases rather than owns. On this point, the regulations state, “For example, meals and lodging furnished in the employer’s home to a domestic servant would constitute meals and lodging furnished on the business premises of the employer. Similarly, meals furnished to cowhands while herding their employer’s cattle on leased land would be regarded as furnished on the business premises of the employer.”[34]
Caselaw on the “business premises" issue.
The courts have dealt with the “business premises” issue in numerous cases. The following is a summary of some of the more relevant decisions:- In Dole v. Comr.,[35] the court held that “on the business premises,” for purposes of the lodging exclusion, meant living quarters constituting an integral part of business property or premises on which the employer carries on some of its business activities. The court disallowed the exclusion, however, because the lodging in question was located approximately a mile from mills where the taxpayers were employed – it was not located on the business premises. In addition, the employees were not required to accept the lodging as a condition of their employment.
- In Comr. v. Anderson,[36] the employer owned a motel and built a house within two blocks of the motel for the motel manager and his family to live in. The employer paid for the home, utilities, laundry, cleaning expenses, milk and groceries. The Tax Court held that the value of the meals and lodging were excludible from the employee’s income because they were provided on the employer’s business premises. However, the appellate court reversed, pointing out that, to be excluded, meals or lodging must be provided either at the place where an employee performs a significant portion of his duties or on premises where the employer conducts a significant portion of the business.[37]
- In McDonald v. Comr.,[38] the taxpayers, a married couple, moved to Japan and the husband’s employer reimbursed their cost of lodging in Japan. The court held that the value of the employer-provided lodging was includible in the employee’s gross income to the extent it exceeded the amount of rent that the taxpayers paid. The court held that the lodging was not furnished for the employer’s convenience, were not on the business premises and was not provided as a condition of employment.
As noted above, whether the employer actually owns the property where the lodging (and meals) is provided is irrelevant.[39] The key is that the lodging (and meals) is provided on the business premises, and ownership has no bearing on that fact.
- In Benninghoff v. Comr.,[40] government ownership of a home was not sufficient to prove the home was “on the business premises.” Instead, the court ruled that there must be a “direct, substantial relationship” between the lodging and the interests of the employer. Under the facts of the case, that relationship was not present. Thus, the value of the lodging was not excludible. Other cases also bear this point out:
- In Boykin v. Comr.,[41] the rental value of quarters provided on the grounds of a Veteran’s Administration Hospital was excludible from the taxpayer-physician’s gross income.[42]
- In Lindeman v. Comr.,[43] the taxpayer was the general manager of a hotel that was located on property that the taxpayer’s employer leased. While the IRS denied the exclusion of value of the employer provided lodging, the court held that it was immaterial that the hotel was on leased property and that the key was that the employee performed a significant portion of his duties in the residential quarters on the employer’s premises.[44]
In most of the farm and ranch cases decided to date, whether the meals and lodging were provided “on the business premises” has not been an issue, but there are a few cases where it has been an issue. The following cases illustrate the application in farm/ranch settings:
- In Peterson v. Comr.,[45] the value of a home provided to the president of a poultry breeding corporation adjacent to the corporation’s poultry farm was not excluded from income. The court acknowledged that “the facility in question was on the business premises of the employer,” but the court held that the taxpayer was not required to live on the premises as a condition of employment[46] and the taxpayer failed to show that the housing was furnished for the convenience of the employer.[47]
- In Wilhelm v. United States,[48] the value of food and lodging provided by a ranching corporation was not taxed to the shareholder-employees. Under the facts of the case, the ranch was located in a remote location several miles from the nearest town. The court noted that the ranch was a grass ranch that put up very little hay and required constant attention by persons experienced in grass ranch requirements to keep cattle alive. The court also noted that during snowstorms the cattle needed to be fed daily, needed to be moved, waterholes had to be kept open, and the cattle had to be protected against the hazards of being trapped or falling into ravines. The court felt that the employees had no choice but to accept the facilities furnished by the corporate employer, and that the food and lodging were furnished to the employees not only for the convenience of the employer, but that they were indispensable in order to have the employees on the job at all times.
- The same court went further in 1994. In Caratan v. Comr.,[49] each shareholder-employee of a closely-held farm corporation lived in a corporation-owned house on the business premises. The taxpayers met the burden of proving that the lodging furnished to them was indispensable to the proper discharge of their employment. This was the case even though the corporation was located within a ten minute drive from a residential area of a nearby town. The court reasoned that the issue was not the remoteness of the corporation, but whether there was a good business reason to require the employees to reside on the premises.
- In J. Grant Farms, Inc. v. Comr.,[50] the value of lodging and cost of utilities of a farm manager-sole shareholder and family was held to be excludible from the manager’s income because the manager’s residence on the farm was necessary and a condition of employment in the swine-raising and grain drying operation.
- Likewise, in Johnson v. Comr.,[51] a married couple, as the sole shareholders of a corporation, were allowed an exclusion from income of the fair rental value of the corporate-owned residence located on the premises where the husband was the manager of the corporation’s grain drying and storing operation.
- In Waterfall Farms, Inc. v. Comr.,[52] a corporate farming operation rented the residence where the taxpayer (who was a corporate shareholder, office and the sole corporate employee) lived. The shareholder/employee was provided food and lodging, but the court held that the amounts weren’t excludible because the corporation couldn’t prove that substantial business activity occurred at the residence. That was the key reason that the court determined that the food and lodging were not provided on the corporation’s business premises. The fact that the corporation rented the residence was not material as to the business premises issue.
Summary
Employer-provided meals and lodging is an important fringe benefit that corporations can provide for their employees. But, it is important to properly structure such arrangements within the confines of the guidelines set forth by the IRS and the courts.
Sample Corporate Resolution
(Grain Farming)
[with permission from the Iowa Bar Tax Manual]
Whereas, the corporation’s employees are required to perform duties which include extended working hours during the crop production cycle, and the duties include a requirement to reside on the corporate farm premises to supervise and secure grain inventory and machinery/equipment of the corporation; and
Whereas, in consideration for those extended hours and on-site duties, the corporation has provided on-premises meals and lodging as a condition of employment within the definitions of I.R.C. §119;
Now, therefore, it is resolved that effective immediately that the corporation shall make its on-premises eating facility available to all of its employees, to allow those employees to attend to their extended duties and on-site supervision requirements.
[1] I.R.C. §119. The value of meals and lodging is includible in an employee’s income if the employee can choose to receive additional compensation instead of receiving the meals or lodging in-kind.
[2] I.R.C. §162.
[3] Id. The exclusion of the value of meals and lodging from an employee’s income has no bearing on the employer’s deduction. See, e.g., Harrison v. Comr., T.C. Memo. 1981-211.
[4] I.R.C. §119(a)(2). Treas. Reg. §119-1(b)(3).
[5] Rowan Companies, Inc. v. United States, 452 U.S. 247 (1981) (offshore oil rigs).
[6] § 119(a)(1).
[7] Treas. Reg. §1.119-1(c)(1).
[8] Rev. Rul. 71-411, 1971-2 CB 103 (even though meals were not served at the place of employment, they were served where a major part of the employer’s business was conducted).
[9] Id.
[10] Rev. Rul. 81-222, 1981-2 C.B. 205. See PLR 9143003 (value of meals included in employees’ income; not reasonable to believe wages excludible).
[11] I.R.C. §119(b)(1)(employment contract or state statute not determinative of whether meals (or lodging) are intended as compensation).
[12] Id.
[13] T.C. Memo. 2000-330.
[14] See, e.g., Priv. Ltr. Rul. 9801023 (Sept. 30, 1997). See also Koven v. Comr., T.C. Memo. 1979-213.
[15] Temp. Regs. §1.132-6T(d)(2).
[16] Priv. Ltr. Rul. 9148001 (Feb. 15, 1991)
[17] Jacob v. United States, 493 F.2d 1294 (3d Cir. 1974).
[18] The IRS does not agree with court’s conclusion. See Priv. Ltr. Rul. 9129037 (Apr. 23, 1991). The U.S. Tax Court has reached a different conclusion. See Tougher v. Comr., 51 T.C. 737 (1969). As a result, the IRS does not follow the Third Circuit’s opinion outside of the Third Circuit, and takes the position in those jurisdictions that the value of such items is wages for FICA purposes.
[19] §119(b)(4).
[20] Priv. Ltr. Rul. 7740010 (no date given).
[21] §119(a)(2).
[22] Rev. Rul. 68-579, 1968-2 C.B. 61; Harrison v. Comr., T.C. Memo. 1981-211 (amounts for gas and electricity paid by corporation in grain and dairy operation were necessary for residences to be habitable and so excludible from income of employees); Vanicek v. Comr., 85 T.C. 731 (1985), acq. , 1986-1 C.B. 1 (portion of cost of utilities for residence provided by employer not deductible because of lack of evidence showing how utility cost could be apportioned between business and personal use). See also Inman v. Comr., T.C. Memo. 1970-264; McDowell v. Comr., T.C. Memo. 1974-72 (propane, gas, telephone and utilities excludible in addition to food and depreciation; taxpayers lived on ranch eight months out of year with closest town 80 miles away).
[23] Turner v. Comr., 68 T.C. 48 (1977).
[24] Hatt v. Comr., T.C. Memo. 1969-229.
[25] Turner v. Comr., 68 T.C. 48 (1977) (costs of utilities and furnishings purchased by welder for house in which welder required by employer to reside not deductible because utilities and furnishings not provided by employer).
[26] See Priv. Ltr. Rul. 9801023 (Sept. 30, 1997)(cash housing allowance provided to employee was not excludible from income; lodging not also on business premises); PLR 9824001 (Feb. 11, 1998)(same).
[27] Regs. §1.119-1(e).
[28] See, e.g., Peterson v. Comr., T.C. Memo. 1966-196; Winchell v. United States, 564 F. Supp. 131 (D. Neb. 1983).
[29] See, e.g., Vanicek v. Comr., 85 T.C. 731 (1985).
[30] Rev. Rul. 68-354, 1968-2 C.B. 60. In the Rev. Rul., IRS said that Treas. Reg. §1.119-1(a)(3)(i) which governs the convenience of the employer test as to meals also applies to lodging. Thus, even if there is a compensatory reason for providing the lodging, the lodging will be deemed to have been provided for the employer’s convenience if there is a substantial non-compensatory business reason for providing it.
[31] §119(a)(1).
[32] §119(a)(2).
[33] Regs. §1.119-1(c). It doesn’t necessarily matter if the lodging is not physically contiguous to the actual business premises if the employee conducts significant business activities in the residence. See, e.g., Faneuil v. United States, 585 F.2d 1060 (Fed. Cl. 1978).
[34] Regs. §1.119-1(c)(1).
[35] 43 T.C. 697 (1965), aff’d., 351 F.2d 308 (1st Cir. 1965).
[36] 371 F.2d 59 (6th Cir. 1966), rev’g 42 T.C. 410 (1964).
[37] Id.
[38] 66 T.C. 223 (1976).
[39] See Bornstein v. Comr., T.C. Memo. 1978-278 (apartment occupied by taxpayer and supplied by employer was not located at employer’s place of business, therefore, its value was not excludible from the employee’s income).
[40] 614 F.2d 398 (5th Cir. 1980), aff’g, 71 T.C. 216 (1978).
[41] 260 F.2d 249 (8th Cir. 1958).
[42] Id.
[43] 60 T.C. 609 (1973).
[44] Id.
[45] T.C. Memo. 1966-196.
[46] §119(a)(2).
[47] §119(a).
[48] 257 F. Supp. 16 (D. Wyo. 1966).
[49] Dilts v. United States, 845 F. Supp. 1545 (D. Wyo. 1994) (employee-shareholders of S corporation denied exclusion for both meals and lodging including groceries and utilities).
[50] T.C. Memo. 1985-174.
[51] T.C. Memo. 1985-175.
[52] T.C. Memo. 2003-327.