Monday, May 22, 2017

Employer-Provided Meals and Lodging


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.  I.R.C. §119.  They are also deductible by the employer (as a non-cash fringe benefit) if they are provided in-kind.  I.R.C. §162.   

The IRS, at least in certain parts of the country, appears to have an audit program that examines farm and ranch corporations on the meals and lodging issue.  In light of that, today’s post takes a look at the basic rules and what might cause concern for the IRS.

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 employerI.R.C. §119(a)(2).  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.  Rev. Rul. 68-579, 1968-2 C.B. 61.  The term also includes household furnishings and telephone services.  See, e.g., Turner v. Comr., 68 T.C. 48 (1977); Hatt v. Comr., T.C. Memo. 1969-229.  However, 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.  Turner v. Comr., 68 T.C. 48 (1977).  Also, the lodging must be provided “in-kind.”  Cash allowances for lodging (and meals) are includible in gross income to the extent the allowance constitutes compensation.

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. See, e.g., Peterson v. Comr., T.C. Memo. 1966-196; Winchell v. United States, 564 F. Supp. 131 (D. Neb. 1983).

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.   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.  For example, in MaschMeyer’s Nursery, Inc. v. Comr., T.C. Memo. 1996-78, the petitioner, an agricultural nursery, provided its sole shareholder a residence at the nursery.  The petitioner claimed that the shareholder’s presence was necessary on a full-time basis as a security measure for the equipment, oversee employees and handle shipments that came in after normal business hours.  The Tax Court held that the provision of the lodging met the requirements of I.R.C. §119.

On the business premises. To be excluded from income, meals must be furnished “on the business premises” of the employer. §119(a)(1).  For lodging, the employees must be required to accept the “lodging on the business premises of his employer.”  Thus, both meals and lodging must be provided on the business premises.  The regulations specify that “business premises of the employer” generally means the place of employment of the employee.  Treas. Reg. §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)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 is regarded as being furnished on the business premises of the employer.”  Regs. §1.119-1(c)(1).

As noted above, whether the employer actually owns the property where the lodging (and meals) is provided is irrelevant.  The key is that the lodging (and meals) is provided on the business premises, and ownership has no bearing on that determination.

For additional caselaw on the “business premises” issue, see the following:

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:

  • Peterson v. , T.C. Memo. 1966-196.
  • Grant Farms, Inc. v. Comr., T.C. Memo 1985-174

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.  The “business premises” is the employee’s place of employment where the employee performs a significant portion of his duties or the employer conducts a significant portion of its business.  Treas. Reg. §1.119-1(c)(1); Rev. Rul. 71-411, 1971-2 CB 103.  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.

For the employer’s convenience.  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.  Rev. Rul. 81-222,1981-2 C.B. 205.  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.   The same is true for a state statute.  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 groceries were cooked in the shareholders’ home. 


This type of arrangement is problematic because IRS can make a decent argument that it appears to be for the employees’ convenience rather than that of the employer.  Also, it’s a problem if other employees aren’t similarly treated and the reimbursement isn’t necessary to unexpected corporate issues.  Also, a question can be raised as to whether the lease covers the residence on the property.  See, e.g., Dobbe v. Comr., T.C. Memo. 2000-330.    If it does, it’s best 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.

Allowances?  Cash meal allowances or reimbursements are includible in gross income to the extent the allowance constitutes compensation.  Likewise, meal allowances provided on a routine basis for overtime work are not “occasional meal money” for purposes of the de minimis rules, and are treated as wages for FICA, and withholding purposes (and presumably for FUTA as well). 

What are “meals”?  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.  Jacob v. United States, 493 F.2d 1294 (3d Cir. 1974).  The court reached this conclusion because the employee was required to live on the business premises as a condition of employment. 

However, the U.S. Tax Court (and, on appeal, the Ninth Circuit) has reached a different conclusion.  See Tougher v. Comr., 51 T.C. 737 (1969).  Tougher involved an employee (taxpayer) of the Federal Aviation Agency (FAA) that was stationed on a remote island in the Pacific with only a handful of people and very few places to eat. As a result, the taxpayer bought groceries from the FAA commissary and used them to prepare meals at his home. The Tax Court determined that the groceries did not meet the definition of “meals” under I.R.C. §119.  The Tax Court’s decision was affirmed on appeal.  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. 

The Tax Court got another chance to deal with the “groceries as meals” issue in a 1973 case.  In Harrison v. Comr., T.C. Memo. 19810-211, two farm families incorporated a farming operation.  They lived on the farm and were also corporate employees.  The corporation purchased groceries that the farm wives used to prepare meals for all of the family members and hired help.  The Tax Court, finding that the groceries counted as “meals” for purposes of I.R.C. §119, determined that the wives had a duty as employees of the corporation to buy the groceries and prepare meals that were then provided to all of the corporate employees.  Construed in that light, the groceries were “meals.”

As an additional note, meals provided without lodging can also qualify under I.R.C. §119 if they are consumed on the business premises.  Thus, meals provided to farm employees in the field during harvesting and planting would be covered.  But, if the employees take a break and drive to town to eat meals, the cost would not be deductible.

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.  I.R.C. §119(b)(4).  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.  Priv. Ltr. Rul. 7740010 (Jun. 30. 1977).

What About Partnerships? 

Generally, a partner is treated as a self-employed owner of the business rather than an employee. So, by its terms, I.R.C. 119 does not apply.  However, it can apply when a partner transacts with the partnership in a non-partner capacity. I.R.C. §707(a).  The regulations say that this could occur in “the rendering of services by the partnership to the partner or by the partner to the partnership.  Treas. Reg. §1.707-1(a).  A key case supporting the application of I.R.C. §119 in the context of a partnership is Armstrong v. Phinney, 394 F.2d 661 (5th Cir. 1968).  See also Papineau v. Comr., 16 T.C. 130 (1951), non-acq., 1952-2 C.B. 5; but see, Comr. v. Doak, 234 F.2d 704 (4th Cir. 1956); Moran v. Comr., 236 F.2d 595 (8th Cir. 1956); Comr. v. Robinson, 273 F.2d 503 (3d Cir. 1959), cert. den., 363 U.S. 810 (1960).  In a case involving a ranch partnership, the managing partner had to include amounts received from the partnership for meal reimbursements in gross income.  Wilson v. United States, 376 F.2d 280 (Ct. Cl. 1967).  

Relatedly, an S corporation is not a “corporation” for purposes of I.R.C. §119.  Dilts v. Comr., 845 F. Supp. 1505 (D. Wyo. 1994).


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.

Business Planning, Income Tax | Permalink


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