The Exclusion for Meals and Lodging

By Alan D. Campbell, Ph.D., CPA, CMA, CFP, and Dena S. Mitchell, M.Acc., CPA

EXECUTIVE
SUMMARY

Illustration by lambada/istock

  • Employees may exclude from gross income the value of meals furnished by their employer on the employer's business premises for the employer's convenience if the meals are furnished for a substantial noncompensatory business reason.
  • In some cases, part or all of the value of meals may be excluded as de minimis fringe benefits or qualified employee discounts.
  • The value of lodging may be excluded from an employee's gross income if (1) the lodging is located on the employer's business premises; (2) the lodging is furnished for the employer's convenience; and (3) the employee is required to accept the lodging as a condition of employment. Special rules apply to lodging provided in a foreign camp and qualified campus housing provided by an educational institution.
  • Partners may be deemed as other than partners for purposes of services they provide a partnership under Sec. 707(a). The Fifth Circuit has held that, as a matter of law, in such a situation a partner might be able to exclude meals and lodging furnished by a partnership; however, other circuits have held otherwise.

Gross income generally includes the fair market value (FMV) of meals and lodging received from one's employer. 1 However, Sec. 119 allows an employee to exclude from gross income the value of meals and lodging received from an employer under certain circumstances. In addition, some or all of the value of meals or lodging may be excluded from income under other exclusion provisions. This article explains the general exclusion under Sec. 119(a) and the other limited exclusions for meals and lodging received from an employer and addresses whether a partnership may treat a partner as an employee for purposes of the Sec. 119(a) exclusion.

Conditions for Exclusion of Meals by an Employee

For an employee to exclude the value of meals received from an employer from gross income under the general exclusion in Sec. 119(a), the employer must furnish the meals on the employer's business premises. 2 The "employer's business premises" generally means the employee's place of employment. For example, for a household employee, the business premises are the employer's home. 3 The business premises include the place where the employee performs significant duties or where the employer conducts a significant portion of its business. 4 Places near the employer's premises will not qualify, even though such places might be convenient. 5 The business premises of the employer include any place on the grounds of the employer and not just the main structure. 6 The meals must also be for the convenience of the employer, not the convenience of the employee. 7

Noncompensatory Business Reason Requirement

An employee may exclude from gross income the value of the meals provided free by an employer only if the employer does so for a substantial noncompensatory business reason. An employee may exclude the value of the meals in this case even if the employer also has an additional, compensatory reason for providing the free meals. The employer's statement alone is not sufficient evidence for the conclusion the employer provided the meals for a substantial noncompensatory reason. All the facts and circumstances are relevant to such a determination. 8

Where an employer requires an employee to accept lodging on the employer's business premises as a condition of employment, the law deems any meal the employer provides free to the employee at the business premises to be for a substantial noncompensatory reason. 9

An employee may exclude from gross income the value of small food items and soft drinks as a de minimis fringe benefit. In addition, an employee may exclude from gross income occasional meals provided in kind or occasional cash received to buy dinner to allow the employee to work overtime. 10 The same treatment may be extended to food and drinks provided by the employer to employees and their guests at picnics and parties.

Meals Before and After Work

With some exceptions, the law treats meals provided immediately before and/or after work as not provided for a substantial noncompensatory reason. Thus, the employee must include the value of such meals in gross income. 11 Meals provided to restaurant employees are a common exception. A restaurant employee may exclude from gross income the value of free or discounted meals consumed immediately before work, during work, or immediately after work, as Example 1 illustrates. 12

Example 1: A is a restaurant server who works from 8 a.m. to 5 p.m. each workday. His employer allows him one hour for a meal during his shift. The restaurant manager allows A to eat breakfast free at the restaurant before he starts work. The restaurant does not require A to eat breakfast at the restaurant; however, he must eat lunch at the restaurant. Because A is a food service employee, he may exclude from gross income the value of these breakfasts and lunches the restaurant provides.

However, if a restaurant employee eats a meal free at the restaurant on a nonworking day, the employer must include the value of the meal in the employee's wages and report it on Form W-2, Wage and Tax Statement. 13 The employer must keep adequate records of the value of any meals included in the employee's wages. 14 The employer may treat the value of taxable noncash fringe benefits as paid on a per-pay-period, quarterly, semiannual, annual, or other basis. 15 The employee would have to include the value of the meal in gross income, as Example 2 shows. 16

Example 2: A came in to the restaurant on his day off to see what his shift schedule would be for the next week. While he was there, he ate lunch. The FMV of the lunch was $12. The restaurant provided the lunch to A without charge. A's employer should include the $12 value of the free meal in A's wages reported on Form W-2.

If A's employer fails to do so, A could request an amended Form W-2 from his employer. If his employer will not provide him with an amended Form W-2, A should add $12 to the amount reported as wages on line 7 of Form 1040, U.S. Individual Income Tax Return, and attach an explanation.

However, a restaurant employee might be able to exclude from income the discount on discounted meals consumed on nonworking days as a qualified employee discount. 17 To provide a qualified employee discount, the restaurant must not sell the meal below its cost of goods sold. 18 Example 3 illustrates the exclusion of discounted meals as a qualified employee discount.

Example 3: G works as a bartender at a steakhouse. She may eat meals without charge immediately before her shift, while on break during her shift, and immediately after her shift. She excludes the value of these free meals under Sec. 119. On her nonworking days, G may eat meals at the restaurant for a 50% discount. Assume that the gross profit percentage at the steakhouse is 60%. Because the discount does not exceed the gross profit percentage, G may exclude all the discounts she receives as a qualified employee discount under Sec. 132.

What if the employer would have provided a meal to an employee during working hours for a substantial noncompensatory business reason, but work duties prevented the employee from eating? In that case, the employee may exclude from gross income the value of a meal provided by the employer immediately after working hours. 19

Meals During Working Hours

An employee may exclude from gross income the value of meals furnished by an employer during working hours if the reason is to have the employee available for emergency calls during the meal period. 20 Likewise, an employee may exclude the value of meals furnished by an employer during working hours if the reason is that the employer allows only a short meal period, such as 30 to 45 minutes, and the employee could not be expected to eat elsewhere in that time. 21 Such a circumstance may arise when the employee's peak workload occurs during normal meal hours, as Example 4 shows.

Example 4: A credit card company employs D, a customer service agent, from 8:30 a.m. to 5 p.m. D has a 30-minute lunch period, which management strictly enforces. The lunch period coincides with the peak workload for the employee. Management allows D to eat in the company's cafeteria free. If he left the premises for lunch, he could not return to work within the 30-minute lunch period allowed. D may exclude the value of the free lunch from gross income. 22

However, meals provided by the employer do not qualify for the exclusion if they are not provided for the employer's convenience (e.g., if the purpose of the short meal period is to allow employees to leave earlier in the day). 23

What if the employer charged D a flat fee for each lunch served in the company cafeteria, regardless of whether he ate lunch in the cafeteria? D would exclude the value of the flat fee from compensation. He would also exclude from gross income the value of the meals eaten, even if the value of the meals he ate exceeded the flat fee. 24

An employee may exclude from gross income the value of meals furnished by an employer during working hours if the employee could not otherwise obtain proper meals within a reasonable meal period. This situation could occur if eating facilities near the employer's location are insufficient, as Example 5 illustrates. 25

Example 5: A manufacturing company has a factory in a rural area where no eating facilities are nearby. The company maintains a cafeteria on-site where it provides its employees with free meals during working hours. The employees have no gross income from the free meals they eat during working hours at the company cafeteria.

Other Factors

If an employer provides meals to substantially all its employees for a substantial noncompensatory business reason, then the law treats the meals provided to other employees as provided for a substantial noncompensatory business reason, as Example 6 shows. 26

Example 6: A large hospital has an on-site cafeteria where all of its 250 employees may eat free during working hours. Of the 250 employees, 234 are provided the meals because they must be available for emergencies. Because substantially all of the hospital's employees must eat at the cafeteria, all of the employees may exclude the value of the meals from gross income.

If the employer provides meals for a price and the employee may or may not purchase the meals, the law does not treat such meals as provided for the convenience of the employer. 27 Thus, if the FMV of the meals exceeds the cost paid by the employee, the employee must include the difference in gross income, unless the discounted meals qualify for exclusion as a qualified employee discount under Sec. 132. Example 7 ­illustrates this rule.

Example 7: A company provides a cafeteria where employees may purchase meals at a discount of 40% from the meals' FMV. Employees do not have to eat in the cafeteria. The company allows family and friends of employees to eat with them in the company cafeteria, but the family and friends must pay full price. Thus, the receipt for employees shows the full price, the 40% discount, and the net price paid. The company's accounting system tracks the cumulative discounts received by employees and reports them on each employee's Form W-2. One employee, M, ate 250 meals at the company cafeteria during the year. She received an average discount of $4 per meal. Her gross income will include $1,000 (250 × $4) for the value of the meal discounts she received.

What if an employer deducts a fixed amount from the employee's compensation for the cost of meals the employer provides? The employer does not include such a reduction in pay in the employee's gross income—it is a tax-free reduction in compensation. The employee determines whether the exclusion for the meals under Sec. 119 applies by using the rules of Regs. Sec. 1.119-1(a)(2), as Example 8 shows. 28

Example 8: G works for an oil pipeline company on a project in a remote area of Alaska. His employer provides meals and lodging to the pipeline workers at a camp because no other facilities are available. G pays $75 per week to the employer through a payroll reduction for the meals and lodging. G determines that the meals are furnished for the convenience of his employer in accordance with the rules of Regs. Sec. 1.119-1(a)(2). He does not include the $75 per week withheld from his paycheck in gross income. G also excludes from gross income the value of the meals and lodging provided by the employer. 29

Sec. 119 applies to meals provided by an employer in kind. It does not apply to a cash meal allowance. An employee must include a cash meal allowance in gross income to the extent that such an allowance is compensation, as Example 9 shows. 30

Example 9: B works for a large Western state as a state fire marshal. He travels extensively within the state, but he is usually home late each night. He considers the entire state as the business premises of his employer. Because of his late hours, he generally needs to eat at a restaurant before he arrives home. The state gives him a cash meal allowance. He must include the allowance in his gross income. He may not deduct the cost he pays for meals unless he is away from home long enough to require rest and sleep. 31

If an employee may choose to receive additional cash compensation in lieu of meals and the employee chooses the meals, he or she must include the value of the meals in gross income. However, if an employee refuses to accept free meals provided in kind by the employer, he or she does not necessarily have to include the value of the refused meals in gross income. 32 No additional guidance regarding the tax treatment of an employee's refusal to accept meals provided in kind by the employer is available in Regs. Sec. 1.119-1.

Conditions for Exclusion of Lodging by an Employee

When an employer provides housing or lodging for an employee, the employee may be able to exclude the value of the lodging from gross income. The lodging must meet three tests: (1) The lodging must be on the employer's business premises; (2) the employer must provide the lodging for the employer's convenience rather than for the employee's convenience; and (3) the employer must require the employee to accept the lodging as a condition of employment. Thus, the employee must need to live in the lodging to be able to perform the duties of the employment, as Example 10 shows. 33

Example 10: J is an employee of an apartment building, performing maintenance and repairs. His employer requires him to live in the apartments to be able to provide emergency repair services 24 hours per day and therefore provides J with free lodging there.

J meets all three tests: (1) The lodging is on the employer's premises; (2) it is for the employer's convenience; and (3) J must live there to be on call 24 hours a day as a condition of his employment. Therefore, he may exclude the value of the free lodging from gross income.

For the Convenience of the Employer

The terms of an employment contract or state statutes that describe terms of employment are not determinative of whether meals or lodging are for the employer's convenience. 34 If a state statute or employment contract treats employer-provided lodging as compensation, the employee may still exclude the value of the lodging from gross income for federal income tax purposes if the lodging meets the three tests. The employee must determine whether he or she may exclude the value of lodging from gross income by an objective analysis of all relevant facts and circumstances. 35

An employer's subjective intent is not conclusive of whether an employee may exclude the value of lodging furnished by an employer from the employee's gross income, as Example 11 illustrates. 36

Example 11: S is a state employee. The state institution where she works requires her to be available for duty at all times. The state furnishes S with free meals and lodging at the institution. The applicable state statute considers the meals and lodging as compensation and includible in gross income for state income tax purposes.

Despite the state statute, S may nevertheless be able to exclude the value of the meals and lodging from gross income for federal income tax purposes. She must carefully examine all the facts and circumstances in determining whether the tests of Sec. 119 are met for the meals and lodging.

What if an employer allows the employee to choose between free lodging or additional cash compensation and the employee chooses the free lodging? In that case, the employee must include the value of the free lodging in gross income, as Example 12 shows.

Example 12: Assume that S in the previous example had a choice between accepting the free lodging or a cash allowance in lieu of such lodging. If S chooses the cash allowance, she may live anywhere in the vicinity of where she works. S chose the free lodging on the employer's premises. S must include the value of the lodging in gross income. Under these circumstances, the lodging is not necessary for S to perform the duties of her position. 37

If lodging satisfies the three tests, the employee excludes the value of the lodging from gross income. If the employer charges the employee for such lodging and deducts a fixed amount from the employee's compensation for lodging, then the employee does not include the reduction in pay in gross income. Likewise, the employee may exclude any discount from the FMV of the lodging from gross income.

If the lodging does not satisfy the three tests, the employee must include the FMV of the lodging in gross income, regardless of any amount the employer deducts from the employee's pay for the lodging. Absent evidence to the contrary, the law deems the FMV of the lodging to be the amount deducted from the employee's pay for lodging. 38

Employer's Business Premises

The requirement for the lodging to be on the business premises of the employer generally means at the place of employment. This could include the employer's home, for a domestic servant, or property leased by the employer for the business purpose. 39 It could mean other property owned by the employer where the employee performs a significant portion of his or her duties.

In Lindeman, 40 a hotel manager lived in a house within the perimeter of the hotel property. The manager performed a significant portion of his duties in the house. He was on call 24 hours a day. Under these facts and circumstances, the Tax Court allowed the exclusion for lodging.

However, in Anderson, 41 a motel manager lived in a house owned by the employer. The house was two blocks from the motel. The employer provided the home free, paid for its utilities, and provided staple grocery items. The employer did so to avoid any loss of revenue that would result from the manager's occupying a motel room. The manager was on call 24 hours a day. However, because the manager did not perform a significant portion of his duties in the house, and because the house was not a significant place of business for the employer, the Sixth Circuit did not allow the exclusion for meals and lodging. Thus, the manager had to include the value of the lodging in gross income.

The employer of an engineer on the Trans-Alaska Pipeline built permanent homes and modular homes in the construction area because there was insufficient housing available elsewhere. The employer provided the housing free to employees. The employer then included the value of the lodging in the employees' wages and withheld tax on it. The engineer employee deducted the value of the housing included in his wages as employee business expenses. The Tax Court found the employer provided the housing for the employer's convenience, and the employee had to accept the lodging as a condition of employment. 42

However, for the taxpayer's lodging to be considered as within the employer's business premises, those premises would have to encompass the entire town, an overly broad view of the term, the court said. Because the taxpayer did not perform a substantial amount of his duties in the home but rather at the employer's oil pipeline terminal, the Tax Court found the lodging was not on the employer's business premises. Consequently, the taxpayer had to include the value of the lodging in gross income and could not deduct it as a business expense.

Foreign Camps

In the case of an employee who receives lodging from an employer in a camp in a foreign country, the law will treat the camp as the business premises of the employer. 43 A camp is lodging the employer provides the employee for the employer's convenience. The employer provides the housing in the camp because the area where the employee works is remote and housing is not otherwise available within a reasonable commuting distance. The lodging must be as close as practicable to the place where the employee works. The employer must provide the lodging in a common area that is not available to the general public for lodging. The camp must accommodate 10 or more employees. 4 4

Factors to determine a reasonable commuting distance include the time and distance of the commute, the quality of the roads, the customarily available transportation at the time of day when an employee must commute, and the geographic accessibility of the place where the employee works. 45 The definition of satisfactory housing depends on facts and circumstances including the size and condition of lodging available on the open market, the availability and quality of utilities in such housing, and the adequacy of such other available lodging to protect the employee from environmental conditions. Whether housing is satisfactory is not determined solely by conditions of its general environment, nor does it depend on the employee's income level. 46

Facts and circumstances to consider in determining the availability of satisfactory housing include:

  • The number of housing units available on the open market in relation to the number of the employer's employees requiring such housing;
  • The cost and/or quality of housing available on the open market;
  • The presence of civil insurrection or warfare in the area where other available housing is located and whether those disturbances would subject U.S. citizens to an unusually high risk of harm or property loss. 47

If the foreign government requires the employer to provide housing other than what is available on the open market, or an unrelated third party awarding work to the employer requires the provision of housing the party specifies, satisfactory housing is considered to be unavailable. If these requirements apply primarily to U.S. employers and not to a significant number of third-country employers, the previous conditions will not automatically signify that satisfactory housing is unavailable. 48 The determination of availability would revert to a facts-and-circumstances test.

To qualify as a camp, any common area or enclave must not be adjacent to or surrounded by substantially similar housing available to the general public. However, the law considers two or more common areas or enclaves that house employees who work on the same project to be one common area for the purpose of determining whether each can normally accommodate 10 or more employees. 49

Campus Housing

In general, and as stated above, for an employee to exclude from gross income the value of lodging provided by the employer, the employer must require the employee to accept the lodging on the employer's business premises as a condition of employment. 50 Some educational institutions furnish lodging to their employees. Educational institutions generally do not require their employees to accept such lodging as a condition of employment. Thus, an employee of an educational institution who receives subsidized housing is usually unable to meet the requirements for exclusion.

However, Sec. 119(d) provides that employees of an educational institution may exclude from gross income the value of qualified campus lodging that the educational institution provides them. 51 Qualified campus lodging is lodging on or close to campus that is provided by the educational institution as a residence for the employee and the employee's spouse and dependents.

The exclusion does not apply when an employee pays inadequate rent for such housing. In that case, the employee would include in gross income all or a portion of the value of the housing provided, based on the inadequate-rent calculation. 52

Inadequate rent is the lesser of (1) 5% of the appraised value of qualified campus housing, or (2) the average rent paid by individuals for similar housing provided by the institution, 53 minus the rent paid by the employee for the housing during the calendar year. 54 The educational institution must determine the appraised value as of the close of the calendar year in which the tax year begins or, in the case of a rental period not greater than one year, anytime during the calendar year in which the rental period begins. 55 Example 13 illustrates the calculation of the amount that an employee of an educational institution who receives lodging from the institution must include in gross income.

Example 13: A large state university owns a house on campus it rents to Professor T. The house is currently appraised at $180,000, and similar properties rent for $1,400 per month. The university charges Professor T $600 per month in rent. How much is includible in Professor T's gross income in relation to his rental of the property from the university?

Professor T must include the lesser of (1) 5% of $180,000 or (2) $1,400 per month, minus the $600 per month rent that he pays. The calculation is: 5% × $180,000 = $9,000 per year; $9,000 ÷ 12 months = $750 per month. Because $750 per month is less than $1,400 per month, the calculation is $750 − $600 = $150 per month; $150 per month × 12 months = $1,800. Professor T must include $1,800 per year in gross income as a result of the bargain rental from the university.

An educational institution is an educational organization that maintains a faculty and curriculum and normally has a body of enrolled students at the place where its educational activities occur. 56

The term "educational institution" includes not only a college or university, but also an academic health center. An academic health center is an entity that carries on medical care, medical education, and/or medical research. 57 To qualify as an academic health center, the entity must also receive payments under Section 1886 of the Social Security Act 58 relating to graduate medical education. It must have as one of its principal purposes or functions providing and teaching basic and clinical medical science and research with its own faculty. 59

Tax-Free Housing to a Partner From a Partnership

May a partner receive tax-free housing provided by the partnership if the partnership requires the partner to live there to carry out duties necessary to receive a guaranteed payment from the partnership? Sec. 119 does not address lodging provided by a partnership to a partner on the partnership's business premises for the partnership's convenience. Nevertheless, in some situations a partnership may view its transactions with a partner as being with someone who is not a partner.

A partner has an equity interest in the partnership. The tax law generally treats a partner as self-employed and not as an employee of the partnership. If a partner engages in a transaction with a partnership in a capacity other than as a partner, the law will deem the transaction to be not between a partner and a partnership. 60 This situation could occur in "the rendering of services by the partnership to the partner or by the partner to the partnership." 61 Thus, if the partnership reasonably believes it engaged in the transactions with the partner to provide free housing for the partner so the partner could carry out the business duties of being a partner, the partnership might view the partner as an employee for such purposes. Then, the partnership would have to satisfy itself that it meets the Sec. 119 requirements for excluding the value of the lodging from the partner's gross income.

Case Law Supporting Exclusion by a Partner

In Armstrong v. Phinney, 62 the Fifth Circuit ruled that a partner could act in a capacity other than as a partner under Sec. 707(a) for purposes of the exclusion for meals and lodging under Sec. 119. The court noted that Congress rejected the aggregate theory of partnership taxation when it enacted the Internal Revenue Code of 1954. The court cited Sec. 707(a) as authority for its conclusion of law that a partnership could treat a partner as an employee for purposes of Sec. 119, stating:

[W]e have found nothing to indicate that Congress intended that this section [Sec. 707] is not to relate to section 119. Consequently, it is now possible for a partner to stand in any one of a number of relationships with his partnership, including those of creditor-debtor, vendor-vendee, and employee-employer. Therefore, in this case the government is not entitled to a judgment as a matter of law. 63

The court remanded the case so that the trial court could make findings of fact regarding the application of Sec. 119, given this conclusion of law.

This case is the best one on which a partnership and partner may rely in arguing that Sec. 119 should apply to a partner. This case would provide a partner with only persuasive authority in circuits other than the Fifth Circuit; it is not binding precedent in the other circuits.

In addition, in Papineau, 64 the Tax Court held that where a limited partnership required a general partner who was the operator of a hotel to live at the hotel as a part of his job, the operator had no gross income from the value of the free lodging. The Tax Court also allowed the hotel to deduct the cost of the meals and lodging as ordinary and necessary business expenses. The Tax Court based its decision in this case on the Internal Revenue Code of 1939, finding that the value of the meals and lodging was not income to the taxpayer because as a partner he was working for himself and could not be considered an employee in the sense of providing services to another. He therefore could not compensate or create income for himself by furnishing himself meals or lodgings.

In Wolfe, 65 the Tax Court followed its decision in Papineau, even though the partnership reduced its gross receipts by the cost of the meals and lodging it furnished to the partner. The court declined to address whether the IRS should have disallowed the partnership's reduction of gross receipts because that issue was not before the court.

Case Law Opposing the Exclusion by a Partner

However, taxpayers have lost similar cases. In Doak, 66 the Fourth Circuit held that two married taxpayers who operated a hotel as a partnership could not deduct the cost of their meals and lodging at the hotel as business expenses because they operated the hotel as a partnership; they were not employees of the hotel. However, the court noted that if the law treated a partnership as a separate taxable entity (and not as an aggregation of the partners individually), and the partners as employees, the cost of the meals and lodging provided to the partners might be deductible as a business expense.

In Moran, 67 the Tax Court, on a rehearing following reversal and remand of its earlier decision by the Eighth Circuit, 68 held that a partnership had to reduce its deductible business expenses by the amount of the partners' personal expenses it paid to the partners rather than by the value of the lodging received by the partners.

In Robinson, 69 the Third Circuit ruled against the taxpayers. However, the court stated that if the taxpayers had incorporated and were employees of the corporation, the expenses would be deductible under the convenience-of-the-employer rule. The dissent in the case observed that the law penalized a business owner who was not incorporated.

In Wilson, 70 the taxpayer was a managing partner in a partnership. He lived in a house on a ranch the partnership owned and performed work there on behalf of the partnership. The partnership provided food and housing to the taxpayer as a part of his compensation. The taxpayer did not include the value of the food and housing in his gross income. The taxpayer argued that living on the ranch was a business necessity under the circumstances. The Court of Claims ruled the taxpayer failed the convenience-of-the-employer test because the partnership could not be the employer of its partners. The court cited the decisions in Doak, Moran, and Robinson as support for its decision. Thus, the taxpayer had to include reimbursements for meals received from the partnership in gross income. The court also held the taxpayer could not deduct the cost of the meals because they were a personal expense.

In Briggs, 71 the taxpayer was a managing partner in a partnership. The partnership agreement required him to live at a hotel and manage it as a business. The issue was whether the partnership could deduct the taxpayer's expenses of living at the hotel. The District Court for the District of Colorado held the expenses were deductible. The Tenth Circuit reversed the trial court's decision and held the expenses were not deductible, based on the decisions in Doak and Moran.

Revenue Ruling Opposing the Exclusion

In 1953, the IRS ruled that a partnership had to reduce its deductible business expenses by the personal expenses it paid for a partner and increase the resident partner's share of the partnership's income by the same amount. 72 The IRS based this ruling on its nonacquiescence to the decision in Papineau. This ruling was issued before Congress enacted the Internal Revenue Code of 1954.

Conclusion

Sec. 119 directly applies only to employees. As long as meals and lodging provided to an employee meet the three tests, the employee will be able to exclude the value of employer-provided meals and lodging from gross income. In contrast, the tax law generally treats partners as self-employed owners of a business rather than employees, limiting a partner's ability to take advantage of this exclusion from gross income. However, the Fifth Circuit has allowed a partnership to treat a partner as an employee of the partnership under Sec. 707(a) for purposes of Sec. 119 if the partner is acting in a capacity other than as a partner. Several circuits have issued contrary opinions.

Footnotes

1 Sec. 61(a) and Regs. Sec. 1.61-2(d)(3).

2 Sec. 119(a)(1).

3 Regs. Sec. 1.119-1(c)(1).

4 Meals provided to cowhands by their employer while herding the employer's cattle are considered to be furnished on the employer's business premises. The exclusion applies even if the cowhand is working on leased land not owned by the employer (Regs. Sec. 1.119-1(c)(1)).

5 Anderson, 371 F.2d 59 (6th Cir. 1966), and Lindeman, 60 T.C. 609 (1973), acq., 1973-2 C.B. 2.

6 Anderson, 371 F.2d 59 (6th Cir. 1966).

7 Sec. 119(a).

8 Regs. Sec. 1.119-1(a)(2)(i).

9 Id.

10 Sec. 132(a)(4), Regs. Sec. 1.132-6(d)(2)(i), and IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits.

11 Regs. Sec. 1.119-1(a)(2)(i).

12 Regs. Sec. 1.119-1(a)(2)(ii)(d).

13 Id.; Publication 15-B, Employer's Tax Guide to Fringe Benefits.

14 Sec. 6001, Regs. Sec. 31.6001-2, Regs. Sec. 31.6001-4, and Regs. Sec. 31.6001-5.

15 Announcement 85-113 and Publication 15-B, Employer's Tax Guide to Fringe Benefits.

16 Regs. Sec. 1.119-1(f), Examples (1) and (2).

17 Secs. 132(a)(2) and (c).

18 Sec. 132(c)(1)(A).

19 Regs. Sec. 1.119-1(a)(2)(ii)(f).

20 Regs. Sec. 1.119-1(a)(2)(ii)(a).

21 Regs. Sec. 1.119-1(a)(2)(ii)(b).

22 Regs. Sec. 1.119-1(f), Example (3).

23 Regs. Sec. 1.119-1(a)(2)(ii)(b).

24 Regs. Sec. 1.119-1(f), Example (4).

25 Regs. Sec. 1.119-1(a)(2)(ii)(c).

26 Regs. Sec. 1.119-1(a)(2)(ii)(e).

27 Regs. Sec. 1.119-1(a)(3)(i).

28 Regs. Sec. 1.119-1(a)(3)(ii).

29 Regs. Sec. 1.119-1(f), Example (7).

30 Regs. Sec. 1.119-1(e) and Kowalski, 434 U.S. 77 (1977).

31 Rev. Rul. 61-221 and Correll, 389 U.S. 299 (1967).

32 Regs. Sec. 1.119-1(e).

33 Regs. Sec. 1.119-1(b).

34 Sec. 119(b)(1).

35 Regs. Sec. 1.119-1(b).

36 Bob Jones University, 670 F.2d 167 (Ct. Cl. 1982).

37 Regs. Sec. 1.119-1(f), Example (6).

38 Regs. Sec. 1.119-1(b).

39 Regs. Sec. 1.119-1(c)(1).

40 Lindeman, 60 T.C. 609 (1973), acq., 1973-2 C.B. 2.

41 Anderson, 371 F.2d 59 (6th Cir. 1966).

42 Van Huff, T.C. Memo. 1981-30.

43 Regs. Sec. 1.119-1(c)(2).

44 Regs. Sec. 1.119-1(d)(1).

45 Regs. Sec. 1.119-1(d)(4).

46 Regs. Sec. 1.119-1(d)(2).

47 Regs. Sec. 1.119-1(d)(3)(i).

48 Regs. Sec. 1.119-1(d)(3)(ii).

49 Regs. Sec. 1.119-1(d)(5).

50 Sec. 119(a)(2).

51 Sec. 119(d)(1).

52 Sec. 119(d)(2).

53 Sec. 119(d)(2)(A).

54 Sec. 119(d)(2)(B).

55 Sec. 119(d)(2), flush language.

56 Secs. 119(d)(4)(A)(i) and 170(b)(1)(A)(ii).

57 Secs. 119(d)(4)(B)(i) and 170(b)(1)(A)(iii).

58 Social Security Act of 1935, P.L. 74-271, as amended.

59 Sec. 119(d)(4)(B)(iii).

60 Sec. 707(a).

61 Regs. Sec. 1.707-1(a).

62 Armstrong v. Phinney, 394 F.2d 661 (5th Cir. 1968).

63 Id. at 663–4.

64 Papineau, 16 T.C. 130 (1951), nonacq., 1952-2 C.B. 5.

65 Wolfe, T.C. Memo. 1955-198.

66 Doak, 234 F.2d 704 (4th Cir. 1956).

67 Moran, T.C. Memo. 1958-5.

68 Moran, 236 F.2d 595 (8th Cir. 1956).

69 Robinson, 273 F.2d 503 (3d Cir. 1959), cert. denied, 363 U.S. 810 (1960).

70 Wilson, 376 F.2d 280 (Ct. Cl. 1967).

71 Briggs, 238 F.2d 53 (10th Cir. 1956).

72 Rev. Rul. 80, 1953-1 C.B. 62.

Contributors

Alan D. Campbell is an associate professor of accounting at Troy University in Montgomery, Ala., and Dena S. Mitchell is an assistant professor of accounting at Troy University in Troy, Ala. For more information about this column, contact Prof. Campbell at alancampbell@elmore.rr.com.

 

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