Flight Crew Meals Exclusion Limited to 50 Percent

Photo: Dan Macy

In a recently released legal memorandum, the IRS said that meals provided to airline crewmembers while they are on duty aboard an aircraft are not excluded from the employees’ gross income as a de minimis fringe benefit because they were not provided at “eating
facilities.”

Although the value of the meals would be excludable from their gross income under tax Code Section 119, this distinction means that the employer’s deduction is limited to 50 percent of the amount of the expense under Section 274(n). If the value of the meals had been excluded as de minimis fringe benefits under Code Section 132(e), the expenses would have been excepted from the 50 percent limitation.

The IRS expressed this view in Chief Counsel Memorandum 201151020, released Dec. 23.

The meals were prepared for the airline by an independent third party vendor at a facility on the ground. The memorandum notes that because the value a meal is excludable under Section 119 does not mean that it would necessarily qualify for exclusion under Section 132(e)(2). “Among the requirements of Section 132(e) is that the employer provide the meal at an ‘eating facility.’ The exclusion extends only to such meals provided at employer-operated eating facilities.” The memorandum distinguished the treatment of the airline meals from those provided by the employer in Boyd Gaming Corp. v. Commissioner, 177 F. 3d 1096 (9th Cir., 1999). Citing the regulations under Section 132, the memorandum says that in describing eating facilities, the regulations use such terms as “dining room” and “cafeteria.”

The memorandum elaborated:

Further, the regulations contemplate that an eating facility is a location at which individuals are employed to prepare and/or serve food, stating to this end that components of the direct operating costs of an eating facility include “personnel whose services relating to the facility are performed on the premises of the eating facility” and “labor costs attributable to cooks, waiters, and waitresses.” No guidance raises the inference that the exclusion of section 132(e) extends to all meals provided on the employer’s business premises, irrespective of whether or not they are provided at an “eating facility.”

An airline — not identified in the memorandum — had argued to the IRS that catered meals it provided to employees while on duty aboard an aircraft were a 100-percent deductible de minimis benefit under Code Section 132. However, the IRS found that the meals, which were prepared for the airline by an independent third-party vendor at a facility on the ground, met the de minimis standards of Section 132(e)(2) but the employer did not prove the extent to which it could deduct the costs it incurs to provide its employees with the meals.

Note: the term “de minimis fringe” includes the operation by an employer of any eating facility for employees if (1) such a facility is located on or near the employer’s business premises, and (2) revenue derived from such a facility normally equals or exceeds the its direct operating costs.

Section 119 generally permits an employee to exclude the value of any meals furnished by or on behalf of the employer, but that exclusion is limited by other parts of the tax Code.

For example, Section 162 allows for a full deduction if the benefit provided meets the narrow definition of de minimis provided in that section. That section permits an employer to deduct the cost of food and beverages that are provided to employees as trade or business expenses, but Section 274(n) limits that deduction to 50 percent. The IRS said that the Section 274 limitation is not precluded by the Section 119 allowance. “The legislative history of section 274(n) clarifies that the 50 percent limitation applies even to expenses associated with meals that are excludable under Section 119,” the IRS said in its memorandum, which cited a 1986 House Report.

“In sum,” the IRS wrote, “this conference committee report specifies both that the 50-percent limitation applies to provision of meals
that are excludable only under Section 119, and that the provision of meals must satisfy the particular requirements of Section 132(e)(2) to be exempted from this 50-percent limitation.”