Rev. Rul. 67-259

Advice has been requested whether, under the circumstances described below, civilian food handlers working in dining halls and kitchens at United States military hospitals may exclude from their gross income the mandatory amount withheld from their pay for their meals or the amount they pay in cash for their meals.

Section II of Chapter 15, Subsistence and Quarters, of Army Regulations 37-105, Civilian Pay Procedures, as in effect prior to December 29, 1966, provided that employees classified as food handlers (except those on prescribed medical diets) were required to be furnished at least one meal for each day of the workweek in which they were expected to be present for duty. Commanding officers could further require that two or three meals be furnished food handlers for each day of duty. Food handlers were charged for such meals, whether or not consumed, by payroll deductions at a fixed rate, based on the number of meals made available during the pay period and the prevailing cash rate applicable to each type of meal (breakfast, dinner and supper).

Effective December 29, 1966, the above section of Army Regulations 37-105 was changed to eliminate the payroll deduction system and to provide, instead, that reimbursement is to be made in cash by all employees for meals consumed. Food handlers are free to leave the area during their meal relief periods and are now charged only for the meals they actually consume.

Section 119 of the Internal Revenue Code of 1954 provides, in part, that there shall be excluded from gross income of an employee the value of any meal furnished to him by his employer for the convenience of the employer, but only if it is furnished on the business premises of the employer.

Section 1.119-1(a)(2)(i) of the Income Tax Regulations provides, in part, that meals furnished by an employer without charge to the employee will be regarded as furnished for the convenience of the employer if such meals are furnished for a substantial noncompensatory business reason of the employer.

Section 1.119-1(a)(2)(ii)(d) of the regulations provides that a meal furnished to a restaurant employee or other food service employee for each meal period in which the employee works will be regarded as furnished for a substantial noncompensatory business reason of the employer, irrespective of whether the meal is furnished during, immediately before, or immediately after the working hours of the employee.

Section 1.119-1(a)(3)(ii) of the regulations provides that if an employer furnishes an employee meals for which the employee is charged an unvarying amount (for example, by subtraction from his stated compensation) irrespective of whether he accepts the meal, the amount of such flat charge made by the employer for such meals is not, as such, part of the compensation includible in the gross income of the employee. The value of the meals is then excludable under section 119 of the Code if the meals are furnished on the business premises of the employer for the convenience of the employer. In the absence of evidence to the contrary, the value of the meals may be deemed to be equal to the amount charged for them.

On the other hand, section 1.119-1(a)(3)(i) of the regulations provides that if an employer provides meals which an employee may or may not purchase, the meals will not be regarded as furnished for the convenience of the employer. Thus, meals for which a charge is made by the employer will not be regarded as furnished for the convenience of the employer if the employee has a choice of accepting the meals and paying for them or of not paying for them and providing his meals in another manner.

The facts presented in the instant case clearly establish that the meals are furnished to the employees on the business premises of the employer. Under the system in effect prior to December 29, 1966, the employer was required by Army Regulations to furnish the employees meals for which they were charged an unvarying amount irrespective of whether they accepted the meals. Moreover, the meals were generally furnished to restaurant and other food service employees for each meal period in which they worked.

Accordingly, for the period prior to December 29, 1966, the charges or amounts deducted from the pay of the food service employees for meals furnished by the employer for each working meal period, are not, as such, part of the compensation includible in the gross income of the employees. The value of such meals (represented in this instance by the charges or amounts deducted from the employees' pay) is excludable from gross income under section 119 of the Code. The exclusion does not apply, however, to the value of any meals furnished by the employer with respect to a nonworking period of the employee.

Section 31.3401(a)-1(b)(9) of the Employment Tax Regulations provides that the value of any meals or lodging furnished to an employee by his employer is not subject to withholding if the value of the meals or lodging is excludable from the gross income of the employee. Accordingly, the value of the above meals furnished by the instant employer to an employee for each meal period in which the employee works is not subject to the withholding of income tax at source on wages under section 3402(a) of the Code.

Effective December 29, 1966, with the change in procedure exemplified by the change in Army Regulations 37-105, the situation is quite different. Since that time, the food service employees have been compelled to pay only for meals actually consumed and are free to purchase or not to purchase. Under those circumstances, it is clear that the meals are not furnished for the convenience of the employer, as indicated by section 1.119-1(a)(3)(i) of the regulations. It follows that no exclusion is available under section 119 of the Code for the amount paid by the employees for such meals.