American taxpayers have once again been given an example of the IRS acting as a virtually autonomous institution—one that can just about make its own laws. This eye-opener was delivered recently when the US Supreme Court handed American taxpayers a gigantic tax victory by refusing to review a US Court of Claims tax case in January, thus letting the favorable lower-court ruling stand. But wait till you hear what the IRS has to say about that.
What it all has to do with is Internal Revenue Code Section 119, which says, "There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him by his employer for the convenience of the employer, but only if…the meals are furnished on the business premises of the employer.…" Well, that sounds simple enough.
But enterprising taxpayers as well as the IRS have twisted and chewed it this way and that, testing it here and there, all trying to gain some advantage for their side. By and large, the IRS (as usual) has won. Let's face it: most employees have few resources to fight such battles, and most don't want any trouble with the IRS anyway. The employer? Forget it. Most find it easier to work with the IRS than to get into hassles for their employees, even though the ability to exclude such perks means Social Security and unemployment tax savings for the employer.
Up till now, the IRS has been able to keep a pretty tight lid on this "people's loophole." The commissioner even had a National Office Technical Advice Memorandum sent out, saying that the difference between what is actually paid (if anything) and the "true market value" of such meals is extra, taxable compensation to employees. Which means you not only have to pay income taxes on it, but both you and your employer become liable for Social Security and unemployment taxes to boot!
All of this was going along pretty smoothly for the IRS up till a few months ago. Then along came the Hotel Conquistador, Inc. case. As it turns out, the Tropicana Hotel in Las Vegas (owned by the Hotel Conquistador corporation) operated a cafeteria that dished out around 1,200 meals a day to its employees, many of them free. The whole set-up was so that employees could spend less time on their meal breaks. The hotel, trying to be "fair" about the whole thing, valued those free meals at 45 cents each, which became extra wages to their employees. The IRS, however, decided after an audit that the meals should have been valued at $1.25 each. The extra tax assessments on the hotel and its employees totaled around $12 million.
But the company wanted to fight: to their eternal and glowing credit, they told IRS (figuratively, of course): "Screw you. We and our employees don't owe anything on the damn meals." And they were off to the races (and what poetic justice that the case should originate in Las Vegas, the spiritual heartland of the subterranean economy).
When the smoke cleared—on January 14, 1980, to be exact—the US Supreme Court had let stand a federal Court of Claims ruling that, no, those meals weren't taxable, at least not as far as Social Security and unemployment taxes were concerned (which is what the company was concerned with, since they are liable for both of these taxes).
Now, think of the possibilities. Food's getting pretty expensive these days, and it would be nice to get some free victuals at our job places and not have to pay taxes on them as "wages." Saves on time, saves on hassle getting to a place to eat, saves gas in driving. Since the reason the hotel corporation was giving out the free meals was to cut down on employee meal times, it would stand to reason that any company could do that. Have you asked your own employer lately if he'd like to increase your productivity and time on the job by giving out free meals? Well, maybe you should.
What about the IRS? What was their reaction to the Supreme Court? Just this: they promptly announced they would not follow the Court of Claims decision which the High Court had let stand. Why? Because there are a few federal court districts around the country—including the huge 9th Circuit, which includes California and the west coast—which have ruled the opposite way. This is called "forum shopping," and the IRS does it all the time. Thus, lots and lots of further court litigation—and its attendant expenses—is guaranteed by the IRS.
But don't let this stop you. Indications are that the taxpayers are going to win this one and win it big. It's just going to take a few more years of battling on the issue. In the meantime, take advantage of this tax break. I've got a feeling the highest Court in the land is on our side on this one.
Tim Condon is a tax lawyer currently practicing in Florida.