More on Taxes Meal Deductions

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What is ultimately at issue in this matter is the extent to which Taxpayer can deduct the
costs it incurs to provide its employees with food and beverages.
Although the Taxpayer is entitled to deduct these costs as trade or business expenses
under section 162, section 274(n) limits the extent of this deduction. Namely, section
274(n)(1) limits the Taxpayer’s deduction to 50 percent of these costs.
The expenses are excepted from this 50 percent limitation if they are excludable as de
minimis fringe benefits under section 132(e). The conclusion that these meals are
excludable under section 119 is not dispositive of the issue of whether they are
excludable under section 132(e).
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. H.R.
Conf. Rep. 99-841 specifies that the 50 percent limitation applies to “the amount of any
deduction otherwise allowable for meal expenses, including . . . meals furnished on an
employer’s premises to its employees (whether or not such meals are excludable from
the employee’s gross incomes under sec. 119).” This conference report further
indicates that Congress did not intend for this limitation to apply to meals excludable
only under section 119 when it stated that the exception to the limitation applied only to:
(1 ) reimbursed meal expenses (in which case the employer or person
making the reimbursement is subject to the 80-percent rule); (2) employerfurnished
meals that are excludable from the employee's gross income as
de minimis fringes under Code section 132(e) (including meals at certain
eating facilities excludable under sec. 132(e)(2)); (3) meals fully taxed to
the recipient as compensation; and (4) items sold to the public (such as
expenses incurred by restaurants or dinner theaters for food or
entertainment provided to their customers), or furnished to the public as
samples or for promotion (such as expenses incurred by a hotel in
furnishing complimentary lodging to potential customers).
In sum, 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.
Taxpayer asserts that the costs are, indeed, excludable under section 132(e)(2). The
Ninth Circuit’s decision in Boyd Gaming Corp. v. Comm’r, 177 F.3d 1096 (9th Cir.
1999), lends some support to this argument. The court held in Boyd that an employerprovided
meal meets the revenue/direct operating cost test of section 132(e)(2) if the
employee could exclude the value of that meal under section 119. As noted above, it
appears that employees could exclude the value of the majority—if not all—of the meals
at issue in the present matter under section 119. These meals therefore meet the