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Tuesday, December 27, 2011

Flight Crew Meals Are Excludable From Income Under § 119, Not § 132(e)

IRS LogoILM 2011-51-020 (Aug. 31, 2011):

Taxpayer provides catered meals on its * * * planes for crew members to eat while they are performing their flight duties. The meals are prepared by an independent third party vendor at a facility on the ground. The facility is not owned, leased, or operated by the employer. The crew has to report for duty at least one hour prior to their flight and remain at least 30 minutes after the flight, possibly due to safety checks. During the pre-flight/in-flight/post-flight time period, the crew is not allowed to leave the plane. The amount of food provided to the crew is dependent upon the time period, which the employer refers to as "Duty Time," during which the crew must remain on the plane. ...

Although it appears that the meals are excludable from crew members' gross incomes under § 119, they are not excludable under § 132. Taxpayer may therefore deduct only 50% of the costs associated with providing the meals.

In particular, the limited information we have indicates that Taxpayer is indeed likely to be able to sustain its burden of establishing that the meals satisfy the requirements of § 119. First, it appears that the meals satisfy the requirement of § 119 that the meals be provided to employees by or on behalf of Taxpayer; the meals are provided, to this end, by a third party vendor with whom Taxpayer has entered into a contract. It also appears that the meals provided meet the requirement of § 119 that Taxpayer provide them on its business premises; that is, the meals are provided on the airplanes on which the employees provide services to Taxpayer. Finally, the facts and circumstances indicate that the meals meet the requirement of § 119 that they are provided for a substantial noncompensatory business reason; namely, crew members must remain on the airplanes during their meal periods.

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 § 162, § 274(n) limits the extent of this deduction. Namely, § 274(n)(1) limits the Taxpayer's deduction to 50% of these costs.

The expenses are excepted from this 50% limitation if they are excludable as de minimis fringe benefits under § 132(e). The conclusion that these meals are excludable under § 119 is not dispositive of the issue of whether they are excludable under § 132(e). ...

That the meals are excludable under § 119 does not, however, mean that they necessarily qualify for exclusion under § 132(e)(2). To conclude that any meal that meets the revenue/direct operating cost test of section 132(e)(2) by virtue of being excludable under § 119 is a de minimis fringe benefit would effectively nullify the status of § 119 as a stand-alone exclusion. That is, because employer-provided meals that meet the requirements of § 132(e) are fully deductible, while those that meet the requirements of § 119 are only partially deductible, taxpayers would always exclude the meals under § 132(e). Congress did not intend this result. ...

Among the requirements of § 132(e) is that the employer provide the meal at an "eating facility." Namely, on its face, § 132(e)(2) does not exclude from recipients' gross incomes the value of all employer-provided meals that meet the revenue/operating cost test of § 132(e)(2); rather, this exclusion extends only to such meals provided at employer-operated eating facilities. Although the Code, Regulations, and cases never explicitly define the term "eating facility," they do imply that an "eating facility" means an identifiable location that is designated for the preparation and/or consumption of meals. ... 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."

The employer-provided meals at issue in this matter are not excludable as de minimis fringe benefits under section 132(e)(2) of the Code because they are not provided at eating facilities.

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Comments

If you think about it logically, there's technically no other way to provide airline meals except from an eating facility.. You can't be "at" the eating facility 300 ft. up in the air. The exclusion doesn't make sense.

Posted by: Criminal Lawyer | Dec 27, 2011 3:17:49 PM

The airline might get under under 132 if it operated an "eating facility" that is designated for the preparation of meals. But they contracted it out, like almost every other non-restaurant employer. I bet the hospitals they mention contract out the food preparation in their cafeterias. Its a silly, 1960s era distinction.

Posted by: Yo Gabba Gabba | Dec 28, 2011 3:47:12 PM

I think it is a pretty safe leap to call the galley of a plane "an identifiable location that is designated for the preparation and/or consumption of meals." That is where the meals are stored, heated, and prepared for serving, as well as where the majority of crew activity (jumpseats, comm, etc) occur outside of the flight deck. Nautical lingo strikes again!

("The galley is the compartment of a ship, train or aircraft where food is cooked and prepared." Wikipedia)

Posted by: stephen shaw | Dec 29, 2011 7:41:38 AM