By Emily Arnold*
In 1977, two prominent tax lawyers argued that Section 119 of the Internal Revenue Code (IRC) should be repealed or amended, given its inconsistent and inequitable treatment of similarly situated taxpayers.[i] Although it has been over forty years since this article was published, Trump and the Republican Congress have finally answered the pleas of these lawyers by amending section 119 in the Tax Cut and Jobs Act passed in 2017. Although the motivations behind this change are not clear, the phase out of this rule may present negative consequences for employees and employers, but will relieve the IRS of the task of targeting taxpayers who violate the provision.
So, what did the old section 119 say? Among other things, section 119 allowed employees to exclude from their gross income the free meals they received from their employers.[ii] Passed in 1954, this provision was a response to a series of administrative and judicial decisions ruling that the value of meals provided by employers was occasionally excludable from income.[iii] Although specific requirements of the provision must be complied with to allow the meals to be properly excluded, such as requiring meals to be furnished on the business premises of the employer and making sure the meals are provided for the convenience of the employer, taxpayers have applied 119 to situations Congress may not have intended to reach when enacting this provision.[iv] The result, as the tax lawyers zealously argued in 1977, led to arbitrary distinctions that unfairly allowed employees to avoid tax liability.[v]
Although Congress is responsible for enacting the tax law, the Internal Revenue Service (IRS) provides the official interpretation of how particular Code sections are to be applied.[vi] While some argue that the IRS has created “administrative deviations” from the Code that have resulted in taxpayer friendly results,[vii] other scholars simply acknowledge that the IRS has the responsibility of interpreting the Code, and those “deviations” are merely interpretations.[viii] Whichever view is correct, it is undeniable that the IRS is the agency that is responsible for interpreting the IRC, giving them a lot of power when it comes to defining what exactly is and is not income for the purposes of the Code.[ix]
Because the IRS has the responsibility of interpreting Code sections, they, along with the Courts, are to be blamed for allowing section 119 to be abused. Indeterminate and confusing court decisions and revenues rulings have made it nearly impossible to advise employers and employees as to their tax liability.[x] For example, two Treasury Regulations make an odd and arbitrary distinction regarding section 119, refusing to allow factory workers to exclude their factory cafeteria lunches, but allowing bank tellers to exclude their lunches from gross income.[xi] Some scholars have argued that the Treasury’s liberal attitude towards fringe benefits has had the effect of broadening the scope of section 119.[xii] And, the Courts have favored a view that makes “substance rather than form” the determinative factor in taxation decisions, often departing from the IRS’s or Congress’s own view or interpretation.[xiii] Further complicating the analysis, Courts have often applied section 119 by resorting to pre-section 119 concepts, primarily those codified in Treasury Rulings and Court decisions that differ slightly from the written provision passed by Congress.[xiv]
Examining a modern day application of this provision, the free gourmet meals Google provides to its employees is a great example. Although some argue that the reason Google provides free food is to foster a collaborative working environment where employees are happy and satisfied,[xv] a more cynical view is likely that Google can get away with paying it’s workers less by providing this free perk. This is the inequality that the tax lawyers were concerned about in 1977.[xvi] The reason why the free food Google serves is controversial is because it is not clear that it is excludable as income under 119, and it’s likely that it is not. However, Google’s free food has not gone unnoticed. In 2013, some articles suggested that the free meals could end, if the IRS began cracking down.[xvii] However, five years later the meals were still excludable from income. The new law is thus a sigh of relief for the IRS, as there will no longer be competing pressures on the agency to, or not to, crack down on employers that engage in Google-like practices.
Amending section 119 will eventually lead to employees having to include the cost of employer provided meals in their income, which will likely lead to employers paying higher wages to employees to offset the increased tax liability.[xviii] This would then cause the employer to pay more in employment taxes, so both employees and employers at places like Google will not take lightly to this new change.[xix] On the upside, this new change will eliminate any more confusion on the IRS’s part. Although the provision will not be completely eliminated until 2025, the IRS no longer has to worry about the tax liability implications of its confusing and arbitrary interpretations of 119. However, considering the IRS’s power to interpret code sections the way they like, it would not be surprising if the meals that will not longer be excludable under 119 fall into another section, like fringe benefits, of the code that has the effect of excluding them from income.[xx]
*Emily Arnold is a Junior Editor on MJEAL. She can reached at firstname.lastname@example.org.
The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.
[i] Adrian A. Kragen & Klonda Speer, I.R.C. Section 119: Is Convenience of the Employer a Valid Concept? 19 Hastings L.J. 921 (1978).
[ii] I.R.C. § 119 (2012).
[iii] Steven T. Potts, I.R.C Section 119: An Exclusion for Meals and Lodging, 47 Montana L. Rev. 2, 465, 465 (1986).
[iv] Id. at 465.
[v] Kragen, supra note 1 at 921.
[vi] Tax Research: Understanding Sources of Tax Law, CCH Group. https://www.cchgroup.com/roles/accounting-firms/research/understanding-tax-law
[vii] Lawrence Zelenak, Custom and the Rule of Law in the Administration of the Income Tax, 62 Duke L.J. 829, 844 (2012).
[viii] Alice G. Abreu & Richard K. Greenstein, The Rule of Law as a Law of Standards: Interpreting the Internal Revenue Code, 64 Duke L.J. 54 (2015).
[ix] Tax Research, supra note 6 at 1.
[x] Kragen, supra note 1 at 923.
[xi] Treas. Reg. § 1.119-1(d)(3); Treas. Reg. § 1.119-1(d)(8)
[xii] Taxation–Exclusion Under Section 119 Granted Although Employee Was Charged for Value of Quarters Supplied (Boykin v. Commissioner, 260 F.2d 249 (8th Cir. 1958)) 33 St. John’s L. Rev. 408, 413 (2013).
[xiii] Id. at 410.
[xiv] Potts, supra note 3 at 465.
[xv] David Burkus, The Real Reason Google Serves All That Free Food, (Jul. 2, 2015), https://www.forbes.com/sites/davidburkus/2015/07/02/the-real-reason-google-serves-all-that-free-food/#69c0a44495f6.
[xvi] Kragen, supra note 1 at 949.
[xvii] Benji Lanyado, Google: no such thing as a free lunch, Guardian News (Apr. 2013), https://www.theguardian.com/technology/shortcuts/2013/apr/10/google-tax-department-office-perks.
[xviii] Brian Burnett, Employee Meals with a Side of Tax (Feb. 5, 2016), https://www.schneiderdowns.com/our-thoughts-on/large-companies/tax/employer-provided-meals-taxation.
[xx] Daily Employer-Provided Meals: As Taxable As They Are Delicious, Bloomberg Law (Nov. 26, 2014), https://www.bna.com/daily-employerprovided-meals-b17179913767/.