IRS may not budge on casino meal tax

John Wilen

Friday, Jan. 22, 1999 | 11:29 a.m.

An IRS executive says last year's meal-tax law does not go as far as its sponsors intended, and indicated the IRS may take a harder line toward the free meals casinos offer their employees than the industry had hoped.

Jack Cheskaty, southwest district director of the Internal Revenue Service region that encompasses Nevada, Arizona and New Mexico, made his comments after a speech Thursday to the Nevada Society of Certified Public Accountants.

In August, the IRS released proposed rules for taxing the free meals gaming companies provide their service employees that would have required casinos to justify those free meals on a case-by-case basis. The proposed rules were attacked by the gaming industry as an attempt to avoid the intent of last July's IRS reform law, which industry supporters believe gave most casinos the right to provide their employees free meals without tax consequences.

Not so, said Cheskaty.

"The sponsors of that legislation intended it to go farther than it did," said Cheskaty. "It didn't cure the problem."

The issue stems from a 1997 U.S. Tax Court decision involving Boyd Gaming Corp. In that case, the court agreed with an IRS argument that free meals provided to most employees should be taxed as income. Exempt from the ruling were employees who work in food service or who have restricted lunch periods.

The ruling would have cost thousands of hotel maintenance workers and casino employees $300 to $400 a year in additional taxes. Gaming companies have long argued that the cost of a free lunch is worth the extra productivity they get by keeping their employees on-site.

Gaming companies also list the meals as an expense, reducing their taxable income. That's a large part of the reason the companies themselves are involved in the debate, and the reason the IRS took aim at the practice of providing free meals in the first place, according to some observers.

The IRS plan was attacked by the gaming industry, the Culinary Union and Nevada's congressional delegation at a series of rallies last year. The outcry culminated last summer when Nevada's congressmen succeeded in getting an amendment attached to the IRS reform bill that changed the tax rules on free employee meals.

Under the IRS rules approved by the Tax Court ruling, properties where fewer than 90 percent of the workers are not food service or restricted lunch period employees would have been required to withhold taxes for employee-provided meals, and to stop listing the meals as an expense to reduce their taxable income. But the reform bill amendment changed that threshold to 50 percent, a level supporters thought would exempt most casinos from the rules.

But in August the IRS released new guidelines calling for a case-by-case justification for each free meal. That plan was scheduled to be implemented Oct. 31, but the IRS backed off at the last minute amid renewed industry opposition. The IRS cited a need to consider comments it had received on the proposed rules.

"There was a lot of concern, certainly, by the industry," said Cheskaty.

Industry supporters have been hoping the IRS would soften its approach, but Cheskaty's comments appear to indicate there will not be material changes to the rules proposed in August.

"The court case there, it is pretty clear," said Cheskaty of the Boyd Tax Court decision.

Cheskaty disputed the gaming industry argument that the IRS is trying to circumvent the intent of the IRS reform law.

"I don't see that spin on it," he said.

The IRS has received complaints from other industries that withhold taxes for free employee meals, said Cheskaty. These include companies in the insurance and manufacturing industries that provide free meals in large cafeterias and consider the meals to be income paid to employees. These companies are wondering why the gaming industry should be exempt from rules other industries are required to follow, Cheskaty said.

Cheskaty said the new law also leaves gaming companies open to liability for previous years when they used free meal expenses to reduce their taxable income.

"Basically, we'd like to clean up those past years and get on with business," Cheskaty said.

Cheskaty doubts the IRS will try to pursue casino employees for past free meal-related taxes.

Jenny Bachus, a spokeswoman for Sen. Harry Reid, a key player in the anti-meal tax campaign, said it was difficult to comment on something that is the opinion of one IRS official, not official IRS policy.

"These are the comments of one IRS official," said Bachus. "The intent of the legislation ... was very clear. It was designed to address the issue for Nevada's workers."

New proposed IRS rules are expected to be released this spring.