IRS suspends casino meal tax work

John Wilen

Monday, May 17, 1999 | 1:55 a.m.

In the wake of an appeals court decision last week, the Internal Revenue Service has suspended work on training guidelines that were to instruct casinos and hotels how to tax workers for the free meals they receive while on the job.

The U.S. Court of Appeals for the 9th Circuit last week reversed a 1997 U.S. Tax Court ruling in a case involving Boyd Gaming Corp. that said free meals provided most casino and hotel employees were taxable as income.

In response to that 1997 decision, Congress last year made changes to Section 119 of the U.S. tax code that were intended to do away with the IRS plan to tax free employee meals. Despite this change, the IRS was preparing guidelines that many in the industry saw as an attempt to circumvent the new law and make it very difficult for casinos to justify giving employees free meals.

Last week's decision appeared to leave the IRS' meal-tax efforts in limbo, and a spokesman confirmed today that the agency is taking a time-out.

"The IRS has stopped the work it was doing on the training materials ... so that it could give proper consideration to the appeals court's decision in the Boyd Gaming Case and determine what the form and the content of any future guidance on Section 119 might be," said IRS spokesman Don Roberts.

At the time of the Tax Court's 1997 decision, Section 119 of the tax code said that if an employer could demonstrate that it had a legitimate business reason to provide free meals to 90 percent of its employees, then it could provide free meals to all employees. Under the code, employers who met the 119 test could deduct the cost of the meals from their taxable income, reducing their taxes, and their employees could receive the meals tax-free.

In its suit, the IRS contended that Boyd had no legitimate business reason to feed the majority of its work force for free. The Tax Court agreed, ruling that other than in the case of certain food service, dealers and security personnel, meals provided most casino workers, administrative personnel and hotel workers were taxable as income.

In 1998, Congress lowered the Section 119 threshold from 90 percent to 50 percent. That is, if half a casino's employees qualified to receive free meals for a legitimate business reason, then all a casino's employees could receive free meals.

But the IRS then issued draft meal-tax guidelines that required casinos to justify the meals on a meal-by-meal and employee-by-employee basis. In the past, casinos had simply justified the meals by job class, for instance arguing that if 51 percent of its workforce was made up of exempt employees, it qualified to give free meals under the tax code.

"Those training guidelines put up, we think, a number of roadblocks in our ability to meet the test under 119," said Betty Wilson, vice president for taxes at Caesars World Inc., speaking Friday at a Nevada Society of CPAs conference in Las Vegas.

Last week, the Appeals Court overturned the Tax Court decision, ruling that Boyd's reason for feeding its employees free meals -- a company-wide rule that all employees must remain on premises during their shifts -- was a legitimate business reason. The appeals court ruled that the IRS could not substitute its business judgement for Boyd's.

"The 9th Circuit opinion is very, very good news for those of us in the industry," said Wilson.

However, she noted, the IRS could attempt to overturn the appeals court decision.

"I caution you that the IRS now has to react to this ruling," said Wilson.

Roberts said any decision to appeal is not up to the IRS -- it is up to the U.S. Solicitor General and the Department of Justice. His comments were echoed by Eric Lacher, an IRS industry specialist on gaming, who also spoke at Friday's conference.

"Any decision with regard to what the government will do ... will be made by the Department of Justice," said Lacher.

The IRS, said Lacher, simply enforces the laws as they exist.

"The IRS does not get involved in the politics of tax laws," said Lacher.

Whatever the standards end up being, the IRS will enforce them on a case-by-case basis, said Lacher.

"Each taxpayers' circumstances are still going to dictate the outcome of a 119 consideration," said Lacher.

If the IRS accepts the gaming industry's arguments as to why it should be allowed to provide employees free meals -- and deduct the cost of those meals from taxable income -- then other industries will immediately ask "where would you like us to file for a refund?" said Lacher.

"This issue is difficult for us," he said.