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ACCT 331: Federal Income Taxation

Assignment

Date:  October 25, 2021

To:  Mercy Hospital Tax Files

From:  Tax Staff (your name)

Re:  The taxability of meal vouchers furnished by Mercy Hospital to its medical staff

Facts:  Our client, Mercy Hospital (“Mercy”), provides meal vouchers to its medical employees to enable them to remain on emergency call.  The vouchers are redeemable at Mercy’s onsite cafeteria and at MacDougal’s, a privately owned sandwich shop.  MacDougal’s rents business space from the hospital.  Although Mercy does not require its employees to remain on or near its premises during their meal hour, the employees generally do.  Elizabeth Fegali, Mercy’s Chief Administrator, has asked us to research whether the value of the meal is taxable to the employees.

 

Issues:  The taxability of the meal vouchers depends on three issues:

  1. Whether the meals are furnished “for the convenience of the employer”?
  2. Whether they are furnished “on the business premises of the employer”?
  3. Whether the vouchers are the equivalent of cash?

 

Applicable Law:

IRC Sec. 119 provides that the value of the meals is excludible from an employee’s income if the meals are furnished for the convenience of, and on the business premises of the employer.  Under Reg. Sec. 1.119-1, a meal is furnished “for the convenience of the employer” if it furnished for a “substantial noncompensatory business reason.”  A “substantial noncompensatory business reason” includes the need to have the employee available for emergency calls during his or her meal period.  Under IRC Sec. 119(b)(4), if more than half the employees satisfy the “for the convenience of the employer” test, all employees will be regarded as satisfying the test.  Regulation Sec. 1.119-1 defines “business premises of the employer” as the place of employment of the employee.

 

A U.S. Supreme Court case, Kowalski v. CIR, 434 U.S. 77, discusses what constitutes “meals” for purposes of IRC Sec. 119.  In Kowalski the State of New Jersey furnished cash meal allowances to its state troopers to enable them to eat while on duty.  It did not require the troopers to use the allowances exclusively for meals.  Nor did it require them to consume their meals on its business premises.  One trooper, R.J Kowalski, excluded the value of his meal allowances from his income.  The IRS disputed this treatment, and Kowalski took the IRS to Court.  In Court, Kowalski argued that the allowances were excludable because they were furnished “for the convenience of the employer.”  The IRS contended that the allowances were taxable because they amounted to compensation.  The U.S. Supreme Court took up the case and decided for the IRS.  The Court held that the IRC Sec. 119 income exclusion does not apply to payments in cash.

 

Analysis:

Issue 1:  The meals provided by Mercy seem to be furnished “for the convenience of the employer.”  They are furnished to have employees available for emergency call during their meal breaks.  This is a  “substantial noncompensatory reason” within the meaning of Reg. Sec. 1.119-1.

Issue 2:  Although the hospital cafeteria appears to be the “business premises of the employer,” MacDougal’s does not appear to be.  The hospital is the place of employment of the medical employees, but MacDougal’s is not.

Issue 3:  Based on the foregoing authorities, it is unclear whether the vouchers are equivalent to cash.  On the one-hand, they are redeemable only in meals.  Thus they resemble meals-in-kind.  On the other hand, they are redeemable at more than one institution.  Thus, they resemble cash.  Nor is it clear whether a court deciding this case would reach the same conclusion as the Supreme Court in Kowalski.  In the latter case, the State of New Jersey provided its meals allowances in the form of cash.  It did not require its employees to use the allowances exclusively on meals.  Nor did it require them to consume their meals on its business premises.  In our case, Mercy provides its meals in the form of vouchers.  Thus it indirectly requires its employees to use the allowances exclusively for meals.  On the other hand, it does not require them to consume their meals on its business premises. 

(Note:  In applying case law to the Facts, indicate how case facts are similar to or dissimilar from client facts.  If the analysis does not support a “yes-no” answer, do not give one.)

 

Conclusion: 

Although it appears that the meals acquired by voucher in the hospital cafeteria are furnished “for the convenience of the employer” and “on the business premises of the employer” it is unclear whether the vouchers are the equivalent of cash.  If they are the equivalent of cash, OR if they are redeemed at MacDougals’s, their value is likely to be taxable to the employees.  On the other hand, if they are not equivalent to cash, AND they are redeemed only in the hospital cafeteria, their value is likely to be excludible.