Miscellaneous Tax Bills

98TH CONGRESS 1ST SESSION

H. R. 907

To amend Section 119 of the Internal Revenue Code of 1954 to provide that meals furnished by an employer to an employee may be considered furnished for the convenience of the employer if the meals are furnished on the business premises of the employer generally, except under certain conditions whereby meals may be furnished off the business premises of the employer.

IN THE HOUSE OF REPRESENTATIVES
JANUARY 25, 1983

Mr. VANDER JAGT introduced the following bill; which was referred to the
Committee on Ways and Means

A BILL

Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

SECTION 1. Section 119 of the Internal Revenue Code

4 of 1954, subsection (a)(1) is amended by striking out and in

5 serting in lieu thereof the following subsection:

“(1) in the case of meals, the meals are generally

furnished on the business premises of the employer

except as provided in subsection (b)(4) below, or"

SEC. 2. Section 119 of the Internal Revenue Code of

5 1954 is amended by adding at the end of subsection (b)(3) the

6 following new subsection:

"(4) Furnishing of meals off the business premises

of the employer as a matter of equity:

"(i) the employer is unable to justify economically the operation of on premise eating facilities giving due consideration to capital and oper

ating costs;

"(ii) on premise eating facilities are not provided at the actual place of employment of affect

ed employees;

“(iii) the meals are provided in kind, not in cash; and

"(iv) the meals are furnished within a time

frame consistent with the employer's established

meal schedule."

HR 907 IH

SUMMARY AND DESCRIPTION

PRESENT LAW

Present law excludes from gross income the value of meals furnished to an employee (or to the employee's spouse or dependents) by or on behalf of the employer for the convenience of the employer but only if the meals are furnished on the employer's business premises (sec. 119). If it is reasonable to believe that the employee will be able to exclude the value of a meal from income under section 119, then the value of the meal is not subject to social security or unemployment taxes (secs. 3121(a)(19), 3306 (b)(14)).

Under the Tax Reform Act of 1984, the value of meals provided to an employee at a subsidized eating facility operated by the employer is excluded from income and wages as de minimis fringes if (1) the facility is located on or near the employer's business premises, (2) revenue from the facility equals or exceeds direct operating costs, and (3) in the case of certain highly compensated employee's nondiscrimination requirements are met (sec. 132(e)(2), effective January 1, 1985).

EXPLANATION OF THE BILL

The bill would expand the section 119 exclusion to cover furnishing of meals off the employer's business premises if (1) the employer is unable to justify economically the operation of on-premise eating facilities, giving due consideration to capital and operating costs, (2) on-premise eating facilities are not provided at the actual place of employment of affected employees, (3) the meals are provided in kind, not in cash, and (4) the meals are furnished within a time frame consistent with the employer's established meal schedule.

EFFECTIVE DATE

The provisions of the bill would be effective on enactment.

REVENUE EFFECT

The provisions of the bill are estimated to decrease fiscal year budget receipts by $111 million in 1985, $194 million in 1986, $249 million in 1987, $287 million in 1988, and $320 million in 1989.

[NOTE.-See also statement of the AFL-CIO at p. 242.]

STATEMENT OF HON. BARBER B. CONABLE, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

Mr. Chairman and members of the Select Revenue Measures Subcommittee, I am pleased to be a co-sponsor of H.R. 907 which is before you today. This legislation would correct an inequity in the tax code which discrminates against small businesses in their ability to provide meals during the work day to their employees. It is difficult for such businesses to establish cafeterias within their actual business premises. Allocation of precious work space to an eating facility and making the investment necessary to equip and operate it are often beyond the means of a small business, particularly one which is in competition with larger enterprises. Thus, small businesses are disadvantaged vis-a-vis their larger counterparts.

H.R. 907 would permit employee meals to be furnished off the business premises with the same tax consequences present law provides for on-premises meals. A similar employee meal system has been successfully employed in ten countries of Western Europe and Latin America. The experience of these countries is that, in addition to the enhanced competitiveness of small businesses in terms of their ability to offer comparable benefit packages, the enactment of legislation similar to H.R. 907 has increased both sales and employment in the restaurant industry.

Accordingly, H.R. 907 presents your Subcommittee with a unique opportunity to both promote income tax equity among employees of various businesses and also to expand the food service industry and increase employment within that industry.

I welcome consideration of this legislation and I urge that it be reported favorably.

STATEMENT OF ROBERT E. JULIANO, LEGISLATIVE REPRESENTATIVE, HOTEL EMPLOYEES & RESTAURANT EMPLOYEES INTERNATIONAL UNION, AFL-CIO

On behalf of our general president, Edward T. Hanley, and the 400,000 members we proudly represent, we strongly endorse H.R. 907. Our union membership includes not only service personnel such as waiters, waitresses and bartenders, but also support personnel. Only % of our members are tipped employees, and industry experience shows that the ratio of service personnel to total employees is 0.4.

Notwithstanding our substantial current membership, the Hotel Employees and Restaurant Employees International Union enrolls more new members annually than any other union in the labor movement. This surprising statistic reflect the high turnover in the restaurant industry which ranges between 150 and 200 percent each year. In addition, approximately 75 percent of all restaurants fail during their first five years of operations. Each failed restaurant represents a loss of numerous jobs and, thus, has a devastating impact on the lives and livelihoods of our members. Because restaurants are concentrated in urban areas where there is often relatively high unemployment, these lost jobs are not easily replaced, particularly given that our restaurant workers are over 50 percent females and minorities which have traditionally suffered most in the job market.

Our union strongly supports H.R. 907 because we believe that it will not only create jobs in the restaurant industry but also enhance continuity of employment in the industry, so that those jobs which are created will also be retained. Because of the necessary and substantial expenditures for labor and perishable supplies, a restaurant must establish a steady client base in order to service. H.R. 907 will provide such a base, in that a restaurant will be able to arrange with nearby employers, either directly, or through a coupon voucher system, to make its facilities available for daily employee meals. These arrangements will benefit both the employer, who will be able to ensure that his employees receive a nutritious meal in a convenient location, thereby contributing to employee continuity and productivity, and the restaurant, which will obtain an expanded, and more importantly a predictable, clientele.

The average work week in the restaurant industry is approximately 27 hours. In 1982, the Treasury Department and Joint Committee on Taxation conservatively estimated that 0.4 percent of the U.S. workforce would take advantage of H.R. 907 when the system was fully in place (after five years). Using these estimates, the new business generated for the restaurant industry from implementation of the employee meal system would produce approximately 12,000 new jobs in that industry. If these estimates of workforce participation should be enhanced, there would be a proportionate increase in the number of restaurant industry jobs created by H.R. 907. There is a serious need for job security among our membership and in our industry, and because our industry is a major employer of women and minorities, such employment could be a major factor in combating this Nation's most difficult structural unemployment problems.

Because our union cares deeply about recurring unemployment in the restaurant industry and its impact upon our members, we strongly urge the members of this subcommittee and of the Committee on Ways and Means to report H.R. 907 favorably.

STATEMENT OF G. RICHARD SCHREIBER, PRESIDENT, NATIONAL AUTOMATIC
MERCHANDISING ASSOCIATION

The National Automatic Merchandising Association (NAMA), the national trade association of the merchandise vending and contract food service management industry, is opposed to H.R. 907 introduced in the House of Representatives January 25, 1983 by Mr. Vander Jagt of Michigan.

NAMA represents more than 2,400 companies, most of which provide food and beverage service to employees of business and industry, hospitals, nursing homes, recreational facilities, and to the public generally and more particularly to students in secondary schools and colleges and universities. It is on behalf of these members that we speak in opposition to H.R. 907.

HISTORY OF THE CONVENIENCE-OF-THE-EMPLOYER RULE

Congress codified the convenience-of-the-employer rule in Section 119 of the Internal Revenue Code in 1954. It provides for the exclusion from the gross income of an employee the value of meals and lodgings furnished him, his spouse or dependents on the business premises of the employer for the employer's convenience.

At that time Congress retained, and has since left unchanged, the substantially identical definitions of "wages" for all three tax withholding obligations of employers, namely, income, FICA and FUTA taxes.

Following the codification, a number of problems have arisen over interpretations of the applicability of Section 119 by the Internal Revenue Service.

One recently settled by the U.S. Supreme Court in Rowan v. United States concerns the IRS position that the Section 119 exemption to gross income did not apply to wages under FICA and FUTA. The court held that the IRS erred in including in the computation of "wages" the value of the meals and lodging that the employer provided for its own convenience to its employees. Since gross income would include the narrower concept of wages, the court concluded that the Section 119 exemption applies to gross income as well as FICA and FUTA obligations.

Another troublesome issue was the interpretation by the IRS that if a charge were made for meals furnished employees for the convenience of the employer. The IRS held, therefore, that management fees paid by the employer to contract foodservice management companies for their preparing and selling employee meals would be considered part of the reasonable value of the meals and therefore subject to income, FICA and FUTA taxes and withholding. This interpretation was overruled by H.R. 12841 adopted in 1978 which amended Section 119 to state: "In determining whether meals are furnished for the convenience of the employer, the fact that a charge is made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account." As a result, management fees and reimbursements paid to foodservice management companies providing foodservice to employees of a client on the premises of the client were no longer subject to inclusion as gross income to the employees. The Rowan decision would apply this limitation on the IRS to FICA and FUTA taxes also.

ARGUMENT IN OPPOSITION TO H.R. 907

The question of whether meals are furnished for the convenience of the employer generally depends on whether they are provided for substantial non-compensatory purposes. The exclusion of such meals from gross income of the employee is considered for the employer's convenience and not as an inducement or an employee benefit to the employee. It was not the intent of Congress to provide a tax shelter for the employee but to encourage ease of administration for the employer.

The current interpretation of the Section 119 exemption, as modified by the recent amendent and court decisions, now fully reflects this philosophy. It is our position that to further amend the section to include meals provided employees off the premises at public eating facilities could not be realistically regarded as for the convenience of the employer but could be considered an inducement or employee benefit for the employee and therefore readily arguable that the value of such meal is income to the employee. We conclude that if H.R. 907 were adopted it would undercut the underlying principle of the Section 119 income exemption for employees and could lead to a consideration for its total abolition from the code. This would be an obviously undesirable result both from the employer and employee point of view. The extension of the tax exemption to employees for meals furnished off the premises of their place of employment provides a tax incentive that is counter-productive to the government's program of energy conservation. By providing meals to employees at the place of work, business and industry helps dissuade employees from leaving their place of work at mealtime, which is an important contribution to energy conservation. Congress has adopted a number of tax incentives to encourage energy conservation and now is not the time to use the code for a reverse effect. Our members stand ready to expand their food service to employees at their place of work and could readily cover workplaces that do not now provide such facilities. The merchandise vending and contract foodservice managment industry is making an important contribution to the government's energy conservation program and is able and willing to expand its program where needed.

CONCLUSION

The basic question is: How does furnishing meals to employees off the business premises of the employer serve the convenience of the employer? If the value of such meals is not to be included in the employees' gross income for tax purposes such a nontaxable employee benefit may serve equity when compared to the situation where meals are served employees on the business premises; but this is true only in the context of viewing such transactions as compensatory employee benefits. The whole purpose of Section 119 is to provide a convenience to the employer which

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