The following article was originally published in Casino Executive and is presented in Gaming floor with permission of the author. Professor Rose can be reached at his web site:

There Really Is A Free Meal

The federal 9th Circuit Court of Appeals has ruled that when it comes to
taxes, both casinos and their employees are winners.

The case involved the dual questions of whether casinos could deduct the
cost of free meals they give their employees, and whether those employees
have to pay income taxes on those meals.

The Court has now settled the question, at least for the western United
States, including Nevada. If a casino and its lawyers set up the program
correctly, the casino may deduct 100% of the expenses involved with
supplying its employees with free meals. As a nice corollary, the company
can offer prospective workers the fringe benefit of two free meals every day
they work, without the employees having to report the food as income.

One of the most fundamental rules of the federal income tax system is that
everything any American receives in any way is, theoretically, income that
may be taxed. There obviously have to be lots of exceptions. People would
not put up with paying taxes on personal Christmas and Chanukah gifts.

Fundamental fairness requires that businesses only pay taxes on their actual
income, not their total sales. A grocery store that receives a dollar by
selling a state lottery ticket would quickly go broke if it had to pay taxes
on that dollar, rather than on the few cents it actually gets to keep.

Any individual or business that makes money has expenses as well.
Policy-makers are constantly struggling with the question of which expenses
should be deductible when calculating income, and which should not.

In theory, if a taxpayer -- say a salesperson -- takes a prospective client
out to lunch, the meal should be considered a legitimate cost of doing
business. Particularly if the sale is made, the salesperson should be able
to deduct the meal expense to figure out how much he or she actually made.

The problem is that any tax deduction can be misused. Is it really a
necessary part of business for executives to have three-martini lunches
every day?

In 1986, Congress became concerned that high-income taxpayers were taking
business deductions for meals and entertainment which were really part of
their personal living expenses. So Congress put a cap on the amount of these
deductions; today only 50% of the costs of business meals and entertainment
may be deducted.

But there are some important exceptions. Some companies supply meals to
their employees because they need to have these workers present at all times
in case of emergencies. Other companies are located so far from even the
nearest restaurant that employees could not get back before their work break
was over.

Congress declared that a company that provides meals to its employees for
its own convenience can deduct 100% of the cost of those meals.

What about other meals and other employees? In 1998 Congress amended the law
so that a company can deduct the cost of all meals given to all its
employees, if more than half of the employees are being fed for the
convenience of the employer.

The recent federal case arose when the IRS decided that the Boyd Gaming
Corporation's casinos were providing employees free meals that were not for
the convenience of the casino. The IRS believed the Stardust, California,
Fremont and Sam's Town were giving free food simply to remain competitive
with other casinos in attracting and keeping good workers.

The IRS also argued that meals, to be deductible, must be linked to an
employee's specific duties. The 9th Circuit found that would be "virtually
impossible to satisfy; only restaurant critics and dieticians could meet
such a test."

Further, the IRS regulations themselves state that meals furnished to
employees who cannot leave the premises because there are insufficient
eating facilities in the vicinity are provided for the "convenience of the
employer." Thus, "we can discern no logical distinction between workers
isolated by geography and those isolated by employer policy."

Boyd required its employees to stay in the casino during the entire eight
hours of their work shifts. Naturally, the company realized that it had to
supply meals. But the IRS argued that there was no good reason for the
"stay-on-premises" policy. The Tax Court agreed.

The 9th Circuit reversed, holding it was not up to government officials "to
second guess Boyd's business judgment." So long as the company had "adequate
evidence of legitimate business reasons" to "support its closed campus
policy," the meals would be 100% deductible.

The IRS argued that employees could eat in restaurants in the casino. It
ignored the fact that the restaurants were reserved for patrons, who might
find uniformed employees ... distracting. "A cocktail waitress, for example,
wears a very short black dress."

Boyd put on evidence showing that many employees handle large amounts of
cash and gaming chips, and that checking workers in and out for meals would
be costly and disruptive.

Boyd's most interesting argument was "that the 'stay-on-premises'
requirement allows it to maintain tight control over its workforce, thereby
reducing the chances of employees succumbing to the distractions and
temptations of the 'festive' Las Vegas atmosphere."

There are not many businesses that would admit that if their employees visit
the competition during their workday, they might not return to work.

©Copyright 1999, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I. Nelson Rose, Whittier Law School, Costa Mesa, CA.