Casinos, workers beat IRS over tax on meals

Opponents of the so-called IRS meals-tax are cheering a federal appeals court ruling Wednesday reversing a U.S. Tax Court decision that would have required most casino employees to pay taxes on the free meals they receive from their employers.

The 1997 Tax Court decision in an Internal Revenue Service case against Boyd Gaming Corp. of Las Vegas led to a lengthy battle between the casino industry and the IRS over free employee meals.

But Wednesday's ruling, by the 9th U.S. Circuit Court of Appeals in San Francisco, appears to completely undercut the IRS' campaign to charge casino employees extra taxes for the free meals they receive at work. It also appears to validate the casino industry practice of reducing overall company taxes by deducting the cost of the meals from taxable income.

"This is tremendous news for our company and for the industry," Boyd spokesman Rob Stillwell said.

"We believe that it closes the issue," Sen. Richard Bryan, D-Nev., said. "It's a big victory of tens of thousands of Nevada hotel employees."

"This is a huge victory for the hardworking employees of the casino-entertainment industry," Rep. Jim Gibbons, R-Nev., said.

Wednesday's decision has implications for businesses nationwide that provide free meals to employees, but is especially important to the hotel-casino industry that employs some 223,000 people in Nevada -- more than a quarter of the state's work force.

The IRS could appeal the decision either back to the 9th Circuit Court for a re-hearing or to the Supreme Court. An IRS spokesman declined comment on the ruling or the IRS' plans.

The dispute between Boyd and the IRS centers on competing interpretations of a provision of U.S. tax law that, until last year, allowed employers to provide all employees free meals if it could demonstrate that at least 90 percent of its employees had to remain on premises throughout their shifts for a compelling business reason.

Last year, Congress reduced the threshold to 50 percent in an attempt to kill the IRS meal-tax. Since that time, meal-tax opponents charge the IRS acted to thwart the new law by adopting a rule that the meals must be justified on an employee-by-employee and meal-by-meal basis.

The gaming industry argues that casinos provide free meals because they do not want employees leaving their properties to buy meals during their shifts. It would take employees too long to leave a large casino complex, find something to eat, and return by the end of their break, argues the industry. Also, a nightmare of gridlock would ensue as thousands of casino employees descended on local eateries during their meal breaks.

Also, the court noted, "Boyd contends 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 also security concerns, argues the industry. Many casino complexes have complicated check-out procedures for employees involved in gaming and money-handling. Having those employees check out twice a day -- once when they leave for lunch, and once when they leave for good -- would be impractical, argues the industry.

"There is a compensatory business reason why we need our employees to stay on premises," Stillwell said.

But the IRS argued that the industry's reasons for requiring many of its employees to remain on property during meal breaks were not compelling. The Service conceded that some money-handling, food service and security personnel should be exempt from paying taxes on free meals, but argued that virtually all other employees should not receive complimentary meals tax-free.

In September, 1997, the U.S. Tax Court ruled in favor of the IRS. Boyd appealed the case, which resulted in Wednesday's ruling.

Wednesday's ruling appears to be a significant setback to the IRS on all fronts in its meal-tax campaign.

"I think the decision renders all of that moot," Bryan said.

The decision attacked the strict standard the IRS applied in the Boyd case, ruling that casino companies had legitimate reasons for keeping the majority of their employees on premises during their shifts, and thus for feeding them free meals.

Under the IRS' strict interpretations of what kinds of employees should qualify for free meals, ruled the court, "only restaurant critics and dieticians could meet such a test."

"Boyd was required to and did support its closed campus policy with adequate evidence of legitimate business reasons," ruled the court. "While reasonable minds might differ regarding whether a 'stay-on-premises' policy is necessary for security and logistics, the fact remains that the casinos here operate under this policy. ... We find it inappropriate to second guess these reasons or to substitute a different business judgement for that of Boyd."

The court also noted that because Congress had lowered the tax code threshold under which employers can offer all employees free meals from 90 percent to 50 percent, "the landscape for the Tax Court's decision was altered..."

"As a result of the 'stay-on-premises' requirement, 'more than half' of Boyd's employees received the free meals for the 'convenience of the employer,' and thus Boyd is entitled," to provide free meals, the court ruled.

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