Under general principles of federal income taxation, the value of meals or lodging that an employer provides to its employees without charge constitutes additional compensation subject to tax unless the employees demonstrate that such benefits qualify for exclusion from gross income under a specific provision of the Internal Revenue Code.

The Code provides that meals and lodging may be excluded if they are provided for the "convenience of the employer" on the "employer's business premises" and, in the case of lodging, if the employee is required to accept it as a "condition of employment."

Meals are considered provided for the "convenience of the employer" if they are furnished for a "substantial non-compensatory business reason." This test is satisfied only if, based on an objective examination of all the circumstances, there is a primary business reason for furnishing the meals. For example, meals provided to employees who must be available during their meal period to attend to urgent business satisfy this test.

Lodging is considered to be furnished for the convenience of the employer if it is furnished for a primary non-compensatory business reason. Generally, this test is satisfied if it is established that the employee could not properly perform his duties without being furnished lodging.

To qualify for exclusion from gross income, meals and lodging must also be furnished on the employer's "business premises." For example, in the case of the employees at a remote site, the lodging must be furnished on, or contiguous to, the work-site. However, it is not necessary in all cases that the meals or lodging be furnished on property owned by the employer, such as its office building or distribution plant. The business premises test is satisfied if the meals or lodging are furnished at a place where the employee performs a significant amount of services.

In addition to the "convenience of the employer" and "business premises" tests, the exclusion for lodging also requires the employee to demonstrate that he is required to accept the lodging "as a condition of employment." Generally, this test is satisfied if, as a practical matter, the employee must accept the lodging in order to properly perform his duties. This test is essentially the same as the convenience of the employer test.

The discussion above outlines the general rules governing the excludability from gross income of the value of meals and lodging provided by an employer. The correct tax treatment of a particular situation, however, can be made only after a careful examination of the facts and circumstances.