Bruins owner Jeremy Jacobs lifts the Stanley Cup (Photo via NHL.com)
When I saw the news about Boston Bruins owners Jeremy and Margaret Jacobs winning a case in U.S. Tax Court regarding away game meal costs, I didn’t really think much of it. But, after reading the decision and some coverage on the case, I came to realize that this actually was a big deal not only for the Jacobs’, but any large business in the United States that requires its employees to travel a lot.
I also realized that I actually have some insight into this issue. During my tenure as Coordinator of Hockey Operations at Union College, one of my biggest tasks was planning and organizing away game meals at the hotels we stayed at. I never thought this experience would give me great understanding about a tax law case. While some non-hockey people might find Judge Ruwe’s decision to be surprising (see The National Law Review), his decision made complete sense to me due to my experience at Union with team travel and away game protocols (Judge Ruwe described this process in pages six through twelve in the decision). To quickly explain, when hockey teams travel for away games, all players and staff members stay at the same hotel where they sleep, eat, watch film, receive medical attention, etc. in preparation for the upcoming game. The hotel essentially acts as a home base (or “business premises”) for the team operation while on the road, which is a central issue in this case.
Admittedly, I have limited experience in tax law, so I was curious as to the issues here and what parts of the Internal Revenue Code (“the Code”) were in play. Below I will succinctly explain this case.
The Tax Court’s full decision in Jacobs v. Commissioner, 148 T.C. No. 24 (June 26, 2017) can be found here.
The conflict revolves around the tax deduction the Jacobs’ were entitled to for away game meal expenses at hotels. For the tax years at issue (2009 and 2010), the Jacobs’ deducted the full cost (100%) of the meals. However, when they were audited, the IRS declared that the Jacobs’ could only deduct 50% for away game meal expenses, and thus they owed the IRS $45,205 and $39,823, respectively, in federal income taxes.
As a general rule, Section 162(a) of the Code allows an employer to deduct for “all the ordinary and necessary expenses paid for or incurred during the taxable year in carrying on any trade or business,” including meal expenses during travel. But, this deduction, as stated by Section 274(n), cannot exceed 50%. However, there are exceptions to the 50% rule, including the one mentioned in Section 274(n)(2)(B), which states that a full (100%) deduction can be taken if the meals provided at an employer-operated eating facility qualifies as a “de minimis fringe benefit” under Section 132(e).
First, in order to qualify as a “de minimis fringe benefit” under Section 132(e)(2), the meals served at the eating facility must be available to all players and staff, no matter their pay grade (non-discriminatory). Therefore, team meals on the road can’t only be available to players and high-ranking staff like owners, management and coaches (the hockey ops guy needs to eat too!).
If the meals are provided in a non-discriminatory way, they will be qualify as a “de minimis fringe benefit” under Section 132(e), if five requirements are met (see 26 CFR 1.132-7(a)(2); 26 USC 132(e)(2)):
(1) the eating facility is owned or leased by the employer;
(2) the facility is operated by the employer;
(3) the facility is located on or near the business premises of the employer;
(4) the meals furnished at the facility are provided during, or immediately before or after, the employee’s workday; and
(5) the annual revenue derived from the facility normally equals or exceeds the direct operating costs of the facility (the revenue/operating cost test).
Thus, the issue here was whether the Bruins’ pregame meals at away city hotels qualified for the exception under Section 274(n)(2)(B) as a “de minimis fringe benefit” as defined in Section 132(e).
Judge Ruwe held that the Bruins’ operation was non-discriminatory and satisfied each condition. He started out by noting that for the Bruins’ situation, a “highly compensated employee” was one who was paid over $110,000. Since every single traveling Bruins employee (even the hockey ops guy) were provided meals at the hotel, this was a “reasonable classification,” and thus non-discriminatory.
1. Eating Facility Leased by Employer
While the contracts between the Bruins and the hotels they stayed at are not called “leases,” Judge Ruwe looked to the common meaning of the word “lease.” He determined that “the substance of these contracts indicates that the Bruins are paying consideration in exchange for ‘the right to use and occupy’ the hotel meal rooms.” It was also noted that while the Bruins don’t pay separate consideration for the use of the meal rooms, those rooms “are essential to the Bruins’ away city business operations,” and are provided free of charge because they pay for lodging and food. Since the Bruins contract with hotels to “use and occupy” meal rooms during their stays, the hotel agreements are essentially “leases.” Therefore, the eating facility is leased by the Bruins.
2. Eating Facility is Operated by the Employer
Treasury Regulation Section 1.132-7(a)(3) states that “[i]f an employer contracts with another to operate an eating facility for its employees, the facility is considered to be operated by the employer for purposes of this section.” When the Bruins travel to a city, they contract with a hotel to prepare food and set-up a meal room (along with other services). In doing so, the Bruins pay for the food, as well as the 22% service fee. Thus, through the contract, the eating facility is technically operated by the Bruins.
3. Eating Facility is located on or near the Business Premises of the Employer
This was the most contentious and important prong in the case. Judge Ruwe noted that an employer’s business premises is where “employees perform a significant portion of duties or where the employer conducts a significant portion of business,” and the facility does not have “to be located in an employer’s principal structure for it to be considered a business premises.” Thus, this factual decision is based more on the function of facility, rather than its location. Judge Ruwe determined that the hotels were part of the Bruins’ business premises since the hockey players performed “significant business duties” at the hotels which were "essential to the Bruins' effective preparation." The eating facilities are more than just a place for players and staff to eat, “they also serve as a forum for the Bruins to maximize preparation time and conduct team business,” such as reviewing film, conducting team meetings, preparing for interviews, and receiving medical treatment. These activities are vital for the Bruins’ on-ice performance, and cannot be conducted in any other reasonable place while in an away city. Thus, away city hotels and its eating facilities are technically a part of the Bruins’ business premises. This part of the ruling will have the biggest impact in tax law moving forward.
4. The Meals are furnished during the Employee’s workday
This prong was conceded by the IRS since players ate meals before and after games, and a “game day” (including the time leading up to and immediately after the game) is considered a “workday.”
5. Revenue/Operating Cost Test
An employer satisfies this test if it can demonstrate that the meals are excludable to recipient employees under Section 119 of the Code, meaning they are: (1) furnished for the convenience of the employer; and (2) furnished on the business premises of the employer. Regarding the first prong of Section 119, which is a question of fact, meals are considered to be for the convenience of the employer if they are “furnished for a substantial noncompensatory business reason of the employer.” Judge Ruwe held that the Bruins proffered enough evidence showing that they provided meals to its players and staff for substantial noncompensatory business reasons, including “nutritional and performance reasons,” and the fact that the employees “are subject to a busy schedule and have only limited time to prepare for an upcoming game.” Since it was already determined that the second prong (business premises) was satisfied, the Bruins satisfied the Revenue/Operating Cost Test.
Therefore, the Bruins’ pregame meals at away city hotels qualify for the exception under Section 274(n)(2)(B) as a “de minimis fringe benefit” as defined in Section 132(e). Thus, the Jacobs’ are entitled for a full deduction of these expenses.
Clearly, this is a huge victory for not only professional sports franchises, but large businesses as well. This is a very plaintiff- friendly decision by the Tax Court and could end up haunting the IRS in the years to come. Perhaps Congress will have something to say about it.
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Tax Withholding & Reporting Blog
Covington & Burling LLP