by Attorney Patricia Weisgerber, LLM
Like Napolean recognizing that an army marches on its stomach, the owners of the Boston Bruins know a hockey team needs to be well-fed to ensure optimal performance on game day. So, when the Bruins go on the road to play away-games, management plans ahead. With half of the Bruins’ regular season games played at the arenas of their competitors, as required by the NHL constitution, Bruins management contracts with the hotels at the visiting venues with the efficiency of a military deployment. Food is a major focus. Not only are all the players fed at away-games, but other traveling Bruins’ employees are included in the meals as well.
Background: Mandatory Away-Game Meals for Bruins Players
For the Boston Bruins, these pre-game meals aren’t just about the players eating nutritious and specifically designed pre-game meals, they’re about winning hockey games. As six-time Stanley Cup winners, this is the business of the Bruins. Thus, attendance at away-game meals is mandatory for the players.
Meals are conducted in hotel meal rooms, the location of which the hotels must not disclose to the public. Meal-time includes sessions with coaches, strategy discussion, film reviews, interaction with Bruins public relations staff as well as other business-related meetings. Basically, business is conducted. These pre-arranged meals are so important to the achievement of Bruins short-term and long-term goals that, if players skip them, the players may be fined or “scratched” from participating in an upcoming game.
Jacobs v. Commissioner: Full Deductions for Away-Game Meals
The owners of the Bruins, Jeremy and Margaret Jacobs, fully deducted the costs of the above described away-game meals on the 2009 and 2010 federal income tax returns of their S corporations holding their interests in the Bruins. The amounts deducted were $255,754 and $284,446 for each of the tax years, respectively. The Jacobs treated these costs as de minimis fringe benefits under IRC Section 274(n)(2)(B). The IRS did not agree.
The IRS view was that the 50% meals and entertainment deduction limitation under IRC Section 274(n)(1) should apply. The IRS assessed the owners of the Bruins with deficiencies of $45,205 and $39,823 for tax years 2009 and 2010, respectively. The owners of the Bruins, in turn, disagreed with that assessment and took the case to U.S. Tax Court.
A. A Look at the 50% Deduction Limitation under IRC Section 274(n)(1)
The starting point for the deduction of a business expense is IRC Section 162, which addresses deductions for a trade or business. Section 162, in general, permits “ordinary and necessary” business deductions carried out in the normal course of business. It includes traveling expenses, such as lodging and meals, as long as they aren’t too “lavish or extravagant under the circumstances.” Section 274(n)(1) then restricts the full deduction and sets a 50% deduction limitation on “food and beverages” as well as for items having a connection to entertainment or recreation.
B. 100% De Minimis Fringe Deduction under IRC Section 274(n)(2)(B)
As with many parts of the Code, exceptions apply and Section 274(n)(2) provides the de minimis fringe benefit exception. To apply this exception to the deduction limitation, you must look to IRC Section 132(e) where the term “de minimis fringe” is defined as “any property or service the value of which is … so small as to make accounting for it unreasonable or administratively impracticable.”
With relation to the Bruins’ deduction for pre-game away meals, we look specifically to Section 132(e)(2) regarding the “treatment of certain eating facilities.” This section basically allows de minimis fringe treatment if an employer operates an eating facility for employees which meets two requirements:
- The facility is located on or near the business premises of the employer, and
- The revenue derived from such facility normally equals or exceeds the direct operating costs of such facility.
Additionally, the benefit cannot favor highly compensated employees and the operational requirements above must be applied in a non-discriminatory manner.
C. Analysis of the Section 132(e) De Minimis Fringe Benefit Deduction by the U.S. Tax Court
1. De Minimis Fringe Benefit May Not Discriminate in Favor of Highly Compensated Employees
The Tax Court first looked at whether the benefit favored highly-compensated employees (HCEs) as defined by Section 132(j) in reference to the income thresholds under IRC 414(q). In both 2009 and 2010, this threshold was $110,000. The Tax Court found that there was no discrimination in favor of HCEs because the meals were made available to all Bruins traveling hockey employees. Not only were the meals made available, but the meals were provided “substantially in the same terms” through a buffet-style meal service
2. Five Prong De Minimis Fringe Benefit Test for Meals
Once, it has been established that the meals were provided in a non-discriminatory manner, there is a five-prong test to be met to determine if the de minimis fringe benefit applies:
- Is the eating facility owned or leased by the employer?
- Is the facility operated by the employer?
- Is the facility located on or near the business premises of the employer?
- Are the meals furnished at the facility provided during, or immediately before or after, the employee’s workday?, and
- Does the annual revenue normally derived from the facility equal or exceed the direct operating costs of the facility (the revenue/operating cost test)?
The Tax Court Findings:
Based on the information presented by the Bruins, the Tax Court applied the five-prong test and found the following:
1. There was a lease.
The substance of the contracts with the hotels for the use of the hotel meal rooms rose to the level of a lease because of an exchange of consideration for the “right to use and occupy” the property.
2. Operation by employer.
The banquet event orders (BEOs) process created as part of the Bruins’ contract to have the hotels provide the meals met the second prong because the Bruins contracted with another to operate an eating facility for their employees.
3. Hotels as the business premises.
With regard to the business premises prong, the Tax Court found that the Bruins were in a unique situation and were obligated to conduct business in away city hotels. Therefore, those hotels constituted the Bruins’ business premises for the years in question.
4. Meals furnished during, before, or after the workday.
The IRS didn’t disagree that the meals weren’t furnished during, before or after the employee’s workday, so no analysis by the Tax Court was required.
5. Revenue/cost operating test.
For the revenue/operating cost test, Section 132(e) provides that “an employee entitled under section 119 to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal.” If an employer can show that the meals are excludible from the employee’s gross income, then the employer operating an eating facility will have satisfied the revenue/cost operating test. The Section 119 test to show that meals are excludible to the employees asks:
→ Were the meals furnished for the convenience of the employer, and
→ Were the meals furnished on the business premises of the employer.
The Tax Court determined that the Bruins had nutritional, scheduling and performance reasons for providing the meals and did not feel the need to “second-guess their business judgment.” By meeting the Section 119 test and already having established that the meals were furnished on the Bruins’ business premises, the revenue/cost operating test was met.
In conclusion, the Tax Court holding was in favor of the owners of Bruins. For now, they have scored and no one is the penalty box. Whether or not the IRS will appeal the ruling isn’t known just yet. The IRS might appeal if they are concerned about the broader application by other companies who conduct significant business away from their regular premises. If there is another “play-off” between the Bruins and the IRS, I hope, somewhere, Fred Cusick is getting ready to provide the next play-by-play.
 See IRC Section 132(e), Treas. Reg. 1.132-7 and Boyd Gaming Corp. v. Commissioner, 106 T.C. 343, 348 (1996).
 Fred Cusick was a Bruins announcer for over forty years and well-known for his excited exclamation of “SCORE!” whenever the Boston Bruins made a goal.
The tax attorneys at M. Robinson and Company have experience with tax planning, preparation and controversy issues for corporations, partnerships, and sole proprietorships; we may be able to assist you. Please feel free to contact us at 617-428-6900 with questions. The material in this publication does not constitute legal advice. It is intended for general information purposes only.
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