In a surprising decision, the Tax Court has allowed the owners of the Boston Bruins hockey team (a subchapter S corporation) to deduct 100 percent of the cost of pre-game meals at hotels for employees while traveling for away games. Although deductions for meals and entertainment are normally limited to 50 percent of the cost, the Tax Court concluded in Jeremy M. Jacobs, et. ux. v. Commissioner, 148 T.C. No. 24 (2017) that pre-game meals at hotels for away games qualify as a de minimis fringe benefit, an exception to the 50 percent rule, which allows the full cost to be deducted.
The dispute between the Bruins’ owners and the Internal Revenue Service (IRS) arose after the Bruins deducted 100 percent of away pre-game meals on its 2009 and 2010 income tax forms. The IRS disallowed 50 percent of the amount deducted for the pre-game meal expenses.
Section 162(a) of the Internal Revenue Code (IRC) allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 274(n) imposes a 50 percent limitation on the deduction of meals unless an exception applies. The Tax Court found that the cost of the pre-game meals satisfied all of the requirements to qualify under the de minimis fringe benefit exception of Section 274(n)(2)(B) and thus allowed the Bruins to deduct 100 percent of the cost of those meals.
In order for pre-game meals to qualify as a de minimis fringe benefit, access to the eating facility and meals must be available on substantially the same terms to each member of a group of employees and must not discriminate in favor of highly compensated employees as per Section 132(e)(2). The Tax Court found that employees of the Bruins, including but not limited to players, coaches, trainers, and equipment managers, had access to pre-game meals on substantially the same terms and that providing access to these pre-game meals did not discriminate in favor of highly compensated employees.
For employee meals to be provided in a non-discriminatory manner under the de minimis fringe exception, five conditions must be satisfied, namely that: (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 annual revenue derived from the facility normally equals or exceeds the direct operating costs of the facility; and (5) the meals furnished at the facility are provided during, or immediately before or after, the employee’s workday.
The Tax Court found that the Bruins lease hotel space when they contract to use a hotel’s facilities while at an away game. The court also found that the Bruins participate in the operation of the hotel’s facilities because when contracting with hotels, they dictate terms such as food preparation, the timing of meals, service of meals, etc. In reaching its conclusion that the third requirement of a de minimis fringe exception was met, the court noted that the Bruins were required by league rules to participate in away games, which account for 50 percent of their regular season schedule. Therefore, the court concluded, perhaps somewhat surprisingly, that out of town city hotels constituted part of the Bruins’ business premises. The court easily found that the team provided meals to its employees at away city hotels for its convenience as it enabled the Bruins to maximize effectively time for activities dedicated to winning hockey games. Finally, the IRS conceded that the meals were furnished at the facility during, before, or after, the employee’s workday.
What Should Pro Sports Teams Do Now?
The ruling in Jeremy M. Jacobs, et. ux. v. Commissioner, provides an opportunity for teams from the NHL, NBA, MLB, NFL, MLS, and other professional sports leagues to attain full cost deductions for meals provided to employees at hotels while traveling for away games.
Given the number and high visibility of taxpayers who benefit from this decision, the IRS will likely appeal the case. Nevertheless, teams that have not previously taken the full deduction should now file protective refund claims for prior years in order to keep the statute of limitations open, pending subsequent judicial review.
Although the scope of the holding in Jeremy M. Jacobs is unknown, and the court in several instances noted the “unique nature” of the hockey business, it is possible the full deduction could be available to other professions where the physical well-being of the employees is a professional qualification, such as bands, modeling agencies, and other entertainment related businesses. As such, these groups may want to consider filing protective claims as well.