Meals provided to Boston Bruins players and personnel before away games qualified as a de minimis fringe benefit under Sec. 274(n)(2)(B) and were not subject to the 50% limitation under Sec. 274(n)(1), the Tax Court held.
Facts: The petitioners, Jeremy and Margaret Jacobs, co-owned the Boston Bruins National Hockey League (NHL) team through two S corporations.
The NHL required its teams to play half of their yearly games away from home and had detailed rules governing travel to those games, and the rules in the league's collective bargaining agreement required the teams to arrive the night before a game if its location entailed a plane trip longer than 150 minutes. To accommodate this schedule, the Bruins contracted with hotels for lodging and food in cities where the team played away games. Under these arrangements, the hotels provided banquet or meal rooms where pregame meals and snacks are served. These meal facilities were open to all traveling staff, but players' attendance was mandatory.
The Jacobses, through their S corporations, deducted the full cost of away-game meals served at these facilities. The IRS had disallowed 50% of the deduction, which resulted in deficiencies of $45,205 and $39,823 in the Jacobses' 2009 and 2010 federal income taxes.
Issues: Generally, deductions for food and beverages allowable under Sec. 274(a) are limited by Sec. 274(n)(1) to 50% of the expense amount. Sec. 274(n)(2)(B) excepts from this limitation meals that qualify as a de minimis fringe benefit under Sec. 132(e). Under Sec. 132(e)(2), the provision of meals by an employer to employees in a nondiscriminatory manner at an eating facility for employees may qualify as a de minimis fringe benefit.
Under Regs. Secs. 1.132-7(a)(2) and (3), meals provided at an eating facility in a nondiscriminatory manner will qualify as a de minimis fringe benefit if the following conditions are met: The employer must own or lease the facility; the facility must be operated by the employer, directly or by contract with another party; the facility must be located on or near the business premises of the employer; the meals must be provided during, or immediately before or after, the employees' workday; and the annual revenue derived from the facility must normally equal or exceed the direct operating costs of the facility (the revenue/operating cost test).
The Jacobses argued the full amount paid for meals was deductible as a de minimis fringe benefit.
Holding: The Tax Court determined that because all staff traveling with the team could use the meal facilities, the meals were provided in a nondiscriminatory manner. The IRS conceded that the meals met the requirement of being provided during or immediately before or after the employees' workday, so the court did not analyze this issue. The court found that the facility was owned or leased by the employer because the team in substance leased the hotel meeting rooms for the meals. The team also contracted with the hotels to provide the meals, thus operating the facility within the meaning of the regulations.
With respect to the business-premises requirement, the court stated that, based on its precedent, an employer's business premises are where employees perform a significant portion of their duties or where the employer conducts a significant portion of business. After a detailed consideration of the "unique nature of the Bruins' business," the court found that this requirement was met because the hotels the team stayed at were "where a significant portion of the traveling hockey employees' responsibilities and the Bruins' business is conducted."
Under the regulations, an employer is considered to have met the revenue/operating cost test if the employer can reasonably determine that the meals were excludable from the employees' income under Sec. 119. To be excludable, the meals must be furnished for the employer's convenience on the employer's business premises. Noting that the meals also had substantial noncompensatory business purposes, including accommodating players' special dietary needs and an often hectic timetable with game schedules, strategy sessions, and other team business, the court found they were furnished for the employer's convenience. Because the court had also determined that the hotel meal rooms were part of the team's business premises, it found that the revenue/operating cost test was met.
Therefore, the court held, the provision of pregame meals to the Bruins' traveling employees qualified as a de minimis fringe benefit and was not subject to the Sec. 274(n)(1) 50% limitation.
- Jacobs, 148 T.C. No. 24 (2017)
—By Sally Schreiber, J.D., a JofA senior editor.