The U.S. Tax Court recently decided a casein which it held that a professional hockey team could deduct 100% of the cost of meals provided to players and other employees at the team's hotel while traveling for games. The decision may have implications beyond the sports world, affecting the entire entertainment industry.
Jeremy M. Jacobs and his wife, Margaret, own the Boston Bruins, a National Hockey League (NHL) franchise, through three entities: Deeridge Farms Hockey Association (Deeridge), Manor House Hockey Association LLC (Manor House), and the Boston Professional Hockey Association Inc. (BPHA). Jeremy owned 99% of Deeridge, an S corporation; Manor House, which was 100% owned by Margaret, owned the other 1%. BPHA was a qualified Subchapter S subsidiary of Deeridge. Thus, income and expense items of the team were passed through to the Jacobses and reported on their individual return.
Pursuant to the collective bargaining agreement (CBA) between the NHL franchise owners and the league's players, NHL teams are required to play one-half of their total games at their home arena and the other half at the arenas of the league's other teams. The NHL requires teams to arrive for road games at least six hours before the start of the game. If the time required to travel to a road game is greater than 150 minutes by flight, the CBA requires that the team arrive the day before the game.
During the tax years at issue, 2009 and 2010, the team personnel traveling with the Bruins to road games included players, the head coach, assistant coaches, medical personnel, athletic trainers, equipment managers, communications personnel, travel logistics managers, public relations/media personnel, and other employees. For road games, the Bruins would contract with hotels in the cities where they would be playing to provide the team sleeping accommodations, exercise facilities, space for massage and medical treatment, and banquet or conference rooms to use for pregame meals and snacks. Each meal or snack was carefully crafted to meet specific nutritional guidelines to ensure the athletes' optimal performance. In addition, the hotel was forbidden from making public the location of the team's meal room to ensure the players' privacy.
The Bruins contracted to stay at a hotel only if the team was satisfied the hotel could meet all nutritional and privacy concerns. The hotels where the team stayed generally did not charge for the cost of the meal room, but rather provided it free in exchange for the considerable sums the team paid the hotel for the sleeping rooms and meals the hotel provided.
On the day of a road game for which the Bruins traveled the night before, the players had a mandatory two-hour breakfast. The team also made the breakfast available to all traveling employees. During these breakfasts, the team conducted business. The players met with coaches to discuss strategy or review game film, the public relations staff met with players to review anticipated issues with the media, and coaches gathered to discuss roster adjustments, injuries, or performance issues.
Following breakfast, the Bruins traveled to the opponent's arena or practice facility to practice for the upcoming game. After returning from practice, the team provided a two-hour lunch. Once again, this was mandatory for all players, and all other traveling team employees were welcome to join. During lunch, the Bruins' coaches conducted small group and/or one-on-one meetings with players. If the game was scheduled for the afternoon, the players had only one meal, a brunch, sometime between 8 a.m. and 12:30 p.m. The brunch was mandatory for the players and was also available to all traveling employees. The team condensed the business activities that would normally take place at breakfast and lunch into the brunch.
On its S corporation returns for 2009 and 2010, Deeridge claimed 100% meal expense deductions for pregame meals provided to the Bruins' traveling employees at the hotels. These expenses were passed through to the Jacobses, who deducted them on their individual return. In 2015, the IRS issued a deficiency notice to the Jacobses that included deficiencies for 2009 and 2010. The deficiencies were a result of the IRS's disallowance of 50% of Deeridge's deduction of meal expenses for meals provided to the Bruins' traveling team employees in cities other than Boston.
Under Sec. 162, a taxpayer is entitled to deductions for all ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business. This includes traveling expenses; specifically, a taxpayer can take a deduction for meal and lodging amounts that the taxpayer incurs while away from home in the pursuit of a trade or business.
Special rules govern deductions for meals and entertainment. First, Sec. 274(a) disallows any meals and entertainment expenses that are not associated with a trade or business activity. If the meals and entertainment are associated with a trade or business activity, a taxpayer may take a deduction, but Sec. 274(n) generally limits the deduction to 50% of the expense.
Sec. 274 provides numerous exceptions to the 50% limitation that permit a taxpayer to deduct 100% of the meal or entertainment expense. One exception is found in Sec. 274(n)(2)(B), which provides that 100% of a meal cost may be deducted if the meal qualifies as a de minimis fringe benefit under Sec. 132.
Sec. 132(e)(2) defines a de minimis fringe as any property or service in which the value is so small as to make accounting for it unreasonable or administratively impracticable. In the case of employer-provided meals, the cost of meals provided to employees by an employer at an employer-operated eating facility for employees will be considered a de minimis fringe if the meals are provided in a nondiscriminatory manner and the eating facility meets the following tests of Regs. Secs. 1.132-7(a)(1)(i) and (2):
- The eating facility is owned or leased by the employer;
- The facility is operated by the employer;
- The facility is located on or near the business premises of the employer;
- The meals are provided at the facility before, after, or during the employee workday; and
- The annual revenue derived from the facility normally equals or exceeds the direct operating costs of the facility (the revenue/operating cost test).
The Tax Court's decision
The Tax Court held that the Bruins' provision of pregame meals and snacks to the traveling employees at away city hotels qualified as a Sec. 274(n)(2)(B) de minimis fringe because the requirements of Sec. 132(e) and the regulations thereunder were all met. Accordingly, the Jacobses were entitled to deduct the full cost of the meals without regard to the 50% limitation imposed by Sec. 274(n)(1). In its opinion, the court separately discussed each of the requirements from Sec. 132(e) and the regulations.
The meals provided on the road trips were open to all traveling employees. The meals did not vary depending on whether the employee was a coach, a player, athletic staff, or a lower-level employee. Thus, the Tax Court concluded that the meals were not discriminatory.
Eating facility is owned or leased by employer
Regs. Sec. 1.132-7(a)(2)(I) does not specifically define the term "lease." Based on Supreme Court precedent, the Tax Court found that under the rules of statutory construction, words should be interpreted using their ordinary, contemporary, and common meaning. To determine the meaning of "lease," the court looked to Black's Law Dictionary, which defines a lease as "[a] contract by which a rightful possessor of real property conveys the right to use and occupy the property in exchange for consideration."
In this case, despite the fact that the hotels generally provided the Bruins the meal rooms for free, this was only the case because of the considerable sums the team paid for sleeping rooms and the cost of meals. Thus, the court concluded that the team "leased" the meal rooms as part of the total cost it paid to procure space in the hotel.
Operated by the employer
Regs. Sec. 1.132-7(a)(3) provides that if 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. The court found that because the Bruins provided the hotel specific requirements for the meals regarding nutritional and privacy needs, and approved the contract only when the team was sure that the hotel could meet those needs, the Bruins were contracting with the hotel to operate the eating facility.
The facility is located on or near the business premises of the employer
Under Tax Court precedent, an employer's business premises is a place where employees perform a significant portion of their duties or where the employer conducts a significant portion of its business (Lindeman, 60 T.C. 609 (1973)). The IRS argued that the Bruins' only business premise was located in Boston, the Bruins' home city.
The court began its business premises analysis by looking at the NHL's CBA, which required the Bruins to travel to road games and arrive the day before if the flight time was longer than 150 minutes. If the Bruins did not meet the CBA's requirements, they would forfeit games, lose playoff points, incur financial penalties, and be required to indemnify the home team for loss of revenue and other expenses. Therefore, it was the Bruins' responsibility as an NHL team to make hotel accommodations in away cities in order to compete.
Next, the court considered its decision in Mabley, T.C. Memo. 1965-323, in which a rented hotel suite used for daily executive lunches constituted business premises because the taxpayer acquired and actually used the suite in which the meals were furnished for the conduct of business. As noted above, the Bruins used the meal rooms provided by the hotel not only to eat, but also to strategize and review game film, conduct meetings, and have the public relations staff meet with players to discuss questions the media might ask. In addition, the team used other hotel space to meet with athletic trainers to receive medical treatment and used the hotel fitness centers for strength work and conditioning. Therefore, the court determined that the use of the hotel for sleeping, eating, training, and other activities was critical to the team's preparation and directly correlated to the potential for victory. As a result, the court concluded that while the Bruins were on the road, the team used the hotel in the city they were playing to conduct business, and it qualified as the team's business premises.
The meals are provided before, after, or during the employee's workday
Regs. Sec. 1.132-7-(a)(2)(iv) requires that the meals furnished at the facility are provided during, or immediately before or after, the employee's workday. The IRS conceded that the Bruins met this requirement.
Revenue/operating cost test
Regs. Sec. 1.132-7(a)(2) provides that an employer-operated eating facility satisfies the revenue/operating cost test if the employer can reasonably determine that the meals are excludable to the recipient employees under Sec. 119. Meals are excludable to recipient employees under Sec. 119 if they are furnished (1) for the convenience of the employer, and (2) on the business premises of the employer.
Regs. Sec. 1.119-1(a)(2)(i) provides that meals furnished without charge to an employee will be considered to be for the convenience of the employer if the meals are furnished "for a substantial noncompensatory business reason of the employer." The meals provided by the Bruins at hotels were carefully prepared to provide players with the most nutrition for performance reasons. The team kept the menus consistent from city to city to avoid upsetting the athletes' stomachs during the game. Because the Bruins' objective is to win hockey games, the court found that it was important for the athletes to be at their highest performance level for games and that providing consistent, nutritious meals helped in that process.
In addition, the court noted that a team playing on the road has limited opportunities to prepare for a game. The team has breakfast, lunch, practice, athletic training sessions, game planning, and various other hockey- and business-related activities that it needs to take care of before the game. This leaves the employees and players with limited time and a hectic schedule. Having set meal times at one location allowed the team and players to manage that schedule. Thus, the court concluded that the meals provided at the team hotel had a significant noncompensatory purpose because they helped ensure the players ate meals that improved their game performance and they allowed the team members to maximize their limited time together before road games.
Having already found that the meal rooms were business premises of the employer, the court concluded that the meals were excludable from the income of the Bruins' players and other employees under Sec. 119. Therefore, the meal rooms met the revenue/operating cost requirement.
The Tax Court's decision could have far-reaching consequences. It is the first to rule in favor of a sports team's deducting 100% of its meals provided in road city hotels, providing a significant tax benefit to all professional sports franchises provided they can meet the required criteria. The decision may also help other taxpayers in the entertainment business who travel, such as performing artists, musicians, touring theatrical performances, etc., who have been subject to the 50% limitation but can now potentially qualify for the 100% deduction.
The critical determination for those in the entertainment business will be, however, whether—similar to the Bruins' situation—the hotel is used for significant and essential preparation activities, allowing the hotels to qualify as the taxpayer's business premises. These preparation activities would also allow the taxpayer to establish a substantial noncompensatory purpose for the meals, strengthening the argument that the meals meet the definition of a de minimis fringe benefit.
Jacobs, 148 T.C. No. 24 (2017)
Joshua Horowitz is a supervisor with WithumSmith+Brown in New York City. For more information about this column, contact firstname.lastname@example.org.