The Boston Bruins are center-ice in a battle with the IRS that could affect all major sports teams and many other businesses that move employees to so- called “offsite premises” to provide their services.
In a petition filed with the U.S. Tax Court, Jacobs v. Commissioner, No. 019009-15, by the owners of the Boston Bruins, the issue raised is whether the hockey club may deduct 100% of the costs it incurs to provide players and staff with meals while they are at away games.
Internal Revenue Code Section 274(n) places a limit on the tax deduction allowed for meals to 50% of the costs incurred, so long as the meals are considered ordinary and necessary business expenses. However, there is an exception to this rule that allows a full deduction for the cost of the meals. The exception applies when the cost of the meal is considered to be a de minimis fringe benefit. To be considered a de minimis fringe benefit and not includable in the employee’s gross income under IRC sections 132 and 119, the meal must given to an employee on the business premises of the employer in an employer-operated eating facility, and it must be provided for the convenience of the employer.
Bruin’s tax counsel will likely argue that when they are at away games, the hotels where they stay and consume their meals are the teams’ business premises. While a hotel may not seem like a traditional business premise for a hockey team, a compelling argument for such treatment may be utilized by Bruins counsel. The team asserts that the hotel becomes its base of operations while away from home. While at the hotel, substantial time is spent in preparation for the upcoming game. Strategy meetings, physical therapy sessions, medical treatment, video sessions, curfew enforcement, and a carefully constructed nutrition plan that culminates in two mandatory meals on game day are provided on the hotel premises. The meals and entire pre-game preparation at the hotel are designed to physically and mentally prepare the players and allow the team to control the players’ movements and conduct before the game. The hotel in almost every aspect becomes the operational center for the team, even if it is only a temporary one. The Bruins state in their petition to the Tax Court that this movement of their workforce is “critical to each Bruins player’s job and to the club’s ultimate purpose of playing and winning professional hockey games.”
While an eating facility is not defined in the Internal Revenue Code, regulations under Section 1.132-7 state that an employer operated eating facility is:
- Owned or leased by employer,
- Operated by employer,
- Located on or near the business premises of the employer,
- Have meals that are furnished at the facility that are provided during, or immediately before or after, the employee’s workday.
In a prior case involving the eating facilities of a concert promoter that moved from venue to venue with the band, the IRS conceded and allowed a full deduction for meals based upon the convenience of the employer exception. In another case, the IRS concluded and discussed in an Internal Legal Memorandum (“ILM”) that flight crew members could not exclude from their gross income the value of their catered meals from third party vendors while they performed their pre- and post-flight duties on a grounded plane. The plane was not considered to be an employer- operated eating facility by the IRS, and the deduction, therefore, was disallowed. The ILM further notes that the flight crew was served at a facility that was not owned, leased, or operated by the employer. It appears that the IRS regulations assume that an eating facility must be at a location designated for the preparation and consumption of meals, at which individuals are employed to prepare and serve food.
A case in which the taxpayer prevailed was a Las Vegas casino operator, where a 100% deduction was allowed for the cost of meals provided to its employees in an employee cafeteria owned and operated by the casino. The casino had a stay-on-premises policy where employees were prohibited to leave the casino while they were on duty.
Potentially, there exist many situations, other than just those involving professional sports teams, where employees are moved in order to perform their jobs and the employer takes control of the space and the employees’ actions. IRS officials have noted that employers are increasingly taking aggressive positions involving employer-provided meals and employee cafeterias allowing free meals to entire workforces in some cases. In response to this, the IRS, in its priority guidance plan for the years 2015-2016, indicate that regulations are to be written under Internal Revenue Code Sections 119 and 132 to clarify these issues. Until then, we will await guidance from the U.S. Tax Court, which will decide who wins the game being played between the Boston Bruins and the IRS.
