Update: Not Just Another Sports Story
By Monte Colbert, Director, Tax & Business Services
The Boston Bruins just concluded a center ice battle with the IRS that could affect all major sports teams and other businesses that have employees provide services at offsite premises.
In a petition filed with the U.S. Tax Court, (Jacobs v. Commissioner), by the owners of the Boston Bruins, the owners of the hockey club argued that they were entitled to deduct 100% of the cost of pre-game meals provided to all travelling players and staff at hotels in other cities while the Bruins were at away games.
The 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 and associated with the active conduct of a trade or business. However, there is an exception to this limitation, which allows a 100% deduction for the cost of the meals. This is known as the de minimis fringe benefit exception. The Bruins counsel argued that the meals qualified under this exception, or, the costs of the meals were an expense for entertainment sold to their customers. The IRS argued that none of these exceptions applied and the pre-game meals were subject to the 50% limitation. The IRS did not challenge that the cost of the meals was associated with the active conduct of a trade or business.
To be considered a de minimis fringe benefit, the meals cannot discriminate in favor of highly compensated employees, and also must meet the following criteria:
- The eating facility is owned or leased by employer. The contracts between the Bruins and the hotels used for away games were not identified as leases per se; however, the amounts paid to the hotels for the right to use and occupy hotel meal rooms to conduct team business were enough to convince the Tax Court that these agreements, in substance, were leases.
- The eating facility must be employer–operated. The Bruins contract with each hotel weeks in advance to provide the meal rooms and food preparation and service. IRS regulations indicate 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.
- Meals are provided to an employee on or near the business premises of the employer. The Bruins’ tax counsel successfully argued that when players are at away games, the hotels they occupy and at which they consume their meals are the team’s business premises. While a hotel may not seem to be a traditional business premise of a hockey team, a compelling argument for such treatment was made by Bruins counsel. The team cites 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 at 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 has become the operational center for the team, even if it is only a temporary one. The Bruins’ counsel convinced the Tax Court that the movement of its workforce is “critical to each Bruins player’s job and to the club’s ultimate purpose of playing, and winning professional hockey games.
- The meals are provided during or immediately before or after the employee’s workday. The IRS concluded that the Bruins have met this requirement.
- Meals must meet the revenue/operating cost test. Since it was determined that the meals provided were for the convenience of the employer, it satisfied the requirements of this test.
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 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.
In another case in which the taxpayer prevailed, a Las Vegas casino operator was allowed a 100% deduction 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 the premises policy” where employees were prohibited from leaving the casino while on duty.
Potentially, there exist many situations, other than those involving professional sports teams, where employees are moved in order to perform their services and where their 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.
For now, we have clearer guidance in these matters as a result of the convincing arguments presented by the Boston Bruins to the US Tax Court in its victory over the IRS.