On June 26, 2017, the Tax Court ruled in Jeremy M. Jacobs et ux. v. Commissioner (Dkt. No 19009-15), that pregame meals provided to the players and traveling staff of the Boston Bruins (Bruins) at away-city hotels qualify as de minimis fringe benefits under Section 274(n)(2)(B. This holding is significant because the cost of such meals is not subject to the 50% limitation under Section 274(n)(1) and accordingly is 100% deductible.

Ruling summary

There were three major points of contention between the Jacobs (Petitioners, who are the owners of the Bruins) and the IRS: (1) were pregame meals provided in an eating facility owned or leased by the Plaintiff; (2) did the Plaintiff operate the eating facility; and (3) was the eating facility located on or near the business premises of the Plaintiff? Based on the evidence before it, the Court concluded, for the hotel meals at issue, that the Petitioners had established that: (1) the Bruins leased an eating facility; (2) the Bruins had contracted with another to operate the eating facility; and (3) the "away-city hotels constituted part of the Bruins' business premises."

The Court also addressed the three additional requirements of Section 132(e)(2)¹ and the requirements for a meals to qualify under Section 119 as a meal provided for the convenience of the employer. This Alert, however, focuses on the first three issues.

Eating facility is owned or leased by employer

The Treasury regulations do not define the term "lease" for purposes of these statutory provisions, so the Court applied a common definition of that term. The Court noted that the team pays consideration in exchange for "the right to use and occupy" the hotel meal rooms to conduct team business and for the right to dictate several aspects of the meal rooms' setup. Accordingly, the Court concluded that the contracts between the Bruins and the away-city hotels are substantively leases even if they do not specifically identify the contract as a "lease." The Court indicated that taxpayers should look to the "substance of the contract" in determining if it is a lease for purposes of these provisions. If the contract indicates that there is a payment of "consideration in exchange for the right to use and occupy" space, that language may be adequate for the contract to constitute a lease.

Operated by the employer

The Court noted that the contracts between the Bruins and the away-city hotels establish the date, time, designated meal room, number of guests, menu, and per-person pricing for each meal ordered with the hotel. It therefore held that this arrangement with away-city hotels constitutes a contract by the team to have a third party operate an eating facility for the team's employees, satisfying the applicable regulatory requirement that the employer operate the eating facility.

Business premises

Citing Benninghoff v. Commissioner, 71 T.C. 216, 220 (1978), aff'd, 614 F.2d 398 (5th Cir. 1980), the Court noted that it is not necessary for an eating facility to be located in an employer's principal structure for it to be considered on the employer's business premises. In Mabley v. Commissioner, T.C. Memo. 1965-323, the Tax Court held that a rented hotel suite used for daily executive meetings during which lunch was served constituted part of a company's business premises, as the furnishing of the meals was merely incidental to the use of the space to the conduct of the company's business.

In evaluating the Bruin's business requirements, the Court noted that staying in away-city hotels is indispensable to the team's preparation and is necessary to maintain a successful hockey operation under the rigors of an NHL-mandated schedule. The Bruins use the hotels to conduct business and achieve optimal performance by providing adequate rest, proper nutrition, physical training and meeting space.

The IRS argued that the traveling hockey employees' activities at away-city hotels are insignificant because these activities are qualitatively less important than playing in the actual hockey game and because the team spends quantitatively less time at each individual away-city hotel compared to the team's time spent at its Boston facilities.

The Court disagreed with the IRS and held that the traveling hockey employees' actions at away-city hotels are significant business duties and that the unique nature of the team's business requires away travel, making it illogical to analyze the amount of time spent at each away-city hotel in isolation. Accordingly, the Court held that away-city hotels were part of the Bruins' business premises for the years in issue.

Implications

The Jacobs ruling is a full Tax Court opinion, not a memorandum decision. It reflects the Court's view that the case raised sufficiently important legal issues or principles, and the opinion can be cited as precedent. Given the potentially broad application of the opinion, the IRS likely will appeal, and it has 90 days from the time the Court enters the final decision to do so.

CAUTION: The opinion can be viewed as taking a more expansive view compared to prior authorities as to what constitutes a "business premise" and what constitutes an "employer-operated eating facility." Although the opinion might be read to cover many common situations beyond meals served to professional sports teams while traveling, it is important to note that the Court emphasized the unique facts of a professional sports team in addressing these issues. Specifically, the Court referenced the travel requirements inherent in professional hockey and the role meals play in conducting the business activity of professional hockey. As such, a determination as to whether the opinion can reach beyond the specific facts presented must be carefully evaluated.

If the IRS appeals a final decision by the Tax Court, which appears likely, it may be several years before it is known whether the Tax Court's interpretations of the provisions at issue, including what constitutes a "business premise" and an "employer-operated facility," are upheld. If the IRS files an appeal, taxpayers may wish to consider filing protective refund claims.

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ENDNOTES

¹ The three additional requirements of Section 132(e)(2) addressed by the court were: (1) the meals furnished by the Bruins did not discriminate in favor of highly compensated employees; (2) the meals were provided during, or immediately before or after the employees workday; and (3) the annual revenue derived from the facility equaled or exceeded the direct operating cost of the facility (i.e., the revenue/operating cost test).