The Tax Court refused to go along with the IRS’s view of strictly interpreting the provisions under IRC §274(n)(2)(B), allowing a full deduction for meals provided by the Boston Bruins NHL hockey team to players and employees traveling with the team at away games in the case of Jacobs v. Commissioner, 148 TC No. 24.

In order to get a 100% deduction for meals provided to employees, rather than only 50%, IRC §274(n)(2)(B) provides a full deduction is allowed “in the case of an expense for food or beverages, such expense is excludable from the gross income of the recipient under section 132 by reason of subsection (e) thereof (relating to de minimis fringes)…”

An item is excludable from an employee’s wages under IRC §132(e) if it meets the following requirements:

(e) De minimis fringe definedFor purposes of this section—

(1) In general

The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.

(2) Treatment of certain eating facilitiesThe operation by an employer of any eating facility for employees shall be treated as a de minimis fringe if—

(A) such facility is located on or near the business premises of the employer, and

(B) revenue derived from such facility normally equals or exceeds the direct operating costs of such facility.

The preceding sentence shall apply with respect to any highly compensated employee only if access to the facility is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees. For purposes of subparagraph (B), an employee entitled under section 119 to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal.

A meal not qualifying for this exclusion may still be excluded from the employee’s wages if provided for the benefit of the employer under IRC §119(a)(2) on the employer’s premises (whether or not it is an eating facility), but the employer faces a loss of 50% of the deduction under the general rule of IRC §274(n)(1).

In Chief Counsel Advice 201151020 the IRS asserted that an airline was required to give up of its deduction for meals paid for employees who remained on the plane while it was in transit, had meals delivered to the plane and ate such meals on the plane. In the IRS’s view the meals served to the crew on the plane failed the “eating facility” test noted above, since the meals were prepared by a third party and the plane itself failed to qualify as an eating facility.

The IRS was asserting much the same position against the hockey team in this case. As the opinion notes:

Each away city hotel prepares pregame meals (i.e., breakfast, lunch, or brunch) and snacks that meet the players’ specific nutritional guidelines to ensure optimal performance for the upcoming game and throughout the remainder of the season. The Bruins contract in advance with each away city hotel for the provision of pregame meals and snacks, and the food is made available to all traveling hockey employees. The Bruins initiate the meal contracting process by providing a custom meal menu to the prospective away city hotel requesting specific types and quantities of food. The Bruins tend to keep food options consistent at each away city hotel to avoid players’ having gastric problems during the game. The Bruins always order the same quantity of food to feed all traveling hockey employees. Using this custom meal menu the hotel prepares and sends to the Bruins a banquet event order (BEO) which sets forth the date, time, meal room, number of guests, menu, and pricing for each pregame meal. The BEOs typically list fewer anticipated meal attendees than the actual number of meal attendees for cost reduction reasons. If the BEO deviates from the custom meal menu, the Bruins contact the hotel to have the discrepancy corrected. Once the BEO meets the Bruins’ needs, the team accepts the offer set forth in the BEO by executing the document and returning it to the hotel for a countersignature.

The meal room is provided to the Bruins at no extra cost, and the meal rooms are set up similarly at each hotel — usually round tables with chairs and buffet stations where food and beverages are available for self-service. For privacy reasons, the Bruins request that the location of the meal room not be disclosed to the public, and the meal room is accessible only to traveling hockey employees, waiters, waitresses, and dining captains.

The key question was whether the hotel qualified as an “eating facility” of the Bruins, thus causing the meals to be treated as a fringe benefit. The Tax Court found that while the arrangement with the hotel was not labeled a “lease” the arrangement was essentially equivalent to a lease so this requirement is satisfied in this case.

The opinion points out:

Although the BEOs and hotel contracts entered into between the Bruins and the away city hotels are not specifically identified as “leases”, the substance of these contracts indicates that the Bruins are paying consideration in exchange for “the right to use and occupy” the hotel meal rooms. The Bruins’ execute BEOs and hotel contracts with each away city hotel to occupy meal rooms and determine what types of food are served, and the BEOs specify the dates and times of the meals and the anticipated number of attendees. The Bruins do not provide separate consideration for the rental of the meal rooms; however, the meal rooms are essential to the Bruins’ away city business operations, and the hotels agree to provide the meal rooms free of charge because the Bruins spend money for lodging and food. The Bruins dictate several aspects regarding the setup of the meal rooms, such as the furnishings and the presence of audiovisual equipment or a whiteboard. The Bruins also require the hotel to keep the location of the meal room private from the general public by refraining from posting any identifying information about the Bruins’ use of the room. The evidence establishes that the Bruins contract with away city hotels for the right to “use and occupy” meal rooms to conduct team business, and therefore these agreements are substantively leases.

Additionally, the regulations under IRC §132 require that the eating facility must be operated by the employer. Specifically, Reg. §1.132-7(a)(3) provides:

(3) Operation by the employer. — 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. If an eating facility is operated by more than one employer, it is considered to be operated by each employer.

The Tax Court determined this requirement was also met. The Court found:

The Bruins contract with each away city hotel regarding the operation of the meal rooms as well as food preparation and service. Several weeks before the Bruins travel to the away city hotel they provide meal requirements to the hotel. The away city hotel then prepares a BEO setting forth the date, time, designated meal room, number of guests, menu, and per-person pricing for each meal ordered. The Bruins will either (1) contact the hotel if changes to the BEO are needed or (2) accept the offer set forth in the BEO by executing the BEO and returning it to the hotel for a countersignature. The BEOs also typically provide for the furnishings and setup of the meal room and the hotel staff that will assist in preparing and serving the food. The Bruins agree to pay a fee for each meal and a service fee of up to 22% of the cost of the meals. We find that by engaging in this process with away city hotels the Bruins are “contract[ing] with another to operate an eating facility for its employees”.11 See sec. 1.132-7(a)(3), Income Tax Regs.

The eating facility must also be at or near the employer’s “business premises” for this exception to qualify. [Reg. §1.132-7(a)(2)(iii)] The IRS argued that the Bruins could not meet this requirement in this case, arguing that while the Bruins may perform some business activities at away city hotels, the activities are insignificant.

As the opinion notes:

Respondent acknowledges that the Bruins perform business activities at away city hotels; however, respondent argues that the traveling hockey employees’ activities at away city hotels are insignificant because: (1) the activities at away city hotels are qualitatively less important than playing in the actual hockey game and (2) the Bruins spend quantitatively less time at each away city hotel than they do at the team’s Boston facilities.

But the Court refused to accept this view, holding rather:

Although we agree with respondent that playing in hockey games is important to the Bruins’ business, it seems that the quality of play is directly related to the team’s preparation. This preparation includes business activities that occur at away city hotels, such as: eating nutritious meals, obtaining adequate rest, meeting with coaches individually or in small groups to strategize, reviewing game film, receiving athletic treatments and massages, and completing strength and conditioning workouts. The evidence at trial further indicates that the strength and conditioning workouts performed by the players at away city hotels provide important benefits to the players, not just for the immediate game but throughout the remainder of the season. Without the preparatory activities that occur at away city hotels the Bruins’ performance during games would likely be adversely affected. Furthermore, respondent provides no precedent to support the argument that business premises are limited to the location where the most qualitatively significant business activity occurs.

We also disagree with respondent’s argument that away city hotels cannot constitute the Bruins’ business premises because the team spends quantitatively less time at each individual away city hotel when compared to the team’s time spent at its Boston facilities. Although the Bruins do spend quantitatively less time at each individual away city hotel than they do in Boston, this goes to the unique nature of a professional hockey team that is required to play one-half of its games away from home. It is therefore illogical for respondent to ignore the nature of the Bruins’ business and the NHL and analyze the amount of time spent at each away city hotel in isolation. See Vanicek v. Commissioner, 85 T.C. at 739-740; Lindeman v. Commissioner, 60 T.C. at 615. Respondent also provides no precedent to support the proposition that a quantitative comparison of time is critical to determining business premises. See Adams, 585 F.2d at 1066 (stating that determinations of business premises “limited to the geographic contiguity of the premises or to questions of the quantum of business activities on the premises are too restrictive”). Accordingly, we hold that the away city hotels constituted part of the Bruins’ business premises for the years in issue.

The regulations also require that the revenue derived from an employer-operated eating facility must equal or exceed the direct operating costs of the facility. [IRC §132(e)(2)(B)] But, IRC §132(e) also provides that “an employee entitled under section 119 (the convenience of the employer exclusion) to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal.” As was noted earlier, the §119 exclusion requires that:

The meal was furnished for the convenience of the employer (as opposed to the employee) and
The meal was furnished on the premises of the employer.

The Court has previously concluded the hotels were business premises of the employer, so the only question was whether the meals were for the convenience of the employer. The Court found they were, noting:

The evidence establishes that the pregame meals at away city hotels are provided to the Bruins’ traveling hockey employees for substantial noncompensatory business reasons. The Bruins provide pregame meals to traveling hockey employees at away city hotels first and foremost for nutritional and performance reasons. Meals are selected by the Bruins to meet the exacting nutritional needs of professional athletes, and menus are kept consistent from city to city to avoid players’ experiencing unexpected gastric problems during games. The Bruins also provide pregame meals to the traveling hockey employees at away city hotels because they are subject to a busy schedule and have only limited time to prepare for an upcoming game. The Bruins play 82 regular season games, which include 41 away games at locations throughout the United States and Canada. The record establishes that the traveling hockey employees arrive at away city hotels the day before the game (or sometimes the morning of the game) and spend most of their time with preparation activities, such as: ensuring players get adequate rest; reviewing game film, strategizing, and making roster adjustments; conducting player-coach meetings; preparing for public relations inquiries; providing remedial or preventative athletic treatments; and completing strength and conditioning workouts to maintain player health and optimize performance. Providing meals to traveling hockey employees at away city hotels enables the Bruins to effectively manage a hectic schedule by minimizing unproductive time (e.g., finding and obtaining appropriate meals from restaurants in each city) and maximizing time dedicated to activities that help achieve the organization’s goal of winning hockey games. Petitioners have provided credible evidence establishing the business reasons for furnishing pregame meals to traveling hockey employees at away city hotels, and we will not second-guess their business judgment. See id.

The final requirement is that the employer must provide meals must be provided “during, or immediately before or after, the employer’s workday” in order to be excluded. [Reg. §1.132-7(a)(2)(iv)] The IRS conceded that the Bruins met this test. So, as the Court notes, the taxpayers “are entitled to deduct the full cost of the meals without regard to the 50% limitation imposed by section 274(n)(1).”

What is not clear is whether this is a “unique facts” case whose result is triggered by the special and details agreements and arrangements the hockey team has with its hotels, or whether it could apply more broadly to any situation where a business requires that certain employees must be out of town. Presumably the IRS will attempt to narrow the applicability of this case, so likely this will not be the last time this matter will be in dispute between taxpayers and the IRS.