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Tax Court allows full deduction on sports team’s away-game meals

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Tax Hot TopicsMeals provided to a professional sports team’s players and personnel at hotels before away games qualify as a de minimis fringe benefit under Section 274(n)(2)(B) and are not subject to the 50% limitation under Section 274(n)(1), the U.S. Tax Court ruled on June 26.

In Jacobs v. Commissioner, 148 T.C. No. 24 (2017), the taxpayers, Jeremy and Margaret Jacobs, are the owners of the Boston Bruins, a National Hockey League (NHL) team, through two S corporations. The Bruins deducted the full cost of away-game meals, but the IRS disallowed 50% of the deduction for the meals pursuant to Section 274(n). The taxpayers argued that Section 274(n) does not limit the deductions for the away game meals because the meals qualify as a de minimis fringe benefit and are not subject to the 50% limitation under Section 274(n)(2)(B).

For the team’s annual 41 away games, the Bruins contracted with various hotels for the provision of sleeping accommodations, conference rooms, and food. The Bruins initiate the meal contracts by requesting a custom food menu to provide essential nutrition for the players and the team orders the same type of food whenever the team is away to avoid causing the players digestive problems.

The contracts require the hotels to provide the furnishing and set up of a conference room for serving the pre-game meals and snacks, and that the hotel staff assist in preparing and serving the food. The players are required to eat at these meals, and the meal facilities are open to all traveling staff. In addition to the meals, the hotels provide a space for game preparation and team business, including obtaining adequate rest, meetings with coaches, reviewing of game film, receiving athletic treatments and massages and strength-training workouts.  

The Tax Court agreed with the taxpayer and held that the full cost of the pre-game meals were deductible as de minimis fringe under Section 132(e). The court analyzed Section 274(n)(2)(B), which provides that the 50% limitation does not apply if a meal qualifies as a de minimis benefit under Section 132(e), and analyzed the five-prong test under Section 132(e) for meals to be de minimis fringe benefits. That test requires that (1) the eating facility is owned or leased by the employer; (2) the facility is operated by the employer; (3) the facility is located on or near the business premises of the employer; (4) the meals furnished at the facility are provided during, or immediately before or after, the employee's workday; and (5) 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 went into significant detail regarding how the away-game arrangements made by the Bruins, as well as the rules the NHL requires for its teams regarding away games, including a requirement to play half of their yearly games away from home, impact the analysis under the five-prong test under Section 132(e).

First, the court held that the meals were provided at an “eating facility owned or leased by the employer” because the contracts with the hotels for the right to use and occupy the meal rooms to conduct team business were substantively leases.

Second, the court held that the process of engaging the hotel to provide the meals and services was consistent with the provisions in the regulations providing that an “eating facility is operated by an employer” if the employer contracts with another to operate the facility.

Third, the court held that considering the traveling hockey employee’s performance of significant business duties at away-city hotels, along with the unique nature of the Bruins’ business, the hotels were part of the Bruins’ business premises.

Fourth, the IRS conceded that the meals were furnished during, or immediately before or after, the employee’s workday. Finally, the court held that the annual revenue/operating costs test of Section 132(e)(2)(B) was satisfied because the meals were for the convenience of the employer under Section 119.  As a result, the court agreed with the taxpayer and held that the full cost of the away-game meals were deductible as de minimis fringe under Section 132(e) and were not subject to the 50% limitation.

Contact
Eddie Adkins
Partner, Washington National Tax Office
T +1 202 521 1565

Jeffrey Martin
Senior Manager, Washington National Tax Office
T +1 202 521 1526

Sharon Kay
Partner Washington National Tax Office
T +1 202 861 4140

Ellen Martin
Partner, Washington National Tax Office
T +1 202 521 1558

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