Posted by: jkalinski | July 18, 2017

Tax Court Update: Boston Bruins Shoot and Score Against the IRS by JONATHAN KALINSKI

Jeremy and Margaret Jacobs, owners of the Boston Bruins through three entities, checked the IRS into the boards and walked out of Tax Court with no deficiency.[i]  The only issue in the case was whether the entity that owns the Bruins could deduct 100% of meal expenses for away games.  The IRS argued the 50% haircut under IRC §274(n)(2) applied.  The taxpayer claimed the de minimis exception, which allows the entire deduction applied.

The opinion goes into seemingly obvious detail about the requirement that the Bruins play half their regular season games at home and half on the road, that its goal is to win hockey games, and that failing to show up for a game leads to a forfeit.   The Collective Bargaining Agreement (CBA) between the league and the players also contains specific travel requirements such as arrival and departure times relative to game time and location.  But, in the context of the de minimis exception, these facts are crucial in the outcome as meals play an essential role.  Once the NHL schedule is released, the Bruins negotiate with away hotels to provide hotel rooms, conference rooms, and of course meals.  The Bruins staff goes to great lengths to select the specifics of the meals and enters into a banquet event order (BEO) with the hotel.

Meals are mandatory for players, and are provided to all Bruins traveling staff, not just players and coaches. Players and coaches will meet during meals to review strategy, watch film, and the PR staff will go over media inquiries.  During the years at issue the Bruins deducted $255,754, and $286,446 for away game meals.

To qualify for the de minimis exception, as a preliminary matter, access to the eating facility must be available on substantially the same terms to each member of a group of employees. Basically, you cannot discriminate in favor of highly compensated employees.  In this case, meals were provided to all traveling employees, so the Bruins play on.

Employee meals provided in a nondiscriminatory manner satisfy the de minimis exception if they meet 5 requirements: (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) meals 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.

At first blush, it would seem like that IRS had a winning argument, but an analysis of each factor and the specifics of the Bruins business illustrate why the Bruins ultimately prevailed. The Bruins do not enter into a formal lease agreement with hotels, but the Court held the BEO and hotel contract function as a lease because the Bruins pay for the right to use and occupy hotel meal rooms.

Under the regulations, operation by the employer includes contracting with another to operate the eating facility. The negotiations between the Bruins and the hotel over the specific meal room requirement met this requirement.

The third requirement, that meals be provided on or near the business premises of the employer, would appear to be too much to overcome. The Tax Court had previously held, however, that a rented hotel suite could constitute a company’s business premises.[ii]  The requirement is functional, not spatial, and not limited by geography.  Here the Court relied heavily on the nature of the Bruins business, namely, a hockey team that travels across the US and Canada to play games with the goal of winning as many as possible.  Players need to be properly housed and fed in order to accomplish that goal.  Hotels are therefore, essential to the Bruins business.

The fourth requirement, the revenue/operating cost test, is met if the meals are excludable from the employees income under IRC §119, which means the meals must be furnished for the convenience of the employer and furnished on the employer’s business premises. Meals are for the convenience of the employer if it is furnished for substantial noncompensatory business reasons.  In this case the players get meals to maximize performance, and the rest of the traveling team receives meals to make sure everything runs smoothly for the players.

The fifth and final requirement, that meals be provided during, before or after the workday is obvious and needs to analysis.

The deficiency in the case was rather small, certainly compared to the overall wealth of Mr. and Mrs. Jacobs, and the expenses to bring this case to trial was likely many multiples greater than the amount at stake. The issue, however, not only repeats itself every year for the Bruins, but for every professional sports team.  This is a substantial win for team owners.

Outside the professional sports world, the case illustrates the specific requirements needed to deduct 100% of meals. Many companies may deduct meals without much thought to what is actually needed to properly claim the deduction.  Similarly, companies might subject themselves to the 50% haircut, without taking advantage of the de minimis exception.

Jonathan Kalinski specializes in both civil and criminal tax controversies as well as sensitive tax matters including disclosures of previously undeclared interests in foreign financial accounts and assets and provides tax advice to taxpayers and their advisors throughout the world.  He handles both Federal and state tax matters involving individuals, corporations, partnerships, limited liability companies, and trusts and estates.

Mr. Kalinski has considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters.  Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters.  Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States Tax Court.

 

[i] Jacobs v. Commissioner, 148 T.C. No. 24 (2017).

[ii] Mabley v. Commissioner, T.C. Memo. 1965-323

 

 

Category: Tax Court

 

Tags: Tax Court, Meals and Entertainment, IRC §274, de minimis, deductions

 

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