The IRS said the owners of the Boston Bruins were skating on thin ice for deducting 100 percent of the cost of pregame meals furnished to their players and personnel at hotels on the road as a de minimis fringe benefit. But the hockey team’s owners won the faceoff in US Tax Court.
As a general rule, meals provided by a business are tax-free to employees if the food and beverages are furnished for the “convenience” of the employer and they are served on the business premises. However, meals are furnished for the employer’s convenience only if there’s a substantial noncompensatory business purpose (e.g., feeding on-call workers quickly).
In other words, this can’t be a form of “disguised compensation.”
Normally, an employer may deduct only 50 percent of the cost of those meals provided to employees, but there are a few notable exceptions. For instance, an employer may deduct 100 percent of the cost of meals that qualify as a de minimis fringe benefit, such as when it operates a cafeteria or other eating facility on its business premises for the benefit of employees.
Now let’s get back to the case at hand. The National Hockey League requires all of its teams, including the historic Boston Bruins franchise, to play half of their games on the road and to adhere to strict rules relating to those games. For instance, the teams must arrive at the destination city at least the night before the game during long-distance trips.
In accordance with this schedule, the Bruins contracted with various hotels for food and lodging in cities where they play their away games. Typically, the hotels provided banquet rooms where meals and pregame snacks were served. Although the meals are available to all personnel traveling with the team, they are mandatory for players. The Bruins simplify matters and satisfy nutritional goals by ordering the same type of food at each stop.
After the team’s owners, Jeremy and Margaret Jacobs, deducted 100 percent of their pregame meal costs under the exception for eating facilities, the IRS disallowed the full deduction and assessed deficiencies of approximately $45,000 and $40,000 for 2009 and 2010, respectively. So the Bruins took the IRS to court.
In Jacobs v. Commissioner, 148 TC No. 24, the Tax Court preliminarily determined that the meals would qualify as a de minimis fringe benefit only if they were provided in a “nondiscriminatory” manner. Because all the staff traveling with the team could partake in the meals, the Bruins passed this test.
Furthermore, the court examined if the eating facility met the following requirements under the prevailing regulations:
- The eating facility is owned or leased by the employer.
- The facility is operated by the employer.
- The facility is located on or near the business premises of the employer.
- The meals are furnished during or immediately before or after the workday.
- The annual revenue derived from the facility equals or exceeds the direct operating costs of the facility.
The main point in contention was the requirement that the facility be located at or near the business premises of the employer. After considering the unique nature of the Bruins’ situation, the Tax Court determined that this requirement was met. The reason? The hotels where the Bruins stayed are essentially the place where they were conducting business. As a result, the deduction for 100 percent of the meal costs was allowed as a de minimis fringe benefit.
This case may be significant to certain business clients who perform most of their services away from their home office. Consider the circumstances of each situation.