Tax Court Expands De Minimis Fringe Exception to Away City Pregame Meals
July 19, 2017
By Murray Solomon, CPA
In a decision very favorable to taxpayers, the Tax Court, in Jeremy M. Jacobs, et ux v. Commissioner, 148 T.C. No. 24 (2017), has ruled that the owners of the Boston Bruins professional hockey team (a subchapter S corporation) may fully deduct the cost of pregame meals provided to players and personnel prior to away games as a de minimis fringe benefit. The decision is rather surprising as meals and entertainment costs are normally limited to the 50% limitation under IRC Sec. 274(n)(1). While the decision was rendered in the context of a travelling hockey team, there are implications for other industries where the care and well-being of employees is integral to business operations.
The genesis of the controversy occurred when the Boston Bruins fully deducted pregame meals for away games on its 2009 and 2010 income tax returns. The IRS naturally countered that the deductions were subject to the 50% limitation under IRC Sec. 274. Under IRC Sec. 274(n), a 50% deduction limitation is imposed on meal and entertainment expenditures (unless an exception applies).
IRC Sec. 274(n)(2)(B) permits a 100% deduction on such expenditures if they are a de minimis fringe benefit. To qualify as a de minimis fringe benefit, the benefit must be provided in a nondiscriminatory manner. For these purposes, the provision of meals would be deemed de minimis if (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 provided 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 Bruins satisfied the first factor as they leased the hotel facilities. The Court’s analysis and rulings regarding the other factors are noteworthy. As to the second factor, Treasury Regulation 1.132-7(a)(3) provides that if an employer contracts with another to operate an eating facility for its employees, the facility is considered to be operated by the employer. The Court agreed that the facility, the hotel, was operated by the Bruins because the team directed the terms of food preparation, the meal schedule and service. Further, because the Bruins must play 50% of their games away, the Tax Court deemed the away city hotels as part of the Bruins’ business premises and therefore satisfied the third prong. The Court held the fourth and fifth requirements were also satisfied.
Tax Planning Opportunities
The Court rendered its decision by applying the law in the context of the intricacies of a professional hockey team playing on the road. While the case dealt with a sports franchise, savvy taxpayers should spot tax planning opportunities under the ruling, even outside the world of sports. While it is unclear how broadly the courts might extend the holding in this case, it might well be applied, for example, to the world of film and music. So, a movie production company may be able to deduct 100% of catering expenditures on location for its cast and crew. Perhaps a global music act may be able to deduct the cost of meals while on tour. We strongly encourage readers to consult with their tax advisors to gauge if such opportunities exist.