BOSTON BRUINS RAISE CONTROVERSY BY ARGUING THAT MEALS ARE DEDUCTIBLE, TEAM IS “WORLD-CLASS”

Like so many of my colleagues, whether they will admit it or not, I settled for law school only after accepting that my 5’ 5’’ non-gentile frame and general lack of coordination rendered my aspiration to be the Washington Capitals’ starting right winger somewhat far-fetched. And it was despite, and perhaps even because of, that realization (which I came to terms with sometime around my 35th birthday after catching a glimpse of myself in a mirror showing my support for the team by wearing the jersey of a player not old enough to buy a beer) that a recent case filed in the U.S. Tax Court, Jacobs v. Commissioner, No. 19009-15 (petition filed July 27, 2015), caught my eye. 

At issue is whether the Boston Bruins hockey club may deduct 100% of the costs it incurred to provide its players and staff with meals while travelling to away games. The case poses the IRS and Tax Court with some fairly interesting questions concerning the deductibility of employee fringe benefits.

The tax Code of course allows businesses like the Bruins to deduct their business expenses. Issues, however, crop up the less that the expenses resemble business and the more that they resemble entertainment. 

Providing employees with food and beverages, the Bruins in this controversy land in the murky no-man’s land between the two. It will come as shock to approximately no one that the tax Code prescribes a complex and not-always-intuitive formula for navigating this real estate. Summarizing briefly and, seriously, as simply as I possibly can: 

  • Section 162 allows taxpayers to deduct business expenses…
  • … HOWEVER, Section 274(a) disallows this deduction, entirely, for “entertainment, amusement, or recreation” activities…
  • … HOWEVER, even if the activity is not “entertainment, amusement, or recreation,” Section 274(n) limits any deduction for meals to 50% of the cost…
  • … HOWEVER, Section 274(n) also lists certain meals that are not subject to this 50% limitation.  That is, meals that meet these criteria are nonetheless fully deductible. Among these criteria are food or beverages that are excludible from the recipient’s gross income under Section 132(e). And among the food or beverages excludible under Section 132(e) are those that a business provides at an “employer operated eating facility.” And among those meals excludible as provided at an “employer operated eating facility” are those that are excluded from the employee’s gross income under Section 119.

And, although it is not clear on the face of the Bruins’ Tax Court petition, I think it is this employer operated eating facility exception that the Bruins are going to rely on to argue that the meals are 100% deductible.

For these purposes, whether a meal meets this employer-operated eating facility exception boils down to whether it satisfies two prongs: First, the Bruins must furnish the meals on their “business premises.”  Second, the Bruins must provide the meals for “the convenience of the employer.”

Considering the first prong, the Bruins appear to argue in the petition that the hotels at which they eat while at away games are the team’s business premise. Most obviously problematic about this argument is that hotels are not traditional business premises. Yet the team makes a fairly compelling argument that, here, the nature of its use of the hotels renders them its business premise. Namely, the team cites its business-oriented reasons for staying at the hotel, which it describes as the team’s “base of operations,”  including to maintain curfews, carry on club meetings, provide physical therapy and medical treatment and as a place to conduct “business meetings,” including strategy meetings and video sessions. The team further argues that the club’s business, and that of the NHL in general, “simply could not function if the club did not travel to ‘away’ cities for half its games.” The Bruins state that its “entire hockey operations group travels to the away city on the evening before an away game and checks into the hotel there.” Given how extensive these indicia of a business premise are, the Bruins indeed raise a compelling argument that the Tax Court would be elevating form over substance by distinguishing these hotels from business premises merely because they are not traditional business premises.

The team meantime appears poised to try to argue that it meets the second prong—that is, that the meals are provided for the convenience of the employer—by citing a series of noncompensatory business reasons it has for providing them. It appears to argue to this end in the petition that the pre-games meals, and associated mandatory meetings, serve “as a necessary component of the Bruins’ hockey operations,” that “are critical to each Bruins player’s job and to the club’s ultimate purpose of playing, and winning, professional hockey games.” The team cites to this end that the coaches and media have game-related discussion with the players during the meals, the medical staff selects the meals to provide specific nutritional guidelines, the meals “allow the club to control the players’ movement and conduct up until the game” and the team immediately takes the players to the visiting arena after each meal for practices or pre-game warm-ups.

It will be interesting to see if the Tax Court is willing to adopt such a flexible definition of an employer-operated eating facility.*

*Almost as interesting will be to see if the Tax Court is receptive to the Bruins’ statement in the petition that it is “a world-class hockey team,” given that the club this offseason traded a future-franchise defensemen and iconic top-line winger for what amounts to a bucket of pucks…

This story was first reported by Erin McManus in the July 30, 2015 edition of Bloomberg BNA’s Daily Tax Report.