A Celly For The Bruins: Tax Court Rules That Pregame Meals At Away Venues Are Fully Deductible As De Minimis Fringe Benefits

I’m not a team sports fan at all.  I’m the type of person who enjoys a long solitary run or hot yoga class.  So, if I’m blogging about an issue that covers a national sports league, you should know that it must concern another topic that is very important to me.  And, in this case, it’s basic fairness under the Internal Revenue Code. 

Every now and then, I’ll hear about a court decision that goes against the Internal Revenue Service that seems to defy all logic.  I know that the IRS isn’t the most sympathetic party and not many people will shed a tear when they hear that an IRS position has been deemed incorrect.  But what about where dismissal of the IRS position makes it easier for highly-paid taxpayers and business owners to enjoy the benefits of an income exclusion or expense deduction, whereas the average taxpayer (the little guy like you and me) doesn’t get the same privilege?  The decision in Jacobs v. Commissioner, a recent case decided by the U.S. Tax Court concerning the deductibility of pregame meals to Boston Bruins’ players and personnel at away city hotels that ruled in favor of the Bruins owners, is certainly one of these logic-defying cases.  What makes this case more shocking, though, is that it could be used (although I definitely do not think it should be used, as I think the case holding can be limited by its facts) by the sports industry to deduct expenses incurred in providing meals to highly-paid athletes during away games for just a few days at various city hotels, even where services incurred in connection with the meals are more in the nature of meal purchase orders rather than the operation of an established and fixed food preparation or eating facility.  In addition, the decision would allow for a deduction for the meals even where time spent eating and attending conferences during meal times are qualitatively less important than playing in an actual game, and where time spent at an away city hotel is quantitatively less than time spent at a team’s home town facilities. 

If you got through that last paragraph, I promise it gets easier from here on out.  The key takeaway is that, in Jacobs v. Commissioner, 2017 BL 220189 (June 26, 2017), the Tax Court ruled that the provision of pregame meals to Boston Bruins players (for the yogis like me, these guys play hockey – you know, the game with sticks and a puck, where the players get to slam each other against walls at times with impunity) and personnel at away city hotels qualified as a de minimis fringe benefit, the expenses of which could be fully deducted by the employer without being subject to a 50% deduction limitation that applies to certain eating facilities. 

Generally, in order for a benefit to qualify as a de minimis fringe benefit under applicable provisions of the tax Code, it has to meet a whole bunch of specific requirements.  First is that the eating facility is owned or leased by the employer.  In this case, although the contracts entered into by the Bruins and the hotels were not identified as leases, the Tax Court thought they still operated as such.  The Tax Court reached this decision even though the Bruins didn’t pay for the rental of any of the rooms in which meals were provided.  The court relied on a definition of lease that provided that the right to use and occupy property must be conveyed in exchange for consideration (fancy legal term that usually means money).   Despite the fact that the banquet room where meals were served was provided for free, the Tax Court concluded that there was ample consideration because the Bruins did pay for lodging and food and the banquet room was provided for free as an enticement to secure that payment.  Hmm . . . seems very flimsy.

Secondly, a benefit qualifies as a de minimis fringe benefit where an eating facility is located on or near the business premises of the employer.  The Tax Court ruled that inquiries concerning business premises inferred functional rather than spatial unity and were not limited by questions of geography or the quantum of business activities.  In yoga terms, that would be like me saying “great handstand” to a class member who is doing an upward dog pose because, even though she isn’t anywhere near the actual handstand pose, at least her hands are functionally on the floor in the exact same position they would be in a handstand. 

The Tax Court further explained that it had already ruled in the past that rented hotel space constituted a taxpayer’s business premises.  The Tax Court came to this conclusion even though, in that prior case, the hotel suite was rented out at the same exact location under an actual lease agreement that provided for usage from 1957 through 1960, and where meetings could take up to three hours a session, and sometimes longer.  For some reason, that fact scenario was comparable to the few days spent cumulatively at a hotel in an away city in the Jacobs case. 

Most surprisingly, out of all of this, though, is language in the decision that implies that actual discrimination in the provision of benefits, where nondiscrimination is required pursuant to I.R.C. §132(e)(2), might be okay if it is due to cost reduction concerns.  Huh?  Since when has it been ok to circumvent nondiscrimination rules because you are looking to cut costs? 

“Oh, hello Mr. Zdeno Chara, please do try the foie gras, it’s especially nutritious and energizing, and the ducks were plucked from the finest farms in Provence.  Shall we order a gluten free variety for the next game?”

“Sorry, water boy/girl (Blogger’s note: anyone know the hockey equivalent – is it an ice boy/girl?), no lunch for you today, we’re trying to cut costs.  There’s a vending machine down the hallway.”

(Fun fact: the court decision gets even sillier than ever by including a statement that “The Bruins tend to keep food options consistent at each away city hotel to avoid players’ having gastric problems during the game” as support that the quality of the Bruins’ gameplay is directly related to receiving delicious, consistent meals at the hotels.  I don’t get it.  Is the reduction of gastric problems for the benefit of the opposing team?  Hmm, now that I think about it, I wish yoga studios offered these types of food options prior to classes.)

Generally, I.R.C. §132(e) requires that access to an eating facility be available on substantially the same terms to each member of a reasonably classified group of employees that is not discriminatory in favor of highly compensated employees.  In Jacobs, the Tax Court held that providing pregame meals to a group of Bruins employees that traveled to away cities to perform business duties was reasonable.  Therefore, this group included not only hockey players, but also coaches, medical personnel, athletic trainers and OTHER employees (I think this is where the ice boy/girl comes in).  Therefore, to comply with the tax law, you must provide the ice boy/girl with access just like you provide it to Zdeno Chara or Patrice Bergeron.  In this case, however, the court states that there were reported discrepancies between “anticipated and actual meal attendees.”  Despite these discrepancies, the Tax Court ruled that, because this was due to cost reduction concerns, there was no discrimination.  Ouch. 

In all honesty, I’m not sure this decision would hold well on appeal.  I think there are a lot of unexplained and shaky conclusions reached by the Tax Court.  Any attempt by the sports industry to rely on Jacobs to support full deduction of pregame meals a team provides on away trips might be premature.  I’d be especially cautious to rely on language that seemed to allow discrimination where cost reduction is the justification. 

I don’t know.  Maybe it just comes down to the fact that the Tax Court really likes the Bruins?  (Another fun fact: The Tax Court, in its opinion, writes that “The Bruins are a highly respected professional hockey organization. . . .”).

Anyway, this is the most time I’ve ever spent thinking about hockey.  I think I’ll do a full hot yoga class tonight as a cleanse. 

(To be fair, the last guy to blog about the Bruins issue was a diehard hockey fan.  I, clearly, am not.  So, if you want an avid hockey fan’s initial reaction to the legal issues presented in this case, you can find the blog here: https://www.bna.com/boston-bruins-raise-b17179934636/).