IRS Action on Decision 2019-01, 2019 I.R.B. 569 (Feb. 19, 2019)
Available at https://www.irs.gov/pub/irs-aod/aod-2019-01.pdf
The IRS has released an action on decision (AOD) explaining the limits of its acquiescence in a Tax Court decision that allowed a hockey team’s owners to take a 100% deduction for hotel meals provided to the team and other traveling employees. (An AOD is an internal memorandum that conveys the IRS Chief Counsel’s recommendation regarding a significant adverse court opinion. While AODs cannot be relied on or cited as precedent by taxpayers, they can offer insight into the IRS’s position on unresolved issues.) In Jacobs v. Comm’r, the Tax Court accepted the team owners’ argument that employer-provided hotel meals qualified as de minimis fringe benefits under Code § 132(e)(2), and thus were fully deductible (see our Checkpoint article). To reach that conclusion, the Tax Court had to determine (among other things) that the meals were provided at an eating facility for employees located on or near the business premises of the employer.
In the AOD, the IRS acquiesces in the Tax Court’s result, but states that it will follow Jacobs only in cases involving sports teams with “substantially identical” material facts. The AOD then explains the IRS’s disagreement with the analysis of three issues that remain relevant after elimination of the 100% meal deduction for years after 2017 (see our Checkpoint article) because they could affect application of the de minimis fringe benefit exclusion for eating facilities in other situations.
Business Premises. The AOD disagrees with the Tax Court’s standard for identifying the team’s business premises, stating that the Court erroneously employed a “functional standard,” instead of a “quantum or quality standard.” The AOD explains that the latter standard requires analyzing the quantum or quality of the team’s activities at the hotels to determine whether those activities were the site of “the significant portion of the employer’s business or of the employees’ activities.” Application of that standard, the AOD asserts, would have altered the case’s result because of the extent and importance of activities in the team’s home city and the relatively small amount of time spent at any one destination-city hotel.
Lease. The AOD disagrees with the Tax Court’s conclusion that hotel facilities were leased by the team, allowing them to be an employer-operated eating facility. The AOD asserts that a lease requires the conveyance of a property interest, which the team did not obtain in contracts that merely authorized them to use each hotel’s facilities.
Nondiscrimination. The AOD also disagrees with the Tax Court’s dismissal of any discrepancy between anticipated and actual meal attendance by highly compensated and nonhighly compensated employees as “a function of cost reduction concerns and not discrimination.” The AOD explains that “cost reduction” is not a permissible reason to discriminate—the relevant inquiry is whether meals were provided on substantially the same terms to all traveling employees or to a subset based on a reasonable classification.
EBIA Comment: The terms “functional standard” and “quantum or quality standard” are not self-defining, and the factors they consider appear to overlap. The Tax Court’s decision seems to have been influenced by both the quantum and quality of the team’s activities. This is evidenced by the Court’s acknowledgement that the team could not avoid traveling for half of the regular season, and that the team’s hotel-based activities were “necessary” and “indispensable.” And when it concluded that “away city hotels…are where a significant portion of the traveling hockey employees’ responsibilities and the [team’s] business is conducted,” the Tax Court was referring to both the amount (quantum) and importance (quality) of those activities. It seems that the difference between the two standards is not about whether quantum and quality are relevant, but whether they should be the only considerations, how they should be evaluated, and what quantum or quality is determinative. The AOD sheds some light on the IRS position regarding these questions. First, it disputes satisfaction of the quantum standard by pointing out that a majority of the team’s activities occurred in its home city. Second, it implies that the quantum of the team’s activity away from home must be judged on a hotel-by-hotel basis. But these insights still leave the business premises determination (like the question of whether meals are provided “for the convenience of the employer” (see our Checkpoint article)) fairly murky. For more information, see EBIA’s Fringe Benefits manual at Section XVI (“Employer-Provided Meals”).
Contributing Editors: EBIA Staff.