IRS has acquiesced in result only with a Tax Court case that held that the Boston Bruins hockey team’s provision of pregame meals to Bruins’ players and personnel at away city hotels qualifies as a de minimis fringe under Code Sec. 274(n)(2)(B).
Background. Code Sec. 274(n) imposes a 50% limitation on the deduction for meal expenses unless an exception applies. Code Sec. 274(n)(2)(B) provides such an exception, if the expense for food or beverages is excludable from the gross income of the recipient under Code Sec. 132(e) (relating to de minimis fringes).
One of the de minimis fringe rules, Code Sec. 132(e)(2), requires that “access to the [eating] facility is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees.”
Employee meals provided in a nondiscriminatory manner constitute a de minimis fringe under Code Sec. 132(e) 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 furnished 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 revenue/operating cost test). (Code Sec. 132(e)(2); Boyd Gaming Corp., (1996) 106 TC 343; Reg. § 1.132-7(a))
Facts. The taxpayer was the owner of the Boston Bruins. The Bruins are a National Hockey League (NHL) professional hockey team.
Half of the team’s games are played away from Boston, in “away cities.” The NHL requires teams to arrive in the away city at least six hours before the start of an away game. The collective bargaining agreement–which binds the NHL, member teams, and players of member teams–requires that an NHL team travel to an away city the day before game day if the flight to the away city is greater than 150 minutes.
The Bruins traveled to every away game with the following personnel: between 20 and 24 players, the head coach, assistant coaches, medical personnel, athletic trainers, equipment managers, communications personnel, travel logistics managers, public relations/media personnel, and other employees (traveling hockey employees).
The Bruins contract with away city hotels provide for sleeping accommodations and banquet or conference rooms (meal rooms) where pregame meals and snacks are served. Each away city hotel prepares pregame meals (i.e., breakfast, lunch, or brunch) and snacks that meet the players’ specific nutritional guidelines to ensure optimal performance for the upcoming game and throughout the remainder of the season. The food is made available to all traveling hockey employees. The Bruins initiate the meal contracting process by providing a custom meal menu to the prospective away city hotel requesting specific types and quantities of food. Using this custom meal menu the hotel prepares and sends to the Bruins a banquet event order (BEO). The meal room itself is provided to the Bruins at no extra cost.
For every breakfast and lunch, traveling hockey employees must be present in the meal room. Aside from nutrition, those meals also provides the Bruins with a chance to conduct team business. Bruins players will meet with coaches– either one-on-one or in small groups–to discuss strategy and review game film. The public relations staff also attends breakfast, where they meet with players concerning anticipated media inquiries, interviews, or other public-facing issues.
Tax Court: the Bruins met the de minimis fringe requirements. The Court determined that the Bruins met all of the above-described de minimis tests and thus weren’t subject to the 50% limitation on the deduction for their away game team meals. The Court reasoned as follows:
…The nondiscrimination test. The Bruins provided pregame meals to all traveling hockey employees, and the Court found this classification (i.e., Bruins employees traveling to away cities to perform business duties) to be a reasonable classification given the nature of the team’s business. The Bruins provided credible testimony that the pregame meals were made available to all Bruins’ traveling hockey employees–highly compensated, nonhighly compensated, players, and nonplayers–on substantially the same terms. The Bruins also provided testimony, which the Court found credible, that any discrepancy between anticipated and actual meal attendees was a function of cost reduction concerns and not discrimination.
The Court therefore held that the Bruins’ provision of pregame meals to traveling hockey employees satisfied the nondiscriminatory manner requirement of Code Sec. 132(e)(2).
… Eating facility is owned or leased by employer. Reg. § 1.132-7(a)(2)(i) doesn’t define the word “lease.” Black’s Law Dictionary provides that a lease is a contract by which a rightful possessor of real property conveys the right to use and occupy the property in exchange for consideration.
Although the BEOs and hotel contracts entered into between the Bruins and the away city hotels are not specifically identified as “leases,” the substance of these contracts indicates that the Bruins are paying consideration in exchange for “the right to use and occupy” the hotel meal rooms. The Bruins’ execute BEOs and hotel contracts with each away city hotel to occupy meal rooms and determine what types of food are served, and the BEOs specify the dates and times of the meals and the anticipated number of attendees. The Bruins do not provide separate consideration for the rental of the meal rooms; however, the meal rooms are essential to the Bruins’ away city business operations, and the hotels agree to provide the meal rooms free of charge because the Bruins spend money for lodging and food. The Bruins dictate several aspects regarding the setup of the meal rooms.
The Court concluded that the Bruins contracted with away city hotels for the right to “use and occupy” meal rooms to conduct team business, and therefore those agreements were substantively leases.
… Operated by the employer. The eating facility must be operated by the employer. (Reg. § 1.132-7(a)(2)(ii)) Reg. § 1.132-7(a)(3) provides, “If an employer contracts with another to operate an eating facility for its employees, the facility is considered to be operated by the employer for purposes of this section.”
The Bruins contract with each away city hotel regarding the operation of the meal rooms as well as food preparation and service. Several weeks before the Bruins travel to the away city hotel, they provide meal requirements to the hotel. The BEOs also typically provide for the furnishings and setup of the meal room and the hotel staff that will assist in preparing and serving the food.
IRS argued: “the Bruins did not note to the Court the repeated instances that the BEOs, as well as the eventual bills, checks, and invoices show sales taxes were imposed on the food charges. Such assessments demonstrate that the BEOs were not contracts for services, but instead, in form and substance, meal purchase orders.” IRS concluded that the operation of the away hotel meal rooms did not reflect “the operation of an established and fixed food preparation and/or eating facility…but only the purchase of a few meals on an individual day to be held in a private room.”
The Court found no merit to this argument. The Court found that by engaging in the above-described process with away city hotels, the Bruins were “contract[ing] with another to operate an eating facility for its employees.”
… Business premises. For employee meals at an employer-operated eating facility to qualify as a de minimis fringe, Code Sec. 132(e)(2) requires that the eating facility be “located on or near the business premises of the employer.”
The Court said that an employer’s business premises is a place where employees perform a significant portion of duties or where the employer conducts a significant portion of business. It is not necessary for an eating facility to be located in an employer’s principal structure for it to be considered on the business premises.
The Court concluded that away city hotels were part of the Bruins’ business premises for the years in issue. Staying in away city hotels is indispensable to the Bruins’ preparation and is also necessary for maintaining a successful hockey operation and navigating the rigors of an NHL-mandated schedule. The away city hotels provide lodging so Bruins’ players can obtain adequate rest, which is essential to professional athletes playing a physical sport with games scheduled in short succession. The Bruins contract with each away city hotel to set up a private meal room and to provide meals/snacks that meet the players’ specific nutritional guidelines, which ensures optimal performance for the upcoming game and throughout the remainder of the season. Not only do the pregame meals provide essential nutrition for the players, but they also serve as a forum for the Bruins to maximize preparation time and conduct team business.
The Court rejected IRS’s argument that the traveling hockey employees’ activities at away city hotels are insignificant because: (1) the activities at away city hotels are qualitatively less important than playing in the actual hockey game and (2) the Bruins spend quantitatively less time at each away city hotel than they do at the team’s Boston facilities. The Court noted that IRS did not provide precedent to support either of these arguments.
… Meals furnished during, before, or after employee’s workday. IRS conceded that this requirement was met.
… Revenue/operating cost test. For employee meals at an employer-operated eating facility to qualify as a de minimis fringe, Code Sec. 132(e)(2)(B) requires that revenue derived from the employer-operated eating facility equal or exceed the direct operating costs of the facility. Code Sec. 132(e) provides that “an employee entitled under Code Sec. 119 to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal.” Regs provide that an employer-operated eating facility satisfies the revenue/operating cost test if the employer can reasonably determine that the meals are excludable to the recipient employees under Code Sec. 119. (Reg. § 1.132-7(a)(2)) Meals are excludable to recipient employees under Code Sec. 119 if they are (1) furnished for the convenience of the employer and (2) furnished on the business premises of the employer. (Code Sec. 119(a))
The Court looked to its discussion above regarding the business premises requirement. As to the convenience of the employer, the Court noted that providing meals to traveling hockey employees at away city hotels enables the Bruins to effectively manage a hectic schedule by minimizing unproductive time (e.g., finding and obtaining appropriate meals from restaurants in each city) and maximizing time dedicated to activities that help achieve the organization’s goal of winning hockey games. The Court said that the Bruins provided credible evidence establishing the business reasons for furnishing pregame meals to traveling hockey employees.
IRS acquiesces. IRS has now announced its acquiescence in result only as to whether a professional hockey team’s expenses for providing pregame meals at away city hotels were fully deductible because they were provided at employer-operated facilities.
References: For the exception to the 50% limit on meal and entertainment expenses for costs excludable as a de minimis fringe benefit, see FTC 2d/FIN ¶ L-2141; United States Tax Reporter ¶ 2744.01. For the treatment of meals at employer-operated eating facilities as a de minimis fringe benefit, see FTC 2d/FIN ¶ H-1821; United States Tax Reporter ¶ 1324.06.