Jacobs v. Commissioner is literally the most-interesting sports tax case of the year. The Jacobs’s own the Boston Bruins and, receiving sage tax advice, sought to deduct the full cost of their players’ and associated personnel’s away-game meals and snacks. The Internal Revenue Service (IRS) believed the general rule that meals and entertainment are only ever deductible to the extent of 50 percent applied under Internal Revenue Code (IRC) § 274(n)(1). The Jacobs’s, through their experienced litigators, countered that they were fully deductible as de minimis fringe benefits through the combination of IRC §§ 274(n)(2)(B) and 132(e). The Tax Court ultimately found for the Jacobs’s.
The following discusses the relevant authorities, facts, and decision. Planning tips and the future are then presented.
Taxpayers bear the burden of proof as IRS deficiency notices are presumed correct. Helpfully, § 162(a) provides deductibility for ordinary, necessary, and reasonable expenses in a trade or business. Despite § 162(a) qualifying deductibility, § 274(a)(1)(A) still bars deductibility for meals expenses without proof of their connection to an active trade or business. Should § 274(a)(1)(A) fail to interfere, meals are only deductible to the extent of 50 percent under § 274(n) save for an exception.
An exception includes de minimis fringe meals under § 132(e). So long as “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),” all is well. Indeed, § 132(e)(2) requires meal access to be available on substantially similar terms to all employees so that no discrimination in favor of the most highly compensated employees occurs. At the time of review, greater than $110,000 served as the definition of highly compensation under § 132(j)(6).
For the first element, a lease is a contract for the right to use property in exchange for monetary consideration. It is not otherwise defined, so it takes its common definition for these purposes. For the third element, the business premises do not have to be restrictively read geographically. The final element is fulfilled to the extent the employees can exclude the meals from their income under § 119. Meals are excludable if furnished for the employer’s convenience and on the employer’s business premises.
For the employer’s convenience is ascertained under Treas. Reg. § 1.119-1(a)(1). Employer’s convenience occurs if the meals expenditures are for a substantial noncompensatory employer business reason. In making this determination the Tax Court is guided by Treas. Reg. § 1.119-1(a)(2)(ii), which lists examples of substantial noncompensatory business reasons.
The Jacobs’s own the Boston Bruins through an S corporation, an LLC, and a corporation with an S election now applicable to it. The home arena is TD Garden in Boston, Massachusetts, and the work-out facility is Ristuccia Memorial Arena in Wilmington, Massachusetts. The league requires teams to arrive in away cities at least six hours before an away game. However, the collective bargaining agreement (CBA) forces teams to travel the day before the game if the away city flight time is in excess of 150 minutes. The penalties for failing to comply include forfeiture of the game and playoff points as well as financial penalties from the league and the away team’s loss of revenues.
The traveling contingent includes 20 to 24 players, the coaching staff, medical personnel, equipment mangers, public relations personnel, and other employees. Immediately after schedule release, the Bruins contract for away-game hotels, including for meal rooms for pregame meals and snacks. Their selection criteria include location, service quality, and food quality. Their preconditions also include pre-keyed rooms; late checkout; no game-day cleaning; free suite for the coach; upgrades for the general manager, president, medical personnel, and travel coordinator; and no meal-room fee. Finally, should the Bruins get to the playoffs, the contract with away-game hotels in their conference ensures room availability for them for the postseason.
A custom menu is sent to the away-game hotel, in which specifics as to food and quantities are detailed and a standard limit of 22 percent of the cost of the meals as waiter and waitressing fees. The banquet event orders have fewer meal attendees than actually occur for cost-minimization reasons. The meal room is at no additional cost and has food available in a self-service way.
Again, the issue was whether the pregame meals at away-game hotels are fully or only partially deductible. As the Bruins made pregame meals available to all traveling employees, the classification was reasonable and therein not discriminating in favor of the most highly compensated employees. So long as “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),” the de minimis fringe benefit test is satisfied. The first element is fulfilled through the Bruins, in substance if not in form, leasing the hotel provision of meals. Treas. Reg. § 1.132-7(a)(3) suggests that contracting for an eating facility counts as “operation by the employer.”
- 132(e)(2) also specifies that the facility be “located on or near the business premises of the employer,” but it is unnecessary for such a facility to be in the employer’s principal structure. It is a functional, not then a spatial, test. The away-game hotels were business premises for the Boston Bruins.
Revenue equaling or exceeding the direct operating costs is necessary, which is met with employees satisfying § 119. This section requires furnishing them for the employer’s convenience and on the employer’s business premises. The latter was already discussed. The former was satisfied in showing the time-saving necessity of having meals at hotels to allow players to have pregame meetings and medical treatment while eating. Courts give great credence to businesses’ judgment, which this court did here. § 119 was met, and the revenue/operating cost element of § 132(e)(2)(B) was, thus, satisfied.
- To get full deductibility for away-game meals, professional teams should allow all traveling employees equal access to the food. Otherwise, discrimination might occur, disallowing the fringe benefit full deductibility of such meals.
- Also, professional teams should have team activities occur during the meals to assure the meals are connected to a business use.
- Whether the meals are separately paid for or part of the hotel cost should not matter.
- Professional sports leagues should continue to have penalties under their CBAs for not fulfilling traveling requirements as these penalties help justify the full deductibility of away-game meals provided to players.
It is unlikely the IRS will refile over this type of issue. However, professional teams should still be vigilant in adhering to the above planning tips to avert such a possibility.
 Docket No. 19009-15, 148 T.C. No. 24 (2017).
 U.S. Tax Ct. R. 142(a).
 All references are to 26 U.S.C., the Internal Revenue Code (IRC), and, as such, references to 26 U.S.C. and the IRC are omitted in subsequent text.
 § 132(e)(2); Treas. Reg. § 1.132-7(a).
 § 119(a).
 Treas. Reg. § 1.119-1(a)(2)(i).
 § 132(e)(2); Treas. Reg. § 1.132-7(a).
 Benninghoff v. Commissioner, 71 T.C. 216, 220 (1978), aff’d by, 614 F.2d 398 (5th Cir. 1980).
 Adams v. United States, 585 F.2d 1060, 1066, 218 Ct. Cl. 322 (Ct. Cl. 1978).