A billionaire sports club owner winning in Tax Court seems like one of those stories that is more of sensational than practical interest. As it happens though Jeremy Jacobs’s win is a real meat and potatoes issue (quite literally in a sense) for people with more ordinary businesses. This was driven home for me when I read the notice that Lucien Gauthier took of it.
Our thanks to Daniel R. Scully, CPA who went on the Tax Court web site yesterday at our seminar on Current Tax Developments in Marlboro to find the following case!
In Jeremy Jacobs v. Comm., 148 TC 24 (06/26/17), the Tax Court (in a regular opinion) held that Deeridge Farms Hockey Association (an S corp that owns the Boston Bruins) could deduct the full amount (rather than only 50%) of the expenses incurred in providing meals to professional hockey players and team personnel in hotels in cities other than Boston as a de minimis fringe benefit under sections 274(n)(2)(B) and 132. If you represent a client who sends employees out of town on business and deducts only 50% of their meals expense, you might want to read this case more closely to see if the full amount of the meals expense is deductible.
Where CPAs Learn About Taxes
Lucien Gauthier’s Boston Tax Institute is the best continuing professional education value in New England and the people attending his seminars tend to be working CPAs who are hands-on serving the tax compliance and planning needs of the ordinary businesses that are the stuff of life. The 50% disallowance on meals affects many businesses sometimes significantly. So I can just imagine the heady excitement in Lu’s class as someone was downloading the decision. Independence Day being this week, imagine being in New York City, perhaps, as the Declaration of Independence, delivered hot off the press by relays of couriers is being read. Well, it wasn’t anything like that at all, but it was still pretty exciting.
Bottom Line Of The Decision
In my initial post on the decision, I focused more on the sensational than the technical. It is necessary to take a closer link at the technical aspects lest you think that this decision allows 100% deductibility for all the meals of your company’s road warriors. The case, not really big stakes for a billionaire, was about deficiencies totaling just over $80,000 for 2009 and 2010. The issue was whether what was spent on feeding Boston Bruins players and staff when they had away games was subject to the 50% disallowance called for by Code Section 274(n)(1).
The Hockey Distraction
I was distracted by the hockey parts of the story such as the Tax Court’s observation that the Bruins business plan included winning as many games as possible. Ironically, at least back in the day, there were some followers of the Bruins who would have argued with that proposition. Here is a bit from a piece by Sean Crowe – Nothing Bruin: Why I Refuse to Care About the Boston Bruins – in 2008:
Jeremy Jacobs. His name inspires rage almost universally among Bruins fans. He doesn’t care about winning. He refuses to spend his billions on making the team better. He charges ridiculous amounts of money for tickets to the arena he owns. He rakes in money from NESN, rent paid by the Celtics, and all of the food or drinks sold at the Garden. He doesn’t live in Boston. His own players hate him. He paid his GMs in the ’80s and ’90s based on profits, not on-ice results (I’ll believe this until I die).
I need to tread carefully in these matters, as my knowledge of sports is well below average for an American male, but I have to say that it should have occurred to me that “winning as many games as possible” is not a self-evident business plan for a bottom-line focused sports franchise. I have observed over the years that]when it comes to making money, excellence is overrated. Enough about hockey.
A More Technical Take
Marianna Dyson and Michael Chittenden in their piece Tax Court Expands Section 119 Exclusion in Boston Bruins Decision in the Miller & Chevalier Withholding & Reporting Blog explain the interaction of Code sections that produced the favorable result for the Bruins.
The Bruins’ owners argued that they were entitled to a full deduction because the banquet rooms in which employees were provided free meals qualified as an employer-operated eating facility. That may leave some of our readers wondering, “How can a facility that is free have revenue that covers its direct operating cost?” The key to answering that question lies in the magic found in the interface of sections 132(e)(2)(B) and section 119(b)(4) of the Code. Under section 132(e)(2)(B), an employee is deemed to have paid an amount for the meal equal to the direct operating cost attributable to the meal if the value of the meal is excludable from the employee’s income under section 119 (meals furnished for the “convenience of the employer”) for purposes of determining whether an employer-operated eating facility covers its direct operating cost. In turn, section 119(b)(4) provides that if more than half of the employees who are furnished meals for the convenience of the employer, all of the employees are treated as having been provided for the convenience of the employer.
When I spoke with Ms. Dyson, she indicated that a lot of the development in this area came out of the gaming industry (casinos that is, not World of Warcraft). Boyd Gaming required employees to stay on premises for meal breaks, because of logistical and security concerns making the free meals for the convenience of the employer.
Can This Work For You?
The typical road warrior pays the hotel and restaurant charges and then gets reimbursed by his or her employer. If they are traveling on their own, I don’t see how this ruling could help, but when they are in packs, some changes in process might do the trick. One of my friends has a sales organization as a client. It is a C corporation and the 50% disallowance is quite burdensome. The company has representatives all over the country and periodically has sales meetings for groups of representatives. The are required to stay at the same hotel.
If instead of leaving them on their own for meals, the company had the hotel reserve some sort of dining room and had the meals served there, they might fit the facts of the Jacobs decision. In order for it to work, the company should be paying the hotel rather than reimbursing the representatives. The key is to make part of the hotel, however temporarily, a business premise of the employer, so the company should be paying everybody’s bill and booking the meal room.
Based on the Dyson/Chittenden article there is an argument for being careful about the menu.
No doubt, all employers are concerned with the performance of their employees. To that end, it could be argued that ensuring that they eat well-balanced nutritionally appropriate meals can increase performance even if the employer is more concerned with brains rather than brawn. Indeed, given the large health insurance costs borne by many employers, employers have a legitimate interest in providing healthy meals that may reduce the incidence of obesity, diabetes, heart disease, and other chronic ailments that raise their costs. Moreover, many employees have hectic schedules during the work day with frequent appointments, meetings, and other activities that make it necessary to maximize the time available for work during the day. Given the Tax Court’s implicit admonition of the IRS’s attempt to substitute its own judgment regarding the employer’s business reasoning in Jacobs and the court’s refusal to substitutes its own judgment as well, the IRS likely has a more difficult road ahead if it attempts to challenge the purported business reasons that an employer provides for furnishing meals to its employees.
Business Opportunity?
Hotels with a heavy business clientele might think about crafting packages that fit the Jacobs decision facts as a way of luring group business. I can see the promotional material – “Feed your road warriors like hockey players and deduct 100%”.
What Is With The IRS?
It seems when the IRS decided to fight this case, nobody was thinking about “hazards of litigation”. The decision has people with practices like I used to be in plotting and scheming. And probably some people will misinterpret it to have it apply much more broadly than it should. And mostly they will get away with it.
One of my sources tells me that the IRS has a long-standing grudge against deductible meals. There is actually somebody there, according to rumor, that is something of a meals czar (czarina actually, if the rumor is true). Think Lois Lerner. Instead of railing on about money in politics, she rants about “three-martini lunches”. Maybe a group of restaurateurs will start doing FOIA requests and we can have a new phase to the IRS scandal.
Regardless, the issue of deductible meals is a long-lived source of resentment against the business class, as this article about restaurant lobbyists trying to overturn the 50% rule indicates:
George McGovern’s 1972 Presidential bid never quite took off, but one of his stump lines did.
“There is something fundamentally wrong with the tax system,” that quip went, “when it allows a corporate executive to deduct his $20 martini lunch while a workingman cannot deduct the price of his bologna sandwich.”
That $20 in 1972 would probably be about $100 now. Of course, drinking at lunch went out of style around the same time as smoking in the office And for those of you, not a few I have learned, who don’t know who the heck George McGovern was, you can read my account of those days, that I did on his passing in 2012.