Originally published on Forbes.com.
Sometimes the Tax Court comes out with some really deep thought. Jeremy and Margaret Jacobs, who through entities own the Boston Bruins, a National Hockey League Team, I should mention for the sports challenged, were there about the IRS disallowance of 50% of the cost of feeding Bruins personnel before away games. Senior Judge Robert Paul Ruwe observed:
As part of their business model, the Bruins’ goal is to win as many hockey games as possible.
I mean who knew?
Not A Big Dollar Case
These things are all relative of course but to Jeremy Jacobs deficiencies of $45,205 and $39,823 for the taxable years 2009 and 2010 respectively could not have been that intimidating. Last I checked Forbes had his net worth pegged at $4.4 billion. There is something a little odd about the Tax Court numbers
Return for an S Corporation, for the taxable years 2009 and 2010, claiming meal expense deductions of $127,877 and $142,223, respectively
Respondent issued a notice of deficiency dated April 28, 2015, determining deficiencies of $45,205 and $39,823 in petitioners’ Federal income tax for the taxable years 2009 and 2010, respectively. The deficiencies result from respondent’s disallowance of 50% of Deeridge’s claimed deductions for meal expenses provided to the Bruins’ traveling hockey employees in cities other than Boston.
For the numbers to make any sense, the meal expense deduction cited above need to be the amounts disallowed. I’ll let you do the math. Note that it looks like the Jacobs were paying AMT in 2010. Anyway it appears that the Bruins spent a bit over $250,000 in 2009 and $280,000 in 2010 on away game meals.
Do Those Hockey Players Eat A Lot?
I’m not enough of a fanatic to go through the schedule in fine detail but I did note that the Bruins played five away playoff games in 2009 and six in 2010. Adding that to the 41 regular season away games, it will work out to a meal cost of between five and six thousand for each away game. The case goes into quite a bit of detail about the way the meals work, but it actually does not say how many people are being fed. The crew consists of:
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
They all get fed the same breakfast and lunch for evening games and brunch for afternoon games. There are also afternoon snacks. Food choices are kept consistent to avoid the players having gastric issues.
Most Important Meal Of The Day?
Players can be fined or scratched from participating in games if they are late or absent from breakfast. I’m wondering if there might be some sort of parenting help here for those who have hockey-obsessed kids. Breakfast is not just about eating
Bruins players will meet with coaches during breakfast– 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. Bruins players also meet with staff at breakfast to receive game tickets for family and friends. Coaches, trainers, and management also use breakfast to meet amongst themselves and make roster adjustments because of illness, injury, strategy, or performance issues.
The Technical Issue
Since the whole away team crew is away from its business home, the IRS does not question that the meals are deductible. Generally, though, the deduction for meals is limited to 50% (Code Section 274(n)). There are exceptions. There were two that the Bruins owners argued they qualified for. One was that the meals were a “de minimis” fringe benefit and the other was that they were an expense of entertainment sold to customers. The first excuse turned out to be good enough, so the Tax Court did not discuss the second one.
It might seem odd, but a footnote indicates that the IRS was not proposing an adjustment with respect to meals provided to players and staff in TD Gardens in Boston, but that is the key to the controversy.
In order to qualify as de minimis fringe benefits the meals must be provided in a non-discriminatory manner. There did not seem to be any issue about that. The more challenging requirement is that the meals be provided at a facility owned or leased by the employer located on or near the business premises of the employer. That’s why there was no question about meals provided for home games.
Business Premises
The requirement of at or near business premises is what required the seemingly odd observation that the business plan of the Bruins includes winning as many game as possible. Judge Ruwe goes to some length to establish that an NHL team can’t blow off its away games and remain in business.
We conclude that away city hotels were part of the Bruins’ business premises for the years in issue. In arriving at this conclusion we consider the traveling hockey employees’ performance of significant business duties at away city hotels along with the unique nature of the Bruins’ business (i.e., professional hockey).
First and foremost, the nature of the Bruins’ business requires the team to travel to various arenas across the United States and Canada, and it is not feasible for the Bruins to be a viable NHL franchise without participating in hockey games outside of Boston. The NHL constitution and bylaws obligate each NHL team to play both home and away games during the regular season and, if the team qualifies, postseason games. Not only does the NHL require teams to participate in away games, but it also requires visiting teams to arrive in an away city at least six hours before the away game commences.
Could This Decision Be More Generally Applicable?
One of the odd things I noted in my years in public accounting was the use of sports and military metaphors as we went about jobs with little in the way of physical demands or physical danger of any sort. I think it is reflective of Samuel Johnson’s observation that “Every man thinks meanly of himself for not having been a soldier, or not having been at sea”. When I was in charge of partnership taxation for a large regional, I sweated a lot about clients maintaining capital accounts in accordance with the regulations. When we were absorbed into a national firm, I was shocked that the standard engagement letter for partnerships disclaimed responsibility for capital account maintenance. It seems like the firm was agreeing to do your return, but would charge extra to do it right.
In some other region there was a group that would send a crew to straighten out your client’s capital accounts. I really like the kid who ran the group. He was one of the few people I knew in the world that it was worthwhile to call up and talk about knotty 704(b) problems. I was still concerned though about the concept of charging extra to do the returns right. The expert team leader would talk about his group “deploying”, which struck me as just a little grandiose.
Regardless I could see the national firm using this decision to avoid the 50% disallowance for a group like that. The hotel provides a room for them to eat their meals so they can stay in good trim for their deployment and able to discuss minimum gain over breakfast. Conceivably a team of lawyers working a long trial out of town might be able to pull off the same thing.
This is a regular tax court decision making it a strong precedent. It strikes me that the IRS may have shot itself in the foot with this one.
Other Coverage
I picked this up from a Lew Taishoff post – Feed Those Bears! The definition of bruin is “a bear, especially in children’s fable”. Not everybody knows that.
Judge Ruwe must be a die-hard hockey fan, because he does a play-by-play, with pictures, descriptions and accounts, of every away-day event, from boarding the plane the night before to the moment when the announcer at the away arena shouts “And now, the starting line-up for the Boston Bruins” accompanied by the “horrid shapes, and shrieks, and sights unholy” of the home team fans.
When I went to bed last night Law360 had picked it up, but that was it. When I checked the coverage this morning I was afraid I had lost a breaking tax story as Jeremy Jacobs seemed to be all over the place. As it turns out, on the same day of his Tax Court victory, he was elected to the Hockey Hall of Fame.
Update And Vindication
Lew Taishoff had something on a follow-up order in the case. Mr. Taishoff follows the Tax Court much more closely than I do, so I would not have notice it. It really makes me feel great. The order reads:
On page 12 , line 19, “$127,877 and $142,223, respectively.” is deleted and “$255,754 and $284,446, respectively, for pregame meals provided to the Bruins’ traveling employees while at away city hotels.” is substituted therefor.
If you look back at the second section of this post you will note that I inferred that there was something wrong with the Tax Court numbers. We have here a great illustration of how different tax bloggers notice different things because of the influence of their disciplines. Tax lawyers will be attuned to the legal niceties in the decision, but someone who has spent a lot of time preparing and reviewing tax returns will notice other things.