On February 19, 2019, the IRS issued AOD 2019-01, 2019 IRB 569, acquiescing in the result only in the Tax Court’s decision in Jacobs v. Commissioner, 148 T.C. 24 (2017). (Earlier coverage, here.) By virtue of the AOD on Jacobs, the IRS indicated its acceptance of the Tax Court’s holding and will follow Jacobs “only with respect to cases involving sports teams in which the material facts are substantially identical.”
In Jacobs, the owners of the Boston Bruins, a team in the National Hockey League (“Bruins”), contracted with various hotels during the team’s away games to provide team employees pregame meals in hotel meeting rooms. At issue was whether the owners were entitled to a full deduction for the cost of the meals provided in 2009 and 2010. The Tax Court held in favor of the Bruins’ owners, holding that they were entitled to the full deduction because they provided the meals at “employer-operated eating facilities,” which qualified as a de minimis fringe benefit under Treasury Regulation § 1.132-7 (prior to January 1, 2018, a de minimis fringe benefit was excepted from the 50% limit typically applied to a deduction for a meal expense). The Tax Court’s determination that the hotel meeting rooms constituted an “employer-operated eating facility” relied on the reasoning that (1) the hotels in which the Bruins held pregame meals were the team’s “business premises”; (2) the Bruins “leased” the hotel meeting rooms; and (3) the Bruins did not provide meals in a manner that discriminated in favor of highly compensated employees.
Notably, in the AOD, the IRS explains that it disagrees with the reasoning applied by the Tax Court. The IRS disagrees with the standard that the Tax Court used to conclude that the hotels were the Bruins’ “business premises” in part because, in the IRS’s view, the Court’s reasoning could render any location in which an individual conducts business activities a business premises. According to the Service, the Tax Court erroneously applied a “function standard” − looking at whether the business premise “infers a functional rather than a spatial unity” − when it should have applied a quantum standard by analyzing the quantity or quality of the Bruins activities. Nonetheless, the Service explains that it will not challenge that sports teams have business premises in cities in which away games occur.
Similarly, the IRS cites a concern that the Tax Court’s finding that the Bruins “leased” hotel rooms expands the definition of the term “lease,” rendering the requirement meaningless. The Service believes that a lease requires more than just authorization to use the premises and here, the hotels did not create and transfer a property interest in those meeting rooms. Ultimately, the Service contends, the Bruins’ arrangements with hotels are not leases for federal tax purposes.
Finally, the IRS disagrees with the Tax Court’s implication that cost reduction is relevant to the issue of whether the Bruins provided meals in a manner that discriminated in favor of highly compensated employees. The Tax Court found that the Bruins provided pregame meals to all traveling hockey employees on substantially similar terms, and that any discrepancy between anticipated and actual meal attendees was related to cost reduction concerns. The Service states that in its view cost reduction is not a permissible reason to discriminate between employees.
Ultimately, the Service explains, it did not appeal that Tax Court’s decision because it intends to publish regulations regarding employer-provided meals. The Tax Cuts and Jobs Act (“TCJA”) also eliminated the exception to the deduction under section 274(n)(2)(B) so that a similar issue will not arise for amounts paid or incurred after December 31, 2017. Section 274(o), adopted as part of the TCJA, will fully disallow deductions beginning in 2026 for expenses related to meals provided in employer-operated eating facilities excludable under section 132 and meals provided for the convenience of the employer excludable under section 119. Accordingly, employers should consider relying on other exclusions in the future, such as working condition fringes under section 132(d), to preserve a 50% deduction.