photo by Jorge Cancela
Business owners should cheer a recent win by the Boston Bruins, regardless of their hockey team allegiance or geography.
The victory in question happened not on the rink, but in the U.S. Tax Court, where the Bruins’ owners triumphed in a clash with the Internal Revenue Service – one that may have wide-ranging effects, especially if the result withstands a potential rematch.
The case, Jacobs v. Commissioner, centered on how much of the costs of certain meals that the team provided to players and staff members were deductible. Business meal expenses have long represented a highly contested corner of tax law. The tax code allows businesses, including sports teams, to deduct business-related expenses – but food and beverages often venture into the murky area between business and entertainment.
The limits on business meal deductions largely grew out of the image of Madison Avenue executives or Wall Street brokers indulging in “three-martini lunches” and then writing them off. Accurate or not, this perception of excess prompted Congress to scale back allowable business meal expense deductions in the 1980s.
Because it is difficult to quantify the degree to which feeding staff counts as a business expense, federal tax law gets unsurprisingly arcane in providing instructions for what is and is not deductible. Section 274 (a) of the Internal Revenue Code disallows the business deduction entirely for activities that qualify as “entertainment, amusement or recreation,” and Section 274 (n) specifies that even nonentertainment meals can only be deducted at 50 percent of their costs. However, the same section also lists exceptions for certain meals that can be fully deducted.
Among these criteria for meals that businesses may fully deduct is the requirement to provide the meal at an “employer operated eating facility.” In the Bruins’ case, the dispute arose about meals provided at hotels while the team traveled to away games. The main questions at issue: Were the meals provided on “business premises” and were the meals provided for “the convenience of the employer?”
Jeremy and Margaret Jacobs, who own the Bruins through various entities, took the position that meals provided to players and staff at road games met the IRS’ requirements for fully deductible meal expenses. The team cited business-related reasons for staying at the hotels where it served the meals in question, and reasonably pointed out that an NHL team could not function if it did not travel to games outside its home city. The Bruins also noted that providing nutritionally tailored meals to players represents “a necessary component of the Bruins’ hockey operations” and that coaches often have game-related discussions with players while they eat.
The IRS did not agree that the team met the exception criteria and so argued that only 50 percent of the meal expenses were deductible. The Tax Court judge, however, disagreed. Because of circumstances such as when the meals were served (during a workday), where they were served (in a space that was effectively leased by the team, arguably the key component of the case), and who contracted for and selected the food provided (team ownership), the judge found that the decision to fully deduct the expenses was justified.
The ruling is great news for the Jacobses. It’s also great news for all sorts of business owners, because it provides new clarity about how to handle meal expenses that happen outside an organization’s main workplace. The applications are obvious for other sports teams who feed players during away games. But the principles extend further than sports.
For instance, consider a firm with offices across the country that gathers employees together for a firmwide training session in a hotel or conference center. If the meeting is not held in one of the firm’s offices, the meal the business provides to staff may in fact still be fully deductible, as Jacobs v. Commissioner demonstrated. There is logic behind this reading. The staff is required to attend for the convenience of the firm; why should the owners be penalized because they need to hold the meeting somewhere other than their permanent facilities?
The IRS may still appeal the decision, so business owners and tax professionals should keep an eye out for further developments. For now, the Tax Court has reached the decision that I and my colleagues at Palisades Hudson expected, and one that seems fair on its face. The Jacobses took a highly scrutinized position, but one with a solid basis in the law.
Of course not all meal expenses should be 100 percent deductible with no limitations at all. But on the other hand, business owners should claim the deductions to which they are legally entitled. If the IRS disputes a tax position you or your advisers took in good faith, do not simply assume the Service is right. As the Bruins demonstrated, taxpayers can and do win.