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.

Photo of Pooja Shah Kothari Pooja Shah Kothari

Pooja Shah Kothari is an associate in the firm’s Washington office and a member of the Tax Practice Group. She also has experience in corporate bankruptcy and restructuring.

Photo of Marianna G. Dyson Marianna G. Dyson

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers…

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers on the application of employment taxes, the special FICA tax timing rules for nonqualified deferred compensation, the voluntary correction of employment tax errors, and the abatement of late deposit and information reporting penalties for reasonable cause. On behalf of the restaurant industry, her practice provides extensive experience with tip reporting, service charges, tip agreements, and Section 45B tax credits.

She is a frequent speaker at Tax Executives Institute (TEI), the Southern Federal Tax Institute, and the National Restaurant Association.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.