On July 27, 2015, the Boston Bruins (NHL) filed an action in the U.S. Tax Court titled Jacobs v. Commissioner to go head to head with the Internal Revenue Service (IRS) over the deductibility of players’ meals. On April 28, 2015, the IRS sent a letter to the Boston Bruins stating the Bruins owed $85,000 for the years 2009 and 2010 in taxes. The note additionally stated that the IRS had disallowed many deductions dating back to 2007. One of the largest of those disallowed deductions was for the Bruins’ practice of deducting players’ meals 100% while traveling for away games.
Under Internal Revenue Code (IRC) section 162, businesses are allowed to deduct necessary and ordinary expenses that are incurred during the taxable year. However, under IRC section 274(a) these full deductions are not allowed for entertainment, amusement, or recreation activities. IRC section 274(n) only allows 50% of the cost of meals to be deducted. There is a list of exceptions in IRC section 274(n) that would not be subject to the 50% deduction limitation of meals. Specifically there is an exception that the cost of meals could be fully deducted if they are not included in the gross income of employees (a fringe benefit) under IRC sections 132 and 119. To be included as a fringe benefit and not includable in an employee’s gross income under IRC sections 132 and 119, it has to be a meal given to an employee on the business premises of the employer and it must be provided for the convenience of the employer.
The Bruins can likely make two arguments as to why they are not subject to the 50% limitation for the deduction of meals. One is the argument that even though the players are “employees”, they are also the “product” and therefore spending money on proper and adequate nutrition for the players is a fundamental piece of their business. Since using world-class athletes for competition is their business, the argument could be that the food, often consumed in large amounts, required for these athletes is like fuel needed for a tractor on a farm, which could be deducted as an ordinary and necessary business expense. Hockey teams already take deductions for things that would ordinarily be seen as “recreational” such as hockey pucks.
Another argument the Bruins could, and appear to, make outside of the “ordinary and necessary expense” argument is that the cost of these meals when traveling are in fact excepted from IRC section 274(n)’s 50% requirement because they fit the requirements under IRC sections 132 and 119. The Bruins seem to argue that the hotels where the players stay for away games are in fact the “business premises” for the team because they are necessary to enforce curfews, carry on team meetings, give medical treatment, etc. The Bruins then continue to state how traveling and staying at hotels for away games is essential to the NHL as a business, but to get the Tax Court on their side they will have to effectively argue that substance should be seen over form as hotels have not been traditionally seen as “business premises”. As to the “convenience of the employer” requirement, the Bruins seem to go on about the necessity of providing meals for their athletes, both for nutritional and logistical purposes such as hosting meetings and such during these meals.
Either way this case plays out is going to have a significant amount of importance in the setting of precedent for not only sports teams, but in other situations including large company conventions or retreats. The NHL is joining to help the Bruins in this suit as the outcome would affect all of the member clubs of the NHL. In the end, the Bruins seem to have two arguments with compelling reasons as to why they should be able to fully deduct the cost of meals for their players. Time will tell as to whether the Tax Court will agree.
* Alec Roberson is a third year law student at Wake Forest University School of Law and hopes to practice in sports, trust and estate planning, or tax law after graduation. He holds a Bachelor of Arts in Political Science and a Bachelor of Science in Accountancy from the University of North Carolina at Wilmington.