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IRS Sent to the Penalty Box

August 6, 2017

Seems like an odd combination.  Hockey and the IRS.  In summertime.  But here we have Jeremy Jacobs, the owner of the Boston Bruins, a National Hockey League franchise, contesting the IRS's audit results disallowing half of the players meals costs paid by the team for its road games.

 

Now Mr. Jacobs has never been a very popular owner in Boston, despite his induction into the Hockey Hall of Fame as a contributor, or the Bruins winning a Stanley Cup in 2011.  Much of this has to do with him living in Buffalo (home of a division rival), the public perception of him as a spendthrift with regards to paying top tier talent, some rather foolish trades of top players (Tyler Seguin and Joe Thornton), and a recent controversy where local high school students discovered the team hasn't been funding local charity as it was obligated to do when the TD Garden was constructed in the mid 90's.

 

 

None of that is really relevant to this case, but if you see Bruins fans eyes roll, now you'll understand why.

The Tax Court decided that the pregame away-city meals provided to the team was not subject to the normal 50 percent deduction disallowance on the basis that the meals were both for the “convenience of the employer” and were provided at an “employer operated eating facility.” In Jacobs v. Commissioner, 148 TC No 24 (June 26, 2017), the court found that meals were served in a room provided without charge by the hotel and to all employees of the Bruins traveling to the games.  

 

IRC 119(a) allows an employee to exclude the value of any meals furnished by or on behalf of his employer if the meals are furnished on the employer’s business premise for the convenience of the employer. There are several requirements for this, of which the court found that the team met all of them.  Generally, the expenses of IRC 119 meals can be used to satisfy the first requirement that the revenue from the eating facility equal direct operating costs. In Jacobs, the Tax Court concluded that the group meals served in the away-city hotel rooms provided at the hotels where the team stayed for the games was an “employer operated eating facility,” which deems the rooms as the “eating facility” and “on the business premises of the employer” for purposes of the requirements. The rooms were also considered the business premises of the employer for purposes of the IRC Section 119 requirement, which is the second requirement.  Lastly, because all traveling team members were required to participate, it was found that the third requirement that the policy not discriminate in favor of highly paid employees (such as David Backes at $5 million or $125,000/point, even plus/minus, and too many bad penalties).  Now this may seem simple enough but the fact is there were a lot of hoops that had to be jumped through to get there.  Of particular note is that the leased hotel space is considered employer premises for this purpose.

 

The court spent much time discussing how the team is in the business of winning hockey games, and that in order to achieve that goal, must spend half of its games on the road.  It went to describe how the team would use the meals as both prep for nutrition and for game planning, that they were mandatory, and that all traveling team members including non-players were included.  The IRS's arguments were summarily rejected, and the ruling seems to expand the limits of what allowable employer provided meals are.  Presumably, if a business can provide a solid business rationale for providing meals to employees, the business reasons should be given preference over any government's judgement.   The court made a point of stating that.

 

 

The final decision?  IRS is given five minutes for unsportsmanlike conduct.  The Bruins?  Well they still need a scoring winger and a young solid defenseman.

 

 

 

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