Boyd Gaming Corp. v. Commissioner of Internal Revenue, 093097 FEDTAX, 3433-95

Docket Nº:3433-95, 3434-95.
Opinion Judge:LARO, Judge
Party Name:BOYD GAMING CORPORATION, F.K.A. THE BOYD GROUP AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent CALIFORNIA HOTEL & CASINO AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Thomas P. Marinis, Jr., J. Barclay Collins III, Sarah A. Duckers, and Charles L. Almond, for petitioners. Paul L. Dixon and Barbara S. Trethewy, for respondent.
Case Date:September 30, 1997
Court:United States Tax Court
 
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T.C. Memo. 1997-445

BOYD GAMING CORPORATION, F.K.A. THE BOYD GROUP AND SUBSIDIARIES, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

CALIFORNIA HOTEL & CASINO AND SUBSIDIARIES, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 3433-95, 3434-95.

United States Tax Court

September 30, 1997

Ps provide free meals to their employees in private cafeterias located on Ps' business premises. R determined that sec. 274(n)(1), I.R.C., limits Ps' deduction for the cost of these meals. Ps argue that they may deduct 100 percent of their costs under the de minimis fringe benefit exception of sec. 274(n)(2)(B), I.R.C., which requires in this case that Ps provide the meals to each of substantially all of their employees for a substantial noncompensatory business reason. Held: Ps' deduction is limited by sec. 274(n)(1), I.R.C.; the de minimis fringe benefit exception of sec. 274(n)(2)(B), I.R.C., is inapplicable under the facts herein because Ps do not provide the meals to each of substantially all of their employees for a substantial noncompensatory business reason.

Thomas P. Marinis, Jr., J. Barclay Collins III, Sarah A. Duckers, and Charles L. Almond, for petitioners.

Paul L. Dixon and Barbara S. Trethewy, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge

The docketed cases are before the Court consolidated for purposes of trial, briefing, and opinion. California Hotel & Casino (CHC) petitioned the Court to redetermine respondent's determination of deficiencies of $81,761, $14,428, and $42,124 in its consolidated group's 1982, 1984, and 1987 Federal income tax, respectively. Boyd Gaming Corp. (Boyd) petitioned the Court to redetermine respondent's determination of a $152,346 deficiency in its consolidated group's 1988 Federal income tax.

Following concessions by the parties, we must decide whether petitioners' deductions for food and beverages provided to their employees without charge on petitioners' business premises are limited by section 274(n)(1). In Boyd Gaming Corp. v. Commissioner, 106 T.C. 343, 344, 349 (1996), we held in summary adjudication that section 274(n)(1) does not limit petitioners' deductions if the food and beverages are a de minimis fringe benefit under section 274(n)(2), which, in turn, requires that petitioners provide the food and beverages to each of substantially all of their employees for the "convenience of the employer" under section 119.1 We hold herein that petitioners do not provide the food and beverages to each of substantially all of their employees for the convenience of the employer, and, hence, that petitioners' deductions are limited by section 274(n)(1) because the food and beverages are not a de minimis fringe benefit under section 274(n)(2)(B). Unless otherwise stated, section references are to the Internal Revenue Code in effect for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulated facts and the exhibits submitted therewith are incorporated herein by this reference. The record consists mainly of these stipulated facts and exhibits and the testimony of numerous witnesses, all of whom were called by petitioners. Petitioners' primary witnesses were: (1) Robert Boughner, petitioners' executive vice president during the subject years, (2)John Repetti, CHC's casino manager during the subject years, (3)Steve Thompson, the general manager of Fremont Hotel & Casino (Fremont) during the subject years, (4) Bruce Fraser, the assistant general manager of Sam's Town Hotel & Gambling Hall (Sam's Town) during the subject years, (5) John Miner, who joined the Stardust Hotel & Casino (Stardust) in July 1988 and served as its general manager throughout the remainder of the subject period, and (6) Mary Ann Burns, who joined the Stardust in October 1988 and served as its director of hotel operations throughout the remainder of the subject period.

CHC and Boyd are Nevada corporations whose principal offices were in Las Vegas, Nevada, when they petitioned the Court. For its taxable year ended June 30, 1988 (the 1987 taxable year), CHC was the parent of an affiliated group of corporations that filed a consolidated Federal income tax return. CHC's affiliated group included: (1) Sam-Will, Inc., doing business as Fremont, and (2) Mare-Bear, Inc., doing business as Stardust. CHC also did business as Sam's Town. By virtue of a reorganization of the group, Boyd became the parent of the affiliated group beginning with the 1988 taxable year. Boyd's affiliated group included: (1)CHC, which sometimes did business as Sam's Town, (2)Sam-Will, Inc., doing business as Fremont, and (3) Mare-Bear, Inc., doing business as Stardust.

Petitioners operate CHC, Fremont, Sam's Town, and Stardust (collectively, the Properties). Each of the Properties is a large resort or hotel complex located in Las Vegas, Nevada. CHC and Fremont are located downtown. Stardust is located a "stone's throw" away from CHC and Fremont, in an area commonly known as "the Strip". Sam's Town is located approximately 6 miles from the Strip and approximately 6 miles from downtown.

Each of the Properties has casino, restaurant, and hotel facilities; the hotel rooms tend to run at close to full occupancy, and the hotel guests tend to "turn over" weekly. Some of the Properties also have convention and/or entertainment facilities. As of June 30, 1989, CHC had 635 hotel rooms, 222 R.V. parking spaces, four restaurants, two lounges, 35 gaming tables, 81 keno seats, 18 race and sports book seats, and 970 slot machines. Fremont had 450 hotel rooms, five restaurants, one lounge, 48 gaming tables, 58 keno seats, 142 race and sports book seats, and 952 slot machines. Stardust had 1,367 hotel rooms, 370 R.V. parking spaces, six restaurants, one showroom, one lounge, 84 gaming tables, 105 keno seats, 300 race and sports book seats, and 1,324 slot machines. Sam's Town had 204 hotel rooms, 508 R.V. parking spaces, eight restaurants, one lounge, 57 gaming tables, 166 keno seats, 193 race and sports book seats, and 1,892 slot machines. Sam's Town also had a 56-lane bowling alley and a 25,000-square-foot retail area called the Western Emporium.

Each of the Properties is located in a heavily populated area of Las Vegas near numerous eating facilities, including fast food restaurants, competitor casino restaurants, ethnic restaurants, sandwich shops, pizza houses, food courts, and convenience stores. Many of these eating facilities serve meals 24 hours a day. The aggregate seating capacity of the eating facilities, exclusive of the casino restaurants, near Stardust and Sam's Town is in both cases more than 1,100 diners. The aggregate seating capacity of the eating facilities, exclusive of the casino restaurants, near CHC and Fremont is in both cases more than 650 diners. The record does not disclose the seating capacity of the casino restaurants near CHC, Fremont, Stardust, or Sam's Town. CHC and Fremont have 11 competitor casinos situated nearby, and these competitors house numerous restaurants offering an assortment of meals including fast food, ethnic food, buffet food, sandwiches, and pizza. The same assortment of restaurants is present in the 11 competitor casinos located near Stardust. Sam's Town has two competitor casinos nearby, one of which has a pasta buffet, a cafeteria, and a delicatessen.

Most of the major casinos in Las Vegas provide meals to their employees at no charge in private eating facilities located on the casinos' premises. In order to attract and keep employees, petitioners offer compensation and benefits packages to their employees that are highly competitive with those of other similar employers. Included in these packages is the benefit of a meal or meals during, and/or in some cases before or after, an employee's shift. Petitioners opted before the subject years to provide meals to all of their employees after it was decided, by the management of the affiliated group's parent, that petitioners would generally require their employees to stay on the premises throughout their shifts and that it was unreasonable to require full-time employees to stay on the premises for an 8-hour shift without offering them meals. Management believed that it was essential to petitioners' operations that 75 to 80 percent of their employees (by name and not by number) stay on the premises throughout their shifts, and that these employees deserved meals for having to stay on the premises. Management also believed that it was not essential to petitioners' operation to keep the remaining 20 to 25 percent of the employees on the premises throughout their shifts, but petitioners would generally require these employees to stay on the premises, and offer them meals, as a matter of consistency. The meals that petitioners provide to their employees include hot meals, cold foods, and snacks (collectively referred to as the meals). Petitioners provide the meals to their employees as a form of compensation, and petitioners' provision of the meals is not discriminatory in favor of highly compensated employees.

Petitioners provide the meals to the employees at each Property in a private employee cafeteria (the Cafeteria) that is located on the Property's premises. Each of the Properties owns and operates its Cafeteria, and each Cafeteria is separate from the public restaurants located on the Properties, which, in turn, are separate from the alcohol bars on the premises. Employees receive the meals without charge, and it is petitioners' policy to provide the meals in the Cafeterias only to employees. Petitioners occasionally serve in the Cafeterias the surplus food from their banquets or buffets. Petitioners do not...

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