Exclusion Of Value Of Lodging Provided By Employer

Exclusion of Value of Lodging Provided by Employer

Tax Court In Brief: Freeman Law

Smith v. Comm’r, T.C. Memo. 2023-06| January 12, 2023 |Toro, J. | Dkt. No. 5191-20

Summary: This is a deficiency case and a continuation of the Tax Court’s opinion in Smith v. Commissioner, No. 5191- 20, 159 T.C. (Aug. 25, 2022), which is blogged right here on the ol’ Tax Court in BriefSee https://freemanlaw.com/tax-court-in-brief-smith-v-commr-closing-agreement-and-malfeasance-of-fact/ (addressing the issue of whether a closing agreement could be avoided if there is malfeasance or misrepresentation of a material fact). In this more recent opinion, the Court addresses, basically, one issue: Whether, under 26 U.S.C. § 119, Smith may exclude from gross income the value of lodging his employer provided during the relevant years (2016-2018).

Smith was employed by Raytheon Company, a private defense contractor, to work as an engineer in Pine Gap, Alice Springs, Northern Territory, Australia (Pine Gap). Raytheon used an Australian operations handbook, which informed Smith that he was eligible for housing in Alice Springs but was responsible for IRS taxable income on the rental value of furnished housing and the associated utilities. The Raytheon handbook stated that income tax on the value of housing and the associated utilities is the responsibility of the employee, and the taxable value of housing provided was reported via a Form 1099 issued by the U.S. Air Force.

Smith was assigned U.S.-government housing (Housing Accommodation) on a public street with public access. It was not on Raytheon’s business premises, nor was it a “camp” as defined by section 119(c). All utilities other than telephone service were provided at no cost to Smith. Smith also performed some work from home. If any visitors stayed with Smith, he was required to alert the Pine Gap security. After residing at the Housing Accommodation for eight years, in September 2018, Smith had to move out and find housing on his own because Pine Gap ceased to provide housing.

For each relevant year, Smith received a Form 1099–MISC, Miscellaneous Income, reporting as nonemployee compensation the value of his Housing Accommodation, and Smith reported those amounts on Schedule C–EZ, Net Profit From Business. Smith, through a professional preparer, later filed Forms 1040–X, Amended Returns, for taxable years 2016 and 2017, accompanied by revised Forms 1040. Smith again reported as gross receipts the value of the Housing Accommodation shown on the Forms 1099–MISC for 2016 and 2017. But Smith claimed corresponding deductions for “employee benefit programs” in amounts equal to the value of the Housing Accommodation, which had the effect of excluding the value of the Housing Accommodation from gross income. In his 2018 return, Smith reported gross receipts equal to the value of his Housing Accommodation reflected on Form 1099–MISC and then again claimed a corresponding deduction for employee benefit programs.

After conducting an examination, the IRS issued Smith a notice of deficiency for the relevant years. The IRS disallowed the deductions Smith claimed for employee benefit programs. Smith petitioned the Tax Court for redetermination of the deficiencies.

Key Issues: Whether, under 26 U.S.C. § 119, Smith may exclude from gross income the value of lodging his employer provided during the relevant years (2016-2018)?

Primary Holdings: No. While Smith worked some from the Housing Accommodation, the work was not significant, the Housing Accommodation was not necessary for the performance of duties, and it did not serve an important function on behalf of the business. In sum, the Housing Accommodation did not bear an integral relationship to the business activities of Raytheon, which is a required condition for the exclusion under section 119.

Key Points of Law:

Gross Income Under Section 119. Gross income generally includes all income from whatever source derived, including compensation for services. I.R.C. § 61(a). An employee may be able to exclude the value of lodging provided by the employer if certain conditions are met: (1) the lodging must be “furnished on the business premises of the employer,” (2) the lodging must be “furnished for the convenience of the employer,” and (3) the employee must be “required to accept such lodging as a condition of his employment.” Treas. Reg. § 1.119-1(b); see I.R.C. § 119(a); Vanicek v. Commissioner, 85 T.C. 731, 737–38 (1985). If any one of the conditions is not met, the exclusion is not allowed. See Dole v. Commissioner, 43 T.C. 697, 705 (1965), aff’d per curiam, 351 F.2d 308 (1st Cir. 1965).

Business Premises of the Employer. The “business premises of the employer” generally means the employee’s “place of employment.” Treas. Reg. § 1.119- 1(c)(1). Lodging is considered located “on the business premises of the employer” if such lodging is furnished at a place where the employee performs a significant portion of his duties or on the premises where the employer conducts a significant portion of his business. Lodging is located on the business premises of the employer if (1) the living quarters constitute an integral part of the business property or (2) the company carries on some of its business activities there. The extent or boundaries of the business premises in each case is a factual question whose resolution follows a consideration of the employee’s duties as well as the nature of the employer’s business. The property must bear an integral relationship to the business activities of the employer. See Vanicek, 85 T.C. at 739–40; McDonald v. Commissioner, 66 T.C. 223, 230 (1976); Lindeman v. Commissioner, 60 T.C. 609 (1973); Dole v. Commissioner, 43 T.C. 697, 707 (1965).

Insights: Smith provides a good roadmap for evaluation of exclusion, under section 119, of housing benefits received by an employee as part of employment. Smith would have been better off had he not engaged the professional preparer to amend the 2016 and 2017 tax returns or to prepare the 2018 return, each of which claimed (but were ultimately denied) the exclusion of the Housing Accommodation as part of the reported “employee benefit program.”

Have a question? Contact Jason Freeman, Freeman Law.

Mr. Freeman is the founding and managing member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney. Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service.
He was honored by the American Bar Association, receiving its “On the Rise – Top 40 Young Lawyers” in America award, and recognized as a Top 100 Up-And-Coming Attorney in Texas. He was also named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas” by AI.

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