Rev. Rul. 84-86

Caution: Modified & Superseded by 90-64

                       Internal Revenue Service
                                 Revenue Ruling

                 LODGING FURNISHED TO U.S. GOVERNMENT EMPLOYEE

                            Published: June 18, 1984

Section 61. - -Gross Income Defined, 26 CFR 1.61-2: Compensation for services, including fees, commissions, and similar items.

Section 119. - -Meals or Lodging Furnished for the Convenience of the Employer, 26 CFR 1.119-1:  Meals and lodging furnished for the convenience of the employer.

(Also Section 61;  1.61-2.)

  Lodging furnished to U.S. Government employee.  The value of lodging furnished to an U.S. Government employee permanently stationed in a foreign country, who is a "principal representative" of the U.S., and the amounts deducted from the employee's salary and applied against the household expenses of the employee are excludable from the employee's gross income under section 119(a)(2) of the Code.  Rev. Rul. 58-545 modified and superseded;  Rev. Rul. 59-307 clarified.

ISSUE

  Whether the value of lodging furnished to an employee and the amounts deducted from the employee's salary and applied against the household expenses of the employee are excludable from the employee's gross income under section 119(a)(2) of the Code.

FACTS

  A, an individual, is an employee of the United States Government permanently stationed in a foreign country.  Because A is a "principal representative" of the United States, A is furnished, without cost, with an official residence in a Government owned building, as well as with heat, fuel, and light.

  Under 5 U.S.C. 5912 (1976), an employee of the United States permanently stationed in a foreign country who is a citizen of the United States may be furnished, without cost, living quarters, including heat, fuel, and light.

  Section 410 of the Standardized Regulations (Government Civilians, Foreign Areas) (5-7-78) states that "principal representative" means a senior official of the United States Government serving in a foreign country who has been designated by the Secretary of State as occupying a position of such importance that the Government should defray the unusual expenses incident to the operation of his or her official residence.  Section 412 states that the defraying of official residence expenses is intended to make possible the operation of official residences in which principal representatives can properly represent the United States abroad by extending official (as distinct from personal) hospitality to foreign dignitaries and important visitors, by receiving official deputations and callers, and by holding requisite and appropriate ceremonies smoothly and with dignity.  Section 440 states that, subject to certain exceptions not applicable here, the amount of annual usual household expenses that must be borne personally by a principal representative is 5 percent of salary.

  Pursuant to section 440 of the Standardized Regulations, 5 percent of A's salary is deducted by the United States.  The amount so deducted does not exceed the Government's cost in furnishing the residence with heat, fuel, and light to A.  A was not reimbursed or otherwise compensated for the amounts deducted from A's salary.

  A has met the three tests contained in section 1.119-1(b) of the regulations.

LAW AND ANALYSIS

  Section 61 of the Code provides that, except as otherwise provided by law, gross income means all income from whatever source derived.

  Section 1.61-2(d)(3) of the regulations provides that the value of living quarters that an employee receives in addition to the employee's salary constitutes gross income unless it is furnished for the convenience of the employer and meets the conditions specified in section 119 of the Code.

  Section 119(a)(2) of the Code provides that there shall be excluded from the gross income of an employee the value of any lodging furnished the employee, the employee's spouse, or any of the employee's dependents by or on behalf of the employer for the convenience of the employer, but only if the employee is required to accept such lodging on the employer's business premises as a condition of employment.

  Section 1.119-1(b) of the regulations provides that the value of lodging furnished to an employee by the employer is excludable from the employee's gross income if three tests are met:

  (1) The lodging is furnished on the business premises of the employer,

  (2) The lodging is furnished for the convenience of the employer, and

  (3) The employee is required to accept such lodging as a condition of employment.

  The regulation further provides that the requirement of subparagraph (3) is met where the employee is required to accept the lodging in order to enable the employee to properly perform the duties of his or her employment, and that if the three tests are met, the exclusion applies irrespective of whether a charge is made, or whether, under an employment contract or statute fixing the terms of employment, the lodging is furnished as compensation.

  With respect to the amounts deducted from A's salary, Rev. Rul. 59-307, 1959- 2 C.B. 48, holds that the Internal Revenue Service will follow the decision of Boykin v. Commissioner, 260 F.2d 249 (8th Cir.1958), rev'g 29 T.C. 813 (1958). There, the court held that the rental value of living quarters furnished on business premises by the employer to the employee was properly excludable from the employee's gross income under section 119 of the Code, even though the rental value of the living quarters was considered a part of the employee's compensation and deducted from the employee's salary.

  Section 1.119-1(b) of the regulations, as amended, provides that if the employer furnishes the employee lodging for which the employee is charged an unvarying amount irrespective of whether the employee accepts the lodging, the amount of the charge made by the employer for such lodging is not, as such, part of the compensation includible in the gross income of the employee. Whether the value of the lodging is excludable from the employee's gross income is determined under the other rules of section 119 of the Code.

  Rev. Rul. 68-579, 1968-2 C.B. 61, holds that lodging furnished an employee for the convenience of the employer includes the value of any necessary utilities also furnished by the employer.  See also Inman v. Commissioner, T.C.M. 1970-264.

HOLDINGS

  The amounts deducted from A's salary and applied against the household expenses of the official residence furnished A are excludable from A's gross income under section 119(a)(2) of the Code.  Further, the value of the lodging furnished A by the United States is excludable from A's gross income under section 119(a)(2) of the Code.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 58-545, 1958-2 C.B. 50, which limits the section 119 exclusion from gross income to the excess of the fair market value of the lodging provided over the amounts charged the employees for such lodging, is modified and, as modified, is superseded.

  Rev. Rul. 59-307, 1959-2 C.B. 48, to the extent it indicates an exclusion from gross income is available only in the situation where the amount of salary deducted is equal to the full rental value of the furnished lodging, is clarified.

Rev. Rul. 84-86, 1984-1 C.B. 26, 1984-25 I.R.B. 4.