REVENUE RULE 90-64

1990-2 C.B. 35, 1990-33 I.R.B. 4.

Internal Revenue Service
Revenue Ruling

LODGING FURNISHED TO U.S. GOVERNMENT EMPLOYEE

Published: August 13, 1990

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.

(See Also Sections 61, 262, 912.)

Lodging furnished to U.S. Government employee. The value of lodging furnished to a U.S. Government employee who is a 'principal representative' of the U.S. serving in a foreign country is excludable from the representative's gross income. However, amounts deducted from the salary of the principal representative to pay for usual household expenses that must be borne personally by the representative are not excludable from gross income. Rev. Rul. 84-86 modified and superseded.

ISSUES

1. Whether the value of lodging furnished to a 'principal representative' of the United States is excludable from the gross income of the principal representative under section 119(a)(2) of the Internal Revenue Code.

2. Whether amounts deducted from the salary of a 'principal representative' of the United States to pay for usual household expenses that must be borne personally by the representative are excludable from the gross income of the principal representative or allowable as a deduction.

FACTS

A, an individual, is a principal representative of the United States stationed in a foreign country. The government provides the principal representative, without cost to him, an official residence, including heat, fuel, and light, in a government owned or rented building. Under section 411(a) of the Standardized Regulations (Government Civilians, Foreign Areas) issued by the Department of State (hereafter 'Std. Regs.'), a principal representative is a senior official of the U.S. Government serving in a foreign country who occupies a position of such importance that the government should defray the unusual expenses incident to the operation and maintenance of his official residence.

Section 22 of the Administrative Expenses Act of 1946 (Pub.L. 86-707, section 311(a)) provides, in part, that under such regulations as the President may prescribe, funds available to an agency for administrative expenses may be allotted to posts in foreign countries to defray the unusual expenses incident to the operation and maintenance of official residences suitable for 1) the chief representatives of the United States at the posts, and 2) such other senior officials of the Government of the United States as the President may designate. These unusual expenses are commonly known as official residence expenses or 'ORE.'

In accordance with section 22 of the Administrative Expenses Act of 1946, section 411(c) of the Std. Regs. provides that official residence expenses are those unusual expenses which a principal representative is obliged to incur in the operation and maintenance of a suitable office residence. These expenses must be in excess of the usual expenses incident to the operation and maintenance of the residence he would occupy if he were serving at the post in any other capacity.

Section 412 of the Std. Regs. provides that the defraying of official residence expenses is intended to make possible the operation and maintenance 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. Also, payment of official residence expenses is intended to keep the official residences staffed and in operation, to the extent necessary, even during intervals between the departure of an officer because of recall, transfer, or some other reason, and his return or the arrival of his successor.

Sections 450-453 of the Std. Regs. provide that government paid or reimbursed official residence expenses include expenses such as the following: wage and maintenance of household servants; transportation of servants; rent, installation, repair, upkeep, and removal of furnishings, equipment, and appliances; services to renovate and redecorate the premises for use as an official residence; general house cleaning, dry cleaning, laundry, trash removal and window washing; certain telephone costs; expendable household supplies such as cleaning supplies, paper, light bulbs, linen, nails, and wire; and supplies worth $10 or less such as electrical equipment, kitchenware, plumbing supplies, and tools.

Section 440 of the Std. Regs. provides that the amount of annual usual household expenses that must be borne personally by a principal representative regardless of rank or grade is generally five percent of salary subject to certain additions and exclusions.

Since official residence expenses include only the unusual expenses of operating and maintaining an official residence, section 440 of the Std. Regs. serves as a method of separating unusual expenses from usual expenses. The government pays for residence expenses that include both usual and unusual, but then subtracts five percent from the principal representative's salary to defray the cost of usual expenses that must be borne personally.

A has met the three tests contained in section 1.119-1(b) of the Income Tax Regulations for exclusion from gross income of lodging furnished to an employee by an employer.

LAW AND ANALYSIS

Section 61(a) of the Internal Revenue Code provides that gross income means all income from whatever source derived, including (but not limited to) compensation for services, including fees, commissions, fringe benefits and similar items.

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 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.

Section 1.119-1(b) of the regulations further 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.

Rev. Rul. 84-86, 1984-1 C.B. 26, holds, among other things, that the amounts described above that are deducted from the salary of a principal representative and applied against the household expenses of the official residence furnished to the principal representative by the government are excludable from the principal representative's gross income under section 119(a)(2) of the Code.

Section 262 of the Code provides that, except as otherwise provided by law, no deduction shall be allowed for personal, living, or family expenses.

Section 912(l)(D) of the Code provides, in part, that in the case of civilian officers and employees of the Government of the United States, amounts received as allowances or otherwise (but not amounts received as post differentials) under subsection (e) or (f) of the first section of the Administrative Expenses Act of 1946, as amended, or section 22 of such Act, are excludable from the gross income of the recipient.

The official residence expenses of operating the official residence occupied by the principal representative are defined by law as those unusual expenses which a principal representative is obliged to incur in the operation and maintenance of a suitable official residence that exceed the usual expenses that would be incurred in operation and maintenance of the residence that he would occupy if he were serving at the post in any other capacity. The five percent of salary that is paid toward household expenses by the principal representative is not a charge for those unusual expenses, nor is it a charge for lodging. Instead, the five-percent salary deduction is designed to cover ordinary day-to-day expenses of living, such as household supplies, house cleaning, laundry, dry cleaning, and trash removal, that might be incurred by any individual. Thus, the five-percent salary deduction merely represents a payment for usual household expenses that must be borne personally by the principal representative. In contrast to official residence expenses, these day-to-day household expenses are nondeductible personal, living or family expenses that are not excludable under either section 119 or section 912 of the Code.

HOLDINGS

1. 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.

2. While amounts paid by the government as authorized by section 22 of the Administrative Expenses Act of 1946 to defray unusual expenses incident to the operation and maintenance of an official residence are excludable from gross income under section 912(l)(D) of the Code, the five percent of salary paid by the principal representative, through payroll deduction, for the usual expenses incident to the operation and maintenance of the official residence is not a charge for lodging, but rather a payment for ordinary, everyday living expenses, and is not excludable from gross income.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 84-86, 1984-1 C.B. 26, is modified and superseded.

PROSPECTIVE APPLICATION

Under the authority granted by section 7805(b) of the Code, this revenue ruling is effective for payments received on or after October 1, 1990.

DRAFTING INFORMATION

The principal author of this revenue ruling is Richard Pavel of the Office of the Assistant Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding this revenue ruling contact Mr. Pavel on (202) 566-3503 (not a toll-free call).

Rev. Rul. 90-64, 1990-2 C.B. 35, 1990-33 I.R.B. 4.