Compensation and Residual Gross Income
Chapter 5: § 61(a)(1) Compensation
A. Section 119
Section 119 had its start in the common law under the “convenience of the employer” doctrine, created by some courts and affirmed by the IRS in the early days of the income tax. A straightforward example was the food and bed afforded to an army major at Fort Monroe in Virginia in Jones v. United States.7 Should the value of the food and bunk provided in kind to the major be includable in Gross Income as compensation under § 61(a)(1)? The Jones court said “no”
in 1925 because the food and lodgings were provided for the convenience of the employer (the U.S. Army) in order for the employee to perform his duties properly, not to provide remuneration to the employee.8 As early as 1919, the IRS agreed that a seaman away on the high seas need not include the value of meals and lodgings provided by his employer on the ship (or boat).9 Treasury memorialized this position in a 1920 regulation.10 The doctrine was codified in 1954 when Congress enacted § 119, but it did not take long for taxpayers far afield of army majors and fishermen to argue that meals and lodgings should be excluded under § 119.11
Note each, separate requirement listed in § 119 that must be satisfied in order for the meals or
6 Matt Richtel, Housecleaning, Then Dinner? Silicon Valley Perks Come Home, at
www.nytimes.com/2012/10/20/us/in-silicon-valley-perks-now-begin-at-home.html?pagewanted=all.
7 60 Ct. Cl. 552 (1925).
8 See also Benaglia v. Comm’r, 36 B.T.A. 838 (1937); Diamond v. Sturr, 221 F.2d 264 (2d Cir. 1955); Comm’r v.
Doak, 234 F.2d 704 (4th Cir. 1956); Papineau v. Comm’r, 16 T.C. 130 (1951); Ellis v. Comm’r, 6 T.C. 138 (1946).
9 O.D. 265, 1 C.B. 71 (1919).
10 T.D. 2992, 2 C.B. 76 (1920).
11 Today, the exclusion of military housing is afforded under § 134. A “minister of the gospel” can exclude the value of housing provided in kind under § 107(1) and can exclude a cash housing allowance under § 107(2).
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lodgings to qualify for exclusion. Does lunch money (cash) constitute “meals”? What are “the business premises of the employer” of state troopers? The entire state? Private restaurants along the public highways? If the requirements of § 119 are not satisfied, did the common law, convenience-of-the-employer doctrine survive the 1954 enactment of § 119 so that amounts failing to satisfy the new statutory provision might nevertheless be excludable?
COMMISSIONER v. KOWALSKI 434 U.S. 77 (1977)
MR.JUSTICE BRENNAN delivered the opinion of the Court.
Respondent is a police trooper employed by the State of New Jersey. During 1970 he received a base salary of $8,740, and an additional $1,698 designated as an allowance for meals. Under the meal allowance system, troopers remain on call in their assigned patrol areas during their midshift break. Otherwise, troopers are not restricted in any way with respect to where they may eat in the patrol area. Troopers are not required to spend their meal allowances on their midshift meals, nor are they required to account for the manner in which the money is spent.
In the absence of a specific exemption, respondent’s meal-allowance payments are income within the meaning of [§ 61(a)(1)].
Respondent contends, however, that § 119 can be construed to [exclude] the meal-allowance payments. By its terms, § 119 covers meals furnished by the employer and not cash reimbursements for meals. The Senate Report is very clear: “Section 119 applies only to meals or lodging furnished in kind.” See also Reg. § 1.119-1(c)(2). Accordingly, respondent’s meal allowance payments are not subject to exclusion under § 119.
Alternatively, respondent argues a specific exemption may be found in a line of lower-court cases and administrative rulings which recognize that benefits conferred by an employer on an employee “for the convenience of the employer” are not income. In 1920 a convenience-of-the-employer section was added to the regulations, which as modified stated:
When living quarters such as camps are furnished to employees for the convenience of the employer, the value need not be added to the cash compensation of the employee, but where a person receives as compensation for services rendered a salary and in addition thereto living quarters, the value to such person of the quarters furnished constitutes income subject to tax.
O.D. 514, 2 C.B. 90 (1920), extended the convenience-of-the-employer doctrine to cash payments for “supper money.” ….
Even if we assume that respondent’s meal-allowance payments could have been excluded from income pursuant to the doctrine we have just sketched, we must nonetheless inquire whether such an implied exclusion survives the 1954 recodification. Two provisions of the 1954 Code are relevant to this inquiry: § 119 and § 120, now repealed.
In enacting § 119, Congress was determined to “end the confusion as to the tax status of meals and lodging furnished an employee by his employer.” The House proposed to exclude meals from income “if they [were] furnished at the place of employment and the employee [was] required to accept them as a condition of his employment.” The House view [entailed] complete disregard of the convenience of-the-employer doctrine. The Senate, however, was of the view that the doctrine
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had at least a limited role to play. The Senate Report states:
Your committee has provided that the basic test of exclusion is to be whether the meals or lodging are furnished primarily for the convenience of the employer.
In a technical appendix, the Senate Report further elaborated that:
Section 119 applies only to meals or lodging furnished in kind. Therefore, any cash allowances for meals or lodging received by an employee will continue to be includible in Gross Income to the extent that such allowances constitute compensation.
After conference, the House acquiesced in the Senate’s version of § 119.
As the last step in its restructuring of prior law, the Senate adopted an additional restriction created by the House and not theretofore a part of the law, which required that meals subject to exclusion had to be taken on the business premises of the employer. Thus, § 119 comprehensively modified the prior law, both expanding and contracting the exclusion for meals and lodging previously provided, and it must therefore be construed as its draftsmen obviously intended it to be—as a replacement for the prior law, designed to “end [its] confusion.”
Because § 119 replaces prior law, respondent’s further argument that the technical appendix in the Senate Report recognized the existence under § 61 of an exclusion for a class of non-compensatory cash payments is without merit.
Finally, respondent argues that it is unfair that members of the military may exclude their subsistence allowances from income while respondent cannot. While this may be so, arguments of equity have little force in construing the boundaries of exclusions and deductions from income many of which, to be administrable, must be arbitrary. In any case, Congress has already considered respondent’s equity argument and has rejected it in the repeal of § 120 of the 1954 Code. That provision as enacted allowed state troopers like respondent to exclude from income up to $5 of subsistence allowance per day. Section 120 was repealed after only four years, however, because it was “inequitable, since there are many other individual taxpayers whose duties also require them to incur subsistence expenditures regardless of the tax effect.” H.R. Rep. No. 775.
MR.JUSTICE BLACKMUN, with whom THE CHIEF JUSTICE joins, dissenting.
I have no particular quarrel with the conclusion that the payments received by the New Jersey troopers constituted income to them under § 61. I disagree with the Court’s conclusion that the payments are not excludable under § 119. The Court draws an in-cash or in-kind distinction. This has no appeal or persuasion for me because the statute does not speak specifically in such terms.
It does no more than refer to “meals furnished on the business premises of the employer,” and from those words the Court draws the in-kind consequence. I am not so sure. In any event, for me the business premises of the State of New Jersey are wherever the trooper is on duty in that State.
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What does “convenience of the employer” mean? Treas. Reg. § 1.119-1(a)(2) provides that the meals and lodgings must be provided by the employer for a “substantial noncompensatory business reason” (emphasis added), as opposed to a “means of providing additional compensation.” The
“mere declaration” by the employer that the meals or lodgings are provided for a noncompensatory business reason is not sufficient; rather, all the facts and circumstances must be examined in making this determination. Note the several examples provided in the regulations that will
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constitute a substantial noncompensatory business reason, such as having the employees available for emergency call during meals. Also note that providing meals merely to boost employee morale is not a substantial noncompensatory business reason.
If a hospital provides meals in kind to all employees for free at the hospital cafeteria, and it can be shown that the doctors and nurses that are employed by the hospital are not infrequently called back to their wards during meals, can the ward janitors, who are not often called back to the ward for emergencies, exclude their free meals? Could you imagine the reaction if the low-paid employees were told that their free meals must be valued and included in their Gross Incomes but that the better-paid doctors and nurses need not include the value of their free meals in their Gross Incomes? Likely to counteract such perceptions of unfairness, Congress enacted § 119(b)(4) in 1998.
Note that the statute imposes an additional requirement for the value of lodgings provided in kind to be excludable under § 119 (not required for meals): that “the employee is required to accept such lodging … as a condition of employment.” What does that additional requirement mean?
Does it mean only that the employer stipulate in the employment contract that the employee must accept the lodgings provided on the business premises? What employer would refuse to add such a provision in the contract at the request of the employee once the employer agreed to provide such free lodgings in any event? See Treas. Reg. § 1.119-1(b). As described in the regulation, can you think of any fact pattern where the convenience of the employer requirement would be satisfied but the condition of employment requirement would not be (or vice versa)?
What does the “business premises of the employer” mean? See Treas. Reg. § 1.119-1(c)(1).
LINDEMAN v. COMMISSIONER 60 T.C. 609 (1973)
JUDGE FEATHERSTON: [Jack B. Lindeman was the general manager of the Beach Club Hotel in Fort Lauderdale, Florida. For many years, he and his family were provided a free four-room suite in the hotel in which to live, but his employer decided that the suite could be more profitably rented to guests. Thus, his employer purchased a house across a 50-foot-wide street from the hotel and allowed Mr. Lindeman to live there rent-free. The government sought to include the fair rental value of the home in Mr. Lindeman’s Gross Income under § 61(a)(1).]
As a general rule, all remuneration for services is Gross Income, and an employee’s remuneration includes the value of lodging or living quarters furnished by his employer. See Treas. Reg. sec. 1.61-2(d)(1). However, section 119 excludes from an employee’s Gross Income the value of lodging furnished to him by his employer if three conditions are met: (1) The lodging is furnished for the convenience of the employer; (2) the employee is required to accept the lodging as a condition of his employment; and (3) the lodging is “on the business premises” of the employer. The sole issue in the instant case is whether the house in which petitioner and his family lived during 1968 and 1969 was “on the business premises” of Beach Club Hotel.
These deceptively simple words—“on the business premises” of the employer—have been the subject of extended judicial opinions with varying results. See, e.g., Comm’r v. Anderson, 371 F.2d 59 (C.A. 6, 1966), reversing 42 T.C. 410 (1964), and Gordon S. Dole, 43 T.C. 697 (1965), affirmed per curiam 351 F.2d 308 (C.A. 1, 1965). We examine anew the legislative history of section 119 insofar as it bears on the issue presented for decision.
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The requirement of section 119 that, to be excludable from Gross Income, lodging must be furnished and accepted “on the business premises” of the employer was first adopted as part of the 1954 Code. As passed by the House of Representatives, the section used the term “place of employment” rather than “business premises.” H. Rept. No. 1337, to accompany H.R. 8300 (Pub.
L. No. 591), 83d Cong., 2d Sess., pp. 18, A39 (1954). The Senate changed the term to “business premises,” but the accompanying report explained that “Under both bills meals and lodging are to be excluded from the employee's income if they are furnished at the place of employment and the employee is required to meet certain other conditions.” S. Rept. No. 1622, to accompany H.
R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess., pp. 19, 190-191 (1954).
The Senate version was adopted with the following explanation in Conf. Rept. No. 2543, 83d Cong., 2d Sess., p. 27 (1954):
The term “business premises of the employer” is intended, in general, to have the same effect as the term “place of employment” in the House bill. For example, lodging furnished in the home to a domestic servant would be considered lodging furnished on the business premises of the employer. Similarly, meals furnished to a cowhand while herding his employer’s cattle on leased lands, or on national forest lands used under a permit, would also be regarded as furnished on the business premises of the employer. * * *
As in the case of other exclusions from Gross Income, this one is subject to abuse, and the statutory language must be construed with this thought in mind. Accordingly, the term “on” in relation to the employer’s business premises does not mean “in the vicinity of” or “nearby” or
“close to” or “contiguous to” or similar language, but is to be read literally. Comm’r v. Anderson, supra at 67. If the lodging is furnished at a location some distance from the place where the employee works, the lodging is not furnished on his employer’s business premises.
In determining what are the employer’s “business premises,” Congress quite obviously intended a commonsense approach. Read literally, the statutory language ordinarily would not permit any exclusion for lodging furnished a domestic servant, since a servant’s lodging is rarely furnished on “the business premises of his employer”; yet the committee report, quoted above, shows a clear intention to allow the exclusion where the servant’s lodging is furnished in the employer’s home. Similarly, the section, as a condition to the exclusion, does not require that the meals or lodging be furnished at any particular location on the employer’s property; thus, the same committee report clearly states that meals provided for a cowhand are excludable even though they are furnished on leased lands or on lands used under a permit.
These illustrations in the committee report, moreover, demonstrate that section 119 does not embody a requirement that the meals or lodging be furnished in the principal structure on the employer’s business premises. Thus, the committee report makes it explicitly clear that a cowhand’s meals and lodging need not be furnished at the ranch headquarters. And surely the right of a domestic servant to the section 119 exclusion cannot be made to turn on whether his lodging is furnished in the family residence or in servants’ quarters located elsewhere on the estate. Indeed, in Boykin v. Commissioner, 260 F.2d 249 (C.A. 8, 1958), affirming in part and reversing in part 29 T.C. 813 (1958), the Commissioner at least implicitly conceded that a physician’s living quarters, located on the grounds of a Veterans Administration Hospital, were on his employer’s business premises even though he performed none of his employment services in his living quarters. Similarly, the Commissioner has ruled that meals furnished at branch offices of an
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employer, as well as at a central dining facility, meet the requirements of the section. Rev. Rul.
71-411, 1971-2 C.B. 103.
The issue as to the extent or the boundaries of the business premises in each case is a factual issue, and in resolving that question consideration must be given to the employee’s duties as well as the nature of the employer’s business. The section 119 exclusion applies where the 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. Comm’r v. Anderson, 371 F.2d at 67. Or, in the words of this Court in Gordon S. Dole, 43 T.C. at 707, “the phrase should be construed to mean either (1) living quarters that constitute an integral part of the business property or (2) premises on which the company carries on some of its business activities.”
We think petitioner has shown that the house which his employer furnished him during 1968 and 1969 was part and parcel of the “business premises” of Beach Club Hotel. In reaching this conclusion, we think it apparent that the business premises of the hotel are not limited to 3100 North Ocean Boulevard, where the hotel building is located, but include both parking lots and the house furnished to petitioner.
There is a large parking lot on the property where the hotel building is located, but it is by no means adequate to meet the needs of the hotel guests. The parking lot situated across Oakland Park Boulevard is used by hotel guests and employees and is essential to the operation of the hotel business. Even though these lots are across a street from the hotel building, they are obviously as much a part of the “business premises” of the hotel as the parking area located on the lot at 3100 North Ocean Boulevard.
Similarly, we think the house in which petitioner resides is part of the business premises of the hotel. These lots were acquired to alleviate a chronic shortage of parking spaces in connection with the operation of the hotel and to provide the hotel general manager with living quarters that were more economical to the hotel.
Moreover, the nature of the Beach Club Hotel business is such as to require the general manager to live where he is immediately accessible at all hours, and the house meets this need. It is stipulated that:
In 1963, after a cost study, Beach Hotel Corporation determined it should be more profitable to purchase or rent accommodations [sic] for * * * [petitioner] and his family as close to the hotel as possible and have the suite of four rooms he was occupying available to be rented.
Thereupon, [the house was acquired by the Beach Club Hotel] to provide housing for petitioner and his family. This was a business decision based on business considerations, and there is no suggestion in the record that it was prompted by any other factors or that it involves an abuse of the section 119 exclusion.
The house is so situated and so used that it is part of the hotel plant. While petitioner’s office is located in the business area of the hotel building (as it was while he occupied the suite of rooms as his residence), he is subject to call 24 hours a day, and he is as readily accessible for the frequent calls by direct telephone as he was in the suite located in the hotel building. He often returns to the hotel building several times in an evening. People dealing with him through the direct telephone line have no way of knowing whether he is in the hotel building or his home. Moreover, from the house he can observe the entire south half of the building and can “tell if there is a disturbance of
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any kind, see if lights are on or off, if the night lights don’t come on early enough,” and the like.
While petitioner does most of his management work in his office in the hotel building, he also has an office in the house. In this latter office in his home, he receives calls from the hotel personnel or guests on the direct telephone line from the hotel while he is not on regular duty. He also uses this office when he is working on new brochures or rate structures and when he is planning a program for future hotel activities, such as “cook-outs, games, picnics on the beach, cocktail parties, and this sort of thing.” In addition, he occasionally entertains a guest of the hotel.[5]
In our view, these facts demonstrate that the lodging furnished petitioner is, within the meaning of section 119, “on the business premises of his employer” or, within the meaning of the accompanying committee reports, “at the place of employment.” The house in which he lives is an indispensable and inseparable part of the hotel plant, and it is within the perimeter of the hotel property. Since it is part of the premises where petitioner performs the duties required in his job and where his employer carries on its business, we hold that petitioner is entitled to the section 119 exclusion.
Commissioner v. Anderson, 371 F.2d 59 (C.A. 6, 1966), on which respondent relies, is factually distinguishable. In that case, the housing furnished the employee was “two short blocks” from the facility being managed by the taxpayer (p. 61), and the Court of Appeals did not conclude, as we do here, that the living quarters of the employee-taxpayer were an integral part of the business property. Accordingly, the Court of Appeals held that the requirements of the statute were not met.
In the instant case, the premises of the business managed by petitioner include the house in which his lodging was furnished.
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The Lindeman case noted the servant and cow hand examples in the regulations, which were drawn from the legislative history. (Are they particularly helpful examples in the 21st century?) Do the chosen examples imply that the employer must have some sort of ownership interest in the premises, such as a lease or a fee interest? If that is the case, the private restaurants along the public highways in New Jersey could not have been the “business premises of the employer” in the Kowalski case, notwithstanding Justice Blackmun’s dissenting opinion to the contrary. Moreover, even if the servant is considered to be on the business premises of the employer, does she satisfy the “convenience of the employer” requirement?
One of the common law cases pre-dating codification in § 119 of the convenience of the employer doctrine was Benaglia v. Commissioner,12 which one tax professor13 described thusly:
In Benaglia, a hotel manager was permitted to exclude the value of a posh hotel suite and equally extravagant meals on the ground that his presence was necessary to attend to the “numerous, varied, and unpredictable” demands of the filthy rich patronizing the establishment—i.e., for the convenience of the employer. 36 B.T.A.
[5] Seeking a decision on the broader ground that the house was located “at the place of employment,” petitioner deemphasizes the duties which he performs in this home office. However, under the meaning of the term “on the business premises,” discussed above, we think his work at his home office as well as its proximity to the hotel building are factors to be taken into account.
12 36 B.T.A. 838 (1937).
13 Erik M. Jensen, Food for Thought and Thoughts About Food: Can Meals and Lodging Provided to Domestic Servants be for the Convenience of the Employer?, 65 IND.L.J.639(1990).