The Tax Court held that a housing accommodation provided to an employee did not meet the conditions for exclusion from gross income under Sec. 119 because it was not furnished on the business premises of the employer.
Facts: In September 2010, after accepting an offer of employment by Raytheon Co. in Australia, Cory Smith, an Air Force veteran and engineer, began living at Raytheon’s housing accommodation for its employees assigned to the nearby Pine Gap Joint Defense Facility in Alice Springs, Northern Territory. He resided there until Pine Gap stopped providing housing in September 2018.
The housing accommodation was located approximately 11 miles from the building designated as Smith’s place of work. Though in a cul-de-sac where other Pine Gap employees lived, the residence was on a public street with public access. During Smith’s time at Pine Gap, maintenance, trash removal, and all utilities other than telephone service were provided at no cost.
Smith completed voluntary and mandatory training, maintained his time sheets, and completed employee evaluations in his Pine Gap residence. He also received a key fob, or hardware token, from Raytheon, which allowed him to remotely access its network from outside the workplace. If Smith hosted any U.S. or foreign visitors, he was required to notify the Pine Gap security office.
For 2016, 2017, and 2018, the tax years in question, Smith received Forms 1099-MISC, Miscellaneous Income, from Pine Gap reporting $15,889, $15,501, and $10,015, respectively, as nonemployee compensation for the value of his lodging. On his originally filed 2016 and 2017 tax returns, Smith reported the value of the housing accommodation as gross receipts on Schedule C-EZ, Net Profit From Business (Sole Proprietorship).
A U.S. tax preparer hired by Smith subsequently filed amended returns for 2016 and 2017. These amended returns continued to report the housing accommodation as gross receipts but now also claimed an offsetting deduction for “employee benefit programs” equal to the value of the accommodation. Smith’s tax preparer also filed his 2018 tax return following the same procedure.
Following an examination, the IRS issued a notice of deficiency for tax years 2016, 2017, and 2018. The IRS identified other issues besides the treatment of the housing accommodation that were settled in a separate case, leaving the lodging as the only remaining issue (see Smith, 159 T.C. No. 3 (2022); see also “Engineer Cannot Escape Closing Agreement,” The Tax Adviser, Nov. 2022). Both parties moved for summary judgment on the issue of whether Smith could exclude from gross income the value of the housing accommodation.
Issues: Sec. 61(a) defines gross income as all income from whatever source derived. Sec. 119(a), however, allows an employee to exclude the value of lodging provided by an employer, but only if the following three conditions are satisfied: (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 the lodging as a condition of employment (Regs. Sec. 1.119-1(b)). Failing any one condition will cause the value of the lodging to be includible in gross income (Dole, 43 T.C. 697 (1965), aff ’d, 351 F.2d 308 (1st Cir. 1965)).
The Tax Court analyzed whether Smith’s Pine Gap lodging was furnished on the business premises of the employer. The parties stipulated that the housing accommodation was not located on the business premises in the literal sense and that it did not constitute a “camp” within the meaning of Sec. 119(c). Regs. Sec. 1.119-1(c)(1) provides that “business premises of the employer” generally means the employee’s place of employment. In McDonald, 66 T.C. 223 (1976), the court found that the employer’s business premises could be where the employer conducts a significant portion of its business or where its employees perform a significant portion of their duties. Additionally, the court established in Dole that lodging is on the employer’s business premises if the living quarters constitute an integral part of the business property or if the company carries on some of its business activities there. Finally, quoting Benninghoff, 71 T.C. 216, 221 (1978), aff ’d, 614 F.2d 398 (5th Cir. 1980), the court stated that “[t]he touchstone of the business premises test is the lodging’s relationship to the business activities of the employer. . . . The property must bear an integral relationship to the business activities of the employer.”
Unfortunately for Smith, the Tax Court had already applied these principles in two other cases to determine whether housing accommodations near Pine Gap were on the business premises within the meaning of Sec. 119. In both Middleton, T.C. Memo. 2008-150, and Hargrove, T.C. Memo. 2006-159, the court had concluded the lodging was not on the business premises because it was located miles away from the base on publicly accessible roads and neither the employer nor the employees performed work at the employees’ residences.
Smith, however, suggested four reasons why his case should be decided differently. He argued that the lodging allowed his employer to monitor his behavior; his employer “maintained extensive control over [his] assigned hous[ing]” (e.g., maintenance, repairs, trash removal, and reporting requirement for guests); the residence was in a cul-de-sac where other Pine Gap employees lived; and he completed some work from the residence (e.g., training, time sheets, and employee evaluations).
Holding: Ultimately, the Tax Court did not find Smith’s arguments persuasive and held that his activities at the housing accommodation were not significant enough to show they were integral to his employer’s business or “part and parcel” of its workplace.
Namely, Smith did not require immediate access to Pine Gap to perform his duties, and the housing accommodation did not in fact provide such access; he did not perform significant work from the residence; the residence was not necessary for his work duties; and the housing accommodation did not serve an important function on behalf of the business. In addition, the court found that while Smith was given a key fob to access Raytheon’s secured network remotely, the existence of the key fob does not convert otherwise insignificant work to significant.
With Smith having failed to meet the “on the business premises” test in Sec. 119(a), the Tax Court reasoned it did not need to consider the other two tests to conclude Smith had not met the requirements to exclude the value of his lodging. As a result, the court granted the IRS’s motion for summary judgment.
■ Smith, T.C. Memo. 2023-6
— Matthew Geiszler, Ph.D., is a lecturer in accounting in the College of Human Ecology at Cornell University in Ithaca, N.Y.; Luke Richardson, CPA, J.D., is an associate professor of instruction and Kerkering Barberio fellow in accounting in the Muma College of Business at the University of South Florida in Tampa, Fla.; and John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business at Cornell University. To comment on this column, contact Paul Bonner, the JofA’s tax editor.