• Key point: The value of lodging provided to faculty and staff by a private school may constitute taxable income.
• Is the value of free lodging provided to faculty and staff at a private school taxable? That was the question addressed by the IRS in a private letter ruling. A private school provides rent-free lodging to five categories of employees: (1) administrative staff; (2) faculty and instructional support staff (“teaching staff”); (3) resident dormitory staff (“dorm parents”); (4) infirmary staff; and (5) maintenance staff. The lodging provided to employees includes utilities (heat, electricity, water, and sewers) and maintenance. The fair rental value of the lodging was not included on the employees’ W-2 forms for the years at issue. Students at the school reside in a dormitory setting consisting of cottages. Each cottage is supervised by a dorm parent who lives in the cottage. Because they do not have any teaching responsibilities at the school, dorm parents are considered to be “off duty” when the students are in class and “on duty” after school hours, including evenings and weekends. Near the cottages are three single-family dwellings occupied by a math teacher, chaplain, and choirmaster. An evening nurse resides above the school infirmary and a maintenance worker is provided living accommodations in the administration building. The lodging provided by the school to its remaining employees is located from one to three miles away from the central campus, and is connected to the central campus area by public roads. According to the school’s unwritten policy, members of the administrative and teaching staffs are required to live on school property in order to carry out the school’s mission of an integrated educational and social environment. To that end, each member of the teaching staff is assigned as an advisor to no more that eight students. The advisor’s role is to ensure the academic and non-academic welfare of his or her advisory group. The school requires advisors to hold formal weekly meetings and monthly outings with the advisory group. In addition, advisors are encouraged to include the students in family outings and social functions and to be available to perform additional advisory duties if necessary. The school claims that both the administrative and teaching staffs are on 24-hour call and meet in their homes with students after normal work hours. These employees, however, are provided classrooms and offices and are not required to conduct business or hold classes in their residences. Most extracurricular activities appear to take place in the central campus area or off school property in the form of field trips. No records are kept to indicate the number of times or circumstances under which the administrative and teaching staffs are called at their residences for emergency duties. The teaching staff is not responsible for the security of the physical property.
Nine of the ten maintenance workers employed by the school reside in lodging provided by the school. With the exception of the maintenance worker who is provided lodging in the administration building, all live in lodging located beyond the central campus area. The school asserts that a full-time maintenance staff is required to respond to emergencies on a 24-hour basis. The supervisor of the maintenance staff, the plant manager, does not live in school-provided lodging, however. Instead, he resides in a privately-owned residence located approximately four minutes away by automobile. The explanation given by the school for this arrangement is that the plant manager has lived off campus for a number of years. Of the three nurses employed by the school in its infirmary, only the evening shift nurse resides in lodging furnished by the school. The lodging consists of an apartment above the infirmary.
The IRS began its ruling by noting that the income tax regulations specify that the value of lodging furnished to an employee by an 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 regulations further specify that the “condition of employment” requirement means that the employee must be required to accept the lodging in order to enable him to properly perform the duties of his employment. Therefore, even if an employer requires an employee to accept lodging on the employer’s premises, the employee may not exclude the value of lodging unless it is necessary to enable the employee to properly perform the duties of his or her employment. The IRS explained that “lodging is furnished to enable the employee to properly perform the duties of his employment when, for example, it is furnished because the employee is required to be available for duty at all times or because the employee could not perform the services required of him unless he is furnished such lodging.”
The IRS noted that “the issue of whether or not lodging is furnished for the convenience of the employer, or whether the employee is required to accept the lodging to properly perform his or her duties, is primarily a question of fact to be resolved by a consideration of all the facts and circumstances.” The IRS relied primarily on Winchell v. United States, 725 F.2d 689 (8th Cir. 1983), a federal court ruling. The taxpayer in the Winchell case was a college president who lived in a residence located four miles from the main campus on property owned by the college. The president maintained offices at his home and in the administration building on the main campus. Theoretically, he was “on call” around the clock and was, on occasion, summoned to the main campus after hours to secure buildings, direct maintenance personnel, or consult with law enforcement officers. In addition, he performed certain services at home, which included occasionally entertaining potential benefactors and dignitaries, hosting receptions, holding business and faculty meetings, and working on administrative matters in the evenings or on weekends. In concluding that the value of the residence furnished by the college to the taxpayer was not excludable from gross income under section 119, the court found that neither the “condition of employment” nor the “convenience of the employer” tests had been met. With respect to the condition of employment test, the court found that the nature of the president’s position did not realistically require him to be available for duty at all times. In addition, the court determined that the president performed relatively insubstantial services for the college at home. The court concluded that “[i]n sum, the ability of the [president] to satisfactorily discharge his duties irrespective of whether he occupied employer-supplied housing, coupled with [minimal] college-related activity carried on in [his] home, evidences the college’s purpose to provide lodging so its president could be closer to the campus … and not because proximity was [essential] to performance of [his] duties.” The IRS concluded that its official policy is “the position set forth in Winchell that school employees on call for infrequent emergency situations are not considered to satisfy the test of being available for duty at all times.”
The IRS addressed each category of worker as follows:
- Administrative and teaching staff. The IRS concluded that lodging provided to these workers did not satisfy all three of the requirements of section 119, and accordingly the value of their lodging was taxable. The IRS did not dispute the fact that the administrative and teaching staffs were considered by school officials to be “on call” around the clock and were occasionally summoned to the central campus area after hours. The IRS noted that “the ability of the administrative and teaching staffs to respond to an emergency would not suffer … if they lived a ten-minute drive away” (i.e., off campus). The IRS stressed that:
[N]o substantial portion of the school activities are conducted in the lodging occupied by the administrative and teaching staffs (including the lodging provided to the math teacher, chaplain, and choirmaster in the central campus area). The school does not require the administrative and teaching staffs to perform services in their homes. The requirement that they meet regularly with members of their advisory groups and perform duties outside the classroom does not impose upon them the obligation to meet with students in their homes. The school admits that most contacts take place on the central campus area or off-campus, i.e., on field trips, at athletic events or monthly dinner outings with their advisory groups. We believe that the evidence of occasional visits by students to staff residences is insufficient to elevate the lodging to being “on the business premises” functionally for the purposes of section 119(a) of the Code.
- Evening shift nurse and the dorm parents. The IRS concluded that lodging provided to these workers met the “convenience of the employer” and the “condition of employment” tests, since “the nurse and the dorm parents are on duty during the evenings to respond to school emergencies and perform substantial services for the school at their dwellings.”
- Maintenance workers. The IRS concluded that lodging provided to the eight maintenance workers residing beyond the central campus area did not meet the “convenience of the employer” and the “condition of employment” tests since “maintenance emergencies occur infrequently … [and] there is no other evidence to suggest that the off-hours operation of the school requires nine maintenance workers to be available for duty at all times.” Further, “[t]he fact that the plant manager lives off-campus suggests that a response time of greater than a few minutes to the occasional emergency would be adequate, particularly when considered in conjunction with the fact that one member of the maintenance staff resides in the central campus area.” However, the IRS concluded that the lodging provided to the maintenance worker in the administration building may meet the “convenience of the employer” and the “condition of employment” tests. It did not have enough information to make a final decision with respect to this worker. IRS Private Letter Ruling 9404005.
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