TAXABILITY OF COST OF LIVING AND HOUSING ALLOWANCES OF EMPLOYEES STATIONED IN THE UNITED STATES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP75-00793R000300060021-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 5
• Document Creation Date: December 16, 2016
• Document Release Date: October 1, 2004
• Sequence Number: 21
• Publication Date: July 17, 1973
• Content Type: MF

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17 July 1973
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MEMORANDUM FOR: Chief, Audit Staff
SUBJECT: Taxability of Cost of Living and Housing
Allowances of Employees Stationed in the
United States
1. You have asked whether cost of living allowances and
housing allowances paid to employees stationed in the continental
United States should be reported as gross income on the W-2 forms
of such employees. The particular allowances giving rise to the
question at this time are those paid tol employees 25X1A
of =Division, who are required by the Division to live within a
small area of 25X1A
2. In our opinion, cost of living allowances paid to em-
ployees stationed anywhere in the United States in order to com-
pensate them for the difference in cost of living between Washing-
ton, D. C. and the area where stationed, are taxable compensation
and should be reported on the W-2. Similarly, housing allowances
to compensate for the difference between the cost of housing in the
Washington, D. C. area and in the area where stationed, are taxable
and reportable. However, in special situations, and specifically
here, in the cases of employees directed and required to live in a
particular section of a metropolitan area where they are stationed,
a portion of a housing allowance need not be considered taxable
compensation. The non-taxable portion is that which compensates
for the difference between housing costs in those parts of a metro-
politan area where employees would normally live and the higher
cost where they are required to live.
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3. Section 61 of the Internal Revenue Code defines gross
income as all income from whatever source derived. Treasury
Regulation 9 1. 61-1 provides:
Gross income means all income from what-
ever source derived, unless excluded by law.
Gross income includes income realized in any
form, whether in money, property, or services.
Income may be realized, therefore, in the form
of services, meals, accommodations, stock, or
other property, as well as in cash.
Accordingly, if cost of living allowances and housing allowances
are to be tax free, they must be excluded from income by the Code
or Regulations, or they must be deductible as reimbursed expenses.
Certain cost of living allowances and housing allowances, including
housing in kind provided to Government employees serving abroad,
are not taxable compensation because they are specifically exempted
by 9 912 of the Internal Revenue Code. There is no such statutory
provision for housing or cost of living allowances paid to employees
stationed in the United States.
4. Meals or lodging furnished for the convenience of the
employer are excluded from gross income when certain conditions
are met. Internal Revenue Code ? 119 provides:
There shall be excluded from gross income of
an employee the value of any meals or lodging furn-
ished to him by his employer for the convenience of
the employer, but only if-
(2) in the case of lodging, the employee is required
to accept such lodging on the business premises of his
employer as a condition of his employment.
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Regulation 5 1. 119-1(b) provides:
The value of lodging furnished to an employee by
the employer shall be excluded 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 his employment.
If the tests described in subparagraphs (1), (2) and
(3) of this paragraph are met, the exclusion shall
apply irrespective of whether a charge is made, or
whether, under an employment contract or statute
fixing the terms of employment, such lodging is
furnished as compensation. . . . If the tests de-
scribed in subparagraphs (1), (2) and (3) of this
paragraph are not met, the employee shall include
in gross income the value of the lodging regardless
of whether it exceeds or is less than the amount
charged. In the absence of evidence to the contrary,
the value of the lodging may be deemed to be equal
to the amount charged.
other cases of employees receiving housing allowances in the United
States, the condition of the Code that the lodging be on the business
premises of the employer cannot be met. In addition, Regulation
? 1. 119-1(c) (2) provides:
The exclusion provided by section 119 applies
only to meals and lodging furnished in kind by an
employer to his employee. If the employee has an
option to receive additional compensation in lieu of
meals or lodging in kind, the value of such meals
and lodging is not excluded from gross income.
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5. IRS and the courts have interpreted the "on the premises"
requirement strictly.
Thus, the rental value of a house and the value of
food furnished by taxpayer's employer at an employer-
owned residence located 'two short blocks' from the
motel which taxpayer managed for the employer were
includable in taxpayer's income.
C.N. Anderson, (CA-6) 67-1 USTC Para. 9136,
371 F. 2d 59. Cert. denied, 387 U. S. 906.
Supervisory employees of a woolen mill who
lived rent-free in houses located about one mile
from the mill in order that they might be on call
24 hours a day realized additional income in the
amount of the fair rental value of the houses. The
employees were not required to accept the lodging
as a condition of their employment, and, more-
over, the lodging was not on the employer's business
premises.
G.S. Dole, 43 TC 697, Dec. 27, 253 (Acq. ).
Aff'd per curiam, (CA-1) 65-2 USTC Para.
9688, 351 F. 2d 308.
The Code, Re ulations and court decisions provide no basis for
excluding the housing allowance from taxable in-
come. While the specia circumstances here may provide a
reasonable equitable argument, I do not believe the argument
would prevail, and consequently, I would recommend against
seeking a Revenue Ruling which almost certainly would be un-
favorable.
6. In the case of thel housing L`"" '
allowance, I think the circumstances causing the Agency to grant
the allowance provide a legitimate means for effectively excluding
at least part of it from each employee's income. The reason the
allowance is given is t n t the employees must live in a particular
small areal I in order 25X1A
to carry out their Agency duties. It is a requirement o the job,
imposed by the Agency, that they live in this area. Internal Revenue
Code ? 162 provides that there shall be allowed as a deduction all the
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ordinary and necessary expenses paid or incurred in carrying on
any trade or business. The definition of business includes services
as an employee so that any expenses incurred by an employee may
be deducted if they meet the requirements. The law specifically
includes as deductible expenses rentals, to the extent that they are
incurred in carrying on a trade or business. In order to be deduc-
tible, an expense must meet three requirements: (1) it must be
incurred in a trade or business carried on by the taxpayer, this
excludes all personal expenses; (2) it cannot be a capital expenditure;
and, (3) it must be ordinary and necessary. Housing is normally a
personal expense, and obviously these employees 25X1A
would incur personal housing expenses wherever they lived. Being
assigned to they would live somewhere in the metropolitan
area, and no part of their housing costs could be considered business
expenses. However, in order to carry out their Agency duties, some
of these employees are directed and required to live in a small area
of the city where rents are very high and where, presumably, they
would not ordinarily live. Accordingly, we are of the opinion that it
would be reasonable and proper to consider the difference between
the normal housing costs incurred by employees living where they
wish in thel area and the costs incurred by these employees
required to live in a particular area as a reimbursed expense and thus
deductible by the employee on his income tax return.
7. Security considerations will not permit these employees to
report the business expense portion of the housing allowance as income
and then take a deduction against it. However, IRS Regulations do not
require reimbursements for ordinary and necessary business expenses
to be included on the tax return if (1) the employee makes an accounting
for such expenses to his employer; (2) he does not deduct his expenses
on his return; and, (3) the expenses equal the reimbursement. The
conditions under which these allowances are granted are substantially
equivalent to the accounting requirement in (1) above and, therefore,
it will not be necessary for the Agency to include the expense portion
1A
of the allowance on the employee's W-2, nor for the employee to repoo5
the income and take the deduction.
Assistant General ounse
cc: SSA/DDM&S
C / FR Divis ion
OCap
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