Local lodging provided to an employee: how to determine whether to include it in the employee's income.

• Author: Adkins, G. Edgar, Jr.

Suppose an employee lives and works in the Chicago area. Her employer has offices and employees across the United States. The employer hosts a national meeting for a group of employees at a hotel in Chicago that lasts for several days. The meeting starts each day with breakfast at 7 a.m. and concludes with dinner and networking until about 10 p.m. Because of the long days, the employer pays for the Chicago employee to stay at the hotel. Are the lodging expenses paid by the employer taxable to the employee for federal income tax purposes?

Most employers would not even ask this question for the employees who are from out of town. It is common knowledge that the lodging expense for an employee from out of town is excluded from the employee's income. A relatively quick look through the Code confirms this.

First, Sec. 132(a)(3) says that an employee's income does not include any fringe benefit that qualifies as a working condition fringe benefit. Next, Sec. 132(d) says that a working condition fringe benefit is any property or services provided to an employee to the extent that, if the employee paid for the property or services, the payment would be allowable as a deduction under Sec. 162. Finally, Sec. 162(a)(2) provides that "there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business." Since the lodging expenses would be deductible by the out-of-town employee if he paid for the expenses himself, payment of the lodging expenses by the employer is excluded from income as a working condition fringe benefit.

It is common sense to conclude that the employee from Chicago is not away from home, and, therefore, the Code provisions stated above do not apply. This commonsense conclusion is backed up by revenue rulings the IRS issued several decades ago. For example, Rev. Rul. 73-529 provides that to be away from home, the distance must be long enough that the employee would need to "stop for substantial sleep or rest." Similarly, Rev. Rul. 75-170 states that to be away from home, the employee "cannot reasonably be expected to complete the round trip without being released from duty ... for sufficient time to obtain substantial sleep or rest." No...