Meals and lodging exclusion for S shareholders.

• Author: McPherron, Cecil

Sec. 119 provides for the exclusion from gross income of meals and lodging furnished to employees for the convenience of an employer. Many farm and ranch operations are organized as S corporations, with the shareholders living in a corporate-owned home. The shareholder-managers are often compelled to live on the farm or ranch in order to be on the premises around the clock, particularly when livestock is involved. Care must be exercised when excluding the value of meals and lodging from the shareholder's income.

S shareholders are treated as partners for fringe benefit purposes (Sec. 1372). Partnerships generally are not allowed to deduct expenses incurred in providing fringe benefits to partners (Sec. 703(a)(2)(E)). However, a partner may be considered as acting in a capacity other than as a member of a partnership (Sec. 707(a)). A partner who is also an employee of the partnership should be allowed to exclude the value of meals and lodging provided to him under Sec. 119. This was the case in Armstrong v. Phinney, 5th Cir., 1968.

In Armstrong, a 5% partner served as manager of a 50,000-acre ranch. The partner received a share of the profits, as well as a fixed salary, for his services as manager. The partnership provided a home at the ranch and paid for some of his utilities and groceries. The value of the meals and lodging was excluded by the partner-manager, and the partnership deducted the costs incurred in furnishing the home and incidental expenses. In holding for the taxpayer, the Fifth Circuit said that a partner who is considered as "one who is not a partner" for purposes of Sec. 707 could also take advantage of the Sec. 119 exclusion for meals and lodging.

In contrast to Armstrong is the Dilts case, DC, 1994. In Dilts, an S corporation provided the shareholders with a home located on a ranch owned by the S corporation. Apparently, the shareholders were not paid a separate salary for management of the ranch and there was no written agreement...