Taxable rent-free lodging ruling applies retroactively.

• Author: Elinsky, Peter I.

The IRS in Letter Ruling (TAM) 9609001 has refused a boarding school's request to limit the retroactive effect of a prior TAM's ruling that the school's rent-free lodging provided to several classes of employees would be taxable to the employees. Under Sec. 7805(b), the school sought a determination that the Service's earlier TAM would not be applied retroactively.

Background

Sec. 119 excludes from an employee's gross income the value of any lodging furnished to the employee, the employee's spouse, or any of the employee's dependents by or on behalf of the employer for the convenience of the employer, but only if the employee is required to accept such lodging on the employer's business premises as a condition of employment. Under Regs. Sec. 1.119-1(b), the value of lodging furnished to an employee by the employer is excludible if three tests are met:

1. The lodging is furnished on the employer's business premises; 2. The lodging is furnished for the employer's convenience; and 3. The employee is required to accept such lodging as a condition of employment.

In TAM 9404005, the National Office concluded that lodging provided by the taxpayer to its teaching, maintenance and administrative staffs did not meet the Sec. 119 (a) requirements for exclusion. Therefore, the value of lodging provided to these employees was wages for FICA and income tax withholding purposes. Apparently, these employees lived one to three miles from the center of the campus or did not perform duties after hours or in their residences. Conversely, the lodging provided by the taxpayer to the resident dormitory staff and the evening shift nurse was excludible under Sec. 119(a); its value was not considered wages.

Retroactive Effect of TAM

A TAM holding adverse to a taxpayer is applied retroactively, under Regs. Sec. 601.105(b) (5) (viii) (b), unless the Associate Chief Counsel of the Employee Benefits and Exempt Organizations Section exercises the discretionary authority under Sec. 7805 (b) to limit the holding's effect. The boarding school argued this discretionary authority was appropriate, based on three alternative theories: (1) receipt of a 1943 determination letter, (2) "standard industry practice" and (3) a prior examination. The Service rejected all three theories.

As to the school's argument that a 1943 determination letter establishing its status as a tax-exempt entity should prevent retroactive application of the lodging ruling, the IRS found there was no...