CCA 200031003: Hotel owner must remove personal lodging costs from business expenses

Plain-English summary

A sole proprietor lived with his spouse in the hotel he operated and argued that he needed to stay on the premises. Chief Counsel advised that he could not be an employee of his own sole proprietorship, so section 119's employee exclusion for employer-provided meals and lodging did not apply. The costs of the owner's personal meals and lodging had to be removed from the hotel's Schedule C business expenses under sections 162 and 262. The advice explained that the proper adjustment was disallowing personal deductions, rather than adding the value of the owner's lodging to his income.

Ruling snapshot

• Question: Could the hotel owner deduct personal meals and lodging as business costs or exclude their value under section 119?
• Outcome: Advice given; neither treatment was available to the sole proprietor.
• Key authorities: IRC §§ 119, 162, and 262; Rev. Rul. 80, 1953-1 C.B. 62.

Full text (IRS public release)

                            DEPARTMENT OF THE TREASURY
                               I N T E R N AL R E V E N U E S E R V I C E
                                    WASHINGTON, D.C. 20224


                                        March 16, 2000

Number: 200031003
Release Date: 8/4/2000
CC:EBEO:2

UILC: 119.01-01

  INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE


MEMORANDUM FOR DISTRICT COUNSEL


FROM:                 Chief, Branch 2 (Employee Benefits and Exempt
                      Organizations)

SUBJECT:                                                § 119 Issue


      This Field Service Advice responds to your electronic mail message
dated December 16, 1992. Field Service Advice is not binding on Examination or
Appeals and is not a final case determination. This document is not to be cited as
precedent.

LEGEND

Taxpayer =

Hotel =

ISSUE

1. Whether section 119 causes Taxpayer’s otherwise personal expenses for meals
and lodging at Taxpayer’s Hotel to be deductible expenses on the Taxpayer’s
federal income tax return.

2. If these personal living expenses are not deductible by the Taxpayer, whether
Taxpayer is considered an employee of Taxpayer’s sole proprietorship so that the
value of the meals and lodging are excludable from Taxpayer’s gross income under
section 119 of the Code.
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CONCLUSION

1. Section 119 of the Code has no affect on whether Taxpayer’s expenses for
meals and lodging are deductible by Taxpayer because Taxpayer cannot be an
employee of Taxpayer’s sole proprietorship. Accordingly, personal living expenses,
including the expenses incurred for meals and lodging at the Hotel, must be
eliminated from the costs and expenses reported on the Taxpayer’s Schedule C.

2. Because Taxpayer cannot be an employee of Taxpayer’s sole proprietorship,
the exclusion provided under section 119 of the Code is not available to Taxpayer.

FACTS

       Taxpayer operates Hotel as a sole proprietorship. This activity is reported on
Schedule C of Taxpayer’s Form 1040. During the years 1990 through 1992,
Taxpayer and his spouse lived in the Hotel. The Service proposed an adjustment
to the Taxpayer’s income based on the value of the lodging provided to Taxpayer.
Taxpayer asserts that it is necessary that he be on the premises at all times and
therefore the value of the lodging should be excludable under section 119 of the
Code. As support, Taxpayer cites Papineau v. Commissioner, 16 T.C. 130 (1951).

LAW AND ANALYSIS

        Section 162 of the Code provides that there shall be allowed as a deduction
all the ordinary and necessary costs paid or incurred during the taxable year in
carrying on a trade or business. However, section 262 of the Code provides that
except as otherwise provided, no deduction shall be allowed for personal, living or
family expenses.

        Section 119(a)(2) of the Code provides that there shall be excluded from the
gross income of an employee the value of any meals or 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 (1) in the
case of meals, the meals are furnished on the business premises of the employer,
or (2) in the case of lodging, the employee is required to accept such lodging on the
business premises of the employer as a condition of employment.

        Papineau v. Commissioner, 16 T.C. 130 (1951), nonacquiescence 1952-2
C.B. 5, considered whether the estimated value of the board and lodging provided
to a limited partnership general partner who lived at the hotel owned and operated
by the limited partnership was includible in the general partner’s gross income.
This arrangement was essential in order to properly manage the hotel at all times
during the day and night. The court held that a partner, just as a sole proprietor,
“can not create income for himself by buying himself meals and providing himself
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with lodging any more that he can lift himself up by his bootstraps”; instead, the
correct adjustment must be a disallowance of the improper deduction. In footnote
2, the court notes that “[i]n the case of a sole proprietor, it may be academic
whether a claimed deduction is disallowed or offset by an inclusion of income, . . .
yet the fact remains that it is not income.” Thus, the court recognized that an
adjustment was necessary to disallow expenses incurred to provide a personal
benefit to the general partner; it merely disagreed with the Service’s proposed
adjustment to income.

       Revenue Ruling 80, 1953-1 C.B. 62, holds that where the owner of a hotel
lives on the premises, the costs (including cost of goods, wages, general expenses,
taxes, and depreciation) attributable to meals, lodging, and other personal or living
accommodations of the owner and his family must be eliminated from the costs and
expenses of operating the hotel. Likewise, where a partnership operates a hotel
and the managing partner lives on the premises, the costs attributable to such
accommodations of the resident partner and his family must be eliminated from the
operating costs and expenses of the partnership.

       The Service’s position in Revenue Ruling 80 has been accepted by the
courts in several circuit court cases involving partners who lived in a hotel owned by
their partnerships. Commissioner v. Everett Doak, 234 F.2d 704 (4th Cir. 1956);
Commissioner v. Moran, 236 F.2d 595 (8th Cir. 1956); Commissioner v. Briggs, 238
F2d. 53 (10th Cir. 1956); Commissioner v. Robinson, 273 F.2d 503 (3rd Cir. 1959).

       Although the circuit court cases cited above involve years before section 119
of the Code became effective in 1954, there was a regulation in place which set
forth the “convenience of the employer” test. 1 Indeed, the Doak court specifically
addressed whether the rule under section 119 caused the partner’s personal
expenses to be deductible. The court stated,

               From our reading of the Code provision and the Regulations
               then applicable, we think it clear that the costs of meals and


       1
        Under the 1939 Code this rule appeared in Treasury Regulation 118, § 39.22(a)-3 which
provided:

       If a person receives as compensation for services rendered a salary and in addition
       thereto living quarters or meals, the value to such person of the quarters and meals so
       furnished constitutes income subject to tax. If, however, living quarters or meals are
       furnished to employees for the convenience of the employer, the value thereof need not
       be computed and added to the compensation otherwise received by the employees.
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             lodging of taxpayer would have been deductible had they
             occupied the employee status under the above “convenience of
             the employer” rule. They were not, however, either employers
             or employees; instead they were husband and wife owning the
             entity business as partners.

234 F.2d at 707. Thus, the court considered the effect of the “convenience of the
employer” rule and determined that it had no effect because the taxpayers could
not have employed themselves. See also Robinson, supra at 505. For a more
recent case taking a similar position on this issue, see Dilts v. United States, 845 F.
Supp. 1505 (D. Wyo. 1994). In Dilts, the court held that the owner of an S
corporation was not entitled to an exclusion under section 119 because the court
could not “fathom any substantive reasons why the owners of a subchapter S
corporation should be entitled to such exclusions while their neighbors, sole
proprietors, would not be entitled the same exclusions.” Id. at 1510.

        Thus, since Revenue Ruling 80 was issued in 1953, the courts have resolved
this issue in a manner consistent with the Service’s position. The Service’s position
remains that personal living expenses of a taxpayer living at a hotel owned by the
taxpayer must be eliminated from the costs and expenses of operating the hotel.
Moreover, because a taxpayer cannot be an employee of the taxpayer’s sole
proprietorship, section 119 of the Code does not cause such expenses to be
deductible, nor does section 119 cause the value of meals and lodging to be
excludable from Taxpayer’s gross income.

      Please call if you have any further questions.




                                        Jerry E. Holmes
                                        Chief, Branch 2 (Employee Benefits and
                                        Exempt Organizations)