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Defense Contractor Can't Exclude Employer-Provided Housing from Income

(Parker Tax Publishing January 2023)

The Tax Court held that an engineer working for a private defense contractor in Australia was not entitled to exclude from income the value of his employer-provided housing because his activities were not significant enough to show that his housing was "integral" to his employer's business or "part and parcel" of his employer's workplace. The court found that the touchstone of the business-premises test in Code Sec. 119(a)(2), which allows the value of employer-provided housing to be excluded from income, is a lodging's relationship to the business activities of the employer and because the taxpayer did not require immediate access to his employer at all hours and his housing did not in fact provide such access, he failed the business-premises test. Smith v. Comm'r, T.C. Memo. 2023-6.


Cory Smith is an Air Force veteran and engineer who, in September 2009, received and accepted an offer of employment from the Raytheon Company, a private defense contractor, to work as an engineer at the Joint Defense Facility at Pine Gap, Alice Springs, Northern Territory, Australia (Pine Gap). Smith was assigned housing in Alice Springs in August 2010 and his housing accommodation was U.S.-government housing at Shanahan Close, Alice Springs, Northern Territory (Housing Accommodation). The Housing Accommodation was in a cul-de-sac where other individuals who worked at Pine Gap lived, but on a public street with public access. The Housing Accommodation was not located on Raytheon's business premises.

Smith began working for Raytheon and living at the Housing Accommodation in September 2010. All utilities other than telephone service were provided at no cost to Smith. In addition, Pine Gap provided or arranged for maintenance and trash removal services at no cost. Smith's Housing Accommodation was approximately 11 miles from his place of work. He also performed some work from home and Raytheon provided him with a key fob, enabling him to remotely access its secured network from outside the workplace. If any U.S. or foreign visitors stayed with Smith, he was required to alert the Pine Gap Security Office.

The U.S. Air Force sent Smith a Form 1099 - MISC, Miscellaneous Income, reporting as nonemployee compensation the value of his Housing Accommodation. The amounts reported to Smith for 2016, 2017, and 2018 were $15,889, $15,501, and $10,015, respectively. Smith prepared his own Forms 1040 for 2016 and 2017 and initially reported as gross receipts on his Schedule C-EZ for 2016 and 2017, the $15,889 and $15,501 amounts reported to him by the Air Force. Smith then hired a tax return preparer to prepare his 2018 tax return. That preparer also filed amended return for Smith for 2016 and 2017. On the 2016-2018 tax returns, the preparer claimed a deduction for employee benefit programs equal to the amount of housing income included on the returns.

The IRS audited Smith's 2016-2018 tax returns and disallowed the employee benefit program deductions. According to the IRS, Smith failed to meet the three conditions under Code Sec. 119 that would have otherwise allowed him to exclude the value of lodging from income. Under Code Sec. 119(a)(2) and Reg. Sec. 1.119-1(b), an employee is eligible to exclude from income the value of lodging provided by an employer if the following conditions 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.

Smith took his case to the Tax Court, arguing that his Housing Accommodation was furnished on his employer's business premises because it bore an integral relationship to Raytheon's business activities. Smith also contended that his case should be decided differently from two prior cases, Middleton v. Comm'r, T.C. Memo. 2008-150 and Hargrove v. Comm'r, T.C. Memo. 2006-159, where the Tax Court determined that off-base housing provided to contractors working at Pine Gap was not furnished on the business premises of the employer within the meaning of Code Sec. 119.

To support his argument that his Housing Accommodation bore an integral relationship to Raytheon's business, Smith pointed out that (1) his Housing Accommodation allowed Raytheon to monitor his behavior and protect national security information; (2) Raytheon, through Pine Gap, maintained extensive control over his assigned housing by, for example, providing all maintenance, repairs, and trash removal services, using the home to communicate information to him upon his initial arrival there, requiring him to report foreign visitors, and regulating who could live in his housing; (3) while located on public roads, his Housing Accommodation was in a cul-de-sac where other Pine Gap employees lived; and (4) he completed some work from his Housing Accommodation, including completing training programs, time sheets, and employee evaluations, and was provided with a key fob that he could use to remotely access Raytheon's secure network.


The Tax Court found Smith's efforts to distinguish his situation from prior cases unpersuasive and thus held that the value of his Housing Accommodation was not excludible from income under Code Sec. 119. The court concluded that Smith's activities at his Housing Accommodation were not significant enough to show that it was "integral" to Raytheon's business or "part and parcel" of Raytheon's workplace. In reaching this conclusion, the court cited the decisions in (1) McDonald v. Comm'r, 66 T.C. 223 (1976), where the Tax Court held that the value of lodging was not excludable from income when the only business activities conducted by a taxpayer in his residence were the occasional entertainment of business guests and the periodic use of the telephone to place or receive business calls, and (2) Lindeman v. Comm'r, 60 T.C. 609 (1973), where the court concluded that a hotel manager's residence was an integral part of his employer's business because the manager could observe the hotel from the residence, worked evenings from the residence and was connected to the hotel's switchboard there, and occasionally entertained hotel guests in the residence.

The Tax Court also cited the Fifth Circuit's decision in Benninghoff v. Comm'r, 614 F.2d 398 (5th Cir. 1980), where that court found that the touchstone of the business-premises test is a lodging's relationship to the business activities of the employer. Smith, the court noted, did not require immediate access to Pine Gap "at all hours" to perform his job and his Housing Accommodation did not in fact provide immediate access. Nor, the court observed, did any facts show that Smith performed significant work from his Housing Accommodation, that the Housing Accommodation was in some way necessary for the performance of his duties, or that it served an important function on behalf of the business.

Finally, while Smith was given a key fob to access Raytheon's secured network remotely, the court concluded that the existence of the key fob did not convert otherwise insignificant work to significant work.

For a discussion of the general rules for excluding employer-provided housing from income, see Parker Tax ¶123,510.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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