SCOTUS Reports

Tag: Employee Housing

  • Union Pacific Corp. v. Commissioner, 91 T.C. 32 (1988): Investment Tax Credit Exclusions for Rail Maintenance and Employee Housing

    Union Pacific Corp. v. Commissioner, 91 T. C. 32 (1988)

    The operating costs of rail-test cars and investments in mobile homes used for employee housing are not eligible for investment tax credits.

    Summary

    Union Pacific Corp. sought investment tax credits for the operating costs of rail-test cars used to detect defective railroad tracks and for investments in mobile homes provided to employees in remote areas. The Tax Court ruled that neither the rail-test car operating costs nor the mobile homes qualified as section 38 property eligible for the investment tax credit. The court determined that rail-test car costs were general maintenance expenses rather than installation costs, and mobile homes were used predominantly for lodging, thus excluded from the credit.

    Facts

    Union Pacific Corp. operated rail-test cars to detect flaws in railroad tracks, which were then replaced. The company also provided mobile homes rent-free to certain employees responsible for maintaining sections of track in remote areas. Union Pacific claimed investment tax credits for both the operating costs of the rail-test cars and its investment in the mobile homes.

    Procedural History

    Union Pacific filed a petition in the United States Tax Court challenging the Commissioner’s determination of tax deficiencies for the years 1975-1977. The Tax Court addressed whether the costs of operating rail-test cars and the investments in mobile homes qualified for the investment tax credit under section 38 of the Internal Revenue Code.

    Issue(s)

    1. Whether the costs incurred to operate rail-test cars are includable in Union Pacific’s qualified investment in section 38 property.
    2. Whether Union Pacific’s investment in mobile homes used as section housing qualifies as section 38 property.

    Holding

    1. No, because the costs of operating rail-test cars are general maintenance costs rather than installation costs of replacement track material.
    2. No, because the mobile homes constitute lodging and are therefore excluded from section 38 property under the lodging exception.

    Court’s Reasoning

    The court applied section 48(a)(9) of the Internal Revenue Code, which includes replacement track material in section 38 property if detected by rail-test cars, but only the costs of installation, not detection, are included. The court clarified that rail-test car operating costs are a step removed from installation costs, thus not qualifying as “related installation costs. ” Regarding the mobile homes, the court interpreted the lodging exception under section 48(a)(3) to include any place used predominantly for lodging, regardless of whether rent is charged. The court found no basis in the statute, legislative history, or regulations to limit the lodging exception to rental properties only.

    Practical Implications

    This decision clarifies that only direct costs associated with installing replacement track material qualify for investment tax credits, excluding costs of detection or maintenance. Businesses must carefully distinguish between these costs when calculating credits. Additionally, the ruling extends the lodging exception to non-rental properties, impacting how companies treat investments in employee housing for tax purposes. Subsequent cases and tax regulations have continued to refine these distinctions, affecting how railroads and other industries approach investment tax credits.

  • Turner v. Commissioner, 68 T.C. 48 (1977): Exclusion of Lodging Costs Under Section 119 Requires Employer Provision

    Turner v. Commissioner, 68 T. C. 48 (1977)

    For an employee to exclude the cost of lodging from income under section 119, the lodging must be furnished by the employer.

    Summary

    George Turner, employed as a welder, was required to live in a house provided by his employer, American Forest Products Corp. , for its convenience. Turner incurred costs for utilities, carpeting, and a heater, which he sought to exclude from his income under section 119 of the Internal Revenue Code. The Tax Court held that these costs were not excludable because they were not furnished by the employer. The decision emphasized that section 119 requires the employer to provide the lodging, and since Turner had to pay for utilities and other items himself, they did not qualify for exclusion.

    Facts

    George A. Turner worked as a welder for American Forest Products Corp. from June 1969 through 1972. He was required to live in a house provided by his employer within the Sequoia National Forest, as he needed to be available 24 hours a day. The employer deducted $306 as rent from Turner’s salary in 1972. Turner had to purchase utilities, carpeting, and a heater for the house because these were not provided by the employer, despite his requests. He paid $283. 89 for gas, $209. 88 for electricity, $266. 16 for carpeting, and $262. 58 for a heater, without any reimbursement from the employer.

    Procedural History

    Turner and his wife filed a joint Federal income tax return for 1972, claiming a deduction for these expenses. The Commissioner of Internal Revenue disallowed $1,022. 51 of these expenditures, allowing only the $306 rental payment. In an amended answer, the Commissioner argued that the disallowed expenditures were not excludable or deductible under section 119. The case proceeded to the United States Tax Court, which ruled in favor of the Commissioner.

    Issue(s)

    1. Whether the costs paid by Turner for utilities, carpeting, and a heater are excludable from income under section 119 of the Internal Revenue Code.

    Holding

    1. No, because these costs were not furnished by the employer, as required by section 119.

    Court’s Reasoning

    The court applied section 119, which excludes the value of lodging furnished by an employer for the employer’s convenience. The key legal rule was that the lodging must be “furnished” by the employer. The court found that the employer did not provide the utilities, carpeting, or heater; Turner had to purchase these items himself and was not reimbursed. The court rejected the argument that these items were “furnished” in substance because there was no reimbursement. The court also noted that these costs are typically personal expenses, not deductible under the tax laws, unless furnished by the employer under section 119. The court cited Revenue Ruling 68-579, which states that utilities or other commodities necessary for habitable lodging are considered “lodging” but must still be furnished by the employer. The court’s decision aligned with prior cases like Inman v. Commissioner, which held that utilities purchased by the taxpayer were not “furnished” by the employer and thus not excludable under section 119.

    Practical Implications

    This decision clarifies that for employees to exclude lodging costs under section 119, the employer must directly provide or pay for those costs. Employers and employees should ensure that all aspects of lodging, including utilities and furnishings, are explicitly provided by the employer if they wish to claim exclusions under section 119. This ruling impacts how tax professionals advise clients on housing arrangements and related tax exclusions. It may also influence how companies structure their employee housing policies to ensure compliance with tax laws. Subsequent cases have applied this principle, emphasizing the need for clear employer provision of lodging benefits.