Does the taxpayer recognize gross income in the following situations? a. Ava is

Question

Does the taxpayer recognize gross income in the following situations?
a. Ava is a filing clerk at a large insurance company. She is permitted to leave the premises for her lunch, but she always eats in the company's cafeteria because it is quick and she is on a tight schedule. On average, she pays $2 for lunch that would cost $12 at a restaurant. However, if the prices in the cafeteria were not so low and the food was not so delicious, she would probably bring her lunch at a cost of $3 per day.
b. Scott is an executive for an international corporation located in New York City. Often he works late, taking telephone calls from the company's European branch. Scott often stays in a company-owned condominium when he has a late-night work session. The condominium is across the street from the company office.
c. Ira recently moved to take a new job. For the first month on the new job, Ira was searching for a home to purchase or rent. During this time, his employer permitted Ira to live in an apartment the company maintains for customers during the buying season. The month that Ira occupied the apartment was not during the buying season, however, and the apartment would not otherwise have been occupied.

Explanation / Answer

Answer:a § 119 excludes from income the value of meals and lodging provided to the employee and the employee’s spouse and dependents under the following conditions: (1) The meals and/or lodging are furnished by the employer on the employer’s business premises for the convenience of the employer (2) in the case of lodging, the employee is required to accept the lodging as a condition of employment The company’s cafeteria is furnished by the employer on the employer’s business premises for the convenience of the employee, because eating at the cafeteria isn’t a condition of her employment. Therefore, this is a fringe benefit and Ava is to include $10 in gross income. The $10 is the benefit Ava receives from being able to eat at the convenience of the cafeteria at a comparable rate. ($12 that she would pay at a restaurant -­ $2 the amount Ava paid for her meal) .

Answer:b The convenience of the employer test is intended to focus on the employer’s motivation for furnishing the meals and lodging rather than on the benefits received by the employee. If the employer furnishes the meals and lodging primarily to enable the employee to perform his or her duties properly, it does not matter that the employee considers these benefits to be a part of his or her compensation. Scott will exclude everything that pertains to the use of the condominium. The lodging is at the convenience of the employer. The Tax Court considered an employer-­owned house across the street from the hotel that was managed by the taxpayer to be on the business premises of the employer. Therefore, Scott is subject to exclusion as well.

Answer:c This illustrates the reason for the no-­additional-­cost service type of fringe benefit. The services will be nontaxable if all of the following conditions are satisfied:

(1) The employee receives services, as opposed to property

(2) The employer does not incur substantial additional cost, including forgone revenue, in providing the services to the employee

(3) The services are offered to customers in the ordinary course of the business in which the employee works The use of the apartment should qualify as no additional cost service since the apartment would not otherwise have been occupied. Thus, Ira can exclude this from his gross income.

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