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Posted by Richard Scoresby on Thu, Feb 26, 2015 @ 12:00 PM

tax_riskPresidents of educational systems often accept free or reduced-rate housing when they accept their position. Located on or near campus, the residences serve as a fringe benefit to the leadership role. In most cases, the value of the home is not included as part of the employee’s compensation package.

Section 119 of the Internal Revenue Code (IRC) allows university- or college-provided housing to be an income-tax-free fringe benefit for employees if the arrangement passes a three-part test. Recent movement by the IRS, however, suggests the three-part test may be more difficult to meet than you may think.

The IRS recently conducted an audit of Ohio University and found that the housing provided to its president did not qualify for tax-exemption. The IRS said the value of Roderick McDavis’s 7,000 square foot home, located on Ohio University’s campus, should be included as part of his eligible compensation and subject to income and payroll taxes. It is still unknown which part of the three-part test the university failed.

The courts take a hard look at Section 119 as well. A Nebraska district court ruled in the 1983 case, Winchell vs. United States that Richard Winchell, president of Bellevue College, was required to include the fair value rent of his university-provided home as part of his gross income. The court found that Winchell did not have to accept his university-provided housing as a condition of his employment; therefore, he failed to meet the Section 119 exemption.

Given court history, audit findings and the increased attention on university systems’ executive compensation practices, your university should seriously consider whether housing provided to your president qualifies for tax exemption.

Three-Part Test

IRC Section 119 states that the value of lodging provided to an employee is excluded from the employee’s gross income if it meets three conditions:

  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 employment.

On the Business Premises of the Employer

The physical location of the university-provided housing is an important factor in determining whether it could qualify for tax exemption. Ideally, the housing should constitute an integral part of the business property of the university and should be closely identified with the university’s interests. Even if the apartment or home is not physically on the campus, the residence may still qualify as part of the university’s business premises so long as it is a place where the president performs a significant portion of his or her duties and where a significant amount of the university’s business is conducted. In one court case, Vanicek, Petitioners v. Commissioner 85 TC 731 (1985), the court stated the following, “Thus, while we agree with respondent that ‘business premises’ is not an infinitely elastic concept, we do not believe that its parameters are to be as severely circumscribed as respondent contends. Accordingly, we find that petitioners are entitled to exclude from gross income under section 119 the fair rental value of their residences.”

The occasional meeting or phone call in the off-premises residence, for example, does not demonstrate significant business activity.

Utilities, supplies and household furnishings provided by the employer are excluded from income if the lodging meets the exclusion requirements. As with lodging, these items must be provided in kind. Reimbursements or cash allowances are not excludable. Therefore, if the employee contracts directly with the utility and is reimbursed by the employer, these amounts are included in his or her income. Similarly, if the employee pays for supplies through a payroll deduction, these amounts are not excludable from income. If the employee pays the utility charges he or she may be entitled to a business expense deduction.

For the Convenience of the Employer

Universities must demonstrate a direct connection between the business interest of the university and the tax-exempt lodging. Universities can demonstrate that the home is for the “convenience of the employer” by requiring that the president’s home be open to visiting guests or alumni and by demonstrating that the housing is necessary as a condition of employment. The university or college may also expect its leader to be easily accessible at all times in case of a campus emergency. Being able to show that the university constructed and designed the housing to accommodate substantial university-related activities will help meet this test. The benefit to the university must be more than incidental.

As a Condition of Employment

In order to meet the as a condition of employment test, the employee must accept the duties along with the lodging being offered. This test can be met if the employee is required to be available for duties at all times or if the employee could not perform his or her duties unless he or she is furnished with such lodging.

A university president’s contract does not have to state specifically that the president accepts university-provided housing as a condition of employment. The president’s acceptance of the housing as a condition of employment can be demonstrated by his or her acceptance and performance of substantial job responsibilities that extend beyond the typical workday. These responsibilities would require the use of the home on a regular basis for activities such as entertaining civic leaders, hosting fundraising activities, meeting with faculty or students, and working on administrative matters in the evenings and on weekends. It is a best practice to document the duties being performed that extend beyond the typical workday.

The evidence that the home is a condition of employment should be compelling if the arrangement is not explicitly stated in the contract. Simply providing the home or residence to the employee is not enough evidence that the home is a necessary part of the employee’s job. The IRS demonstrates this in its example of an ineligble income tax-exempt housing arrangement:

A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. If Joan chooses to live at the hospital, the hospital cannot exclude the value of the lodging from her wages because she is not required to live at the hospital to properly perform the duties of her employment.

A Partial Exclusion May Be Available

Many university-provided housing arrangements may not qualify for income tax exemption under the three-part test. Qualified campus lodging offers another income tax reprieve. Entities that meet the definition of educational institutions under Section 170(b)(1)(A)(ii) can designate housing provided near or on campus as qualified campus lodging. The designation, outlined further in IRC Section 119(d) , permits a partial exclusion of the residence’s value in income tax reporting. Employees who use the qualified campus lodging without paying rent would include in their income the lesser of 5 percent of the appraised annual rental value of the of the lodging or the average of the rentals paid by individuals for comparable lodging provided by the educational institution. The annual rental value of any qualified campus lodging that exceeds the lower of these threshold amounts would be excluded from income tax consideration. To verify the correct value is being used, the university may want to consider having a qualified appraiser conduct a rent survey and document its findings.

An example will help illustrate this:

A university allows an employee to live in qualified campus lodging without paying rent. The appraised annual rental value of the lodging is $200,000. Five percent of this amount is $10,000. Individuals living in comparable lodging provided by the university pay an average of $15,000 per year in rent. The employee would only have to include $10,000 in taxable income for the use of the qualified campus lodging.

Staying in Compliance

Our specialists can work closely with you to help evaluate the facts and circumstances involved in your university president’s housing arrangement. We will help determine whether your arrangement poses an income tax liability and how you can minimize your exposure. For more information, contact us here.


Richard Scoresby is a Senior Tax Manager in CBIZ’s Salt Lake City office. He can be reached at 801-364-9300 or

Tags: Richard Scoresby, university, tax risk

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