Rev. Rul. 65-158

Advice has been requested as to the treatment, for Federal tax purposes, of allowances or reimbursements paid by an employer to or on behalf of an employee transferred from one official station to another for permanent duty, for expenses of the employee which are related to the move, but which are not actual transportation expenses of moving the employee, his immediate family, household goods, and personal effects.

Specific examples of the items concerning which advice has been sought are: preliminary trips to the new place of employment to locate a suitable residence; the amount by which the net selling price of the employee's residence at the former place of employment fell below its appraised value; fees incurred in connection with the sale of that residence and the purchase of a different residence at the new place of employment; charges for connecting and disconnecting appliances and utilities; alteration and installation of rugs and draperies at the new residence; drivers and auto licenses required by the State to which the employee moved; and similar costs related to the move.

Section 61 of the Internal Revenue Code of 1954 provides that, except as otherwise provided, gross income means all income from whatever source derived, including, among other things, compensation for services, including fees, commissions, and similar items.

Ordinarily, payment of an employee's personal, family, or living expenses by an employer is in the nature of additional compensation which is includible in the employee's gross income. Section 1.61-2(d)(3) of the Income Tax Regulations, for example, provides that the value of living quarters or meals which an employee receives in addition to his salary constitutes gross income unless they meet the conditions specified in section 119 of the Code and the regulations thereunder. This principle is in general accord with such decisions as Old Colony Trust Co., et al. Executors , v. Commissioner of Internal Revenue% i, 279 U.S. 716 (1929), Ct. D. 80, C.B. VIII-2, 222 (1929); Commissioner of Internal Revenue v. Philip J. LoBue , 351 U.S. 243 (1956), Ct. D. 1798, C.B. 1956-2, 967; Harris W. Bradley, et ux. v. Commissioner , 324 Fed.(2d) 610 (1963), affirming 39 T.C. 652 (1963); and Paul Light v. Commissioner , T.C. Memo. 1961-279, affirmed per curiam, 310 Fed.(2d) 716 (1962). Similarly, it is in accord with Revenue Ruling 54-429, C.B. 1954-2, 53, which modified O.D. 1135, C.B. 5, 174 (1921) and I.T. 3022, C.B. XV-2, 76 (1936).

Revenue Ruling 54-429 discusses two basic categories of moving expenses incurred or paid by an employee transferred in the interest of his employer. In the first category, subject to the proviso that the employee is being transferred primarily in the interest of his employer and not primarily for his own benefit, the ruling treats the actual transportation expenses of moving the employee, his immediate family, household goods, and personal effects as essentially the employer's expenses, and holds that reimbursements or allowances for such expenses are not includible in the employee's gross income.

In addition, Revenue Ruling 54-429 treats expenses in excess of these actual transportation expenses, even though related to and occasioned by reason of the employee's transfer, as essentially personal, family, or living expenses of the employee, reimbursement for which represents compensation for services. For example, the Revenue Ruling specifically concludes that amounts received as allowances or reimbursements for meals and lodging of the employee and his family while awaiting permanent quarters at the new post of duty are includible in the employee's gross income.

There is nothing in the character of the expense of meals and lodging of the employee and his family while awaiting permanent quarters at the new post of duty which is different from the expenses concerning which advice has been sought. In both instances the expenses are, by their very nature essentially personal, family, or living expenses of the employee, rather than business expenses of the employer. See, in this connection, the recent decision of the United States Court of Appeals for the Seventh Circuit in Kenneth D. England, et ux. v. United States , entered on April 29, 1965, which held that the costs incurred by a transferred employee for meals, lodgings, and expenses incidental to securing housing at a new post of duty are personal living expenses of the employee, and that if they are provided by the employer, income is realized thereby.

The exclusion from gross income provided by Revenue Ruling 54-429 pertains solely to reimbursements or allowances for expenses paid or incurred by the employee in transporting himself, his immediate family, and household goods. Allowances or reimbursements for expenses related to the move, but which do not constitute the actual transportation costs, are compensatory in nature and includible in the employee's gross income for Federal income tax purposes. See Revenue Ruling 64-153, C.B. 1964-1 (Part 1), 70, which holds that a dislocation allowance received by a member of the uniformed services to cover costs which are merely related to, but not a part of, such actual transportation cost is includible in the recipient's gross income. See also O.D. 1135, supra .

Such allowances or reimbursements constitute wages for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, of subtitle C of the Code).

With respect to the deductibility by an employee of unreimbursed expenses incurred after December 31, 1963, for the reasonable expenses of moving household goods and personal effects from the employee's former residence to the new residence, and the reasonable expense of traveling, including means and lodging, from the former residence to the new place of residence, see section 217 of the Code as added by section 213 of the Revenue Act of 1964, Public Law 88-272, C.B. 1964-1 (Part 2), 6. With respect to the taxes imposed under the Federal Insurance Contributions Act and the Federal Unemployment Tax Act and the income tax withholding on these expenses, see sections 3121(a)(11) and 3306(b)(9) of the Code as added by Public Law 88-650, C.B. 1964-2,656, and section 3401(a)(15) of the Code as added by public Law 88-272, respectively.

Revenue Ruling 54-429, C.B. 1954-2, 53, amplified.