CRS Explains Special Tax Rules for Members of Congress

                       CRS REPORT FOR CONGRESS

[1] This report explains various special tax rules which apply to Members of Congress. Among the topics covered are immunity from income and personal property taxes levied by the jurisdictions comprising the Washington, D.C., metropolitan area; specific requirements that certain amounts be included in gross income for federal tax purposes; and rules allowing certain amounts to be excluded from gross income. Various rules requiring third-party payments of office-related expenses to be included in gross income are explained. Rules regarding deduction of a Member's living expenses incurred in the Washington metropolitan area are explained. Special rules regarding the allowance of other deductions are also explained.

CONTENTS

[2] This report examines provisions of federal law which set out tax rules that only apply to Members of Congress or that, while generally applicable to everyone, apply in special ways to Members of Congress. Generally applicable rules that apply to Members of Congress in the same way they apply to other taxpayers are not examined.

IMMUNITY FROM STATE AND LOCAL TAXES

INCOME TAXES

THE RULE STATED SIMPLY: A Member of Congress (other than one who represents a local jurisdiction) does not have to pay income taxes to any of the local jurisdictions in the D.C. metropolitan area.

TECHNICAL EXPLANATION: A provision of federal law that is NOT part of the Internal Revenue Code ¹ declares that no State (or any political subdivision thereof, such as a county) in which a Member of Congress ² "maintains a place of abode for purposes of attending sessions of Congress" is permitted, for purposes of any income tax imposed by the State (or political subdivision), to treat that Member as a resident or domiciliary of the State (or political subdivision) or to treat any compensation paid by the United States to that Member as income subject to any such income tax. For purposes of this rule, the term "State" is specially defined to include the District of Columbia. ³ Consequently, a Member of Congress does not have to pay any income tax imposed by any of the jurisdictions that constitute the greater Washington, D.C., metropolitan area unless he or she represents that Jurisdiction or the State or congressional district in which it is located. This tax exemption does NOT extend to a Member's spouse or dependents who earn income in the Washington, D.C., metropolitan area.

[3] It is interesting to note that Members of Congress exempted from income taxes imposed by the District of Columbia, Maryland, and Virginia by the language just quoted may also be at least partially exempt from income-tax liability to they represent in Congress. They may not be "residents" of those States under such States' own statutory definitions (e.g., because they are not present within such States for enough days during the taxable year). While these Members would likely nonetheless be taxable as "non-residents" of the States they represent in Congress, they would only be subject to tax to the extent they performed income-producing services within the States during the year (e.g., constituent service type activities while present in the States during "district work periods). Such limited liability could yield significant tax savings.

[4] The fact that congressional spouses are not exempt from the income taxes imposed by the jurisdictions comprising the Washington, D.C., metropolitan area can pose problems. For example, some of the local jurisdictions require married couples who file joint federal tax returns to file joint state returns also. This rule may preclude some congressional married couples from filing joint returns for federal tax purposes.

SPECIAL RULE FOR CONGRESSIONAL STAFF.

[5] Generally speaking, the staff employees of Members of Congress are not eligible to take advantage of any of the special tax rules applicable to the Members themselves. There is, however, one exception to this general denial. An employee on the staff of a Member of Congress who resides in the District of Columbia is exempt from the District's income tax if he or she is a bonafide resident of the same State the Member represents in Congress. ⁴

PERSONAL PROPERTY TAXES

THE RULE STATED SIMPLY: A Member of Congress (other than one who represents a local jurisdiction) does not have to pay personal property taxes to any of the local jurisdictions in the D.C. metropolitan area.

TECHNICAL EXPLANATION: Members of Congress are exempt from State or local personal property taxes ⁵ imposed by the jurisdictions comprising the greater Washington, D.C., metropolitan area. Again a provision of federal law that is NOT part of the Internal Revenue Code ⁶ declares that no State (or any political subdivision thereof) in which a Member of Congress (OTHER THAN a Member who represents the State or a congressional district located within the State) "maintains a place of abode for purposes of attending sessions of Congress" is allowed to "impose a personal property tax with respect to any motor vehicle owned by such Member." For purposes of this rule, the term "State" is specially defined to include the District of Columbia. ⁷ Consequently, a Member of Congress is, in effect, immune from the personal property tax which Virginia counties and cities impose on motor vehicles. This immunity also DOES explicitly apply to motor vehicles owned by the spouse of a Member.

WHAT CONSTITUTES INCOME

THE RULE STATED SIMPLY: Certain special types of receipts collected by a Member of Congress have explicitly been held to be "income." These types of receipts are certain excess or unsubstantiated official allowances for transportation and certain amounts received from private sources -- such as, honoraria; third-party payments for certain office-related expenses (like the costs associated with newsletters, the expense of operating intern programs, and the costs of official travel to the extent not reimbursed from official sources); bribes or other illegal receipts; and campaign contributions converted to personal use.

TECHNICAL EXPLANATION: Under section 61 of the Internal Revenue Code, the expression "gross income" is defined to mean "all income from whatever source derived." Because of the breadth of this definition, in addition to the salary a Member of Congress is paid as compensation for performing his or her official duties, certain other amounts which may be received from other sources during the taxable year have explicitly been held to be includible in the Member's income for federal tax purposes. The discussion immediately below describes the tax treatment that has been explicitly prescribed under regulations or official rulings of the Internal Revenue Service for some non-salary types of income which are sometimes received by Members of Congress.

OFFICIAL ALLOWANCES

[6] In 1977, the Internal Revenue Service ruled that official allowances paid by the House of Representatives generally are not includible in a Member's gross income because they do not generate an accession to the Member's personal wealth and because the Member does not have complete dominion over them. ⁸ Exceptions were noted for two types of allowances that CAN give rise to income. Both exceptions involved official travel.

[7] One of the exceptions applied in the case of allowances or reimbursements received by a Member in excess of amounts he or she actually paid as ordinary and necessary expenses for official transportation that was NOT "away from home" (e.g., allowances or reimbursements the Member received that were in excess of amounts the Member actually spent for such expenses as taxi fares for travel within the Washington, D.C., metropolitan area). ⁹ Citing Regulation section 1.162-17(b)(1), the ruling recounted that:

     . . . an employee 10/ need not report on the tax return expenses

[8] The other exception to the general rule that official allowances are excludable from a Member's gross income involved allowances or reimbursements to a Member for travel expenses incurred in connection with travel WHILE "away from home" (e.g., between the Washington, D.C., metropolitan area and the Congressional District which the Member represents in Congress). ¹¹ With respect to reimbursement of such expenses, the ruling noted that IRC section 274(d) and a regulation prescribed thereunder (Reg. section 1.274-5) disallow any business-expense deduction under IRC section 162 for away-from-home travel expenses unless the taxpayer substantiates the amount of the expenses and the time, place, and business purpose of the travel. Drawing on those restrictions on the deductibility of away-from-home travel expenses, the ruling concluded that failure to substantiate relevant expenses would render the total amount of reimbursement collected by the Member during the taxable year includible in his or her gross income. The ruling went on to note in this connection that, in lieu of detailed documentation, a recognized per diem allowance or fixed mileage allowance could be used to determine the AMOUNT of relevant expenses. However, the ruling also pointed out that, if a standard fixed mileage allowance higher than that recognized by the IRS for other taxpayers is used for reimbursement purposes, then any portion of the allowance collected by the Member in excess of expenses actually paid or incurred must be included in his or her gross income.

AMOUNTS RECEIVED FROM PRIVATE SOURCES

[9] In addition to salary and income derived from official allowances (both of which are paid from the U.S. Treasury), SOME Members of Congress also occasionally receive other amounts which come to them in some sense BECAUSE they are Members of Congress and which must be included in gross income. The discussion below examines several different types of this sort of privately supplied income.

HONORARIA.

[10] It is unlawful for a Member of Congress to accept any honorarium. ¹² However, the statutory definition for "gross income" set out at IRC section 61, in referring to "all income from whatever source derived," clearly contemplates even income that is received unlawfully. Consequently, if an honorarium is offered to, and unlawfully accepted by, a Members of Congress, the amount concerned is income to the Member.

[11] Formerly, even when a Member REFUSED a tendered honorarium and directed the party offering it to pay the amount concerned to a charity, the Member was required to include the amount in gross income. The underlying law has been changed, however. Section 7701(k) of the Internal Revenue Code presently states the following rule:

          TREATMENT OF CERTAIN AMOUNTS PAID TO CHARITY. -- In the

OFFICE-RELATED EXPENSES PAID BY THIRD PARTIES.

[12] Members of Congress are sometimes offered donations and other payments that bear in some manner on their performance of official duties. The Internal Revenue Service has issued rulings concerning the includibility of various such sums in a Member's gross income.

[13] It should be noted that, in the case of those types of payments which the Internal Revenue Service has held must be included in a Member's gross income, even if deductions are allowed for expenditure of the amounts concerned for the purposes described, the inflation of the amount of the Member's adjusted gross income caused thereby will generate distortions of other tax rules that incorporate "floors," "ceilings," or other limitations that are determined by reference to the amount of the taxpayers adjusted gross income.

NEWSLETTER FUNDS.

[14] Subscription charges or solicited donations received by a Member of Congress for use solely to defray publication and distribution costs of newsletters and other constituent reports or questionnaires have been held by the Internal Revenue Service to be includible in the Member's gross income. ¹³ However, the applicability of this ruling has been substantially restricted by an amendment to 39 U.S.C. section 3210 (the statutory provision regulating a Member's use of the franking privilege); the enactment of IRC section 527(g), which specifically relates to the tax treatment of newsletter funds; and, most importantly, certain changes in House and Senate rules. Under Rule XLV of the House of Representatives, a Member is not permitted to maintain any "unofficial office account" and the rule defines that term specifically to include "any newsletter fund referred to in section 527(g) of the Internal Revenue Code." The relevant Senate rule (Rule XXXVIII) is not quite so explicit but nevertheless holds that "[n]o Member may maintain or have maintained for his use an unofficial office account" and goes on to define the term "unofficial office account" to mean "an account or repository into which funds are received for the purpose, at least in part, of defraying otherwise unreimbursed expenses allowable in connection with the operation of a Member's office."

INTERN PROGRAMS.

[15] Donations solicited by a Member of Congress to defray the expenses of maintaining at least one type of intern program have been held by the Internal Revenue Service to be includible in the Member's gross income. ¹⁴ One feature of the program described in the ruling was that participating interns spent part of their time in the Member's office performing services identical to those performed by the Member's regular compensated staff personnel.

TRUSTS TO FINANCE OFFICIAL TRAVEL.

[16] The Internal Revenue Service has held that contributions to a trust established to finance travel by a Member of Congress and that Member's staff in performing official duties are not excludable "gifts" within the meaning of IRC section 102 but rather must be included in the Member's gross income. ¹⁵

PAYMENTS NOT OF A "LEGITIMATE NATURE" (I.E., BRIBES).

[17] The Internal Revenue Service has held that, if a contributor receives from a "political officeholder" a promise that is not of a "traditional and legitimate political nature" to perform some service (for example, a promise to "direct the appropriate governmental office to renew the business license of the contributor") in exchange for a payment from the contributor to a political campaign specified by the officeholder, then the amount of the payment concerned must be included in the officeholder's gross income."

CAMPAIGN CONTRIBUTIONS CONVERTED TO PERSONAL USE.

[18] For many years relevant tax law has required a Member of Congress who converts campaign funds to personal use to include the amount so converted in his or her gross income. ¹⁷ Law to this effect dates at least as far back as 1934. See Paschen v. United States, 70 F.2d 491 (7th Cir, 1934). STATUTORY law which implies that converted campaign funds must be included in gross income is currently set out at IRC section 527(d), which specifies certain dispositions of campaign funds that are NOT treated as income to a candidate (and thus suggests that OTHER dispositions must be so treated). Current regulations prescribed under IRC section 527 explicitly require converted campaign funds to be included in gross income. See Reg. section 1.527-5.

[19] Campaigning for election to public office is not considered a trade or business for federal tax purposes. ¹⁸ Consequently, it can be argued that income in the form of converted campaign funds is not self-employment income and thus cannot have the effect of enlarging the limitation imposed under IRC section 415(c)(1) on the amount which can be contributed to the special type of retirement plan referred to in section 415.

AN ITEM NOT CONSIDERED INCOME

DEATH GRATUITY

[20] A death gratuity paid from the contingent fund of the House of Representatives or the Senate has been held to be a "gift" which the recipient was entitled to exclude from gross income. ¹⁹

DEDUCTIONS

[21] There are some deductions which the Internal Revenue Code allows generally in the case of any taxpayer but which can apply in a special way in the case of a Member of Congress. The discussion immediately below focuses on such deductions.

ORDINARY AND NECESSARY BUSINESS EXPENSES

[22] A deduction for ordinary and necessary business expenses paid or incurred during the taxable year is allowed under IRC section 162. There are several types of business expenses which Members of Congress incur that are different from any that other taxpayers incur.

A MEMBER'S LIVING EXPENSES IN THE WASHINGTON, D.C., METROPOLITAN AREA.

THE RULE STATED SIMPLY: Some (not all) Members of Congress are allowed a special deduction of up to $3,000 for personal living expenses they incur while residing in the Washington, D.C., metropolitan area.

SOME PARENTHETICAL REMARKS: The relevant intent of this rule is not absolutely clear. At one place, legislative history of the pertinent statutory language suggests that it was intended to reduce the burden some Members suffer by virtue of maintaining two residences, one in the Washington, D.C., metropolitan area and another in the States or congressional districts they represent in Congress. An amendment to the proposal which enacted the special language that would have allowed the deduction only to those Members who do in fact maintain two residences was, however, defeated. The cynical might assume that the "real" intent of enacting the language must therefore have been to confer a "back door" pay raise. However, that assumption seems undercut by the observation that some Members are not entitled to claim the deduction and would thus be denied the disguised raise. It seems unlikely that an alternative of enacting supplemental salary for Members who can substantiate that they actually do maintain two residences could be passed. The existing rule is not indexed for inflation and the specified maximum amount of the deduction has not been increased in many years. An effort some years ago to raise the amount concerned, while initially successful, was retroactively repealed when it encountered significant adverse attention from the news media. Should the amount ever be successfully increased, simultaneous enactment of an automatic indexation mechanism might well be desirable.

TECHNICAL EXPLANATION: All taxpayers are allowed to claim business- expense deductions under section 162(a)(2) of the Internal Revenue Code for unreimbursed traveling expenses (i.e., costs of lodging, meals, and incidental expenses such as dry cleaning) which they incur while "away from home" in the pursuit of a trade or business. To qualify, relevant expenses must be incurred at, going to, or returning from a place that is distant enough from the taxpayer's "home" as to require a stop for sleep or rest. For federal income-tax purposes (i.e., for purposes of section 162(a)(2)), the "home" of a taxpayer who is not a Member of Congress is that taxpayer's principal place of business, which may be different from his or her place of abode (for example, in the case of someone who lives in New Jersey but who commutes daily to New York to work, New York is the individual's "home" for relevant purposes). Absent any special rule, the "home" of a Member of Congress for relevant purposes would be Washington, D.C. (i.e., his or her principal place of business). For both Members of Congress and other taxpayers, unreimbursed traveling expenses incurred while away from the principal place of business are deductible without limit. A special rule applies to Members of Congress, however.

[23] It is the first sentence of IRC section 162(a) which explicitly designates "traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business" to be among the ordinary and necessary business expenses for which a deduction may be claimed. The second sentence of IRC section 162(a) states that:

     For purposes of the preceding sentence, the place of residence

[24] The special rule means that, while a Member of Congress is residing in the Washington, D.C., metropolitan area to perform his or her official duties, the Member may deduct up to $3,000 worth of expenses for meals and lodging (and incidental expenses) if they otherwise qualify as "traveling expenses." That is, so long as the Member's "home" is far enough from Washington, D.C., that a trip there would require a stop for rest or sleep. A Member whose "home" is nearer than that (e.g., the Senators from Maryland and Virginia and the Members of the House of Representatives from he District of Columbia and those congressional districts in Maryland and Virginia which are not sufficiently distant from Washington, D.C.) is not eligible to deduct any living expenses incurred in the Washington, D.C., metropolitan area.

[25] It should be noted that the special designation of a Member's tax "home" only applies for purposes of living expenses incurred BY THE MEMBER, NOT those incurred by the Member's spouse or any other relative residing with the Member in his or her Washington- area abode. This observation complicates computation of the amounts of both types of expenses. Another complicating factor in the case of expenses incurred for MEALS in the Washington, D.C., metropolitan area is that such expenses appear to be subject to the 50 percent limitation imposed under IRC section 274(n). See discussion infra.

[26] In connection with LODGING expenses, IRC section 280A generally disallows all deductions, including deductions under IRC section 162(a), with respect to any "dwelling unit" used by a taxpayer during the taxable year as a "residence." For purposes of this disallowance, special rules set out under paragraphs (1) and (2) of IRC section 280A(d) clarify that a "dwelling unit" (such as a house, an apartment, or a condominium) is considered used as a "residence" if it is used "for PERSONAL purposes by the taxpayer . . . or by any members of the family (as defined in [IRC] section 267(c)(4)) of the taxpayer" for more than fourteen days in the taxable year (emphasis added). In the case of a Member of Congress who is "away from home in the pursuit of a trade or business" while he or she is residing in the Washington, D.C., metropolitan area, however, an argument can be made that occupancy of a "dwelling unit" is for BUSINESS, not PERSONAL, purposes. Consequently, if the unit is occupied by the Member alone, it retains its character as away-from- home "lodging" and expenses attributable to it remain deductible. By contrast, if someone in the Member's family occupies the unit for more than fourteen days during the taxable year and can identify no business purpose for doing so, then the general rule on its face appears to disallow any deduction for expenses attributable to the MEMBER's use of the unit. Theoretically, IRC section 280A has imposed this constraint from the date of its enactment in 1976. As a practical matter, since the $3,000 ceiling on a Member's deductible living expenses can fairly easily be reached without counting any "lodging" expenses, the constraint's actual impact has been negligible. For a time, however, the constraint threatened to be more severely restrictive.

[27] The $3,000 ceiling on the deduction of a Member's living expenses incurred in the Washington, D.C., metropolitan area was repealed by section 139 of Public Law 97-51. That repeal was to have been effective for taxable years beginning after December 31, 1981. The effective date was subsequently changed, however, by section 133a of Public Law 97-92 so that the repeal was to have gone into effect for taxable years beginning after December 31, 1980. Still later, the $3,000 ceiling was retroactively re-imposed by section 215(a) of Public Law 97-216. The net effect of all these changes was that the deduction for a Member's relevant living expenses was free from the $3,000 ceiling for only one taxable year (i.e., taxable year 1981).

[28] During the period following the initial repeal of the $3,000 ceiling and prior to its retroactive re-imposition, the constraint imposed by IRC section 280A on deducting expenses for "lodging" drew considerable attention. As a consequence of that attention, a special exception to the general rule of IRC section 280A was enacted. The exception states, in relevant part, as follows:

          Nothing in this section shall be construed to disallow any

[30] Of course, even though IRC section 280A no longer utterly precludes deductions for expenses of lodging shared by a Member of Congress with his or her family, IRC section 162 itself (as noted earlier) only allows a deduction for the Member's own lodging expenses, NOT those allocable to the Member's family. The same limitation applies in the case of other "traveling expenses" (such as, expenses of meals and incidental expenses) deductible under IRC section 162(a)(2). ²¹

SUBSTANTIATION AND USE OF A PER DIEM RATE.

[31] Deductions under IRC section 162 for traveling expenses are ordinarily disallowed in the case of ANY taxpayer UNLESS SUBSTANTIATED in accordance with IRC section 274 and Reg. section 1.274-5. Compliance with these substantiation requirements can be burdensome and would be especially onerous if significant amounts of living expenses incurred over long periods of time had to be allocated between a Member and the rest of his or her family. To relieve its Members from such burdens of substantiation, Congress enacted a provision OBLIGATING the Secretary of the Treasury to "prescribe amounts deductible (without substantiation) pursuant to the last sentence of section 162(a)." ²² That statutory obligation has since been repealed. ²³ However, while the obligation was still in effect, the Treasury did in fact publish relevant temporary regulations in the Federal Register of January 21, 1982, at pages 2986-2988. Those temporary regulations have not been rescinded.

[32] The temporary regulations in question ²⁴ set out two different methods which may be used to determine the amount of relevant living expenses a Member of Congress may deduct without substantiation. One method can only be used by a Member who BOTH OWNS THE RESIDENCE he or she occupies in the Washington, D.C., metropolitan area AND DEDUCTS INTEREST AND TAXES with respect to that residence. Using this method, the sum of living expenses deductible without substantiation is computed by multiplying TWO-THIRDS of a specified daily rate times the number of "Congressional days" falling within the taxable year. ²⁵ The other method is for use by two types of Members: (1) a Member who does not own the residence he or she occupies and (2) a Member who, though an owner of the residence he or she occupies, for some reason does not deduct either interest (e.g., if the residence is not mortgaged) or taxes with respect to that residence. Under this method, the sum of living expenses deductible without substantiation is computed by multiplying the FULL AMOUNT of the same specified daily rate times the number of "Congressional days" falling within the taxable year. ²⁶ For purposes of both methods, all days during the taxable year are considered "Congressional days" EXCEPT those in periods lasting five or more consecutive days (including Saturdays and Sundays) during which the particular chamber in which the Member serves was not in session. ²⁷ Of course, if a Member elects NOT to use either of the two special methods just described, relevant deductions may still be claimed. However, in such a case, the amounts of deductible expenses must actually be substantiated with adequate records. ²⁸

[33] Identifying the daily rate to be used under either of the two methods for computing the sum of living expenses deductible without substantiation requires a careful reading of the temporary regulations. They refer to "the maximum amount of actual subsistence for Washington, D.C. payable pursuant to 5 U.S.C. 5702(c)." At the time the temporary regulations were drafted, that provision, 5 U.S.C. 5702(c), conferred authority to prescribe, by regulation, conditions under which a Government employee's "actual and necessary expenses of official travel" would be reimbursed when such expenses exceeded the amount of the "maximum per diem allowance" otherwise made available. It happens that authority to prescribe such regulations is presently conferred under subsection (a)(1)(B) of 5 U.S.C. 5702, rather than under subsection (c) of section. So, the statutory cross-reference in the temporary regulation is technically inaccurate at present. Nevertheless, it can be argued that, since the relevant authority still exists, the technical inaccuracy of the cross-reference should be overlooked and the current provision which is substantively identical to the former provision should be deemed to be the one referred to in the temporary regulation. So doing renders the relevant inquiry: what is the "maximum amount of actual subsistence for Washington, D.C., payable pursuant to" 5 U.S.C. section 5702(a)(1)(B)?

[34] Under 5 U.S.C. section 5702(a)(1)(A), inter alia, a Federal Government employee, "when traveling on official business away from . . . the employee's home or regular place of business . . . is entitled to . . . a per diem allowance at a rate not to exceed that established by the Administrator of General Services for travel within the continental United States." However, under the relevant part of 5 U.S.C. section 5702(a)(1)(B), a Federal Government employee, "when traveling on official business away from . . . the employee's home or regular place of business . . . is entitled to . . . reimbursement for the actual and necessary expenses of official travel not to exceed an amount established by the Administrator for travel within the continental United States." Relevant regulations have indeed been prescribed by the Administrator of General Services. The regulation set out at 41 C.F.R. section 301-11.303 is captioned "What is the maximum amount that I may be reimbursed under actual expense?" Under this regulation, the maximum amount which can be reimbursed is "limited to 300 percent (rounded to the next higher dollar) of the applicable maximum per diem rate." In its turn, 41 C.F.R. section 301-11.6, captioned "Where do I find maximum per diem and actual expense rates?," refers to tables in 41 C.F.R. chapter 301, Appendix A, or to the internet site [http://Policyworks.gov/perdlem]. For calendar year 2000, the rate listed for "Washington, D.C.(also the cities of Alexandria, Falls Church, and Fairfax, and the counties of Arlington, Loudon, and Fairfax in Virginia; and the counties of Montgomery and Prince George in Maryland)" is a composite of a maximum lodging amount equal to $118 and a meals-and-incidental-expenses (MI&E) rate of $46 for a total maximum per diem rate of $164. ²⁹ Hence, the relevant maximum amount of actual expense which can be reimbursed for staying in the Washington, D.C. metropolitan area is $492 (i.e., 300 percent of $164).

[35] Even if one assumes, more conservatively, that the reference should be interpreted as specifying only the identified per them rate itself (i.e., $164 per day), little practical consequence would follow for most Members. There are typically about 120 to 130 "Congressional days" in a taxable year. Even if there were as few as 100 "Congressional days" during a particular year, the per diem rate would only have to exceed $30 to consume the entire allowed deduction of $3,000. However, if a Member leaves office relatively early in a taxable year (by virtue of retirement, death, resignation, or expulsion), the difference between the two possibly applicable rates could generate some difference in ultimate tax liability.

[36] The various types of living expenses contemplated by the special deduction allowed Members under IRC section 162 are described in the temporary regulations, as follows:

     Meals include the actual cost of food and expenses incident to

[38] An additional point which, though perhaps obvious to some, seems worth brief mention here is that, if living expenses are deducted under IRC section 162, those same expenses may not also be deducted under some other section of the Internal Revenue Code. Thus, for example, the Internal Revenue Service has explicitly ruled that a Member of Congress is not permitted to deduct the same item simultaneously as both a "traveling expense" under IRC section 162 and a "moving expense" under IRC section 217. ³⁰

   THE TWO-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS AND

[40] The statutory definition for the term "miscellaneous itemized deductions" supplied by IRC section 67(b) uses curiously backward language to specify that the term means itemized deductions other than those allowed under a list of specified provisions. Since the list DOES NOT IDENTIFY any deduction allowed under IRC section 162, such deductions therefore ARE "miscellaneous itemized deductions" subject to the two-percent floor. One deduction allowed under IRC section 162 is that for away-from-home travel expenses, including such expenses incurred by Members of Congress while abiding in the Washington, D.C., metropolitan area.

[41] An argument can be made that the way Congress originally intended IRC sections 67 and 162 to interact with one another is not obvious from the face of relevant statutory law. ³² A provision of the Tax And Miscellaneous Revenue Act of 1988 (TAMRA) enacted a relevant "clarification." ³³ It explicitly states that the FLOOR APPLIES BEFORE THE CEILING. The House and Senate committee reports both supply the same example to illustrate what effect this ordering rule has. ³⁴ That example is stated, as follows:

     . . . assume that a Member with AGI (i.e., adjusted gross

     (1) In general. With respect to the deduction for living

A WORD ABOUT THE THIRD SENTENCE OF SECTION 162(a).

[44] Section 1938(a) of the Energy Policy Act of 1992 (Public Law 102-486; 106 Stat. 2776 (October 24, 1992)) added a third sentence in IRC section 162(a), immediately following the sentence which declares that, for purposes of deductions allowed for travel expenses incurred WHILE AWAY FROM HOME, the "home" of a Member of Congress is the congressional district or State he or she represents and which also imposes the familiar $3,000 ceiling on such deductions. That third sentence of IRC section 162(a) states, as follows:

     For purposes of paragraph (2) [WHICH IS THE PARAGRAPH OF

     14. DENY DEDUCTION FOR TRAVEL EXPENSES PAID OR INCURRED IN

[45] Unreimbursed ordinary and necessary travel expenses paid or incurred by an individual in connection with temporary employment away from home (e.g., transportation costs, and the cost of meals and lodging) are generally deductible, subject to the two-percent floor on miscellaneous itemized deductions. Travel expenses paid or incurred in connection with indefinite employment away from home, however, are not deductible.

[46] The position of the Internal Revenue Service as to whether employment is temporary or indefinite is as follows:

(1) If a taxpayer anticipates employment to last for less than one year, whether such employment is temporary or indefinite will be determined on the basis of the facts and circumstances.

(2) If a taxpayer anticipates employment to last for one year or more and that employment does, in fact, last for one year or more, there is a presumption that the employment is not temporary but rather is indefinite, and that the taxpayer is not away from home during the indefinite period of employment. However, under certain circumstances, this one-year presumption of indefiniteness may be rebutted where the employment is expected to, and does, last for one year or more, but less than two years.

(3) An expected or actual stay of two years or longer will be considered an indefinite stay, regardless of any other facts and circumstances.

HOUSE BILL

[47] No provision.

SENATE AMENDMENT

[48] No provision. (However, H.R. 11 as amended by the Senate contains the same provision that is included in the conference report below.)

CONFERENCE AGREEMENT

          The conference agreement treats a taxpayer's employment

CALCULATING THE AMOUNT OF THE LIVING-EXPENSE DEDUCTION.

[49] At one time, in the months immediately preceding the due date for filing individual income tax returns, the Internal Revenue Service maintained an office in the Cannon House Office Building at which Internal Revenue Service personnel were present to answer questions and virtually all IRS Forms were available. At about the same time the Internal Revenue Service stopped maintaining such an office, it also discontinued publication of an unofficial worksheet which had been available at the office and which was for use in calculating the amount of the deduction an eligible Member could claim for living expenses incurred in the Washington, D.C., metropolitan area. Hence, to determine the amount of the deduction accurately, it may be advisable to consult a tax professional.

OTHER AWAY-FROM-HOME "TRAVELING EXPENSES".

[50] In addition to those living expenses incurred in the Washington, D.C., metropolitan area which are treated as "traveling expenses" by virtue of the second sentence of IRC section 62(a), a Member may also deduct unreimbursed "traveling expenses" incurred for business travel that is not only "away" from that Member's tax "home" (i.e., the State or congressional district represented) but is also "away" from Washington. Ordinarily, substantiation of the amounts concerned is required. In this regard, the Internal Revenue Service has ruled that the per them allowance specified in the Federal Travel Regulations for the locality involved and the mileage allowances specified by the Internal Revenue Service itself will satisfy the substantiation and adequate accounting requirements of Reg. sections 1.162-17(b) and 1.274-5. ³⁸ There is no limitation on the amount of these expenses which may be deducted.

EXPENSES OF OPERATING AN INTERN PROGRAM.

[51] In a ruling discussed supra in connection with types of income from private sources that have been held explicitly includible in a Member's gross income, the Internal Revenue Service has also held that amounts paid from solicited donations to compensate interns are deductible business expenses under IRC section 162. ³⁹

NEWSLETTER PUBLICATION AND DISTRIBUTION EXPENSES.

[52] In another ruling discussed supra in connection with types of income from private sources that have been held explicitly includible in a Member's gross income, the Internal Revenue Service has also held that publication and distribution expenses incurred by a Member of Congress in connection with newsletters and other reports to constituents and defrayed by earmarked subscription fees and solicited contributions are deductible under IRC section 162 as business expenses incurred as an employee. ⁴⁰

ENTERTAINMENT EXPENSES.

[53] Determining the extent to which entertainment expenses are deductible is a multi-step process. As an initial matter, the expense must qualify as an ordinary and necessary business expense within the general meaning of IRC section 162. If it is, then the deduction must not be specifically disallowed under any of the special rules of IRC section 274(a). In a relevant ruling, ⁴¹ the Internal Revenue Service described three examples of entertainment expenses incurred by a hypothetical Member of Congress and held that only one of them would be deductible. The situation involving the expense held to be deductible was described as follows:

     A, a Member of Congress, pays for the lunch of a constituent

[55] By contrast, in the case of expenses incurred by a Member of Congress for a cocktail party and buffet to which a few constituents were invited but at which the surroundings were NOT conducive to the discussion of business, the ruling disallowed any deduction, citing Reg. section 1.274-2(c)(7) to the effect that an expense cannot qualify as directly related to the taxpayer's trade or business if the entertainment concerned occurs under circumstances where there is little or no possibility of engaging in the active conduct of trade or business.

[56] The third example involved expenses 'incurred by a Member of Congress for a party for his staff members, secretaries, and aides, all of whom were compensated out of his annual congressional hiring allowance. The ruling held that such expenses were not deductible. The rationale was that the exception to the general disallowance rule of IRC section 274(a) that is set out at section 274(e)(5) and that covers expenses for recreational, social, and similar activities primarily for the benefit of employees would not apply since Congress, rather than the individual Member, was the employer of those attending the party and thus the requisite employer-employee relationship between the individual incurring the expense and those benefitting from it was absent. ⁴²

[57] The Tax Reform Act of 1986 amended IRC section 274, inter alia, by adding to it a new subsection (n) under which the amount allowable as a deduction for "any expense for food or beverages" or for any entertainment expense is not permitted to exceed 80 percent of the amount which "but for this paragraph" would be deductible. ⁴³

CERTAIN OTHER BUSINESS EXPENSES.

[58] Amounts paid from a Member's personal funds to defray the costs of reasonable salaries for staff employees who were in addition to those paid from official congressional allowances and who were needed to handle an unusually heavy workload have been held to be deductible business expenses incurred as an employee. ⁴⁴ That same ruling also held, however, that costs similarly incurred for extra office equipment could only be recovered over time through deductions for depreciation (under IRC sections 167 and 168) rather than all at once in the year in which they were actually paid.

[59] A later ruling ⁴⁵ amplified Revenue Ruling 73-464 to make clear that, under appropriate circumstances, not only staff salaries, but also office rent and "supplies" (i.e., items consumed within the taxable year) are deductible under IRC section 162(a). ⁴⁶

[60] Legal expenses incurred by a Member of Congress in connection with litigation relating to congressional redistricting have been held to be nondeductible "personal" expenses of the kind contemplated by IRC section 262 rather than deductible business expenses within the meaning of IRC section 162. ⁴⁷

CHARITABLE CONTRIBUTIONS

[61] Like any other taxpayer, a Member of Congress is allowed a deduction under IRC section 170 for charitable contributions made during the taxable year. There have been a few rulings, however, which have specifically focused on charitable contributions made by Members of Congress. Several have confirmed the allowance of deductions for certain types of contributions. For example, one rather old ruling held that a Member's return of a portion of his salary to the Treasury was a deductible charitable contribution. ⁴⁸ A more recent ruling held that, when a trust which had been established to finance certain travel expenses of a Member of Congress was terminated and its assets were distributed to various charitable organizations, the distributions would be deductible charitable contributions within the meaning of IRC section 170.

[62] A deduction has been DISALLOWED for the donation of a Member's congressional papers to a university. The essential rationale was that the Member had a zero basis in the materials donated. ⁴⁹

MOVING EXPENSES

[63] A deduction is allowed under IRC section 217 for moving expenses incurred during the taxable year in connection with the commencement of work by the taxpayer at a new "principal place of work." The Internal Revenue Service has specifically ruled that a claim of a deduction under IRC section 217 by a NEW Member of Congress for the expenses of moving to the Washington, D.C., metropolitan area is not inconsistent with a claim of a deduction under IRC section 162 for the same taxable year for living expenses incurred while residing in the Washington area. ⁵⁰ The ruling did go on to point out, however, that the SAME EXPENSES could not be deducted under both sections.

CONTRIBUTIONS RETURNED TO DONORS

[64] The Internal Revenue Service has ruled that contributions collected by a trust established to finance travel by a Member of Congress that remained unspent as of the date the trust was terminated and that were subsequently RETURNED TO DONORS could be deducted by the Member as a business loss. ⁵¹

ODDS AND ENDS

WITHHOLDING

[65] Subchapter A of the Internal Revenue Code (IRC sections 3401 et seq.) relates to "withholding from wages." For purposes of the rules regarding withholding, IRC section 3401(a) defines the term "wages" to mean, in pertinent part, "all remuneration . . . for services performed by an employee for his employer. In its turn, IRC section 3401(c) then defines the term "employee" to include, inter alia, an . . . elected official of the United States." Thus, FEDERAL income taxes MUST be withheld from congressional salaries. VOLUNTARY withholding of STATE income taxes, if any, is permitted (see H.Res. 732, 94th Congress, 1st Session (November 4, 1975)).

EXCISE TAX ON ACTS OF SELF-DEALING WITH PRIVATE FOUNDATIONS

[66] If a Member of Congress participates in any act of "self- dealing" with a private foundation, he or she is subject to the heavy excise tax imposed under IRC section 4941. ⁵² Various acts of self- dealing are described under subsection (d) of IRC section 4941 and under Reg. sections 53.4941(d)-1 and 53.4941(d)-2. All involve transactions or other dealings between a private foundation and a so- called "disqualified person." For relevant purposes, the term "disqualified person" is defined specifically to include an individual holding "an elective public office in the . . . legislative branch of the Government of the United States" (see IRC sections 4946(a)(1)(I) and 4946(c)(1)).

² That is any Member of Congress OTHER THAN a Member who represents the State or a congressional district located within the State.

³ 4 U.S.C. section 113(b)(2).

⁴ See the District of Columbia Code, 1981 Edition, at section 47-1801.4(17), second sentence.

⁵ Such as, Virginia's personal property tax on motor vehicles.

⁶ See note following 4 U.S.C. section 113 and referring to Public Law 99-190, as amended by Public Law 100-202.

⁷ Ibid.

⁸ See Revenue Ruling 77-323. CAUTION: This ruling is partially obsolete in that it includes descriptions of various types of allowance payment schemes that are no longer used by the House of Representatives. The ruling has not been revoked however and therefore presumably reflects current "law" as to the taxability of travel expense reimbursements.

⁹ For purposes of rules relating to travel while not "away from home," the tax "home" of a Member of Congress is the place where he or she pursues his or her trade or business, Washington, D.C.

¹⁰ Although the ruling does not mention the point, it can be argued that, for purposes of the deductibility of ordinary and necessary expenses a Member incurs in connection with performing his or her official duties, the Member is an "employee." A statutory definition set out at IRC section 7701(a)(26) states that the term "trade or business" includes "the performance of the functions of a public office." Since a Member performs such functions and, in doing so, does not act in the capacity of an independent contractor, the only alternative is that he or she acts in the capacity of an "employee."

¹¹ For ordinary taxpayers, "home" for tax purposes is deemed to be the principal place of business. Thus, for an ordinary individual who works in Washington, D.C., and lives in one of the surrounding jurisdictions, "home" is Washington. However, solely for purposes of the deduction that is allowed under IRC section 162 for the expenses of business related travel while "away from home," a Member of Congress is subject to a special rule according to which his or her tax "home" is deemed to be the District or State he or she represents in Congress. This special rule is discussed in significantly greater detail elsewhere in this report.

¹² See 5 USC Appendix 7 section 501(b).

¹³ See Revenue Ruling 73-356.

¹⁴ See Revenue Ruling 75-146.

¹⁵ See Revenue Ruling 76-276.

¹⁶ See Revenue Ruling 75-103.

¹⁷ Such conversions may or may not be lawful. A provision of the Federal Election Campaign Act allows certain Members to undertake such conversions without criminal penalties. However, for tax purposes, it is immaterial whether such a conversion is lawful or unlawful. In either case, the sum converted is income subject to tax.

¹⁸ See McDonald v. Commissioner, 323 U.S. 57 (1944).

¹⁹ See Revenue Ruling 55-609.

²⁰ See IRC section 280A(f)(4).

²¹ This conclusion reflects an assumption that no other person in the Member's family can establish that he or she is also "away from home in the pursuit of a trade or business" while residing in the Washington, D.C., metropolitan area.

²² See IRC section 280A(f)(4)(B). It should be noted that IRC sections 162 and 280A, including the special "away-from-home" exception discussed supra, apply generally to All taxpayers. By contrast, the special provision obligating the Secretary of the Treasury to promulgate relevant regulations for nonsubstantiation of deductible living expenses ONLY applied in the case of Members of Congress.

²³ See Pub.L. 97-216, section 215(b).

²⁴ See 26 C.F.R. section 5e.274-8.

²⁵ See Temp. Reg. section 5e.274-8(c)(1)(i).

²⁶ See Temp. Reg. section 5e.274-8(c)(1)(ii).

²⁷ See Temp. Reg. section 5e.274-8(d).

²⁸ For guidance in such cases, see Revenue Ruling 80-62, as modified by Revenue Ruling 87-93.

²⁹ See 41 C.F.R. (July 1, 994 edition), at page 166. ³⁰ See Revenue Ruling 73-468.

³¹ See IRC section 67(a).

³² There are at least two ways in which IRC sections 67 and 162 could be interpreted as interacting with one another. One interpretation would require the amount of each deduction subject to the floor to be computed first without regard to the floor. Assume that the amount of pertinent living expenses exceeded $3,000 so that, by virtue of the ceiling, exactly $3,000 worth of such expenses would be deductible if IRC section 67 were ignored. The $3,000 would then be added together with any additional otherwise allowed deductions subject to the floor. From this sum, an amount equal to two percent of the taxpayer's adjusted gross income would be subtracted. Any remainder would then be deductible. Following such an interpretation would amount to pro rating the floor among whatever deductions subject thereto the taxpayer could claim for the year in question. In other words, the $3,000 ceiling on the special deduction for a Member's living expenses incurred in the Washington, D.C., metropolitan area would be reduced by two percent of a fraction of the Member's adjusted gross income. The fraction would equal the amount of otherwise deductible living expenses incurred (up to $3,000) divided by total "miscellaneous itemized deductions" for the year. This interpretation would, in effect, apply the CEILING BEFORE THE FLOOR. Despite the apparent logic of so interpreting the two Code provisions' interaction, it is not the interpretation which Congress evidently intended. As explained in the accompanying text, the interpretation evidently intended by Congress was just the opposite.

³³ Section 1001(f)(1) of TAMRA (Public Law 100-647) amended IRC section 67 by adding a new subsection (f) thereto. The new section 67(f) is captioned "coordination with other limitation" and reads, as follows:

          This section shall be applied before the application of the

³⁴ It is set out in H.Rept. 100-795 at page 9, footnote 7, and in S.Rept. 100-445 at page 10, footnote 9.

³⁵ This figure is now, of course, 50-percent.

³⁶ The temporary regulation, in effect, takes a backwards approach from that described in the preceding paragraph: focusing on the proration of the amount allowed by the two-percent floor.

³⁷ The example in the regulation is stated, as follows:

         EXAMPLE. For 1987 A, a member of Congress, has adjusted

³⁹ See Revenue Ruling 75-146.

⁴⁰ See Revenue Ruling 73-356.

⁴¹ See Revenue Ruling 78-373.

⁴² A subsequent private letter ruling (Letter Ruling 8029034) allowed a deduction for expenses incurred by an "elected public official" for a similar party. The distinguishing feature of the arrangements for the party involved in the letter ruling was that the elected public official used a special official expense allowance to pay for the party and, thus, was acting as an agent on behalf of the employer-government.

⁴³ If a Member of Congress elects to substantiate living expenses incurred while residing in the Washington, D.C., metropolitan area rather than to use either of the two estimation methods described in Temp. Reg. section 5e.274-8(c)(1), then THE MEMBER'S OWN MEALS may be subject to the 80 percent limitation. If so, the amounts deducted must be reported separately on the Form 2106 and the 80 percent limitation is applied BEFORE either the two- percent floor of IRC section 67(a) or the $3,000 ceiling of IRC section 162(a). Although there is no explicit statutory authority for this special ordering rule, it reflects statements appearing in the House and Senate committee reports accompanying the TAMRA legislation. See H.Rept. 100-795, at page 9, and S. Rept. 100-445, at page 10. Both reports explain the "clarification" added to IRC section 67 with respect to the interaction of the two-percent floor on miscellaneous itemized deductions and the $3,000 ceiling on deductions for Members' relevant living expenses by asserting that:

          This clarification is consistent with the general rule

⁴⁵Revenue Ruling 84-110.

⁴⁶ See also Frank v. United States, 577 F.2d 93 (9th Cir. 1978), which held that expenses incurred by a Senate STAFF EMPLOYEE in performing official duties were deductible under IRC section 162 even though the sum of these expenses consistently exceeded that employee's annual Senate salary.

⁴⁷ See Revenue Ruling 67-457.

⁴⁸ See Revenue Ruling 56-126.

⁴⁹ See James H. Morrison, 71 T.C. 64 (1979), affirmed sub. nom. Morrison v. Commissioner, 611 F.2d 98 (5th Cir. 1980).

⁵⁰ See Revenue Ruling 73-468.

⁵¹ See Revenue Ruling 76-276.

⁵² The foundation manager who participates in such an act is also subject to the same heavy excise tax. Furthermore, the foundation itself may incur liability for such tax. If a particular foundation incurs such liability willfully and also either repeatedly or "flagrantly," then it is subject to an involuntary termination under IRC section 507. This is a very severe penalty amounting to dissolution of the foundation accompanied by a loss of all of its assets.