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CRS REPORT OUTLINES SPECIAL TAX RULES FOR MEMBERS OF CONGRESS.

DEC. 28, 1992

93-18 A

DATED DEC. 28, 1992
DOCUMENT ATTRIBUTES
  • Authors
    Burdette, Robert B.
  • Institutional Authors
    Congressional Research Service
  • Index Terms
    tax policy
    congress, members
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 93-12365 (26 original pages)
  • Tax Analysts Electronic Citation
    93 TNT 253-36
Citations: 93-18 A

Special Tax Rules for Members of Congress

                         Robert B. Burdette

 

                        Legislative Attorney

 

                        American Law Division

 

 

                          December 28, 1992

 

 

SUMMARY

This report supplies simplified explanations for provisions of federal law that create tax rules which apply only to Members of Congress or which, though applicable to everyone, apply in special ways to Members of Congress. General rules that apply to Members of Congress in the same way they apply to other taxpayers are not discussed.

The discussion begins by noting that Members of Congress are immune from local jurisdictions' income taxes and Virginia's personal property tax. The report also notes, in passing, that the District of Columbia exempts certain congressional staff personnel from its income tax.

The next special rules to be examined are those under which certain amounts have to be counted as income for federal tax purposes. Among the amounts discussed are excess or unused funds supplied by Congress for its Members' official travel or transportation and certain sums derived from private sources, such as donations collected by Members to defray expenses incurred in publishing and distributing newsletters or to maintain intern programs. The discussion points out that, while Members are no longer permitted to accept honoraria, the practice of refusing honoraria and directing that the amount concerned should instead be donated to charity no longer results in incidental tax consequences. The discussion also notes that amounts which Members might receive that are not of a "legitimate nature" (i.e., bribes) and likewise that any campaign funds converted by Members' to personal use must be declared as income.

Conversely, the report points out that official death gratuities, certain proceeds from the sale of a principal residence by a Member over 55 years of age, and rolled-over gain on a sale of a principal residence of a Member are not considered income for federal tax purposes.

Special deductions accorded Members of Congress are examined. The special rule allowing a Member to deduct up to $3,000 of living expenses incurred while residing in the Washington, D.C., metropolitan area is explained. The interaction of that special rule with the so-called "two-percent floor" applicable to miscellaneous itemized deductions is also explained. Deductions allowed for a variety of other business expenses peculiar to Members of Congress are also discussed.

The report concludes by pointing out that congressional pay is subject to withholding and that a special excise tax applies to any acts of self-dealing by Members with private foundations.

                          TABLE OF CONTENTS

 

 

A WORD ABOUT IMMUNITIES

 

 

  INCOME TAXES

 

 

     Special Rule For Congressional Staff

 

 

  PERSONAL PROPERTY TAXES

 

 

WHAT CONSTITUTES INCOME

 

 

  OFFICIAL ALLOWANCES

 

 

  INCOME FROM PRIVATE SOURCES

 

 

     Honoraria

 

 

     Office-Related Expenses Paid By Third Parties

 

 

          Newsletter Funds

 

          Intern Programs

 

          Trusts To Finance Official Travel

 

          Payments Not Of A "Legitimate Nature" (i.e., Bribes)

 

 

     Campaign Contributions Converted To Personal Use

 

 

SOME ITEMS THAT ARE NOT CONSIDERED INCOME

 

 

  DEATH GRATUITIES

 

 

  PROCEEDS FROM SELLING PRINCIPAL RESIDENCE (WHERE THE SELLER IS OVER

 

    THE AGE OF 55)

 

 

  ROLLOVER OF GAIN ON THE SALE OF A PRINCIPAL RESIDENCE

 

 

DEDUCTIONS

 

 

  ORDINARY AND NECESSARY BUSINESS EXPENSES

 

 

     A Member's Living Expenses In The Washington, D.C. Metropolitan

 

       Area

 

 

          The $3,000 Ceiling Generally

 

          Substantiation And The Per Diem Rate

 

          The Two-Percent Floor On Miscellaneous Itemized

 

          Deductions And The Interaction Between It And

 

            The $3,000 Ceiling On Living Expenses

 

          Claiming Living-Expense Deductions On The Return

 

 

     Other Away-From-Home "Traveling Expenses"

 

     Expenses Of Operating An Intern Program

 

     Newsletter Publication And Distribution Expenses

 

     Entertainment Expenses

 

     Certain Other Business Expenses

 

 

  CHARITABLE CONTRIBUTIONS

 

 

  MOVING EXPENSES

 

 

  CONTRIBUTIONS RETURNED TO DONORS

 

 

ODDS AND ENDS

 

 

  WITHHOLDING

 

 

  EXCISE TAX ON ACTS OF SELF-DEALING WITH PRIVATE

 

    FOUNDATIONS

 

 

This report supplies simplified explanations for provisions of federal law that create tax rules which apply only to Members of Congress or which, though applicable to everyone, apply in special ways to Members of Congress. General rules that apply to Members of Congress in the same way they apply to other taxpayers are not discussed.

A WORD ABOUT IMMUNITIES

INCOME TAXES

A provision of federal law that is NOT part of the Internal Revenue Code 1 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 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. 2 Consequently, a Member of Congress is, in effect, immune from any income tax imposed by any of the jurisdictions located in 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 immunity does not extend to a Member's spouse or dependents who earn income in the Washington, D.C., metropolitan area.

Special Rule For Congressional Staff

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 axiom. 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 bona fide resident of the same State the Member represents in Congress. 3

PERSONAL PROPERTY TAXES

Members of Congress are likewise exempt from State or local personal property taxes 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 4 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. 5 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

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 must also be included 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

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. 6 Exceptions were noted for two types of allowances that can give rise to income. Both exceptions involved official travel.

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). 7 Citing Regulation section 1.162-17(b)(1), the ruling recounted that:

. . . an employee 8 need not report on the tax return expenses for travel, transportation, entertainment, and similar purposes paid or incurred solely for the benefit of an employer if such employee is required to account and does account to the employer. The expenses involved are those that are charged directly or indirectly to the employer or for which the employee is paid through advances, reimbursements, or otherwise, provided the total amount is equal to such expenses. In such a case, when reporting, the taxpayer need only state that the total of amounts charged directly or indirectly to the employer and received from the employer as advances or reimbursements did not exceed the ordinary and necessary business expenses paid or incurred by the employee.

Section 1.162-17(b)(2) of the regulations provides that if the total of amounts charged directly or indirectly to the employer as advances, reimbursements, or otherwise, exceeds the ordinary and necessary business expenses paid or incurred by the employee and the employee is required to and does account to the employer for such expenses, the taxpayer must include such excess in income and so state on the return.

Hence, it is the EXCESS, if any, of receipts (in the form of official allowances or reimbursements) over amounts actually spent for local travel, transportation, entertainment, and similar purposes, that must be included in a Member's income.

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). 9 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.

INCOME FROM PRIVATE SOURCES

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

It is unlawful for a Member of Congress to accept any honorarium. 10 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.

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 case of any payment which, except for section 501(b) of the Ethics in Government Act of 1978 [i.e., 5 USC Appendix 7 section 501(b)], might be made to any officer or employee of the Federal Government but which is made instead on behalf of such officer or employee to an organization described in section 170(c) [i.e., a public charity] --

(1) such payment shall not be treated as received by such officer or employee for all purposes of this title and for all purposes of any tax law of any State or political subdivision thereof, and

(2) no deduction shall be allowed under any provision of this title (or of any tax law of a State or political subdivision thereof) to such officer or employee by reason of having such payment made to such organization.

For purposes of this subsection, a Senator, a Representative in, or a Delegate or Resident Commissioner to, the Congress shall be treated as an officer or employee of the Federal Government.

This change in underlying law rendered a large body of complicated and interrelated rules inapplicable.

Office-Related Expenses Paid By Third Parties

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.

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 taxpayer's adjusted gross income.

Newsletter Funds

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. 11 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

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. 12 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

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. 13

Payments Not Of A "Legitimate Nature" (i.e., Bribes)

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. 14

Campaign Contributions Converted To Personal Use

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. 15 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.

Campaigning for election to public office is NOT considered a trade or business for federal tax purposes. 16 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.

SOME ITEMS THAT ARE NOT CONSIDERED INCOME

The discussion immediately below describes certain amounts which explicit regulations or rulings of the Internal Revenue Service specify may be excluded from the gross income of a Member of Congress receiving them. In each of the instances described, the amount concerned is similar to a like amount regarded as excludable from income by a taxpayer who is not a Member of Congress. In other words, the exclusions described here merely represent special applications of generally available exclusions.

DEATH GRATUITIES

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. 17

PROCEEDS FROM SELLING PRINCIPAL RESIDENCE (WHERE THE SELLER IS OVER THE AGE OF 55)

Like any other taxpayer, a Member of Congress is entitled to claim the one-time exclusion of gain from the sale of a principal residence which IRC section 121 confers on a taxpayer who has attained the age of 55. The application of this exclusion in the case of a Member of Congress, however, can be complicated by the fact that many Members maintain residences in both the Washington, D.C., metropolitan area and the States, congressional districts, and possessions which they represent in Congress. A question can arise as to which is the Member's "principal" residence eligible for the exclusion. Although private letter rulings cannot be relied upon as precedent, it nevertheless seems noteworthy that at least one such ruling has been made concerning the application of IRC section 121 to a Member of Congress with a residence in the Washington, D.C., metropolitan area and another in the constituency. 18 That ruling began by taking note of the fact that Article I, Section 2, clause 2, of the United States Constitution declares that "[n]o Person shall be a Representative . . . who shall not, when elected, be an Inhabitant of that State in which he shall be chosen." 19 The ruling recognized that this constitutional requirement does not establish that the residence which a Member maintains in the State in which he or she is an inhabitant on the date he or she is elected is necessarily that Member's "principal" residence within the meaning of IRC section 121. Instead, the ruling concluded that a determination as to which of more than one residences is a Member's "principal" residence is to be made in accordance with the principles set out in Revenue Ruling 77-298. That ruling had originally been issued to clarify the application of a different section of the Internal Revenue Code (IRC section 1034, not IRC section 121). It had held that, as between a residence maintained in the Washington, D.C., metropolitan area and a residence maintained in the congressional district represented, the one occupied a majority of the time would ordinarily be considered the "principal" residence.

Should a Member of Congress elect to claim the exclusion allowed under IRC section 121, a special rule for determining the amount of gain involved MAY apply. As explained infra, Members of Congress are allowed to deduct certain living expenses they incur while residing in the Washington, D.C., metropolitan area. There is a temporary regulation 20 which applies in the case of a Member of Congress who owns the residence he or she occupies in the Washington, D.C., metropolitan area and who uses either of two special methods for computing deductible living expenses without ordinarily required substantiation which another related temporary regulation 21 permits. Both of the special computational methods involve multiplication of a designated constant amount of dollars times the number of "Congressional days" there are in the taxable year concerned. If the Member uses either method in claiming deductions for living expenses, then, according to the temporary regulation, "the Member must treat as an adjustment to the basis of such residence an amount equal to 20 percent of the maximum amount of actual subsistence multiplied by the number of Congressional days."

For example, suppose a Member of Congress owns and occupies a residence in the Washington, D.C., metropolitan area; has an otherwise adjusted basis in that residence of $100,000; deducts interest and taxes with respect to the residence; and uses the relevant special computational rule to determine that $12,133 of living expenses have been incurred during the current taxable year. 22 In such a situation, the Member would be required to reduce his or her basis in the residence by $3,640. 23 Thus, the Member would be left with an adjusted basis of $96,360 in the residence as of the year's end.

It should be noted that the language of the temporary regulation DOES NOT TAKE INTO ACCOUNT either the $3,000 ceiling on living expenses deductible under IRC section 162 24 or the two-percent floor on miscellaneous itemized deductions imposed under IRC section 67 /25/. Consequently, the amount of living expenses used for purposes of computing the required basis reduction will, in most cases, EXCEED THE AMOUNT OF SUCH EXPENSES ACTUALLY ALLOWED TO BE DEDUCTED. Put another way, the benefit derived from claiming the current deduction for relevant living expenses will in most cases be more than offset in the long run by the adverse consequence generated by the overcompensating basis adjustment.

Since IRC section 121(b)(1) itself limits the total excludable gain to $125,000 ($62,500 in the case of a separate return by a married individual), application of the temporary regulation could effectively increase the amount of gain which a Member would have to recognize on an eventual sale of the residence. In the example cited, suppose the Member reached the age of 55 during the taxable year and sold the residence for $225,000. If no deduction for relevant living expenses had been claimed, the Member's taxable income would not have been reduced by the $3,000 maximum amount allowed under IRC section 162 but his or her basis in the residence would have remained $100,000. As a result, the sale of the residence would have yielded a gain of $125,000, ALL of which would have been excluded from the Member's income. By contrast, if the Member used the applicable computational method to claim a deduction of $3,000 for relevant living expenses and consequently was obliged to reduce his or her basis in the residence by $3,640, the net result would have been a $640 increase in taxable income. That is, taxable income would have been reduced by the $3,000 deduction but would have been increased by the excess of the amount realized from the sale of the residence over the $125,000 exclusion allowed by IRC section 121. In other words, the Member would have been allowed to reduce income by the $3,000 deduction but would have had to recognize income equal to the $225,000 selling price of the residence less the Member's $96,360 newly adjusted basis therein and less the $125,000 exclusion. The net result would thus have been that the $3,000 deduction would have been more than offset by the $3,640 addition to income. The tax cost suffered by the Member as a result of claiming the deduction for relevant living expenses would have equalled $640 multiplied times the marginal rate of tax applicable to the Member.

Obviously, overcompensating basis adjustments could accumulate year by year to exaggerate the effect illustrated here. Thus, many Members might achieve tax savings in the long run by NOT CLAIMING ANY (or at least NOT CLAIMING ANY MORE) deductions for living expenses incurred in the Washington, D.C., metropolitan area.

It seems worth mentioning here that occasional informal advice has reportedly been given over the telephone by the Internal Revenue Service to the effect that the temporary regulations described here could simply be ignored since they were issued during a brief period when the underlying statutory law did not impose the $3,000 ceiling on deductions under IRC section 162 which was for many years (and is, once more) a significant factor to be taken into account in computing the tax liability of a Member of Congress. That very informal advice is of NO PRECEDENTIAL VALUE AT ALL. The temporary regulations in question were issued in satisfaction of a statutory obligation to prescribe regulations that was imposed on the Secretary of the Treasury. The temporary regulations have not been officially withdrawn.

ROLLOVER OF GAIN ON THE SALE OF A PRINCIPAL RESIDENCE

Like any other taxpayer, a Member of Congress who sells a principal residence and purchases (and occupies) a new one within a prescribed statutory period is allowed to "rollover" any gain that results from the sale of the old residence. 26 The prescribed period begins two years before the sale and ends two years after the sale. As a technical matter, this rule is not a true exclusion from gross income but rather is a rule of nonrecognition of what otherwise would clearly be income. As explained elsewhere in this report, the Internal Revenue Service has ruled that a residence in the Washington, D.C., metropolitan area that is owned and occupied by a Member of Congress can qualify as that Member's "principal" residence for purposes of IRC section 1034 despite the fact that the Member also owns (and at some times during the taxable year occupies) a residence in the congressional district he or she represents. Which of the two residences is the Member's "principal" residence in such situations is determined by which is occupied a majority of the time.

DEDUCTIONS

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

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 $3,000 Ceiling Generally

Paragraph (2) of IRC section 162(a) 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 is allowed. As a general rule, in order to be considered made while "away from home" so as to render them deductible, "traveling expenses" (pertinent costs of meals and lodging and incidental expenses like dry cleaning) must be incurred as part of a trip to a place distant enough from the taxpayer's "home" to require a stop for sleep or rest. 27 In the case of a taxpayer who is not a Member of Congress, the term "home," as used in this context, refers to the taxpayer's regular or principal place of business. A different rule applies, however, in the case of a Member of Congress. The second sentence of IRC section 162(a) states that:

For purposes of the preceding sentence, the place of residence of a Member of Congress (including any Delegate and Resident Commissioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts expended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes in excess of $3,000.

This special rule means, of course, 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) 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.

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 may be subject to the 80 percent limitation imposed under IRC section 274(n). See discussion infra.

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 the 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, 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.

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., tax year 1981).

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 deduction allowable under section 162(a)(2) . . . by reason of the taxpayer's being away from home in the pursuit of a trade or business. . . . 28

Since it is precisely "by reason of the taxpayer's being away from home in the pursuit of a trade or business" that a Member's expenses for lodging in the Washington area do give rise to a "deduction allowable under section 162(a)(2)," the exception clearly applies and the general rule under which personal use of a dwelling unit would render such expenses nondeductible is disregarded. Consequently, in the case of the Member of Congress who is "away from home" while residing in the Washington, D.C., metropolitan area, lodging expenses are deductible EVEN IF the Member's family occupies the same dwelling unit.

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). 29

Substantiation And The Per Diem Rate

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 when significant amounts of living expenses incurred over long periods of time must 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)." 30 In satisfaction of its obligation, the Treasury published temporary regulations in the Federal Register of January 21, 1982, at pages 2986-2988.

The temporary regulations 31 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 OWNS the residence he or she occupies in the Washington, D.C., metropolitan area and who 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. 32 The other method is for use by Members who do not own the residences they occupy and by Members who, though they do own the residences they occupy, for whatever reason do NOT deduct interest and taxes with respect to their residences. Under this method, the sum of living expenses deductible without substantiation is computed by multiplying the FULL AMOUNT of the specified daily rate times the number of "Congressional days" falling within the taxable year. 33 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. 34 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 be substantiated. 35

The daily rate to be used under either of the two methods for computing the amount of living expenses deductible without substantiation is difficult to identify at present. The temporary regulations refer to "the maximum amount of actual subsistence for Washington, D.C. payable pursuant to 5 U.S.C. 5702(c)." The statutory provision mentioned in this cross-reference (i.e., 5 U.S.C. section 5702(c)) was repealed by Public Law 99-234, effective for 1986 and thereafter. The provision had formerly stated, in relevant part, that:

. . . an employee may be reimbursed for the actual and necessary expenses of official travel when the maximum per diem allowance would be less than these expenses, except that such reimbursement shall not exceed [a specified sum] for each day. . . .

In other words the maximum amount of reimbursement a federal employee could receive under this former provision was either the specified per diem or, IF MORE, the actual amount spent (up to a specified limit). Of course to get more than the amount specified as the per diem rate, a government employee would have to verify the amount. Arguably, no such verification is required in the present context, however, since the sole function of the cross-reference under scrutiny is to identify an amount. In other words, the reference is to an amount (the "maximum amount payable" for a government employee in travel status while in the Washington, D.C., metropolitan area), not to the rules which a government employee must satisfy to receive the amount. After all, the reference occurs in the context of computation methods to be used to AVOID the burdens of detailed verification of expenses. Elsewhere in 5 U.S.C. section 5702(c) a distinction was also (and one still is) drawn between reimbursement using a per diem allowance and reimbursement for actual and necessary expenses of official travel. It can therefore be argued that the cross-reference to the MAXIMUM AMOUNT PAYABLE under former 5 U.S.C. section 5702(c) should be interpreted as a reference to an amount higher than the per diem allowance for the Washington, D.C., metropolitan area.

The per diem allowance for the Washington, D.C., metropolitan area has changed since the temporary regulation noted above first went into effect. It is set out in the Federal Travel Regulations. The Federal Travel Regulations also permit reimbursement for actual and necessary travel expenses up to 150 percent of an otherwise applicable per diem allowance. 36 Thus, a plausible argument can be made that the "maximum amount of actual subsistence" for the Washington area that is payable pursuant to currently applicable Federal Travel Regulations is 150% of the amount specified as the per diem rate for the Washington, D.C., metropolitan area.

Even if one assumes, more conservatively, that the reference should be interpreted as specifying only the identified per diem rate itself (rather than 150 percent of that amount), 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 dies or resigns relatively early in a taxable year, the difference between the two possibly applicable rates could generate a significant difference in ultimate tax liability.

The Internal Revenue Service has not yet officially resolved the ambiguity concerning the amount of the applicable daily rate. The temporary regulations have not been repealed and no relevant formal rulings have been issued.

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 the preparation and serving thereof. Lodging includes amounts paid for rent, care of premises, utilities, insurance and depreciation of household furnishings owned by the Member. In the case of a Member who lives in a residence owned by him in the Washington, D.C. area, the cost of lodging also includes depreciation on such residence. Other incidental expenses include laundry, cleaning, and local transportation. Local transportation includes travel within a 50 mile radius of Washington, D.C., whether by private automobile, taxicab or other transportation for hire.

Interest and taxes payable in connection with ownership of real and personal property are not contemplated. In other words, deductions for those expenses are not subject to the $3,000 ceiling and may be claimed to the full extent they might be claimed by any other taxpayer.

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. 37

The Two-Percent Floor On Miscellaneous Itemized Deductions And The Interaction Between It And The $3,000 Ceiling On Living Expenses

The Tax Reform Act of 1986 added a so-called "two-percent floor" on miscellaneous itemized deductions. 38 According to this rule, sums designated by a statutory definition as included within the meaning of the term "miscellaneous itemized deductions" are allowed to be deducted only to the extent they exceed, in the aggregate, two percent of the taxpayer's adjusted gross income. For example, if a Member of Congress has adjusted gross income of $200,000 for a particular taxable year, then the first $4,000 of his or her otherwise deductible miscellaneous itemized deductions cannot be claimed.

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 EXCLUDE any deduction allowed under IRC section 162, such deductions therefore ARE "miscellaneous itemized deductions" subject to the 2% 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.

The way Congress evidently intended IRC sections 67 and 162 to interact with one another is not obvious from the face of relevant statutory law. 39 A provision of the Tax And Miscellaneous Revenue Act of 1988 (TAMRA) enacted a relevant "clarification." 40 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. 41 That example is stated, as follows:

. . . assume that a Member with AGI (i.e., adjusted gross income) of $100,000 has $5,000 of away-from-home expenses qualifying for the deduction (disregarding application of the $3,000 limit and the two-percent floor, but after application of the 80-percent rule for meal and entertainment expenses) and $5,000 of other miscellaneous itemized deductions, for a total of $10,000 of potential deductions subject to the two-percent floor. Application of the two-percent floor would limit these deductions to $8,000, and the amount disallowed because of the two-percent floor would be disallowed proportionately. Thus, after application of the two-percent floor, the Member could deduct $4,000 of the away-from-home expenses and $4,000 of the [other] miscellaneous itemized deductions. The former amount (i.e., the away-from-home expenses) is further limited to $3,000 because of the special limitation on deducting Member's expenses in sec. 162(a). Thus, the Member could deduct a total of $7,000 of miscellaneous itemized deductions.

Further guidance with respect to the interaction of the 2% floor and the special $3,000 living-expense deduction is afforded by a temporary regulation prescribed under IRC section 67. It is set out as Reg. section 1.67-1T(d), captioned "Members of Congress," and provides, as follows:

(1) IN GENERAL. With respect to the deduction for living expenses of Members of Congress referred to in section 162(a), the 2-percent floor described in section 67 and paragraph (a) of this section shall be applied to the deduction before the application of the $3,000 limitation on deductions of living expenses referred to in section 162(a). (For purposes of this paragraph (d), the term "Member(s) of Congress" includes any Delegate or Resident Commissioner.) The amount of miscellaneous itemized deductions of a Member of Congress that is disallowed pursuant to section 67 and paragraph (a) of this section is determined by multiplying the aggregate amount of such living expenses (determined without regard to the $3,000 limitation of section 162(a) but with regard to any other limitations) by a fraction, the numerator of which is the aggregate amount disallowed pursuant to section 67 and paragraph (a) of this section with respect to miscellaneous deductions of the Member of Congress and the denominator of which is the amount of miscellaneous itemized deductions (including deductions for living expenses) of the Member of Congress (determined without regard to the $3,000 limitation of section 162(a) but with regard to any other limitations). The amount of deductions for miscellaneous itemized deductions (other than deductions for living expenses) of a Member of Congress that are disallowed pursuant to section 67 and paragraph (a) of this section is determined by multiplying the amount of miscellaneous itemized deductions (other than deductions for living expenses) by the fraction described in the previous sentence. 42

This general rule is illustrated by an example that is also set out in the regulation, under subparagraph (2).

The example in the regulation is stated, as follows:

Example. For 1987 A, a member of Congress, has adjusted gross income of $100,000, and miscellaneous itemized deductions of $10,750 of which $3,750 is for meals, $3,000 is for other living expenses, and $4,000 is for other miscellaneous itemized deductions (none of which is subject to any percentage limitations other than the 2-percent floor of section 67). The amount of A's business meal expenses that are disallowed under 274(n) is $750 ($3,750 x 20%). The amount of A's miscellaneous itemized deductions that are disallowed under section 67 is $2,000 ($100,000 x 2%). The portion of the amount disallowed under section 67 that is allocated to A's living expenses is $1,200. This portion is equal to the amount of A's deductions for living expenses allowable after the application of section 274(n) and before the application of section 67 ($6,000) multiplied by the ratio of A's total miscellaneous itemized deductions disallowed under section 67 to A's total miscellaneous itemized deductions, determined without regard to the $3,000 limitation of section 162(a) ($2,000/$10,000). Thus, after application of section 274(n) and section 67, A's deduction for living expenses is $4,800 ($6,750 - $750 -$1,200). However, pursuant to section 162(a), A may deduct only $3,000 of such expenses. The amount of A's other miscellaneous itemized deductions that are disallowed under section 67 is $800 ($4,000 x $2,000/$10,000). Thus, $3,200 ($4,000 - $800) of A's miscellaneous itemized deductions (other than deductions for living expenses) are allowable after application of section 67. A's total allowable miscellaneous itemized deductions are $6,200 ($3,000 + $3,200).

Claiming Living-Expense Deductions On The Return

In its "Tax Information for Members of the House of Representatives," a handout prepared by the Baltimore District office, the Internal Revenue Service advises Members claiming deductions for living expenses incurred in the Washington, D.C., metropolitan area to record the expenses on Form 2106, which relates to "Employee Business Expenses." The total amount of such expenses (without regard to either the two-percent floor or the $3,000 ceiling) is entered on this form's line 4 (captioned "business expenses not included in lines 1 through 3"). Although the instructions for Form 2106 do not explicitly require a Member to do so, typing or writing in a description of the expenses (such as "Member of Congress living expenses in Washington, D.C.") beside the printed matter at line 4 of the form may prove useful. Both on the face of the form itself and in the instructions relating to line 4, the taxpayer is cautioned not to include amounts spent for meals and entertainment on this line. Such amounts are to be listed on line 5 and are subject to the 80 percent limitation discussed infra. The amount shown on line 4 is repeated at various other places on Form 2106 and ultimately appears at the bottom of the form on line 17. This amount shown on line 17 of Form 2106 is then recorded on line 20 of the Member's Schedule A ("Itemized Deductions"), accompanying his or her Form 1040, the personal income tax return. Lines 20 through 24 of the Schedule A all relate to miscellaneous itemized deductions. Line 20 specifically relates to unreimbursed employee business expenses. In computing the amount shown on line 24, the ordering rule described supra should be kept in mind so as to claim the full $3,000 allowed under IRC section 162 if (as is likely) circumstances warrant such a claim.

Other Away-From-Home "Traveling Expenses"

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 162(a), a Member may also deduct "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 diem 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. 43

Expenses Of Operating An Intern Program

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. 44

Newsletter Publication And Distribution Expenses

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. 45

Entertainment Expenses

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, 46 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 whom A takes to a restaurant in order that A might have the time and opportunity to discuss a problem the constituent is having with an agency of the Government. A had no other time to discuss the constituent's problem.

According to the ruling, the discussion of the constituent's problem was evidence of the business-relatedness of the expense. The ruling concluded that, so long as the surroundings where the lunch was furnished were conducive to the discussion of business, the exception specified under IRC section 274(c)(1) applied and the expense was deductible.

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.

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. 47

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. 48

Certain Other Business Expenses

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. 49 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.

A later ruling 50 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). 51

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. 52

CHARITABLE CONTRIBUTIONS

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. 53 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.

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. 54

MOVING EXPENSES

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. 55 The ruling did go on to point out, however, that the SAME EXPENSES could not be deducted under both sections.

CONTRIBUTIONS RETURNED TO DONORS

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. 56

ODDS AND ENDS

WITHHOLDING

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

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. 57 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)).

                                   Robert B. Burdette

 

                                   Legislative Attorney

 

                                   December 28, 1992

 

FOOTNOTES

 

 

1 4 U.S.C. section 113(a).

2 4 U.S.C. section 113(b)(2).

3 See the District of Columbia Code, 1981 Edition, at section 47-1801.4, second sentence.

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

5 Ibid.

6 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.

7 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.

8 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."

9 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.

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

11 See Revenue Ruling 73-356.

12 See Revenue Ruling 75-146.

13 See Revenue Ruling 76-276.

14 See Revenue Ruling 75-103.

15 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.

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

17 See Revenue Ruling 55-609.

18 See Letter Ruling 8031070 (May 12, 1980).

19 Although not mentioned in the letter ruling, a nearly identical provision applicable in the case of Senators is set out at Article I, Section 3, clause 3, of the Constitution.

20 See 26 C.F.R. section 5e.274-8(c)(2). It should be noted that this temporary regulation DOES NOT reflect changes made in underlying statutory law that were enacted as part of the Tax Reform Act of 1986.

For an explanation of how this temporary regulation came into being, see the discussion infra concerning special deductions for Members. In particular, the discussion of the deduction for "traveling expenses" allowed under IRC section 162(a)(2).

21 See 26 C.F.R. section 5e.274-8(c)(1).

22 The amount concerned is assumed to have been computed by multiplying the factor of two-thirds drawn from the special computational method specified in the temporary regulation times a constant of $182 per day times the 100 "Congressional days" which fell within the taxable year. The $182 daily rate equals 150 percent of the maximum per diem rate currently allowed federal employees on travel status in the Washington, D.C., metropolitan area. That sum reflects the "maximum amount of actual subsistence" allowed under the current Federal Travel Regulation. See discussion infra concerning the deduction for a Member's living expenses in Washington.

23 This amount is computed by multiplying the 20 percent factor specified in the temporary regulation for basis adjustment times the "maximum amount of actual subsistence multiplied times the number of Congressional days" (i.e., the $182 per day rate multiplied times the 100 Congressional days which fell within the taxable year).

24 Discussed infra.

25 Discussed supra.

26 See IRC section 1034.

27 See United States v. Correll, 389 U.S. 299 (1967).

28 See IRC section 280A(f)(4).

29 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.

30 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 applies in the case of Members of Congress.

31 See 26 C.F.R. section 5e.274-8.

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

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

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

35 For guidance in such cases, see Revenue Ruling 80-62.

36 See Federal Travel Regulation, section 301-8.3, "Maximum daily rates and reimbursement limitations."

37 See Revenue Ruling 73-468.

38 See IRC section 67(a).

39 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.

40 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 dollar limitation of the last sentence of section 162(a) (relating to trade or business expenses).

The "dollar limitation of the last sentence of section 162(a)" is, of course, the $3,000 ceiling on deductible living expenses incurred by a Member of Congress in the Washington, D.C., metropolitan area.

41 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.

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

43 See Revenue Ruling 80-62.

44 See Revenue Ruling 75-146.

45 See Revenue Ruling 73-356.

46 See Revenue Ruling 78-373.

47 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.

48 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 under the Act to apply certain deduction limitation provisions in the following order: first, provisions disallowing a percentage of a deduction (e.g., sec. 274(n), generally limiting meal and entertainment deductions to 80 percent of the amount otherwise allowable); second, provisions disallowing a . . . [specified] amount of certain deductions (e.g., the two-percent floor on miscellaneous itemized deductions); and third, provisions establishing a deduction ceiling (e.g., the $3,000 limit in the last sentence of sec. 162(a) and certain dollar limitations in sec. 217 on deductions for moving expenses).

49 See Revenue Ruling 73-464.

50Revenue Ruling 84-110.

51 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.

52 See Revenue Ruling 67-457.

53 See Revenue Ruling 56-126.

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

55 See Revenue Ruling 73-468.

56 See Revenue Ruling 76-276.

57 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.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Burdette, Robert B.
  • Institutional Authors
    Congressional Research Service
  • Index Terms
    tax policy
    congress, members
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 93-12365 (26 original pages)
  • Tax Analysts Electronic Citation
    93 TNT 253-36
Copy RID