Temporary and Proposed Regs on Excludability of Military Moving ALlowances

  [4830-01-U]

 ACTION: Temporary regulations.

 SUMMARY: This document contains temporary regulations relating to the exclusion from gross income under section 61 of the Internal Revenue Code of 1986 (Code) of certain allowances received by members of the Armed Forces in connection with a change of permanent duty station. The temporary regulations are required because of amendments to the law made by section 13213(a)(1) of the Omnibus Budget Reconciliation Act of 1993 (OBRA 1993), 107 Stat. 473 (1993), which redefined the term MOVING EXPENSES under section 217(b) of the Code. Persons affected by the temporary regulations are members of the Armed Forces.

 EFFECTIVE DATE: January 1, 1994.

 FOR FURTHER INFORMATION CONTACT: Leonard H. Friedman, (202) 622-1585 (not a toll-free number).

 SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains amendments to the Income Tax Regulations (26 CFR part 1) under sections 61 and 217 of the Internal Revenue Code (Code) that are required because of the amendment of section 217(b) by OBRA 1993. In Notice 94-59, 1994-1 C.B. 371, the IRS announced its intention to issue guidance to clarify that certain allowances received by members of the Armed Forces continue to be excludable from gross income notwithstanding the amendment of section 217(b).

EXPLANATION OF PROVISIONS

 Section 217(g) of the Code provides that a member of the Armed Forces on active duty who moves pursuant to a military order and incident to a permanent change of station does not include in income reimbursements or allowances for moving or storage expenses, or the value of moving and storage services furnished in-kind. For purposes of section 217(g), moving expenses are defined in section 217(b). OBRA 1993 amended section 217(b) by narrowing the definition of deductible moving expenses.

 As a result of this amendment, questions have arisen concerning the federal tax treatment of certain allowances provided by the Department of Defense to members of the Armed Forces (and by the Department of Transportation to members of the Coast Guard) in connection with a transfer to a new permanent duty station. These allowances include: (1) a dislocation allowance, intended to partially reimburse expenses (e.g., lease forfeitures, temporary living charges in hotels, and breakage of household goods in transit) incurred in relocating a household; (2) a temporary lodging expense, intended to partially offset the added living expenses of temporary lodging (up to 10 days) within the United States; (3) a temporary lodging allowance, intended to help defray higher than normal living costs (for up to 60 days) outside the United States; and (4) a moving-in housing allowance, intended to defray costs (e.g., rental agent fees, home-security improvements, and supplemental heating equipment) associated with occupying leased quarters outside the United States.

 Section 1.61-2(b) of the Income Tax Regulations provides, in part, that subsistence and uniform allowances granted to members of the Armed Forces, Coast and Geodetic Survey (now known as the National Oceanic and Atmospheric Administration), and Public Health Service, and amounts received by them as commutation of quarters, are to be excluded from gross income. Similarly, the value of quarters or subsistence furnished to such persons is excluded from gross income. These exclusions from gross income of quarters and subsistence allowances paid to members of the Armed Forces are ones of long-standing, dating back to 1925. See Jones v. United States, 60 Ct. Cl. 552 (1925).

 The Treasury Department and the IRS have determined that the four above-referenced allowances provided by the Department of Defense (and by the Department of Transportation), to the extent not excludable under other provisions of the Code (such as section 217(g) or section 132(g)), are to be treated as subsistence or quarters allowances. Section 1.61-22T is added to provide that these allowances are excludable from gross income. The regulations also clarify that no deduction is allowed for any expenses incurred in connection with a transfer to a new permanent duty station to the extent the expenses are reimbursed by an excludable allowance.

 However, any expense that meets the definition of a moving EXPENSE as defined in section 217(b) and is not reimbursed continues to be deductible under current law.

 The temporary regulations are effective with respect to allowances for expenses incurred after December 31, 1993. Allowances for expenses incurred prior to January 1, 1994, in connection with a transfer to a new permanent duty station are excludable under section 217(g).

SPECIAL ANALYSES

 It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required.

 Pursuant to section 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these temporary regulations is Leonard H. Friedman, Office of Assistant Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR PART 1

 Income taxes, Reporting and recordkeeping requirements.

Treasury Decision 8575

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.61-22T is added to read as follows:

SECTION 1.61-22T COMPENSATION FOR SERVICES, INCLUDING FEES, COMMISSIONS, AND SIMILAR ITEMS RECEIVED AFTER DECEMBER 31, 1993, BY MEMBERS OF THE ARMED FORCES, NATIONAL OCEANIC AND ATMOSPHERIC ADMINISTRATION, AND PUBLIC HEALTH SERVICE (TEMPORARY).

For purposes of section 1.61-2(b) (regarding certain allowances and other items provided to members of the Armed Forces, National Oceanic and Atmospheric Administration, and Public Health Service of the United States), quarters or subsistence includes the following allowances for expenses incurred by members of the Armed Forces after December 31, 1993, to the extent that the allowances are not otherwise excluded from gross income under another provision of the Internal Revenue Code: a dislocation allowance, authorized by 37 U.S.C. 407; a temporary lodging allowance, authorized by 37 U.S.C. 405; a temporary lodging expense, authorized by 37 U.S.C. 404a; and a moving-in housing allowance, authorized by 37 U.S.C. 405. No deduction is allowed under this chapter for any expenses reimbursed by such excludable allowances.

Par. 3. Section 1.217-2T is added to read as follows:

SECTION 1.217-2T DEDUCTION FOR MOVING EXPENSES PAID OR INCURRED IN TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1969 (TEMPORARY).

(a) through (g)(5) [Reserved].

(6) No deduction is allowed under this section for any moving or storage expense reimbursed by an allowance that is excluded from gross income.