Rev. Rul. 63-32

Advice has been requested whether the holding in Revenue Ruling 80, C.B. 1953-1, 62, is applicable to a partnership which has elected, under section 1361(a) of the Internal Revenue Code of 1954, to be taxed as a domestic corporation.

Revenue Ruling 80 holds, in part, that where a partnership operates a hotel and the managing partner lives on the premises, the costs attributable to the accommodations of the resident partner and his family must be eliminated from operating costs and expenses and that the resulting increase in partnership income must be included in the resident partner's share of the net profits of the business.

The position expressed in Revenue Ruling 80 has been accepted by the courts in several cases, notably the cases of Commissioner v. Everett Doak et ux , 234 Fed.(2d) 704 (1956), and Commissioner v. Richard E. Moran et ux , 236 Fed.(2d) 595 (1956).

The courts have indicated that the costs of meals and lodging furnished by a partnership to a partner are not deductible due to the fact that the partnership and the partner are not separate taxable entities and no employer-employee relationship exists.

Revenue Ruling 80 and the above-mentioned court decisions dealt with partnerships and issues under the Internal Revenue Code of 1939. In those cases there were no separate entities nor any provision in tax law under which they could have elected to be separate entities for Federal income tax purposes.

However, with the enactment of the Internal Revenue Code of 1954, a new concept of taxation was introduced by section 1361 as to unincorporated business enterprises electing to be taxed as domestic corporations.

Section 1361(c) of the Code provides, in part, that, with certain specific exceptions not here pertinent, an unincorporated enterprise, as to which an election has been made under section 1361(a), shall be considered a corporation for purposes of subtitle A of the Code with respect to operation, distributions, sale of an interest, and any other purpose; and each owner of an interest in such enterprise shall be considered a shareholder thereof in proportion to his interest.

Section 1.1361-9(a) of the Income Tax Regulations provides, in part, that, except as otherwise provided in section 1361 of the Code and the regulations thereunder, subtitle A of the Code shall apply in determining the taxable income of a section 1361 corporation in the same manner that it applies in determining the taxable income of a domestic corporation. Thus, in determining its taxable income, such a corporation is entitled to a deduction for reasonable salary or compensation paid to its owners for services rendered to the corporation. The amount allowable as a deduction for such payments is determined under section 162 of the Code and section 1.162-7 of the regulations.

Section 1.1361-9(a) of the regulations indicates that a partnership, for which an election has been made under section 1361(a) of the Code, should be treated as a domestic corporation for all purposes of subtitle A of the Code other than those purposes specifically excepted.

The exceptions to the general rule that a section 1361 corporation is to be treated as an actual corporation are that the electing enterprise is not a corporation for purposes of chapter 2, relating to the tax on self-employment income; parts III and IV of subchapter C, relating to organizations and reorganizations; and section 401(a) of the Code, relating to employees' pension trusts, etc.

In view of the foregoing, a partnership, for which a valid election has been made under section 1361(a) of the Code, will not be denied a deduction for the costs of meals and lodging furnished to a partner solely on the grounds that two separate taxable entities do not exist and that there is no employer-employee relationship. Revenue Ruling 80, C.B. 1953-1, 62, is distinguishable since it is not applicable to a section 1361 corporation.

Accordingly, it is held that a partnership, which has elected under section 1361 of the Internal Revenue Code of 1954 to be taxed as a domestic corporation, may deduct the costs of meals and lodging furnished to a partner-employee on its business premises, and the partner-employee may exclude the value of such meals and lodging from his gross income, provided the electing partnership and the partner-employee meet all the tests set forth in sections 162 and 119 of the Code.