Tax Court: Handyman Can’t Repair This Tax Damage

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Ken Berry
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Naturally, if your employer pays you a salary for working at a job, the wages are subject to tax. But taxable compensation can take on many forms.

In a case resolved in July, Welemin, TC Sum. Op. 2017-54, the Tax Court ruled that a handyman who provided repair and maintenance services owed tax on the value of the monthly rent offset he received in exchange. Moreover, the handyman didn’t qualify for a special tax exclusion for lodging on the business premises.

For tax purposes, gross income includes all income from a multitude of sources. This encompasses compensation paid out for services rendered, including fees, commissions, fringe benefits and similar items.

The IRS takes an expansive view of what constitutes compensation, and the courts often back it up.

In the case at hand, the handyman worked for himself, usually through one of two companies he had formed. The handyman and his family rented a home in a neighborhood of properties owned by a trust. They paid the monthly rent to the trustee.

After he experienced trouble in meeting his rent obligations in 2012, the handyman and the trustee worked out an informal agreement. Essentially, he agreed to provide repair and maintenance services for the trust properties, as needed.

In return, the trustee reduced the monthly rent the handyman was legally obligated to pay. The amount of the rent reduction was equal to the value of the services the handyman provided to the trust.

This agreement remained in force through the end of the year. When the handyman didn’t report any compensation under this arrangement, the IRS stepped in and assessed a tax deficiency of $5,075 for the taxable year 2012 and a penalty of $1,015.

The issue seemed pretty cut-and-dried to the Tax Court. The quid pro quo of the handyman’s services, which was equal to the reduction in the monthly rent, constituted taxpayer compensation to the handyman. It didn’t take long for the court to arrive at this conclusion.

Next, the court addressed the handyman’s contention that the compensation should be excluded from tax under a special tax law exception. Section 119(a) of the tax code says an employee may exclude from tax the value of any lodging he or she receives—including lodging costs attributable to a spouse or dependents—if the employee is required to accept the lodging on the employer’s business premises as a condition of employment.

But the Tax Court wasn’t buying this argument.

First, the handyman was operating as an independent contractor, not an employee of the trust, and the trustee consistently treated him as such. Second, the family wasn’t residing in the home (i.e., the business premises) for the employer’s convenience. Third, living in the home was clearly not required as a condition of employment.

Accordingly, the court said that the handyman’s reliance on this tax code section was “misplaced” and the full amount of the rent offset is taxable.

Keep these tax rules in mind when your clients receive payments that aren’t represented as wages or other common forms of compensation.

As the new case shows, it’s difficult to avoid tax liability when you are paid for providing services of value.

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