Posted by Cut to the chase, a resident of the Atherton: West Atherton neighborhood, on Sep 13, 2009 at 8:17 pm
Let's cut to the chase of what's going on here. Employer provided housing is taxable to the employee (based on the fair market value rent; in this case, apparently assessed at $50,000 per year) if and only if, per Internal Revenue Code 119(a), the housing is on the business premises of the employer, and the employee is required to accept the lodging as a condition of his or her employment.
I believe Mr. Gruber was probably "required" to accept the lodging as a condition of his employment (in the sense that this was at least documented as such to attempt to get him the tax exemption). Whether or not that home is on the business premises of the Town of Atherton is a questionable issue. Although the park is owned by Atherton, many would probably consider the "business premises of Atherton" to be 91 Ashfield Road. It's a gray area, plain and simple.
According to the Internal Revenue Code, if the employer is aware that taxes must be paid for taxable income paid to an employee, it is obligated to withhold the taxes. If it does not, the employer – and even the members of the governing body of the employer (board of directors of a corporation; members of the council in the case of Atherton) can be held liable for the taxes.
The simple solution for the Atherton/Gruber housing situation is for Atherton to withhold taxes based on his current income level plus $4166.67 per month (an additional $50,000 per year not being paid as cash, but rather as employer provided housing). At the end of the year, Mr. Gruber can elect to ask the IRS for a refund for those taxes paid if he wishes to take the view that his housing is on Atherton's business premises.
This way, it makes the issue purely one between Gruber and the IRS and ATHERTON CANNOT BE HELD LIABLE FOR THE TAXES.
Now, maybe Mr. Gruber is saying, behind the scenes, that he only accepted the employment with the understanding that that element of his compensation is non-taxable, if taxes will be paid then he needs a raise to "gross up", etc. etc. This is really an employment negotiation between him and the Town Council (my personal opinion is that no income adjustment should be made). No matter what the outcome, if Atherton simply withholds the taxes and leaves it to Mr. Gruber to reclaim from the IRS, they: (1) allow him to take the aggressive tax position if the IRS will let him, and (2) prevent liability to the Town of Atherton and its governing body.
Makes sense? Any reason not to do it? (Perhaps if one views the council as representing Gruber instead of the residents, an argument can be made not to, but only with this very twisted view, in my opinion).