Final answer:
The best description of a tax-free athletic facility benefit is one that is located on the employer's property and available to both employees and their dependents, which highlights inclusiveness and convenience without being taxable.
Step-by-step explanation:
The question is asking to identify which scenario best describes a tax-free athletic facility benefit. A tax-free athletic facility benefit is typically provided by an employer (ER) to an employee (EE) without being included in the taxable income of the employee. The best option that describes such a benefit is 'B. Located on ER owned property and used by EEs and their dependents'. This is because it implies that the facility is a fringe benefit that is both conveniently located for the employees (on the employer's property) and inclusive (available to employees and their dependents), which are key characteristics of employer-provided tax-free benefits.
Other options do not fit as well because a facility staffed by employees and open to most employees ('A') does not necessarily mean it's tax-free; a facility used for residential purposes ('C') is unlikely to be tax-free because it implies personal living space; and a facility operated by a local fitness company and primarily used by highly paid employees ('D') suggests a benefit that could be seen as discriminatory and thus not tax-exempt.