Hatt v. Commissioner
1969 Tax Ct. Memo LEXIS 66, 28 T.C.M. 1194, 1969 T.C. Memo. 229 (1969)
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Rule of Law:
The value of lodging furnished to an employee by an employer is excludable from the employee's gross income under IRC § 119 if the lodging is on the employer's business premises, furnished for the employer's convenience, and the employee is required to accept it as a condition of employment to properly perform their duties.
Facts:
- The Albert Johann & Sons Company, Inc. (Johann) operated a 24-hour funeral home and embalming business.
- Herbert G. Hatt was the president and general manager of Johann.
- Hatt resided in an apartment located within the same building used by Johann for its funeral home business.
- The business telephone line for the funeral home also rang in Hatt's apartment.
- Hatt was responsible for answering the telephone and meeting with customers who came to the funeral home after regular business hours.
- It was a customary practice in the Evansville area for the manager or another authorized employee to live on the premises of a funeral home.
Procedural Posture:
- The Commissioner of Internal Revenue determined deficiencies in the income tax of Herbert G. Hatt and The Albert Johann & Sons Company, Inc.
- In its notice of deficiency to Hatt, the Commissioner determined that the fair rental value of the apartment he occupied on company premises constituted a constructive dividend and was therefore includable in his gross income.
- The Commissioner also disallowed deductions claimed by the corporation for the apartment's utility expenses.
- Hatt and the corporation filed petitions in the United States Tax Court challenging the Commissioner's determinations.
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Issue:
Does the fair rental value of an apartment provided by a funeral home corporation to its president and general manager, located on the business premises, qualify for exclusion from the employee's gross income under IRC § 119?
Opinions:
Majority - Featherston, J.
Yes, the fair rental value of the apartment qualifies for exclusion from Hatt's gross income. To exclude the value of employer-provided lodging under § 119, an employee must satisfy three conditions: the lodging is on the business premises, it is for the convenience of the employer, and it is a condition of employment. First, the apartment was undisputedly on the business premises. Second, the lodging was furnished for the 'convenience of the employer' because the nature of the funeral business requires someone to be in attendance 24 hours a day to answer calls and meet with families of decedents. Third, Hatt was required to accept the lodging as a 'condition of his employment' to properly perform his duties, which included being available at all times. The fact that Hatt was the president and majority stockholder does not, by itself, disqualify him from the exclusion, as the tests focus on the objective needs of the business, which were demonstrated by industry custom and the 24-hour nature of operations.
Analysis:
This case provides a clear application of the three-part test for the IRC § 119 lodging exclusion, especially in the context of a closely-held corporation where the employee is also a controlling shareholder. The court's decision emphasizes that the analysis is objective, focusing on the operational necessities of the business rather than the employee's control over the terms of employment. By looking to industry custom and the specific demands of a 24-hour business, the court affirmed that the 'convenience of the employer' and 'condition of employment' tests can be met even when the employee appears to set his own employment conditions. This precedent is significant for businesses that require round-the-clock employee presence to function effectively.
