J. Grant Farms, Inc. v. Commissioner
49 T.C.M. 1197, 1985 Tax Ct. Memo LEXIS 456, 1985 T.C. Memo. 174 (1985)
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Rule of Law:
The value of lodging provided by an employer to an employee is excludable from the employee's gross income under IRC § 119 if the lodging is on the business premises, for the convenience of the employer, and accepted as a necessary condition of employment to properly perform the employee's duties.
Facts:
- In 1976, James A. Grant and M. Jean Grant incorporated their family farm into J. Grant Farms, Inc., in which they were the sole shareholders.
- J. Grant Farms, Inc. employed Mr. Grant as the sole manager under a contract that required him to reside on the farm premises.
- The corporation engaged in a large-scale grain farming operation which involved planting, cultivating, harvesting, drying, and storing crops.
- The grain drying process required frequent monitoring, including at night, and manual restarting of motors in the event of a power failure.
- The corporation also ran a swine operation, which required hand-feeding twice a day and around-the-clock supervision during farrowing seasons.
- The corporation owned and leased a significant amount of valuable farm equipment that was stored on the farmstead, making on-site security a concern.
- During 1979 and 1980, the corporation provided the Grant family with a residence on the farm and paid for the utilities.
- Expert testimony established that for a farm of this complexity, with a grain-drying operation and valuable equipment, it was customary and highly necessary for a manager to reside on the premises for security and operational efficiency.
Procedural Posture:
- The Commissioner of Internal Revenue determined deficiencies in the federal income tax returns of James and M. Jean Grant for 1979 and 1980.
- The Commissioner also determined deficiencies in the tax returns of J. Grant Farms, Inc. for the fiscal years ending July 31, 1979, and July 31, 1980.
- The Commissioner issued statutory notices of deficiency to the Grants and the corporation on September 15, 1982.
- The Grants and J. Grant Farms, Inc. (petitioners) filed petitions in the United States Tax Court, a court of first instance for tax disputes, to challenge the Commissioner's determinations.
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Issue:
Does the fair rental value of a residence and utilities provided by a closely-held farming corporation to its sole manager and shareholder qualify for exclusion from the manager's gross income under IRC § 119, where the manager's duties require constant availability on the farm?
Opinions:
Majority - Judge Goffe
Yes, the fair rental value of the residence and utilities qualifies for exclusion from gross income. To exclude the value of lodging under IRC § 119, three tests must be met: (1) the lodging is on the employer's business premises, (2) it is for the convenience of the employer, and (3) the employee is required to accept it as a condition of employment. The parties agreed the first two tests were met. The court found the third test, the 'condition of employment' requirement, was also satisfied. This test means the employee must be required to accept the lodging to properly perform the duties of employment, such as being 'available for duty at all times.' Based on extensive factual findings and expert testimony, the court concluded that the nature of Mr. Grant's duties in managing both the complex grain-drying operation and the swine farrowing operation, as well as securing valuable equipment, required his constant presence on the farm. Therefore, living on the premises was not merely for his convenience but was a business necessity essential to the proper performance of his job.
Analysis:
This case clarifies the application of the 'condition of employment' test under IRC § 119, particularly in the context of a closely-held corporation and its shareholder-employee. The decision emphasizes that the test is a factual inquiry based on the objective business necessities of the job, rather than merely the terms of an employment contract or the availability of nearby housing. It establishes a strong precedent for farming operations, demonstrating that the need for constant monitoring of livestock, crop processing, and valuable equipment can satisfy the requirement that an employee be available for duty at all times. This ruling provides guidance for small business owners in determining when providing on-site housing constitutes a non-taxable benefit for an employee.
