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The value of lodging furnished to an employee by the employer shall be excluded from the employee's gross income if three tests are met: (1) the lodging is furnished on the business premises of the employer, (2) the lodging is furnished for the convenience of the employer, and (3) the employee is required to accept such lodging as a condition of his employment. Treas. Reg. § 1.119-1(b). The requirement of subparagraph (3) of this paragraph that the employee is required to accept such lodging as a condition of his employment means that he be required to accept the lodging in order to enable him properly to perform the duties of his employment. Lodging will be regarded as furnished to enable the employee properly to perform the duties of his employment when, for example, the lodging is furnished because the employee is required to be available for duty at all times or because the employee could not perform the services required of him unless he is furnished such lodging. If the tests described in subparagraphs (1), (2), and (3) of this paragraph are met, the exclusion shall apply irrespective of whether a charge is made, or whether, under an employment contract or statute fixing the terms of employment, such lodging is furnished as compensation.
The husband and wife incorporated their family-owned farm and the resulting corporation employed the husband as sole manager and operator of the farm properties. Under the employment contract, the corporation provided their living accommodations, paid all of the expenses of such accommodations, and required the husband to live on the premises. The Commissioner of Internal Revenue made deficiency determinations that the husband and wife could not exclude from gross income the fair rental value of the residence they occupied and that the employer-corporation could not deduct the expenses of the residence it furnished to them. The husband and wife challenged these determinations.
May the husband and wife exclude from gross income under section 119 income equal to the fair rental value of the residence they occupied, which was owned by the petitioner employer-corporation?
The court held that under I.R.C. § 119, the value of lodging furnished to an employee by the employer should be excluded from the employee's gross income if the lodging was furnished on the employer's business premises for the employer's convenience and the employee was required to accept such lodging in order to enable him to properly perform the duties of his employment. The Commissioner argued that it was unnecessary for the husband to live on the premises. The court found, based on testimony of three expert witnesses, that the husband was required to reside on the farm in order to properly manage and operate it because the farm's swine and grain-drying operations required constant monitoring and work. The husband and wife and the corporation met their burden of rebutting the presumptive correctness of the deficiency determination.