Herbert G. Hatt

28 T.C.M. 1194 (1969)

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Nature of the Case

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Facts

D did not file tax returns from 1957-1960. He did file returns for 1961 and 1962. Johann was a corporation organized in Indiana, and it filed corporate tax returns from 1955 and 1957 through 1961. During those years, Johann operated a funeral home and embalming business. In 1955, D opened a place of business known as Select Sewing Center. Eventually, D met Dorothy, the president and majority stockholder of Johann. They were married in 1957. D was 25, and she was 43. Pursuant to an antenuptial agreement, Dorothy transferred to D 130 shares in Johann, and he became president and general manager of the corporation. Immediately after the marriage, D moved into an apartment located in the building used by Johann for its funeral home business, and he resided there from 1957-1962. Another apartment in the building was rented as a dormitory to house an ambulance crew. The phone used by Johann rang in the apartment as well as the business office. D answered the phone in the apartment when the office was closed and made appointments. It was custom in the community for the manager or an employee authorized to deal with customers to live on the premises of a funeral home. Under Section 119 an exclusion from gross income of the value of lodging was furnished if three conditions were met in that the lodging is on the business premises, the employee is required to accept, and the lodging is furnished for the convenience of the employer. The IRS contends that D met the first condition but not the last two and as such Johann is not entitled to deductions for maintenance of D's apartment and that D is taxable for the fair market rental value as a constructive dividend. This case was presented to the Tax Court because the Commissioner disallowed the deductions in that D was not required to live in the apartment as a condition of employment.