Caratan v. Comm'r of Internal Revenue , Docket Nos. 3026-67
| Decision Date | 15 September 1969 |
| Docket Number | Docket Nos. 3026-67,3044-67.,3043-67 |
| Citation | 52 T.C. 960 |
| Parties | M. CARATAN AND CAROLA CARATAN, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Curtis Darling, for the petitioners.
Stephen W. Simpson, for the respondent.
Petitioners were the shareholders and officers of a closely held farming corporation. They were also employed by the corporation in a supervisory capacity. Petitioners resided in company-owned houses located on the business premises which were furnished to them without charge by the corporation. Held, the fair rental value of such lodging is includable in petitioners' gross income. Petitioners were not required to accept the lodging furnished to them as a condition of employment within the meaning of sec. 119(2), I.R.C. 1954.
Respondent has determined deficiencies in petitioners' income taxes for the taxable years 1962, 1963, and 1964 in the following amounts:
Certain issues have been disposed of by agreement of the parties prior to the trial in this case. The only issue remaining for decision is whether petitioners are entitled to exclude from their gross incomes during the taxable years in question the fair rental value of company-owned houses furnished to them by their employer, M. Caratan, Inc.
Some of the facts were stipulated. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.
Petitioners M. Caratan and Carola Caratan are husband and wife. They were residents of Kern County, Calif., at the time of the filing of their petition in this case. They filed their Federal income tax returns for the years 1962, 1963, and 1964 on the calendar year basis with the district director of internal revenue at Los Angeles, Calif. Petitioners Milan and Judith Caratan are husband and wife. They resided in Kern County, Calif., at the time of the filing of their petition in this case. They filed Federal income tax returns on the basis of the calendar year for the years 1962, 1963, and 1964 with the district director of internal revenue at Los Angeles, Calif.
Petitioners Luis and Mary Caratan are husband and wife. They were residents of Kern County, Calif., at the time their petition in this case was filed. They filed their Federal income tax returns for the calendar years 1962, 1963, and 1964 with the district director of internal revenue at Los Angeles, Calif. The wives of M. Caratan, Luis Caratan, and Milan Caratan are petitioners only because the returns involved herein are joint returns. Hereinafter only M. Caratan, Luis Caratan, and Milan Caratan will be referred to as petitioners.
M. Caratan, Inc. (hereinafter sometimes referred to as the corporation), is a California farming corporation. It derives its income principally from raising and selling grapes and other crops. Petitioners and one Ina Baskin owned all the stock of the corporation during the taxable years in question in the following percentages:
+------------------------------+
¦ ¦Percentage of ¦
+-------------+----------------¦
¦Name ¦stock owned ¦
+-------------+----------------¦
¦M. Caratan ¦85 ¦
+-------------+----------------¦
¦Milan Caratan¦5 ¦
+-------------+----------------¦
¦Luis Caratan ¦5 ¦
+-------------+----------------¦
¦Ina Baskin ¦5 ¦
+------------------------------+
M. Caratan organized the corporation and is the father of the other three shareholders of the corporation. During the taxable years in question, M. Caratan was the president, Milan Caratan was the vice president, and Luis Caratan was the secretary-treasurer of the corporation. The officers were also compensated employees of the corporation serving chiefly in a supervisory capacity.
The corporation required its supervisory and management personnel to reside on its farms. Petitioners established this requirement in their capacity as officers and directors of the corporation. During the taxable years in question, the corporation provided petitioners, along with certain other employees, with company housing. This housing was located on the property of the corporation and was furnished to petitioners for the convenience of their employer. The rental value of the housing furnished to each petitioner in 1962, 1963, and 1964 was $1,200 per year. M. Caratan, Inc., also maintained a business office on its farms. This office constituted the business headquarters of the corporation.
While most farm activity took place during the day, certain operations were performed during the evening and at night.
The grape-farming operations of the corporation extended over a total of approximately 1,200 acres of farmland in nine noncontiguous areas. These farming areas were located in the vicinity of the city of Delano. The houses furnished to petitioners were situated on the farmland of the corporation. The distance from M. Caratan's residence to the nearest residential district in Delano was approximately 1.8 miles. The distances from Luis Caratan's and Milan Caratan's houses to the closest residential area of Delano were 5 and 6.2 miles, respectively.
Petitioners' houses either adjoined or were adjacent to Cecil Avenue. Cecil Avenue is a two-lane road which runs through the city of Delano. It takes about 10 minutes for Luis Caratan to drive to Delano from his residence and slightly longer for Milan Caratan to reach Delano from his house. The trip between M. Caratan's house and Delano takes less than 10 minutes.
Delano is the closest city to the farming areas of M. Caratan, Inc. It had a population of 11,913 in 1960, which increased to approximately 15,000 by 1968. Delano provides the usual services of a farming-community town, such as libraries, schools, hospitals, and churches. During the period in question, Delano had housing available for sale or rent.
Respondent has added $1,200 to the gross income of each petitioner for their taxable years 1962, 1963, and 1964 as additional compensation received in those years. This amount represents the fair market value of the lodging provided to the petitioners by M. Caratan, Inc., during the years in question.
OPINIONThe sole issue for decision is whether petitioners were entitled to exclude from their gross incomes the value of lodging furnished to them by their employer, M. Caratan, Inc., under section 119 of the Internal Revenue Code of 1954.2
The lodging furnished to the petitioners constituted compensation for services rendered by them to their employer and is therefore required to be included in their gross incomes under section 61(a) unless specifically excludable under another provision of the Internal Revenue Code. See Commissioner v. Duberstein, 363 U.S. 278 (1960), and Commissioner v. LoBue, 351 U.S. 243 (1956).
Section 119 grants an exclusion for lodging furnished to an employee by his employer if three conditions are met: (1) The lodging is furnished for the convenience of the employer; (2) the lodging is on the business premises of the employer; and (3) the employee is required to accept the lodging as a condition of his employment. The dispute in this case centers around the third requirement since the respondent has conceded that the other two were satisfied. Thus, the question we must decide is whether petitioners were required to accept the lodging furnished to them as a condition of employment. This question is primarily one of fact to be resolved...
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