Herbert G. Hatt v. Commissioner
28 T.C.M. 1194, aff'd 457 F.2d 499 (7th Cir. 1972)

  • Hatt married Dorothy. She gave him the majority of shares in a corporation called Johann (a funeral home).
    • Hatt became the general manager and president of Johann.
  • Hatt moved into Dorothy's apartment, which was above the funeral home and owned by Johann.
  • The IRS claimed that Hatt was required to pay income tax on the fringe benefits he received for living rent-free in a corporate apartment.
    • Actually, the IRS found a whole bunch of tax problems in a number of other areas as well...
  • Hatt objected, claiming that he was required to live in the premises in order to run the business.
    • Traditionally, funeral home directors lived in the funeral home so they could be available at all hours.
  • The Tax Court found for Hatt.
    • The Tax Court looked to 26 U.S.C. 119 and found that there is an exclusion from gross income for lodging as long as:
      • The lodging is on the business premises of the employer.
      • The employee is required to accept such lodging as a condition of employment.
      • The lodging is furnished for the convenience of the employer.
    • The IRS claimed that Hatt was the President of the company, and so was able to set his own conditions of employment, so he wasn't required to live there unless he chose to. But the Court found that since it was traditional for funeral home directors to live at the funeral home, Hatt met the conditions of 119.