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
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
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
The Tax Court found for
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.