## Facts

- The corporate taxpayer operated a funeral home in Evansville, Indiana, from a building that included two on-site residential areas: an apartment and a dormitory used by an ambulance crew.
- The individual taxpayer became the corporation’s president and general manager and lived in the on-premises apartment without paying separate rent.
- The funeral home’s business telephone also rang in the apartment, and the individual routinely took after-hours calls and met with customers there.
- Evidence showed local funeral homes customarily maintained an on-site manager or authorized employee to handle customer needs and services on a 24-hour basis.
- The individual did not include any value for the lodging in gross income, asserting an exclusion for employer-provided lodging.
- The Commissioner determined the apartment’s fair rental value was taxable compensation to the individual and disallowed related corporate deductions (including apartment-related utilities) on the ground the lodging was a personal benefit.
- The Tax Court consolidated the deficiency cases of the individual and the corporation and issued decisions reducing the asserted deficiencies; the court of appeals affirmed.

## Issues

1. Whether the fair rental value of an on-premises apartment provided to the corporation’s president/general manager was excludable from the employee’s gross income under I.R.C. § 119.
2. Whether the lodging was (a) on the employer’s business premises, (b) required as a condition of employment, and (c) furnished for the convenience of the employer.

## Decision

- The Tax Court held the value of the on-premises apartment was excludable from the employee’s gross income under I.R.C. § 119.
- The court found the apartment was on the employer’s business premises, was effectively required for the employee to perform his duties, and served the employer’s operational needs.
- The Seventh Circuit affirmed per curiam, adopting the Tax Court’s findings and conclusions.

## Legal Principles

- Employer-provided lodging may be excluded from an employee’s gross income under I.R.C. § 119 when: (1) the lodging is on the employer’s business premises, (2) the employee is required to accept the lodging as a condition of employment, and (3) the lodging is furnished for the convenience of the employer.
- “Condition of employment” may be satisfied by functional business necessity shown by the employer’s operations and demands, not solely by formal written requirements.
- “Convenience of the employer” turns on whether the lodging primarily serves the employer’s business needs, including after-hours availability and customary operational practices in the relevant industry.

## Conclusion

The courts treated the on-premises apartment as employer-required, operationally necessary lodging for a funeral-home manager and allowed exclusion of its rental value from gross income under I.R.C. § 119, with the Seventh Circuit affirming the Tax Court’s fact-driven application of the statutory test.


Hatt v. Commissioner, 28 T.C.M. (CCH) 1194 (T.C. 1969), aff'd, 457 F.2d 499 (7th Cir. 1972)