## Facts

- James A. Grant and M. Jean Grant were husband and wife who owned and operated J. Grant Farms, Inc., a closely held farm corporation.
- The corporation was organized in 1976 (Delaware) and operated from Charleston, Illinois; James and Jean Grant each owned 500 shares (all outstanding stock).
- James Grant served as the corporation’s sole manager under an employment contract requiring him to devote his full-time energy, skills, and effort to the farm business.
- The employment contract also required James Grant to live on the farm premises in housing furnished and paid for by the corporation.
- The corporation owned the farmhouse where the Grants lived and paid the residence’s utilities.
- The farm business included growing corn and soybeans and operating a hog program, including breeding and farrowing.
- Farm operations required frequent monitoring and quick response, including grain drying during drying seasons and close supervision during farrowing; valuable farm machinery was stored on the premises, creating security and operational reasons for an on-site manager.
- The Grants did not include in income the fair rental value of the farmhouse or the value of utilities paid by the corporation on their 1979 and 1980 individual returns.
- The corporation deducted utility expenses and claimed depreciation for the residence for its fiscal years ending July 31, 1979 and July 31, 1980.
- The Commissioner issued notices of deficiency, treating the lodging and utilities as taxable income to the Grants and disallowing the corporation’s related deductions and depreciation.
- The individual and corporate cases were consolidated in the Tax Court; testimony from farm witnesses supported the need for a resident manager, and the Commissioner’s witness agreed that on-site management improved efficiency.

## Issues

1. Whether the Grants could exclude from gross income under I.R.C. § 119 the fair rental value of employer-provided on-farm lodging and the employer-paid utilities for 1979 and 1980.
2. Whether J. Grant Farms, Inc. could deduct the residence-related utilities under I.R.C. § 162 and claim depreciation for the residence under I.R.C. § 167 for its fiscal years ending July 31, 1979 and July 31, 1980.

## Decision

- The court held that the Grants could exclude the fair rental value of the residence and the utilities paid by the corporation under § 119.
- The court found the lodging was furnished on the employer’s business premises, for the employer’s convenience, and that James Grant was required to accept the lodging as a condition of employment.
- The court held the corporation could deduct the utility expenses as ordinary and necessary business expenses under § 162.
- The court held the corporation could depreciate the residence under § 167 because the residence was used in the corporation’s trade or business by housing the required on-site manager.

## Legal Principles

- Under I.R.C. § 119, the value of lodging furnished by an employer may be excluded from an employee’s gross income when the lodging is (1) furnished on the employer’s business premises, (2) furnished for the employer’s convenience, and (3) required as a condition of employment.
- For a farm operation, a residence located on the farm can qualify as being on the employer’s business premises when the employee’s presence there is tied to day-to-day operations and protection of business property.
- “Convenience of the employer” is satisfied when the primary reason for providing lodging is a substantial business reason, such as immediate response to operational problems, continuous monitoring during critical periods, or safeguarding equipment.
- A written employment requirement to live on-site supports the “condition of employment” element when it matches the actual demands of the job.
- Shareholder-employees are not barred from § 119 treatment when the employment arrangement is genuine and the lodging is provided for business reasons rather than as a disguised distribution.
- When lodging is provided for business reasons in the ordinary course of the employer’s trade or business, related utility costs may be deductible under § 162, and the employer may claim depreciation under § 167 for property used in the business.

## Conclusion

The Tax Court concluded that the corporation required its manager, James Grant, to live on the farm to meet operational and security needs, so the Grants could exclude the value of the on-farm lodging and utilities under § 119, and the corporation could deduct the utility expenses and depreciate the residence as business-use property.


J. Grant Farms Inc. v. Commissioner, 49 T.C.M. (CCH) 1197 (1985)