Caratan V. Judges Case Summary

Case: M.Caratan V. Commissioner (71-1 USTC ¶9353)
ISSUE: whether the employee-taxpayers 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.
FACTS: The company, M. Caratan, Inc,had a policy, established by the taxpayers in their capacity as corporate officers and directors, that required supervisory and management personnel to reside on the farm. Company-owned lodging, strategically located on the farmland, was supplied free of charge for this purpose. The Tax Court conclude that the fair market rental value of company-owned lodging furnished to the taxpayers without charge during the taxable years 1962, 1963 and 1964 was not excludable from taxpayers' gross income under Section 119(2) of the Internal Revenue Code of 1954 (26 U.S.C. § 119(2)).
PROCEDURAL HISTORY: The Tax Court held that the taxpayers had not successfully met their burden of proving that the lodging furnished to them was "indispensable" to the proper discharge of their employment duties. the taxpayers appealed to the Ninth Circuit Court of Appeals.
HOLDING: The court, reversing the Tax
Court’s holding, held that Taxpayers met their burden of proof, the employee-taxpayers were entitled to exclude from their gross incomes the value of lodging furnished to them by their employer, M. Caratan, Inc.
RATIONALE:The appellate court stated that the in light of language of Treas.Reg.
§ 1.119-1(b), it does not appear that the mere availability of nearby housing,so heavily relied upon by the Tax Court, was intended to require a different result. The language of the regulation which pertains to the feasibility of performance without the furnished housing (i. e., "because the employee could not perform the services required of him unless he is furnished such lodging") is joined disjunctively ("or") with the phrase concerning the requirement that the employee be available at all times. If the regulation intended that an employee whose duties required constant availability also must have no access to feasible alternative housing, the two phrases would have been joined conjunctively
("and"). the appellate court reject the extent that Gordon S Dole, supra, relied upon by the Tax Court, as unsound in light of the plain meaning of the language in Treas.Reg. §1.119-1(b). But base on Coyner v. Bingler, 344 F. 2d 736, 738 (3d Cir. 1965); and Harry Schwartz, 22 T.C.M. 835 (1963).In Coyner it was held that the resident caretaker of a community cultural center which was almost constantly in use could exclude the lodging from his gross income because it related to the practical working necessity of performing his duties with any sort of efficiency. In Schwartz, the Tax Court held that the taxpayers, who were officers and employees of a family owned funeral business which served the Jewish community, could exclude lodging furnished as a matter of company policy from gross income because the business required close personal contact that had to be made available on a 24-hour per day basis. The Court conclude that taxpayers clearly met their burden of proof. The decision of the Tax Court is reversed.