Court Opinion

ID: 4602800
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:30:33.645653+00
Date Added: 2024-06-11T07:52:44.218573
License: Public Domain

Olin O. Ellis and Ruth R. Ellis, Petitioners, v. Commissioner of Internal Revenue, RespondentEllis v. CommissionerDocket No. 7502United States Tax Court6 T.C. 138; 1946 U.S. Tax Ct. LEXIS 307; January 29, 1946, Promulgated *307 Decision will be entered under Rule 50.  Respondent's inclusion in petitioner's income of the entire rental value of an apartment furnished by his employer, held erroneous where evidence shows it was in part for convenience of the employer in connection with petitioner's duties as night manager. Ralph Kitchen, 11 B. T. A. 855, overruled.  George S. Yost, Esq., for the petitioners.Elmer L. Corbin, Esq., for the respondent.  Opper, Judge.  OPPER*138  Respondent determined a deficiency in income and victory tax in the amount of $ 1,224.62 for the calendar year 1943.  Petitioners having conceded certain adjustments made by respondent, one issue remains: Whether respondent was correct in adding to petitioners' gross income an item of $ *308  1,800, representing the agreed fair rental value of an apartment occupied by petitioners rent-free.FINDINGS OF FACT.Petitioners, who are husband and wife, are residents of Baltimore.  Maryland, and filed their tax return for the period involved with the collector of internal revenue at Baltimore, Maryland.  Olin O. Ellis will sometimes hereinafter be referred to as petitioner.Petitioner was president, chairman of the board of directors, and a stockholder of Guilford Realty Co., a Maryland corporation (hereinafter referred to as Guilford).Guilford is a real estate holding company, which owns and operates nine apartment buildings and two public garages in Baltimore.  It owns all of the issued and outstanding stock of the Mid-City Rent-A-Car Service, Inc. (hereinafter referred to as Mid-City) and of the Club Apartments Co. (hereinafter referred to as Club), of each of which petitioner is president.  The three corporations occupy office space at 3330 St. Paul Street, Baltimore, next door to the Cambridge Arms Apartments, where petitioner lives.The Cambridge Arms is the largest of the nine apartment buildings owned by Guilford.  It is seven stories in height, contains ninety-six apartments, *309  has three elevators, a switchboard, heating plant, and six compressors which supply cooled air.Guilford had issued and outstanding 5,983 shares of $ 100 par value preferred stock, of which petitioner owned 505 shares.  It also has issued and outstanding 28,624 shares of $ 1 par value common stock, of which petitioner owned 1,952 shares.  In all, Guilford had 107 preferred stockholders and 135 common stockholders.*139  In 1943 petitioner received a salary from Guilford of $ 7,525, a salary from Mid-City of $ 5,200, and a salary from Club of $ 1,325.  In addition thereto, he received rent-free an apartment in the Cambridge Arms of an agreed fair rental value of $ 1,800 per year.  He has occupied this apartment since sometime prior to October 1940, rent-free. Petitioner's cash salary from Guilford prior to 1943 was $ 7,800 per year.  Although his cash salary from Guilford was decreased in 1943, he received increases from Mid-City and Club, thereby increasing his over-all salary for that year.Prior to October 1940 the Cambridge Arms had a manager named Combs, who, in addition to occupying rent-free an apartment with an annual rental value of $ 1,000, received a cash salary. He*310  acted both as day and night manager. In October 1940, because of the illness of his wife, Combs moved from the Cambridge Arms and relinquished his duties as night manager. He continued, however, as day manager at the same cash salary as he had theretofore received.After that time petitioner acted as night manager, serving daily from 5:30 p. m. until 8 a. m. the next morning.  During the day he was available for consultations with the day engineer.  During the hours petitioner has acted as night manager the tenants have called upon him for services such as telephone connections, additional heat, refrigeration, electrical services, quieting noisy tenants, and the like.  A 79-year old employee is also available, but he has acted chiefly as switchboard and elevator operator.  Petitioner has been called about twice a night for various services, and once or twice each week he has been called after 10 p. m.It is the policy of Guilford to require the managers of their apartment buildings to live in the building.It is the practice among all large apartment houses in Baltimore to require their managers to reside on the premises.Petitioner could not perform the various duties as night *311  manager if he were not living in the Cambridge Arms.The apartment was furnished petitioner partly because Guilford wanted him to live on the premises and partly to compensate him for his services.The apartment was not furnished petitioner rent-free for the sole convenience of Guilford.OPINION.Respondent's regulations eliminate from taxable income the fair value of "living quarters * * * furnished to employees for the convenience of the employer," Regulations 111, sec. 29.22 (a)-3.  We read the present record as demonstrating without appreciable qualification that the living quarters furnished to petitioner were to some extent for his employer's convenience.*140  Unlike such cases as Arthur Benaglia, 36 B. T. A. 838, however, it is impossible to find here that petitioner's rent-free occupancy of his living quarters was "solely" for the employer's convenience. See also Greene v. Kanne, 23 A. F. T. R. 1141, and Renton v. Kanne, (both Dist. Ct. Hawaii, Mar. 12, 1938).  Not only had petitioner occupied the apartment before he undertook the duties which made his residence there advantageous to the owner, *312  but he testified that it would be correct to say "that in arranging for you [petitioner] to live in that apartment house it is partly for the reason that they [the employer] want you to live in the premises, and partly to compensate you for your work * * *."Under the circumstances operative here we regard the outer limit of the value of petitioner's apartment which can be attributed to the employer's convenience as the rental value of the living quarters furnished to petitioner's predecessor, which, as set forth in our findings, was $ 1,000 a year.  While perhaps it might be said in other situations where employer and employee are dealing at arm's length that the best evidence of the measure of the employer's convenience is the value of the premises actually appropriated to the employee's use, here petitioner's relation to his employer as director, president, stockholder, and employee in another capacity eliminates the acceptability of such a test.But for the reasons stated we regard respondent's determination as contrary in principle to his regulations. It is true that in Ralph Kitchen, 11 B. T. A. 855, we refused to allow an exclusion of any amount*313  unless the services furnished were "solely" for the convenience of the employer.  Neither by word nor implication, however, does that concept appear in the regulations and, in so far as the Kitchen case is to the contrary, it will no longer be followed.  Respondent's determination is disapproved to the extent that it disallows the exclusion from gross income of $ 1,000 out of the total sum of $ 1,800, which latter amount is agreed to be the full rental value of petitioner's apartment.Decision will be entered under Rule 50.