Adams v. United States, was a case in which the United States Court of Claims

United States Court of Claims

The Court of Claims was a federal court that heard claims against the United States government. It was established in 1855 as the Court of Claims, renamed in 1948 to the United States Court of Claims , and abolished in 1982....

 held that the fair rental value

Rental value

Rental value is the fair market value of property while rented out in a lease. More generally, it may be the consideration paid under the lease for the right to occupy, or the royalties or return received by a lessor under a license to real property...

 of the residence furnished to the taxpayer by his employer was excludable from taxpayer's gross income

Gross income

Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident."Except as otherwise provided" by...

. The three statutory requisites for exclusion were met pursuant to Section 119 of the Internal Revenue Code

Internal Revenue Code

The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...

. Three requirements for lodging under §119: (1) acceptance of residence was a condition of employment

Employment

Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...

, (2) for the convenience of the employer, and (3) was on the business premises.

Facts

Adams was president of Sekiyu Kabushiki Kaisha (Sekiyu), a Tokyo

Tokyo

, ; officially , is one of the 47 prefectures of Japan. Tokyo is the capital of Japan, the center of the Greater Tokyo Area, and the largest metropolitan area of Japan. It is the seat of the Japanese government and the Imperial Palace, and the home of the Japanese Imperial Family...

-based Japanese corporation which was wholly owned by Mobil Oil Corporation in Japan. Pursuant to the company's policy, Mobil provided Mr. and Mrs. Adams (plaintiffs in this case) with a residence for 1970 and 1971. Effectiveness of a president of a company in Japan is influence by the social standing and regard accorded to him. If the president of Sekiyu had not resided in a residence equivalent to the type provided to the plaintiff

Plaintiff

A plaintiff , also known as a claimant or complainant, is the term used in some jurisdictions for the party who initiates a lawsuit before a court...

, it would appear that he would have been unofficially downgraded and slighted by the business community and his effectiveness for Sekiyu correspondingly impaired. Sekiyu, therefore, provided such a house to plaintiff and required him to reside there as a matter of company policy. Adams worked in the house in evenings and weekends and held meetings there for mixed business and social purposes.

Issue

Whether the fair market value

Fair market value

Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or...

 of a Japanese residence furnished plaintiffs by the employer is excludable from their gross income

Gross income

Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident."Except as otherwise provided" by...

 under §119 of Internal Revenue Code

Internal Revenue Code

The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...

.

Analysis

The Court acknowledged that under the statutory definition of §61(a), gross income includes compensation for services amongst all other income from whatever source derived. Section 1.61-2(d)(10 of Treasury Regulations states, "If services are paid for other than in money, the fair market value of the property or services taken in payment must be included in income."
The Court presumed that if the lodging furnished to plaintiff was compensation to him, the fair rental value of the lodging would be includable in his gross income unless excludable under another provision of the Code. So, because of Section 119, the fair rental value of the residence supplied to plaintiffs by Sekiyu in 1970 and 1971 is excludable from his gross income.

“Condition of Employment” Test

This test is met if "due to the nature of the employer's business, a certain type of residence for the employee is required and it would not be reasonable to suppose that the employee would normally have available such housing for the use of his employer."

“Convenience of the Employer” Test

This test is satisfied where there is a "direct nexus between the housing furnished the employee and the business interests of the employer served thereby."

“On the Business Premises” Test

This test is at best elusive and incapable of generating any hard and fast line. This question is largely a factual one requiring a common sense approach.

Where, as here, (1) the residence was built and owned by the employer, (2) it was designed, in part, to accommodate the business activities of the employer, (3) the employee was required to live in the residence, (4) there were many business activities for the employee to perform after normal working hours in his home because of the extensive nature of the employer's business and the high-ranking status of the employee, (5) the employee did perform business activities in the residence, and (6) the residence served an important business function of the employer, then the residence in question is a part of the business premises of the employer.

Conclusion

Some forms of compensation, although typically includible in gross income under § 61(a)(1), are excluded from gross income by operation of a specific statutory provision. Most of these exclusions are set forth in §§ 101-139 of Internal Revenue Code. Section 119(a) provides for exclusion of meals and lodging furnished to employees or their spouses or dependents if certain conditions are met:

Meals	Lodging
furnished by employer	furnished by employer
for convenience of employer	for convenience of employer
on business premises of employer	on business premises of employer
	employee required to accept as a condition of employment