J. Grant Farms Inc. v. Commissioner

James and Jean Grant owned and operated J. Grant Farms, Inc. (plaintiffs). James served as the corporation’s sole manager under an employment contract requiring him to devote his full-time energy, skills, and effort to the business and to reside on the farm premises in housing provided and paid for by the corporation. The farm’s operations were complex, involving crop planning, equipment maintenance, planting, cultivation, harvesting, drying, storage, and selling of corn and soybeans, as well as breeding, farrowing, and selling hogs. Both the grain-drying and swine operations required around-the-clock monitoring, particularly during drying and farrowing seasons. Moreover, valuable farm equipment was stored on-site. The Grants did not report the fair rental value of the housing or the cost of utilities paid by the corporation on their federal income tax returns. Similarly, the corporation deducted related depreciation and utility expenses. The commissioner of the Internal Revenue Service (defendant) assessed deficiencies, determining that the Grants received taxable income equal to the fair rental value of the residence plus utilities, and denied the corporation’s deductions. The Grants and the corporation petitioned the tax court for a redetermination, arguing that James was required to live on the farm to fulfill his employment duties and maximize profits. Experts testified that a resident manager was necessary and desirable on farms with grain-drying operations and expensive equipment to ensure efficient operation, security, and profitability. Even the commissioner’s expert conceded that a resident manager improved efficiency.