Case Study

Case

Dean v. Commissioner, 187 F.2d 1019 (3d Cir. 1951)

Facts

The taxpayers are the sole shareholders in a personal holding company called the Nemours Corporation. Their residence was owned by the wife prior to her marriage, and the taxpayers continued to occupy it after their marriage. In 1931, the Nemours Corporation was indebted to a bank for a large sum, and the bank insisted that the residence be transferred to the corporation. The taxpayers continued to occupy the property as a home following the transfer.

Issue

Whether the rental value of property held in the name of a corporation, of which the taxpayers are the sole shareholders, is includible in their income.

Rule of Law

Section 22(a) of the Internal Revenue Code of 1939 provided:

“Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. . . .

“A corporate officer or stockholder may receive the right to use corporate property rent free in lieu of a money compensation for services rendered or as a dividend, but it may not be presumed that the corporate directors have given away as a gratuity a valuable right to use the corporate property.” Chandler v. Commissioner, 119 F.2d 623, 626-27 (3d Cir. 1941).

Holding / Conclusion

The taxpayer’s gross income includes the fair rental value of property held in the name of a corporation, of which the taxpayers are the sole shareholders.

Rationale / Analysis of the Law

The corporate existence was bona fide, and the taxpayers transferred the property to the corporation for a legitimate purpose. Residing in the property rent-free confers a valuable economic benefit to the shareholders. That benefit is, in effect, a constructive distribution to the shareholder under the Chandler case and, therefore constitutes “gross income” within the meaning of § 22.