52 T.C. 960">*960 Respondent has determined deficiencies in petitioners' income taxes for the taxable years 1962, 1963, and 1964 in the following amounts:

Certain issues have been disposed of by agreement of the parties prior to the trial in this case. The only issue remaining for decision is whether petitioners are entitled to exclude from their gross incomes during the taxable years in question the fair rental value of company-owned houses furnished to them by their employer, M. Caratan, Inc.

FINDINGS OF FACT

Some of the facts were stipulated. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.

Petitioners M. Caratan and Carola Caratan are husband1969 U.S. Tax Ct. LEXIS 57">*59 and wife. They were residents of Kern County, Calif., at the time of the filing of their petition in this case. They filed their Federal income tax returns for the years 1962, 1963, and 1964 on the calendar year basis with the district director of internal revenue at Los Angeles, Calif.

52 T.C. 960">*961 Petitioners Milan and Judith Caratan are husband and wife. They resided in Kern County, Calif., at the time of the filing of their petition in this case. They filed Federal income tax returns on the basis of the calendar year for the years 1962, 1963, and 1964 with the district director of internal revenue at Los Angeles, Calif.

Petitioners Luis and Mary Caratan are husband and wife. They were residents of Kern County, Calif., at the time their petition in this case was filed. They filed their Federal income tax returns for the calendar years 1962, 1963, and 1964 with the district director of internal revenue at Los Angeles, Calif. The wives of M. Caratan, Luis Caratan, and Milan Caratan are petitioners only because the returns involved herein are joint returns. Hereinafter only M. Caratan, Luis Caratan, and Milan Caratan will be referred to as petitioners.

M. Caratan, Inc. (hereinafter1969 U.S. Tax Ct. LEXIS 57">*60 sometimes referred to as the corporation), is a California farming corporation. It derives its income principally from raising and selling grapes and other crops. Petitioners and one Ina Baskin owned all the stock of the corporation during the taxable years in question in the following percentages:

The corporation required its supervisory and management personnel to reside on its farms. Petitioners established this requirement in their capacity as officers and directors of the corporation. During the taxable years in question, the corporation provided petitioners, along with certain other employees, with company housing. This housing was located on the property of the corporation and was furnished1969 U.S. Tax Ct. LEXIS 57">*61 to petitioners for the convenience of their employer. The rental value of the housing furnished to each petitioner in 1962, 1963, and 1964 was $ 1,200 per year. M. Caratan, Inc., also maintained a business office on its farms. This office constituted the business headquarters of the corporation.

While most farm activity took place during the day, certain operations were performed during the evening and at night.

The grape-farming operations of the corporation extended over a total of approximately 1,200 acres of farmland in nine noncontiguous 52 T.C. 960">*962 areas. These farming areas were located in the vicinity of the city of Delano. The houses furnished to petitioners were situated on the farmland of the corporation. The distance from M. Caratan's residence to the nearest residential district in Delano was approximately 1.8 miles. The distances from Luis Caratan's and Milan Caratan's houses to the closest residential area of Delano were 5 and 6.2 miles, respectively.

Petitioners' houses either adjoined or were adjacent to Cecil Avenue. Cecil Avenue is a two-lane road which runs through the city of Delano. It takes about 10 minutes for Luis Caratan to drive to Delano from his1969 U.S. Tax Ct. LEXIS 57">*62 residence and slightly longer for Milan Caratan to reach Delano from his house. The trip between M. Caratan's house and Delano takes less than 10 minutes.

Delano is the closest city to the farming areas of M. Caratan, Inc. It had a population of 11,913 in 1960, which increased to approximately 15,000 by 1968. Delano provides the usual services of a farming-community town, such as libraries, schools, hospitals, and churches. During the period in question, Delano had housing available for sale or rent.

Respondent has added $ 1,200 to the gross income of each petitioner for their taxable years 1962, 1963, and 1964 as additional compensation received in those years. This amount represents the fair market value of the lodging provided to the petitioners by M. Caratan, Inc., during the years in question.

OPINION

The sole issue for decision is whether petitioners 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. ²

1969 U.S. Tax Ct. LEXIS 57">*63 The lodging furnished to the petitioners constituted compensation for services rendered by them to their employer and is therefore required to be included in their gross incomes under section 61(a) unless specifically excludable under another provision of the Internal Revenue Code. See Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278 (1960), and Commissioner v. LoBue, 351 U.S. 243">351 U.S. 243 (1956).

Section 119 grants an exclusion for lodging furnished to an employee by his employer if three conditions are met: (1) The lodging is furnished for the convenience of the employer; (2) the lodging is 52 T.C. 960">*963 on the business premises of the employer; and (3) the employee is required to accept the lodging as a condition of his employment. The dispute in this case centers around the third requirement since the respondent has conceded that the other two were satisfied. Thus, the question we must decide is whether petitioners were required to accept the lodging furnished to them as a condition of employment. This question is primarily one of fact to be resolved by a consideration of all the circumstances before us. Respondent's determination1969 U.S. Tax Ct. LEXIS 57">*64 is prima facie correct and petitioners have the burden of proof of error in such determination. William I. Olkjer, 32 T.C. 464">32 T.C. 464 (1959).

We have interpreted the term "required" in section 119(2) to mean required in order for an employee to properly perform his duties of employment. See Mary B. Heyward, 36 T.C. 739">36 T.C. 739 (1961), affirmed per curiam 301 F.2d 307 (C.A. 4, 1962), citing with approval section 1.119-1(b), Income Tax Regs. Therefore, the fact that an employee was compelled by his employer to accept the lodging on the employer's premises, standing alone, does not satisfy the statutory requirement that the lodging be required to be accepted as a condition of employment. Gordon S. Dole, 43 T.C. 697">43 T.C. 697 (1965), affirmed per curiam 351 F.2d 308 (C.A. 1, 1965). It is necessary to determine in each case whether as a practical matter the taxpayer was required to accept the lodging offered by his employer in order to adequately perform his duties. 43 T.C. 697">Gordon S. Dole, supra;32 T.C. 464">William I. Olkjer, supra.1969 U.S. Tax Ct. LEXIS 57">*65

We are not persuaded by the record before us that petitioners have successfully borne their burden of proving that the lodging furnished to them was indispensable to the proper discharge of their employment duties. This case is not materially distinguishable on its facts from 43 T.C. 697">Gordon S. Dole, supra, in which we held that the fair market value of lodging furnished to the manager of a manufacturing business which operated around the clock was not excludable under section 119.

We have noted in our findings of fact the proximity of Delano's residential area to the houses occupied by petitioners, which was as close as 1.8 miles in the case of one petitioner. We do not see how the short distance between Delano and the farming areas in question, or the minimal travel time required to traverse such distance, can seriously hinder petitioners' performance as officers and directors of the corporation had they resided in Delano. M. Caratan, Inc., had employed foremen and other supervisory personnel besides petitioners who could have called petitioners if an emergency arose requiring the petitioners' attention. Any nighttime supervision which may have been necessary1969 U.S. Tax Ct. LEXIS 57">*66 could similarly have been conducted by petitioners without difficulty had they resided in the nearby city of Delano rather than on the farm. The mere fact that the employer has lodging available and it 52 T.C. 960">*964 seems more desirable that the employee occupy the premises does not satisfy the condition contained in section 119 that the lodging be required as a condition of employment. 36 T.C. 739">Mary B. Heyward, supra.

The fact that there was housing available to petitioners only a short distance from the farm clearly distinguishes George I. Stone, 32 T.C. 1021">32 T.C. 1021 (1959), and Wilhelm v. United States, 257 F. Supp. 16">257 F. Supp. 16 (D. Wyo. 1966), cited by petitioners.

Petitioners have attempted to support their position by offering the testimony of one of the petitioners, Luis Caratan, that it is the policy of the corporation to require its key employees to maintain their residences on company property. We have already stated that this circumstance, albeit a factor to be considered, does not meet the statutory requirements without an objective showing that such housing is required by the exigencies of the employment. 1969 U.S. Tax Ct. LEXIS 57">*67 However, even placing this to one side, petitioners' argument under the facts of this case is much less persuasive than it might have otherwise been in view of the close relationship of petitioners to the corporation. As Luis Caratan testified, petitioners themselves, as shareholders, directors, and officers of M. Caratan, Inc., were the ones who dictated its policies. While we regard the corporate employer as a separate and distinct entity, where the taxpayer is as closely related to his employer as are the petitioners in this case, the taxpayer is required to meet a heavier burden with respect to the bona fides of his employer's demand. Obviously the occupancy of the company-owned housing in this case was of petitioners' own choosing.

We conclude that the fair market value of lodging furnished to petitioners during the taxable years in question is not excludable from petitioners' gross incomes under section 119 and that respondent's treatment of such amounts as additional compensation was therefore correct.

Decision will be entered under Rule 50 in docket No. 3026-67.

Decisions will be entered for the respondent in docket Nos. 3043-67 and 3044-67.