Our client, Vicki Value, owns the only funeral home in Vale, Oregon $($Value Funeral Home$).$ Our client is a sole proprietor and all items of income and deduction are reported on the schedule C of her personal income tax return. Vicki is a trained mortician and serves as the local coroner. Value Funeral Home has one employee, Emma Maple, who works from $8$am $5$pm as a trainee mortician. Because it is impossible to know when someone will die, Emma and Vicki switch off being on call. This means that someone will always be at the funeral home to accept dead bodies to prepare them for funerals or cremation.

Vicki is very happy with Emma$$s work and eventually wants Emma to become a full partner in her business. Before Emma started working, Vicki had to hire a mortician to come over from Boise, Idaho to cover shifts at the funeral home. She had to pay extra money because of the distance from Boise and she was only able to find people who were willing to work as morticians for a few weeks a year.

Value Funeral Home is located on Main Street in Vale. It is a beautiful building that has been extensively remodeled. As part of the last remodel, Vicki had the upper floor converted to two large apartments. Vicki allows Emma to live in one apartment rent free. Because of the attractive location, Vicki is able to rent out the other apartment to Tessa Tomato who works at the vegetable stand across the street. Tessa pays Vicki $$1,000/$ month in rent. Vicki pays all the utilities for the building since it$$s an old building and there is only one set of power$/$gas$/$water meters.

Vicki$$s friend Nancy Nosey recently told Vicki that what she was doing was illegal and could cause a big problem for Emma if Emma is audited by the IRS. Nancy told Vicki that she has to report that she is paying Emma $$12,000$ more a year to account for the rent$-$free apartment. Vicki is worried that Emma won$$t have the cash to pay the extra tax due on that imputed income, so she will quit and move to the big city.

Vicki called us because she$$s afraid that Nancy is right and that she will have to report the apartment as extra income to Emma. She wants to know if Nancy is right and, if so$,$ how should she report the increase to the IRS.

Please research the answer to Vicki$$s question, prepare a letter to Vicki that answers her question, and provide two pieces of advice on how to move forward with her business relationship with Emma. You may use any research tools you like, but please have at least three citations to different pieces of authority $($the law$)$ that you cite in support for your answer to Vicki$$s question.