LO.4 Three unmarried sisters own and operate a farm. The live on the farm and take their meals on the farm for the ‘‘convenience of the employer.’’ The fair market value of their lodging is $40,000, and the fair market value of their meals is $24,000. The meals are prepared for them by the farm cook who prepares their meals along with those of the six other farm employees.

a. Determine the tax consequences of the meals and lodging to the sisters if the farm is incorporated.

b. Determine the tax consequences of the meals and lodging to the sisters if the farm is not incorporated.

CRITICAL THINKING