Kristin Balding Gutting (Charleston) raised an interesting issue on the TaxProf Discussion Group (an email discussion group of 350 tax professors) (reprinted with permission):

[I]n class, a student asked about the tax consequences (if any) of President-Elect Obama’s mother-in-law residing in the White House and helping take care of the children. Section 119 would appear only to apply if the mother-in-law is a dependant (which I am not sure she is). Assuming that § 119 does not apply, is the fair market rental value taxable to President-Elect Obama? Is he then gifting it to the mother-in-law? But, under Duberstein, it would not be a gift as she is going to care for the children in return. So, does the mother-in-law then become an employee and have income? Is she an employee of the government and room and board is compensation to her (thus, not a fringe benefit to President-Elect Obama)?

It is clear that the President's lodging of the White House is excluded under § 119 from his income. But, what my student asked was — if an employee can be given lodging tax-free under § 119 and allow anyone to move in (here, the mother-in-law), then why does § 119 say "[t]here shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer." It is as if the employer (here, the US gov't) is providing lodging to the mother-in-law, which taken alone would not be excluded under § 119. I think this can be distinguished from Obama's Chicago home, as his Chicago home was not being provided by an employer. Also, what about the meals to the mother-in-law?

The mother-in-law has “an accession to wealth” via rent free living and meals. So, under Glenshaw Glass, she (or Obama) has income. In my mind, § 119 does not apply to her (assuming she is not a dependant). Thus, one could argue that the fair market rental value for the room she is living in taxable, as well as the meals. If this is true, it would be taxable to Obama (the employee). I cannot point to a case, code section, or reg. that technically would result in it not being taxable. On the other hand, if she is the hired nanny, then the government is her employer and the meals and lodging are excluded under § 119 (but she should have compensation income).