Circus Tent has as posted up some very interesting material regarding the Chabad custom of not sleeping in the Sukkah. Below is an extract of some of that material, please see his site for some more posts and some interesting comments from other readers.
Video of the meeting (large file)
Transcript of the meeting between R’Zvi Kahana and the Rebbe
(not a perfect transcript)
HRH"G R’ Zvi Kahana: I’d like to ask the Rebbe about the issue that troubles the Bnei Torah in the Yeshiva world regarding the practice in Lubavitch that one doesn’t have to, or is forbidden to, sleep in the Sukka. How should I respond?
Rebbe: You shouldn’t respond at all, because this question is asked by those who only seek to reignite machlokes and sinas chinam, therefore it is best to keep away from them – and certainly not to get involved in responding, explaining, or halachic pilpulim, as if this is even a legitimate shayloh, rather, this is nothing other than a nisayon to create machlokes and sinas chinam. The hanhoga in Lubavitch – which is, by the way, also the hanhoga in Belz – regarding sleeping in the Sukka was well known and mefursam for over a hundred years! Back in the days of the Mitteler Rebbe, who was himself quite a lamdan, this was the practice, and this was what he saw in his father’s home by the Alter Rebbe, the Baal HaTanya & Shulchan Aruch. There is no chutzpa greater than this klape the Alter Rebbe: to come along now, after a hundred years, and come up with shaylos about this practice! And this chutzpa is combined with dishonesty: as if this is some new innovation in our generation – when this is known to have been the practice for generations!
A Gadol b’Yisroel in past generations was once asked regarding the statement in the Gemara (Rosh Hashana (22: ), "Kol milsa davida lagluyei lo mishakrei bo inshei (that people don’t lie about things that are done publically)" – how can the Gemara say this when we clearly see people that lie even about things that are easily verified? And he responded: The Gemara explicitly says "inshei," i.e. those that lie about such things aren’t even in the category of "inshei." And in this case, they lie, not merely about something that was done publicly, but about something that was well-known and common knowledge! I ask you, why associate with such a mechutzaf?!Chazal warn us, "hamisabek im menuval misnavel gam kein."
R’ Kahana: My intention was merely to be meorer the need to explain this for the Bnei Torah .
Rebbe: "Bnei Torah" need to act like talmidim of Moshe Rabbeinu, the first mikabel, as it says in Pirkei Avos "Moshe kibel Torah misinai, umesoroh, etc, vehemidu talmidim harbei." It is important to know if one is a student of Moshe or not; it needs to be contemplated if this behavior is in accordance with Moshe Rabbeinu’s: Moshe sought to create achdus in Klal Yisroel – as we find, when they left Mitzrayim and stood at Har Sinai all twelve shvatim were "K’ish echad b’lev echad." This is the hanhogoh of Moshe Rabbeinu, and this is the hanhogoh of talmidei Moshe Rabbeinu – as we see that the general hanhogoh of all Gedolei haTorah, from all circles, was to bring peace and achdus. R’ Chaim Volozhiner, a talmid of the GR"A, wasn’t a chossid, but he wasn’t a misnaged either – in general, religious Jews weren’t "misnagdim," but there are some mechutzafim that act as shluchim of the Samech-Mem – and it is known how R’ Chaim worked closely with the Mitteler Rebbe, both in matters of halachaaskanus, etc.
Similarly, his son R’ Yitzchok stood together with the Tzemach Tzeddek, both in matters of halacha and askanus, which is well known and verifiable (even non-Jewish sources can attest to this, so you can’t suspect Chassidimgezeira forcing Jewish children to study in secular schools. And in later years, keyodua umefursam, the kesher and the closeness between R’ Chaim Ozer and R’ Lifshitz of Kovno with the Rebbe Rashab and his son the [Previous] Rebbe, and how they worked shoulder to shoulder to defend and strengthen Yiddishkeit in Russia, and how they signed together on many kol korehs, etc. So, after a hundred years of peaceful relationships among gedolei Yisroel from all circles, one Jew stands up, calling himself a "Ben Torah," signs his name "harav," and claims to be carrying on the path of Gedolei Yisroelhatzolas Bnei Yisroel, and what does he do? He ignites machlokes and sinas chinam b’Yisroel!
Such a Jew is not considered a "Ben Torah," because even if he studies Torah, it is apparently not lishma, resulting in his being moreh hepech hahalacha – as the Gemara tells us about one who learns Torah shelo lishmasinas chinam b’Yisroel! Furthermore, not only is the psak hepech halacha, but their entire metziushepech halacha: they become soldiers of the Samech-Mem, hepech halacha. Regarding milchemes Midyan it is written that they stood "keneged klal Yisroel, which is tantamount to opposing HKB"H." It is explained in seforim that the word "Midyan comes from "Madun uMeriva (fighting)," and those who cause fights among Klal Yisroel are messengers of the Samech-Mem, the same one who caused the Ma’aseh Midyan – except that with Midyan the method was through the Midyonite women and now he found a better approach: to involve people called "Bnei Torah" to create machlokes and sinas chinam b’Yisroel. They think that this is something new, but in truth this has already existed – in Midyan. And I say this publicly, and I’m not bothered that it will get out, since this isn’t my chidush – this can be found in seforim.
It is written regarding anyone that makes machlokes and sinas chinam in klal Yisroel – whomever he may be – that even if he acted properly for many years – for 119 years – the Navi Yechezkel states regarding tzidkas hatzaddik: "even one who was a complete tzaddik all his days, but in the end he acts be’ofen hofchi" – and especially in our case, where the individuals creating the machlokes have always sought machlokes, only that in the past they were more cautious and careful with their words that it shouldn’t come out clearly – but I don’t want to continue with what is written in Yechezkel since I am in the business of brochos. They deal with the opposite of brochos, go investigate and decide for yourself what they deserve for their actions. As I said before, I wonder why you associate with them altogether.
R’ Kahana: Nevertheless, they are Bnei Torah…
Rebbe: They aren’t "Bnei Torah." They are mechutzafim who oppose Toras Moshe in that they seek only machlokes and sinas chinam after a hundred years of peace! Regarding chutzpa such as this the Gemora states "at the time preceding Moshiach, chutzpa will abound." Stam chutzpa always existed, but when we see chutzpasiman that we are B’ikvasa De’moshicha, when chutzpa abounds among those who fulfill the will of the Samech-Mem: to bring sinas chinam – the reason for galus – and through that to delay, chas veshalom, the geula ho’amitis vehashleima al yedei Moshiach tzidekeinu! All the "kitzin" have passed, and the fact is that Moshiach has still not come – and the guilty party is those that incite machlokes and sinas chinam b’Yisroel!geula than this!
R’ Kahana: Perhaps it would be appropriate that the Rebbe write something about this for the "Bnei Torah," so that they should understand the issue… that it’s not something new, that it’s an old practice and throughout the years it was accepted with peace and achdus among Gedolim of all types…
Rebbe: They know this already, and it has already been printed in seforim. It is unnecessary to explain things that they know themselves – and you can find proof in megilas Shang-Chai: there they knew to maintain a kesher with Lubavitch, and they had no problem coming to Lubavitch for help, and Lubavitch did everything possible to assist them. Some were brought to Israel and others to America, and there was real achdus and shalom – so much so that it began to erase the sinas chinam that had existed and that had brought galusal pi halacha, if the cause for golus has been removed, Moshiach would have to come and bring Geulah.
So that’s when the Samech-Mem stepped in – and he found Jews with long beards, that learn in Yeshiva, and he shook up what is found in the chalal hasmali (which need not be explained) and caused them "lehoros hepech halacha, " bringing machlokes and sinas chinam. We find that when Moshe took the Bnei Yisroel out of Mitzrayim, Pesel Micha was taken along as well – which was the cause for quite a bit of trouble later on – nevertheless, we cant criticize Moshe Rabbeinu for allowing it to come along – so I’m not surprised that "Pesel Micha" came along from Shang-Chai… Once again, the wonder is why you associate with them. And I wonder about your idea here: that a descendant of the Tzemach Tzeddek, who was named after him, should publicize and be meorer the kesher between his zeide and R’ Yizchok MiVelozhin! Is it necessary for me to do this?! Do they not already know this?! They hide from those facts and pretend not to know merely to make machlokes and sinas chinam.
R’ Kahana: Not everyone knows…
Rebbe: (smiles) If your intention is to be melamed zchus, it’s nice.
R’ Kahana: I myself was not aware.
Rebbe: What didn’t you know? You weren’t aware of the relationship between R’ Chaim Ozer and the [Previous] Rebbe and the Rebbe Rashab?!
R’ Kahana: R’ Chaim Ozer I did know, Baruch Hashem, and I certainly knew of their relationship.
Rebbe: R’ Chaim Ozer was a great lamdan, and chief Rabbi of Vilna. He worked with the [Previous] Rebbe and Rebbe Rashab. Nobody needs to go now and seek permission for their hanhogos from a "chatzaf" keneged Toras Moshe Rabbeinu. Rather, from such chutzpa we must protest – if we remain silent the chutzpa only grows! I don’t want to attack anyone, chas veshalom, but I ask you: In Israel there are many Irgunim shel Rabbonim, how can it be that the mecharcirei-riv do whatever they want and not one opens their mouth to say a word? We say in Shmoneh Esreh, "Es Tzemach Dovid avdecha meheira tatzmiach," but if we only recognize that if we would eliminate machlokes and sinas chinam, Moshiach would already have come!
Chaval on our time discussing this matter… let’s talk about chinuch in Eretz Yisroel. In Israel there are thousands of Jewish children that don’t know the first letter of "Anochi Hashem Elokecha," and from year to year, more and more children – literally tens of thousands bli guzma (haklevai that it should be a guzma) of children don’t get this education. What has been done in these forty years to save the chinuch for these tens of thousands of children? People come with criticism about Sukkah, but they won’t even put their finger in cold water to help these Jewish children and bring them to be able to learn Torah! This doesn’t bother them at all?! But they have no interest in these matters, because their goal is machlokes and sinas chinam – maaseh Midyan.
Midyan was busy with Avoda Zara begilui, but now people are embarrassed of Avoda Zara begilui. They serve Avoda Zara with the egel hazahav: They pay off Rabbonim and Roshei Yeshiva to write what ever they demand (they themselves aren’t talmidei chachomim, their "lomdus" is buying off Rabbonim, etc) and now, now there is an argument over 16 million dollars – no exaggeration – that was earmarked for Yeshivos, and subsequently it came out that a fight ensued for control of the money and it was decided to temporarily keep the money in the USA. Then there was a debate about what bank to put it in, until they found a bank that paid a higher rate and deposited it in someone’s name – and he became in control of the funds. And who benefited from the money? Not the Yeshivos; not even their own Yeshivos!
R’ Kahana: I’d like to apologize to the Rebbe for taking the time.
Rebbe: May we hear besuros tovos, and surely you will excuse the harshness of my words; it’s just that this has gone too far…
R’ Kahana: I know; I know what’s going on there. I have come from there and that’s why I wanted to smooth out the matter.
Rebbe: In this matter nothing can be accomplished coming from here – from the side that is nogeah bedavar. It’s better to find someone from the talmidim of R’ Chaim Ozer, that follows his path, to write and protest against this – and to publicize R’ Chaim Ozer’s letters reflecting his relationship with the Rabbeim, etc, and maybe that will help…
R’ Kahana: I knew R’ Chaim Ozer, and I am aware of the relationship.
R’ Kahana: I would like to ask the Rebbe for a brochoh for deah tzelula
Rebbe: (smiling) Yeah, that’s just what you need…that it get out that you asked me for a brochoh… B’chol ofen, may Hashem help, that you should merit to discuss the coming of Moshiach, and not about the hindrances to his arrival and the chutzpa that prevails from day to day.
R’ Kahana: I need a brochoh that Hashem should grant me deah tzelula.
Rebbe: Certainly your daas is clear enough to explain to them what they need to hear, especially since they already know this deep down.
R’ Kahana: I mean deah tzelula in Limud haTorah, "Vehaer eineinu b’Sorasecha."
Rebbe: We all suffer great pain from the rampant chutzpa of ikvosoh demeshicha, and you want to learn Torahtzilul hadaas and menuchas hanefesh?! This is what Yirmiyahu answered Baruch ben Neriah ( Ch. 45) when he asked why he wasn’t worthy to receive prophecy: "Koh amar Hashem – What I have built I will tear down, and what I have planted I will uproot, I am uprooting all the land, and you seek great things for yourself?!"
(R’ Kahana then introduced his wife as the daughter of the ‘Einayim Lemishpat,’ (Rav Arieli) and she said: "I’d like to ask the Rebbe for a brochoh for my son and my grandson, that they should follow in the path of Torah" – to which the Rebbe responded: "May they have "einayim lemishpat," and by that I mean mishpat amiti.")
Rebbe: May you have besuros tovos in an oifen of keflayim le’toshiah – and, as I said, I hope you weren’t offended (and the Rebbe gave them 2 dollars)
Early letter of the Rebbe on the topic:
7 Cheshvan, 5715 
Rabbi… conveyed to me your question as to why it is not the custom of Chabad Chasidim to decorate the Succah, as well as to sleep in the Succah.
This question calls for a lengthier explanation than this letter would permit. However, I trust the following points may suffice:
Generally, a Mitzvah must be observed on its Divine authority (with Kabolos Ohl) and not on rational grounds, i.e. for any reason or explanation which we may find in it. An exception, to some extent, is the case where the significance of the Mitzvah is indicated in the Torah, and our Sages have connected its fulfillment with it. At any rate, only a qualified person can interpret it more fully.
We have a rule that a Mitzvah should be performed to the best of one’s ability, and as the Rambam explains (at the end of Hilechoth Issurei HaMizbeach). This applies especially to the object of the Mitzvah itself, e.g., a Talis should be the best one can afford, an offering should be the most generous, etc.
Unlike the Sechach [branches covering the top of the Succah] and walls of the Succah, decorations are not an essential part of the Succah, but an external adornment which adds to the enjoyment of the person sitting inside the Succah; they are, as the name clearly indicates, supplementary objects which decorate and beautify the external appearance of the Succah.
The attitude of Chabad Chassidim in this connection, as taught by generations of Chabad leaders and teachers, is that the Succah is to imbue us with certain essential lessons, which are explained in Chassidic literature and Talmudic literature in general. It is expected of Chabad Chassidim that they should be impressed by the essential character of the Succah without recourse to "artificial" make-up; that the frail covering of the Succah and its bare walls, not adorned by external ornaments, rugs or hangings, should more forcibly and directly impress upon the Jew the lessons it is meant to convey.
Re: Sleeping in the Succah
In order to safeguard and inspire a greater feeling toward the Succah, sleeping in it is not practiced by us. The basis for this is two-fold: First, we have a rule that Hamitztaer putter min HaSuccah (suffering exempts one from dwelling in the Succah). Secondly, during sleep a person is not in control of himself, and, furthermore, the very act of undressing and dressing, etc. inevitably creates a common-place attitude towards the place which serves as a bedroom. Such a depreciation of attitude toward the Succah (by sleeping in it, as explained above), from what his attitude should properly be towards the Mitzvoth of G-d whereby He has sanctified all Jews, would be deeply felt by the Chabad Chassid by virtue of his Chassidic teachings and upbringing, and would cause him profound spiritual suffering. The combination of these two considerations, therefore, led to the custom not to sleep in the Succah.
However, if a Jew feels absolutely certain that his sleeping in the Succah will not in the slightest affect his attitude toward the sanctity of the Succah, and is consequently free from any mental pain that might be caused thereby, he is duty-bound to sleep in it, in accordance with the fullest meaning of Taishvu K’ain taduru, to make his Succah his dwelling place to the utmost.
I hope the above will provide an adequate answer to your question, but should you desire further clarification, do not hesitate to write to me.
(Reprinted from L’chaim # 688 (http://www.lchaimweekly.org/lchaim/5762/688.htm#caption5))