Wednesday, January 5, 2011

You Figure it Out

STAHL v. U.S., Cite as 106 AFTR 2d 2010-7154, 11/29/2010

There are certain sections of the Internal Revenue Code that have worked their way into our language.  There is even a joke where somebody says that thanks to the market collapse they now have a 201(k).  I have this inquiring mind that reasons that if there is a 501(c)(3), which everybody knows about there must also be 501(c)(1) and 501(c)(2) and who knows maybe even 501(c)(4).  Believe it or not it actually goes up to 29 (Co-op health issuers) and includes 501(c)(23) - Any veterans association organized before 1880, the principal purpose of which is to provide insurance and other benefits to veterans or their dependents.  I guess the Grand Army of the Republic was still a force to be reckoned with in 1913.  Even better it keeps going past (c).  The Stahl case is about a 501(d) organization :

(d) Religious and apostolic organizations.

The following organizations are referred to in subsection (a) : Religious or apostolic associations or corporations, if such associations or corporations have a common treasury or community treasury, even if such associations or corporations engage in business for the common benefit of the members, but only if the members thereof include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the taxable income of the association or corporation for such year. Any amount so included in the gross income of a member shall be treated as a dividend received.

501(d) organization file form 1065 and the members are taxed on their share of the profits.  They are not, however, considered partnerships subject to the TEFRA audit rules.  John Stahl is a member and president of the Stahl Hutterian Brethren .
SHB was organized to enable its members to live in accordance with the tenets of the Hutterite tradition. The Hutterite tradition is rooted in sixteenth century Germany. In accordance with their religious beliefs, SHB members live in a colony, and currently the SHB colony includes about 65 members. They are all part of the extended Stahl family, which includes eight brothers, two sisters, their spouses, and their children.

Hutterites disavow individual property ownership, so SHB does not pay a salary to any of its members. Moreover, the members do not contribute to or collect Social Security benefits. All of SHB's property is maintained by it and is used for the benefit of its members. SHB provides for the members' personal needs, such as food, shelter, clothing, and medical care.

According to the bylaws of SHB, any member may be expelled. Expulsion may occur for a variety of reasons, including: the member's refusing to obey SHB's rules; the member's “failing to give and devote all his or her time, labor, services, earnings and energies” to SHB; and the member's “failing to do and perform the work, labor, acts, and things required of him or her.” If a member is expelled, he forfeits all interest in SHB's property and leaves with nothing but the clothes on his back.

Stahl brought this action for the purpose of obtaining an income tax refund because, he asserts, corporate level income should have been reduced for tax purposes before it was passed through to him. He insists that the cost of meals and medical expenses of SHB's employees was an ordinary and necessary business expense. The government argued to the district court that none of the Hutterite members, including Stahl, are employees for tax purposes and that should end the inquiry. The district court agreed with the government, and this appeal followed.

After a fairly lengthy analysis, the Court concluded that the individual members are, in fact, employees even though they are not paid wages.

On balance, the individual Hutterites, who work for the SHB business, should be seen as common law employees of SHB insofar as they perform the work of that business. They are permanent workers on SHB's grounds and SHB can both insist that they perform their assigned tasks at the proper times and can direct the detail of that performance. Despite the fact that SHB and those members who work for it have a myriad of interconnected relationships, one of those relationships is operation of and working in a business. That connection is most like the relationship between an employer and employee, and should be so treated for tax purposes.

It must be nice being a judge in the appelate court.  The implications of the members being employees are far reaching but :

SHB is a Hutterian corporation, which like others of its kind, is treated as a 26 U.S.C. § 501(d) entity. By its very nature, it is not exactly like an ordinary business corporation; nor is it like the more common 26 U.S.C. § 501(c)(3) organizations. Nonetheless, we see no reason to hold that its Hutterite workers are not employed by the SHB business when, as here, they essentially meet the definition of common law employees, even if they have many other relationships among themselves and with SHB. Thus, the district court erred when it held to the contrary and granted summary judgment to the government. “Employment” is the sole issue before us, and we will not divagate into others; we leave those to the district court in the first instance.

My spell checker doesn't thing "divagate" is a word and I don't know what it means, but it seems like a cool word, so I'm leaving it there.


  1. The Bruderhofs are not the only groups that utilize the provisions of IRC Section 501(d). Many of the Catholic Monasteries and Nunneries that operate businesses also conduct their business operations in a 501(d) entity. Not to mention other groups such as Baptists and Christians and Egalitarians. One of the more important recent tax cases for organizations exempt under IRC 501(d) involved the Twin Oaks community in Louisa, Virginia.

    The origin of the 501(d) tax status was the intention to conform tax results to the real-world activities of Shaker communal businesses. The Congressional Record of June 5, 1936, page 9074 reads in part "It has been brought to the attention of the committee that certain religious and apostolic associations and corporations, such as the House of David and the Shakers, have been taxed as corporations, and that since their rules prevent their members from being holders of property in an individual capacity the corporations would be subject to the undistributed-profits tax. These organizations have a small agricultural or other business. The effect of the proposed amendment is to exempt these corporations from the normal corporation tax and the undistributed-profits tax, if their members take up their shares of the corporations' income on their own individual returns. It is believed that this provision will give them relief, and their members will be subject to a fair tax."

    The amendment, as passed by Congress that day, reads much the same as it does today: (18) Religious or apostolic associations or corporations having a common treasury or community treasury, even 1f such associations or corporations engage in business for the common benefit of the members, but only if the members thereof include (at the
    time of filing their returns) in their gross income their entire pro-rata shares, whether distributed or not, of the net income of the association or corporation for such year. Any amount so included in the gross income of a member shall be treated as a dividend received.

  2. Thanks for the background. "Nunneries" is a great word.