Wednesday, December 08, 2010

Stahl v. U.S. (9th Cir. - Nov. 29, 2010)

I'm utterly fascinated by this one.

It's a tax opinion.  So you wouldn't initially think it likely to result even in interest, much less total fascination.  But fascinating it is.

Because it's basically about how the U.S. tax laws treat communists.  In particular, religious communists engaged in capitalism.  Or, more specifically, how we tax (or don't tax) people who eschew private property and live in a religious commune in which all income and expenses are owned and distributed collectively.

I admit that I didn't know much about Hutterite communities before I read the opinion.  But now I do.  They seem pretty similar to other utopian communities like the Oneida colony.  The one at issue here runs a huge (30,000 acre) farm in Washington and has 65 members.  It's incorporated as a religious corporation, all of the members eschew private property, every member works on the farm, and the corporation provides all of the members' food, clothing, medical care, etc.  Your basic communist organization working in a captialist society.

Fair enough.  Everyone gets to organize their private lives how they want.  All we care about is this:  How do we tax 'em?

Well, there's a special provision in the tax code that basically says that since the organization is a nonprofit religious corporation that doesn't pay taxes, income is imputed to the individual members based upon their pro rata share of the corporation's net income.  Makes sense, right?  We don't want such entities to be entirely untaxed, including whatever profits they make.  That'd be unfair, since we tax profits for everyone else.  At least when, as here, they get used to benefit the standard of living of their constituent members.

But here's the problem:  Can the members essentially deduct their living expenses -- food, clothing, etc.?  The corporation paid for these things, after all.  It's a "ordinary" business expense in the sense that that's the basic purpose of the corporation, and as the owner of all the property with the responsibility for paying these things, that's the whole point of the enterprise.  So doesn't that reduce the corporation's "profit" and hence the pro-rata tax liability of the members.

But why should members of these organizations get to deduct such expenses when no one else gets to?  For example, Person A works on a regular non-profit collective farm, gets $30,000 as his pro-rata share of the net profits of this enterprise, and subsequently spends $30,000 on food, shelter, and clothing.  He's taxed on the entire $30,000 he received.  No deduction for food or (unmortgaged) housing.  Should the result change if the enterprise is structured in the way that Hutterite communities are structured?

Every court to have considered the issue thus far has said "No" -- holding that the individual members of such communities don't get to deduct their living expenses.  But the Ninth Circuit holds otherwise, and reverses the grant of summary judgment to the United States.  So it may end up that the members get to deduct their living expenses.

Judge Fernandez's opinion makes some doctrinal sense, and he limits the opinion to discussing the particular "employee" issue on which the district court granted summary judgment.  Though I still have a lingering and somewhat uneasy opinion about the net result.  This from someone who's pretty pro-Utopia.

The one thing that I thought Judge Fernandez might have explored a bit more is the nature of "control," as he concedes that this is a pretty decisive tax factor.  In a broader utopian community, I have little doubt that the corporation "controls" its employees/members, and this control is exercised in an ordinary fashion that's fairly typical and understandable by tax law.

But this particular Hutterite community -- as well as many others -- is somewhat special in a way that might be highly relevant to the control issue; in particular, the fact that all of its 65 members are part of one family.  The Stahl family is the community at issue, and consists of eight brothers, two sisters, their spouses, and their children.  So what the Stahls have basically done is to incorporate their family (and family business) and are using that entity to provide food, shelter, and other living expenses for the family.  Do they get to deduct that stuff?

Now, I have no doubt whatsoever about the sincerity of the Stahl's family's beliefs.  I'm positive that they are true believers, and profoundly respect their decision.  But I can't help but wonder whether the definition of "control" that's normally used in tax law for typical employer/employee relations doesn't get distorted a bit when we're talking about a communal family.  When my mother tells me what to do, and I obey -- either as an adult or a child -- I'm not sure that I'm doing so because I'm an "employee" of hers, or are subject to the same control dynamics and are typically at work in a corporate setting.  It seems qualitiatively different to me.

Moreover, when an organization consists entirely of a single family, I just get nervous -- at least potentially -- about the potential results elsewhere.  Imagine that I truly believe, for example, that my own family, consisting of myself, my spouse, and my four children, should all live communally.  As we in fact do.  With no individual "owning" any particular piece of property, but with me (like John Stahl) as the "President" who's in charge of making decisions about the community.  With input and direction, of course, from my fellow members.

I sincerely believe this.  God wants us to be a family.  Undiluted by individual ownership.  Do I now get to deduct all of our living expenses; food, clothing, shelter, etc.?  If so, I'm definitely going to check out the Bible in more detail this weekend.  With a sympathetic view about anything that God might say about the unity of the family.  With more than casual references, if necessary, to the Koran, Book of Mormon, and anything else that might be helpful.  The end of the tax year is coming up, after all.

I've got additional thoughts on this, and it's a really complicated issue (and not one that's definitively resolved by this particular Ninth Circuit opinion anyway), but this post is already too long.

My short take:  It's clearly a topic worth thinking about.  Maybe even worth someone's time (not mine) to write a law review article about.  It'll definitely get read more than a lot of law review articles about tax.