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Communists and Religion and Corporations and Capitalism and Taxes and the 9th Circuit, oh my!
December 13, 2010 2:00 PM   Subscribe

How do you tax religious communists engaged in capitalism through an exempt religious corporation? The Stahl Hutterian Brethren is a 65-member community of Hutterites that runs a 30,000 acre farm in Washington. The community is incorporated as a religious corporation. Its members give all their "time, labor, services, earnings, and energies" to the community. They disavow individual property ownership, draw no salary, and do not contribute to or collect Social Security benefits. Instead, the community provides for its members' personal needs. And now it is the subject of the most fascinating 9th Circuit tax case [PDF] you'll read this year!

But before you dig into the 9th Circuit opinion, here's a great summary and commentary by law professor Shaun Martin. The case addresses the very tricky question of whether, as employees of a non-profit religious corporation, the community members should be allowed to deduct their living expenses, which are paid for by the corporation (they're communists, after all). Tricky additional fact: The 65-member community is all one big family.
posted by The World Famous (36 comments total) 25 users marked this as a favorite

 
Holy shit Hutterites!!!

Okay, my freshman writing professor in college had a weird fascination with the Hutterite community, and he always assigned a book on them (The Hutterites in North America), until it was so out of print and hard to find that he had to give it up.

I am excited to read this and get nostalgic for freshman year.
posted by Tesseractive at 2:15 PM on December 13, 2010


Thanks for this - I'll be interested in the comments. I have just read a romance novel set among the Amish, but there was no mention of tax law, sadly. I was compelled to read it by MetaFilter.
posted by paduasoy at 2:27 PM on December 13, 2010


I love that there's a Japanese colony full of people with no ancestral relationship to the original Hutterites, who just thought it was a nice way to live.

That, and wtf USA? Torturing conscientious objectors to death?
posted by mullingitover at 2:27 PM on December 13, 2010


Great post. I wish there were a Shaun Martin for the Seventh Circuit - he's my favorite legal blogger (along with Dorf and the Balkinization folk).
posted by facetious at 2:32 PM on December 13, 2010


I find religious separatists fascinating. And I find tax... well, more interesting than most people find tax. So this is like the coolest thing I've seen all day, anyway.
posted by gracedissolved at 2:36 PM on December 13, 2010 [1 favorite]


That, and wtf USA? Torturing conscientious objectors to death?

i sing of Olaf glad and big
posted by pracowity at 2:45 PM on December 13, 2010 [6 favorites]


I'm not 100% sure I understand the case (I read the summary by Martin, but not the more opaque case document). Why can't you say that if the corporation gets to deduct the member's living expenses the members must treat the living expenses paid by the corporation as income?
posted by justkevin at 2:51 PM on December 13, 2010


Remind me why we exempt religious organizations from paying tax on their income?
posted by maxwelton at 2:59 PM on December 13, 2010 [4 favorites]


Remind me why we exempt religious organizations from paying tax on their income?

Specifically, why we exempt religious organizations that function as businesses. I am not a big fan of religion in general, but I can see the argument for exempting worship sites from taxation. A farm, radio station, or amusement park, not so much.
posted by GenjiandProust at 3:02 PM on December 13, 2010 [3 favorites]


The Hutts are known for their shady enterprises throughout the galaxy. I'm not surprised that they'd try to weasel their way out of tax codes here.
posted by BrandonW at 3:03 PM on December 13, 2010 [18 favorites]


It is my understanding that they pay income taxes by dividing the income equally between all members. Non-religious income of religious organizations is subject to tax. see pg 16 unrelated business activity. The question here is can the business deduct the costs of clothing and food as business expenses as they would be able to deduct a tractor or grain elevator.
posted by humanfont at 3:20 PM on December 13, 2010 [2 favorites]


I still haven't wrapped my brain around why it's conscionable to punish people via taxation for engaging in an estimable activity like labor. Tax the hell out of capital gains and inheritances and other windfalls, and tax socially costly activities like gambling/smoking/drinking, but we should be rewarding people for doing honest labor.
posted by mullingitover at 3:23 PM on December 13, 2010 [4 favorites]


It's not punishment, it's how we, as a country, pay for shit.
posted by ryanrs at 3:54 PM on December 13, 2010 [8 favorites]


"It's not punishment, it's how we, as a country, pay for shit."

Sure, but that doesn't mean it's the best way to do it, or even a good way.
posted by mullingitover at 4:00 PM on December 13, 2010


Capital gains, inheritance, and dividends are just specific types of income. Taxing any income differently than others just makes the wealthy finagle a way so that their income comes in the cheapest way, and everyone else is SOL.
posted by garlic at 4:05 PM on December 13, 2010 [3 favorites]


"Taxing any income differently than others just makes the wealthy finagle a way so that their income comes in the cheapest way, and everyone else is SOL."

Which is totally different from how things work today. Oh wait.
posted by mullingitover at 4:15 PM on December 13, 2010 [3 favorites]


The question here is can the business deduct the costs of clothing and food as business expenses as they would be able to deduct a tractor or grain elevator.

And, to be fair, that doesn't have much to do with the religion specifically. My gut feeling is that the income represented by the food and clothing is a kind of wage, and that the business should only get to deduct it if businesses normally can deduct wages. My gut is pretty ignorant about tax law, however, so it might be horribly wrong -- can businesses normally deduct "in kind" wages (say, if employees get free meals as part of their shifts or a discount on product)?
posted by GenjiandProust at 4:18 PM on December 13, 2010


Tax the hell out of capital gains and inheritances and other windfalls, and tax socially costly activities like gambling/smoking/drinking, but we should be rewarding people for doing honest labor.

Capital gains, at least ideally, are the result of work and willingness to absorb risk. That's different from inheritance and those other things. To make money in the market, you ideally need to predict a business or sector's successes and failures better than average. That is not terribly easy. The market isn't ideal, of course, and there are some people making money there through dishonesty and exploitation (like every other occupation). But it's weird to refer to all capital gains as a "windfall".
posted by Xezlec at 4:23 PM on December 13, 2010 [3 favorites]


Great discussion question. Makes my mind spin in circles. I like supporting communal living. I don't like the Hutterites' paternalistic religion, but I like religionists who walk their walk. I like pacifists. I support paying taxes to support many governmental functions, but not its primary one: its military. The essential question about what and who is taxed and how much can get down to some primary ethical issues, too, which I would be equally excited about if I could figure out the USA's arcane tax code.
posted by kozad at 4:24 PM on December 13, 2010


The case addresses the very tricky question of whether, as employees of a non-profit religious corporation, the community members should be allowed to deduct their living expenses, which are paid for by the corporation

If the corporation claims a deduction for the benefits they provide their employees (aka "living expenses") and the employees claim a deduction for exactly the same thing, aren't they simply double-dipping? You can't sell the same pup twice.
posted by binturong at 4:45 PM on December 13, 2010


If the corporation claims a deduction for the benefits they provide their employees (aka "living expenses") and the employees claim a deduction for exactly the same thing, aren't they simply double-dipping? You can't sell the same pup twice.

Not exactly. The way the members of a 501(d) corporation are taxed is that they pay personal income tax on their pro rata shares of the corporation's income. If the corporation has a deduction (e.g. if it deducts a business expense), that reduces the corporation's taxable income which, in turn, reduces the pro rata share of each member. From the opinion:

SHB is a 26 U.S.C. § 501(d) nonprofit apostolic corporation.
Apostolic corporations maintain a common treasury and
do not pay income tax. Instead, the members of a § 501(d)
corporation pay personal income tax on their pro rata shares
of the corporation’s income. As a result, a member’s tax liability
is reduced when deductions are allowed at the corporate
level.


And then, also from the opinion:

Stahl claims that he was an employee of SHB, and that,
therefore, his medical and meal expenses are deductible at the
corporate level when SHB’s taxable income is determined.
The district court decided that he was not an employee. It did
not go on to determine whether deductions would be proper
if he were one.

posted by The World Famous at 5:11 PM on December 13, 2010


Xezlec: "Capital gains, at least ideally, are the result of work and willingness to absorb risk."

So we're in agreement that even ideally, capital gains aren't that different from gambling profits.
posted by mullingitover at 5:12 PM on December 13, 2010 [1 favorite]


I still haven't wrapped my brain around why it's conscionable to punish people via taxation for engaging in an estimable activity like labor. Tax the hell out of capital gains and inheritances and other windfalls, and tax socially costly activities like gambling/smoking/drinking, but we should be rewarding people for doing honest labor.

In the United States federal tax specifically there are 3 parts of the taxation relates to your labor. The first two components are the taxes that provide income for those no longer able to work (Social security) and provide medical care (medicare) for then as well. We have also determined that there is a social benefit in having the elderly leave the workforce at a denied age as it makes way for younger workers and allows those too old to continue working at least some measure of income. As an amerricnw worker you have entered into a moral compact of mutual insurance that provides these benefits into form of payroll taxes. Your employer will pay half of this tax. The second component of your tax on labor relates to the income earned from working. If you are poor this tax actually encourage you to work because you become eligible for the earned income tax credit. Essentially you get paid April 15 because you worked, and we didn't have to give you direct welfare beyond food stamps. This then leads into a progressive income tax which looks at your income from labor and short term capital gains. This results in the top 10% of wage earners paying 60% of the nations tax bill (taking in 45% of national income).

We have determined that taxation of your labor (as your primary means of income for most people) is a means of managing social policy. Thus we are able to grant you specific tax exemptions for saving for retirement and purchasing a home, paying for college, buying a hybrid car, installing energy efficient windows. As well as encouraging work among the feet poor and low skilled who might otherwise simply rely on the public dole, or resort to crime.

Of course as an American citizen the world is currently loaning you over a trillion dollars a year, and our central bank just printed 600 billion dollars to dump some additional currency into the mix. Since our government runs at a deficit along with our current accounts in global trade we are essentially being given $20k in discounts per person per year in the form of discounted television sets, mobile phones, consumer goods, computers, autos, gas/oil, etc.

Were you actually required to carry the burden of these things in the form of higher taxes, or higher prices perhaps you could reasonably claim what a terrible punishment the gov'ment done by taking such big bite outta your scratch. Instead marvel at the fact that you get clean water, thousands of miles of toll free paved roads to drive on, and a fairly reliable utility grid.

Also if you really think taxation is punitive, rather than just the cost of citizenship, why would capital gains be more conscionable to tax than labor. I mean I'm a savvy business person, I mass investments in properties and corporations which then paid taxes, provided employment. My investment grew off time along with the value of the company or underlying asset. Are yup going to punish me for being smart with my investments? The company paid taxes on every dollar it made and that drove down the value of the investment by reducing the businesses income. Why should I now have to pay taxes all over again on what the government has deigned to leave of my profits. Since I'm apparently a very good investor, shouldn't the government let me make the decision about what to do with those profits. Also if you Tax me to heavily, I'll just let cash pile up on the balance sheet and increase the value of my underlying assets without selling them (thus exposing them to taxation). I can then borrow against those assets or do other tricks go avoid having to pay you anything. The worst part for the economy will be that mountains of cash will be locked up in bank vaults, the velocity of money will drop and the economy will crater.
posted by humanfont at 5:38 PM on December 13, 2010 [1 favorite]


humanfront: "Also if you really think taxation is punitive, rather than just the cost of citizenship, why would capital gains be more conscionable to tax than labor. I mean I'm a savvy business person, I mass investments in properties and corporations which then paid taxes, provided employment. My investment grew off time along with the value of the company or underlying asset. Are yup going to punish me for being smart with my investments?"

What would the value of your business be without the infrastructure provided by the government? Business gets far more value from those thousands of of miles of toll-free paved roads than the average laborer. As for the double-tax complaint, at the end of the day it's a reasonable price to pay to be completely shielded from liability. Would you be interested in owning BP stock if you knew you might be held personally liable for their next big oil spill?
posted by mullingitover at 6:17 PM on December 13, 2010


I would tax religious communist capitalists by making them watch infomercials in church while singing the Internationale, non-stop.
posted by eegphalanges at 6:18 PM on December 13, 2010


Would you be interested in owning BP stock if you knew you might be held personally liable for their next big oil spill?

Why should I be personally liable beyond my investment. The whole point of the corporate structure was to create a mechanism for investors to limit their risks and provide capital to the operators of the business. As it stands a BP investor lost the dividend income and about 20% of the companies value in the spill. At the height of uncertainty it was close to a 50% loss.

The business benefits from all manner of government policies, but it also pays taxes. I actually think this is a good thing. I am just stating that it seem odd to decry taxing labor and punishing capital gains.
posted by humanfont at 6:46 PM on December 13, 2010


Xezlec: "Capital gains, at least ideally, are the result of work and willingness to absorb risk."

So we're in agreement that even ideally, capital gains aren't that different from gambling profits.


Nope. Gambling profits do not result from work, and the risk absorbed is artificial and doesn't contribute to anything. The risk absorbed by investors is the risk incurred by someone like you deciding to start a company and discovering that it takes more money to do that than a normal person has, or at a larger scale, the risk of growing a small company into a bigger one to compete with the big guys. The work is the work involved in figuring out whether that company really has what it takes to make it and is only lacking the capital.
posted by Xezlec at 6:56 PM on December 13, 2010


Though let's not kid ourselves most capital gains involve some big company getting bugger and crushing all those little startups. I mean AT&T, Exxon Mobil, etc are great anchors for your portfolio, but they ain't small businesses.
posted by humanfont at 7:09 PM on December 13, 2010


Xezlec:
Gambling profits do not result from work, and the risk absorbed is artificial and doesn't contribute to anything. The risk absorbed by investors is the risk incurred by someone like you deciding to start a company and discovering that it takes more money to do that than a normal person has, or at a larger scale, the risk of growing a small company into a bigger one to compete with the big guys. The work is the work involved in figuring out whether that company really has what it takes to make it and is only lacking the capital.
First, what is the definition of work for the purpose of your claim that gambling isn't? Professional poker players and skilled blackjack players certainly exert mental and emotional effort in the pursuit of their craft. That they enjoy it seems immaterial, and in some cases they make a portion of their income from it.

Second, what do you mean by artificial? Much risk in business is "artificial" in the sense of not corresponding to any physical change of state (as opposed to a hurricane destroying a house, which is a physical calamity rather than a mere unfortunate transfer of ownership to the casino). For example, the risk of government expropriation of mineral resources is a real risk that capitalists must consider in deciding whether to invest in a mining venture in a country. Should the expropriation occur, there is no physical calamity, merely a unilateral wealth transfer - yet I would consider this a legitimate form of investor risk.

The difference between investor losses/gains and gambling losses/gains seems less clear cuta to me than you imply.
posted by seejaie at 9:14 PM on December 13, 2010 [1 favorite]


So how 'bout them Hutterites?
posted by Aizkolari at 3:45 AM on December 14, 2010


I still haven't wrapped my brain around why it's conscionable to punish people via taxation for engaging in an estimable activity like labor. Tax the hell out of capital gains and inheritances and other windfalls, and tax socially costly activities like gambling/smoking/drinking, but we should be rewarding people for doing honest labor.

Because taxation isn't punishment, as much as the right would like to have us believe that. Taxation is the bill we pay for all the services the gov't provides.

And, we already tax the hell out of cap. gains. All that money has already been taxed. I get a job and earn money. I pay taxes on that money. I save up some of the money I have left and invest it in a corporation. Now I have to pay MORE tax on any return I get on that money. That I have already paid income taxes on.

And short term cap gains is taxed at the regular income rate.

Also, "labor" is taxed much lower than you think, via the progressive tax. You don't pay tax on the first (almost) $10,000 of income via the standard deduction and exemptions. You pay 10% on the next $8350, 15% on the next $30,000. So you have to make $35,000 or so before you are taxed any higher than the long term cap gains rate.

(Not to mention the AMT, which can evaporate some of the supposed savings of long term cap gains.)
posted by gjc at 7:45 AM on December 14, 2010 [2 favorites]


Gambling profits do not result from work, and the risk absorbed is artificial and doesn't contribute to anything.

Bologna. The risk is anything but artificial- I take my hard-earned dollars and give them to a guy in a bow tie and a vest, and depending on luck and skill, I might get some of that back. If I lose, I lose my money. That's risk. It is almost MORE than risk, because the house always wins. Statistically, I am entering a losing proposition.

And gambling contributes to the economy the same way any other business does. Customers come in with money, and at the end of the day, they leave with less. It doesn't matter at all that the product they are purchasing is Exciting Gaming Action any more than if they were riding roller coasters or purchasing any other service. That profit goes to employ tons of people, and buys tons of products from other companies.

Though let's not kid ourselves most capital gains involve some big company getting bugger and crushing all those little startups. I mean AT&T, Exxon Mobil, etc are great anchors for your portfolio, but they ain't small businesses.

Maybe in dollars, but a lot of that is locked up in 401(k) kinds of things, which will be taxed at the regular rate when you take the money out.

And if you start a small company that is a c-corp, you can take excess profits out as cap gains rather than as salary. More or less.
posted by gjc at 7:55 AM on December 14, 2010


gjc:"Taxation is the bill we pay for all the services the gov't provides."

Cool, so if I don't need those services I don't have to pay the bill? I personally don't need any 'killing brown people on the other side of the planet' services myself, can I decline that charge? That would reduce my tax rate by quite a bit.

gjc: "All that money has already been taxed. "

So if taxation is arbitrary and it's just how we pay for the government, you've already responded to your own objection, and the answer is 'Gotta pay for those government services. Deal with it.' It certainly makes more sense to soak the investor class than the people who are living paycheck to paycheck.
posted by mullingitover at 10:50 AM on December 14, 2010


Dude, mullingitover, you're usually smart enough to avoid pulling a Wesley Snipes.
posted by klangklangston at 11:24 AM on December 14, 2010


klang: "Dude, mullingitover, you're usually smart enough to avoid pulling a Wesley Snipes."

Hey, I'm not actually dodging my taxes, just bitching about them. Trickle down economics hasn't done much for us, I'd prefer that we tried flipping it around. Negative income tax anyone?
posted by mullingitover at 10:26 AM on December 15, 2010


I tried the case for the Hutterities in the District Court, wrote the brief for the Ninth Circuit. Great thing about this case was that of the various lawyers involved, government and taxpayer, only one was not one of my former students at Gonzaga law school.

Probably the most interesting tax case I've had in some 45 years of practice. Five years as an IRS lawyer, 30 plus as a law prof at Gonzaga law school. trying cases on the side.

Not proper to comment on the case, as it is on remand. The briefing is interesting. Google me and I will see that you get a copy of the brief(s) on e mail.

Tax law is interesting, believe it or not.
posted by grandall2 at 7:06 PM on January 2, 2011 [2 favorites]


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