FAMILY TRUST OF MASSACHUSETTS, INC., Plаintiff, v. UNITED STATES of America, Defendant.
Civil Action No. 11-00680 (RBW).
United States District Court, District of Columbia.
Sept. 24, 2012.
892 F. Supp. 2d 149
REGGIE B. WALTON, District Judge.
IV. CONCLUSION
For the reasons stated above, the plaintiff‘s Request for Hearing, ECF No. 20, and Motion to Strike Defendant‘s Reply Brief and Statement of Material Facts in Dispute, ECF No. 22, are DENIED, and the defendant‘s Motion for Summary Judgment, ECF No. 14, is GRANTED. An appropriate Order shall accompany this Memorandum Opinion.
Andrew C. Strelka, Department of Justice, Joseph E. Hunsader, U.S. Department of Justice, Washington, DC, for Defendant.
MEMORANDUM OPINION
REGGIE B. WALTON, District Judge.
This case arises from a claim brought under a section of the Internal Revenue Code, specifically,
I. FACTUAL BACKGROUND
The FTM is a trustee for over 300 disabled and elderly individuals who participate in a pooled-asset special needs trust program.2 AR at 00015-16; AR at 00055-56; AR at 00334-335. A pooled-asset special needs trust that meets the requirements of the Medicaid Statute allows a disabled beneficiary or his or her family to establish a trust account that will supplement, but not replace, the benefits the beneficiary receives from Supplemental Security Income (“SSI“), Medicaid, and other governmental benefits programs. AR at 00420. It essentially аllows disabled beneficiaries to “maintain their federal Medicaid and/or [SSI] eligibility, despite having assets in excess of federally allowed limits.” Gov‘t‘s Mem. at 1.
The FTM was founded by Peter Macy (“Mr. Macy“), a private Massachusetts attorney who specializes in elder law. AR at 00016. Mr. Macy incorporated the FTM as a special needs trust in 2003. AR at 00011; AR at 00021. He serves as Presi
Mr. Macy refers his own disabled clients to the FTM “if they meet the criteria of [the] FTM‘s charitable class.” AR at 00222. Additional clients have been obtained via legal or health care referrals to Macy, i.e., through “word-of-mouth in the Elder Law legal community.” AR at 00018; AR at 00079. Since 2005, the FTM‘s clientele has increased from 20 beneficiaries to over 300, AR at 00068; AR at 00328; AR at 00314, and the trust “hopes to expand the number of participants,” AR at 00016. Consequently, annual revenues also rose from $5,825 in 2004, AR at 00102, Lines 12 & 18, to $667,679 in 2009, AR at 00551, Lines 12 & 19.
On November 21, 2005, the FTM applied for a determination from the IRS that it is an organization encompassed by
II. STANDARD OF REVIEW
This Court has “original jurisdiction of any civil action against the United States provided in [§] 7428 ... of the Internal Revenue Code of 1986.”
Upon consideration of the parties’ cross-motions for summary judgment, “the [C]ourt shall grant summary judgment only if one of the moving parties,” Airlie, 283 F.Supp.2d at 61, shows that “there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law,” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “When faced with cross-motions for summary judgment, th[is] Court must review each motion separately on its own merits ‘to determine whether either of the parties deserves judgment as a matter of law.‘” Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir.2003); see also Fair Housing Council of Riverside County, Inc. v. Riverside Two, 249 F.3d 1132, 1136 (9th Cir. 2001) (“It is well-settled in this circuit and others that the filing of cross-motions for summary judgment ... does not vitiate the court‘s responsibility to determine whether disputed issues of material fact are present.“) (internal quotations omitted). “The evidence of the non-movant is to be beliеved, and all justifiable inferences are to be drawn in [its] favor.” Estate of Parsons v. Palestinian Auth., 651 F.3d 118, 123 (D.C.Cir.2011) (citing Anderson v. Liberty Lobby, 477 U.S. 242, 255 (1986)). Additionally, “a moving party is entitled to a judgment as a matter of law’ [when] the nonmoving party has failed to make a sufficient showing on an essential element of [its] case with respect to which [it] has the burden of proof.” Maydak v. United States, 630 F.3d 166, 181 (D.C.Cir. 2010) (citing Celotex, 477 U.S. at 322-323). And here, despite the plaintiff‘s assertions to the contrary, Compl. at 1, “[t]he burden is on [the FTM] to establish that it meets [the] statutory requirements” of
For the Court to deсlare the FTM exempt from federal income taxation, the Administrative Record must demonstrate that it meets three requirements under
A. Do the FTM‘s net earnings inure to the benefit of any individual?
This assessment requires the Court to determine whether “the earnings of [the FTM] inure[] to the private benefit of” an individual. Presbyterian and Reformed Pub. Co., 743 F.2d at 153. “The term ‘net earnings’ in the inurement-of-benefit clause has been construed to permit an organization to incur ordinary and necessary expenditures in the course of its operations without losing its tax-exempt status.” Founding Church of Scientology v. United States, 412 F.2d 1197, 1200 (Ct.Cl.), cert. denied, 397 U.S. 1009 (1970). However, “an examination [of the Internal Revenue Code] reveals unmistakable evidence that, underlying all relevant parts of the Code, is the intent that entitlement to tax exemption depends on meeting certain common law standards of charity—namely, that an institution seeking tax-exempt status must serve a public purpose.” Bob Jones Univ. v. United States, 461 U.S. 574, 586 (1983). “An organization is not ... operated exclusively for one or more of the [statutorily exempt] purposes ... unless it serves a public rather than a private interest.”
“The public-benefit requirement highlights the quid pro quo nature of tax exemptions: the public is willing to relieve an organization from the burden of taxation in exchange for the public benefit it provides,” IHC Health Plans, 325 F.3d at 1195 (citing Geisinger Health Plan v. Comm‘r, 985 F.2d 1210, 1215 (3d Cir.1993)), because “[f]or every dollar that a man contributes to these public charities, educational, scientific, or otherwise, the public gets 100 percent,” Bob Jones, 461 U.S. at 590 (citation omitted). “The exemption from taxation of money and property devoted to charitable and other purposes is based on the theory that the Government is compensated for the loss of revenue by its relief from financial burdens which would otherwise have to be met by appropriations from other public funds, and by the benefits resulting from the promotion of the general wel
The term “individual” in the inurement clause of
The IRS alleges, Gov‘t‘s Reply at 21, and the Administrative Record demonstrates that Macy has complete and effective control over the FTM, AR at 00001; AR at 00016; AR at 00025. He admittedly established the trust and has nurtured it since its inception, and has afforded himself a position of considerable influence in the organization. The Court finds that “[a]n organizational structure like [the FTM]‘s[,] entailing domination by the founder[,] raises concern about the potential for abuse unless allayed by other information in the record.” Visible Intelligence, 4 Cl.Ct. at 62 (citing Founding Church of Scientology, 188 Ct.Cl. at 498, 412 F.2d 1197). And although “domination doеs not necessarily disqualify [the FTM] from exemption,” id. (citing Bubbling Well Church of Universal Love, Inc. v. Comm‘r, 74 T.C. 531, 535 (1980)), such circumstances do require “open and candid disclosure of all [relevant] facts ... so that the Court ... can be assured that it is not sanctioning an abuse of the revenue laws,” Bubbling Well, 74 T.C. at 535. “If such disclosure is not made, the logical inference is that the facts, if disclosed, would show that [the FTM] fails to meet the requirements of section 501(c)(3).” Id.
The Court must, therefore, consider whether the FTM‘s disclosure was “open and candid” in a manner sufficient for the Court to determine whether Mr. Macy‘s compensation was reasonable. While “payment of a reasonable salary to an employee of the organization does not automatically result in inurement, ... an excessive salary will.” Easter House, 12 Cl.Ct. at 476, 487 (1987) (internal citation omitted). “Whether a salary is reasonable or excessive is a question of fact,” id.; see also Church of Scientology of California v. Comm‘r, 823 F.2d 1310, 1317 (9th Cir.1987), and “[t]he value of [reasonable] services is the amount that would ordinarily be paid for like services by like enterprises ... under like circumstances (i.e., reasonable compensation),”
The Court is unfortunately left only with the knowledge that Mr. Macy‘s salary has steadily increased in conjunction with the expansion of the services provided by the FTM and the infusion of funds into the trust, facts that weigh heavily against the FTM, as evidenced by its adamant, albeit futile, objection to the inclusion of its 2009 Tax Return as part of the Administrative Record. Order, Family Trust of Massachusetts v. United States of America, 11-cv-680 (RBW), 2012 WL 3194421 (D.D.C. June 7, 2012); AR at 00557. The evidence makes clear that Mr. Macy‘s salary has been elevated commensurate with the FTM‘s increasing profitability, as it shows that between 2004 and 2009, the FTM‘s annual excess revenues increased from $5,197, AR at 00102, Line 21, to $362,524, AR at 00551, Line 19, while Mr. Macy‘s compensation followed suit, growing from $9,000 per year to $70,000 per year. See AR at 00102-148; AR at 00340-365; AR at 00557; AR at 00572.
Seeking to avoid the pitfall that potentially arises from the growth in this salary, the FTM suggests that if Mr. Macy‘s normal billing fee of $250 per hour is taken into consideration, then not only was his salary reasonable, but he was actually “undercompensated through the years.” Pl.‘s Mem. at 14. Moreover, the FTM claims that Mr. Macy “contributed about $100,000 of unpaid services through the years to [the] FTM.” Id. The FTM asks the Court to infer that such a contribution outweighs any compensation Mr. Macy has received, and that no earnings ultimately inured to his benefit. Pl.‘s Mem. at 15. The Court is not so easily swayed. Such an inference is undermined by the fact that the amount of purportedly donated funds received by the FTM from Mr. Macy over the years is measured in terms of sacrifice by Mr. Macy, suggesting that the monetary value gained by the FTM equals the value of his lost billable hours. This assertion asks the Court to speculate, and, more important, is unsupported by the Administrative Record.
The flaw in the FTM‘s attempt to label Mr. Macy‘s compensation as reasonable by measuring it against his sacrificed time is that it ignores the Internal Revenue Code‘s requirement that a comparison bе made between the level of his compensation and “the amount that would ordinarily be paid for like services by like enterprises ... under like circumstances.”
[t]he determination of reasonable compensation is made through informal contacts with other organizations that manage similar pooled trust programs and through a review of hours spent on Family Trust related activities through the year, and typical hourly rates are applied. [And] each person‘s time is valued commensurately with his or her professional hourly rate, and adjusted downward to account for the non-profit nature of Family Trust and its current early stage of development.
AR at 00018 (emphasis added). But, unfortunately for the FTM, the Cоurt cannot rely on its “informal contacts” to determine whether Mr. Macy‘s compensation was reasonable; it must rely on what is actually contained in the Administrative Record. Moreover, the plaintiff offers no authority to support its belief that a charitable organization must necessarily pay a salary commensurate with the employee‘s primary occupation or skill level.
“Although control of financial decisions by individuals who appear to benefit personally from certain expenditures does not necessarily indicate inurement of benefit to private individuals, those factors cоupled with little or no facts in the administrative record to indicate the reasonableness and appropriateness of the expenses are sufficient to convince [a court] that there is indeed prohibitive private inurement.” Orange County, 893 F.2d at 534 (quoting Unitary Mission Church v. Comm‘r, 74 T.C. 507, 515 (1980)). Because the Administrative Record clearly demonstrates Mr. Macy‘s overwhelming control of the FTM, and, at the same time, reveals an absence of “comparability data” showing the reasonableness of his compensation, the Court “can[not] be assured that it is not sanctioning an abuse of the revenue laws.” Bubbling Well, 74 T.C. at 535; New Dynamics, 70 Fed.Cl. at 802 (“It is well accepted that, in initial qualification cаses such as this, gaps in the administrative record are resolved against the applicant ... at least where the party with the burden of proof also controls the relevant evidence.“).4
B. Is the FTM organized and operated exclusively for an exempt purpose?
“In order to be exempt as an organization described in [§] 501(c)(3), [the FTM] must [show that it is] both organized and operated exclusively for one or more [exempt] purposes....”
Whether the FTM satisfies the operational test “is a question of fact to be resolved on the basis of the administrative record,” New Dynamics, 70 Fed.Cl. at 800; accord Fund for the Study of Economic Growth and Tax Reform v. I.R.S., 161 F.3d 755, 758-759 (D.C.Cir.1998), and “[u]nder the test, the purpose toward[] which an organization‘s activities are directed, and not the nature of the activities themselves, is ultimately dispositive of the organization‘s right to be classified as a [§] 501(c)(3) organization exempt from tax under [§] 501(a),” B.S.W. Group, 70 T.C. at 356-357. “[T]he critical inquiry is whether [the FTM]‘s primary purpose for engaging in its sole activity is an exempt purpose, or whether its primary purpose is the nonexempt one of operating a commercial business producing net profits for [the FTM].” Id. at 357. “When the legality of an action depends not upon its surface manifestation but upon the undisclosed motivation of the actor, similar acts can lead to diametrically opposite legal consequences.” Presbyterian and Reformed Pub. Co., 743 F.2d at 155. Therefore, “[i]n cases where an organization‘s activities could be carried out for either exempt or nonexempt purposes, courts must examine the manner in which those activities are carried out in order to determine their true purpose.” Airlie, 283 F.Supp.2d at 63 (emphasis in original); see Nonprofits’ Ins. Alliance of California v. United States, 32 Fed.Cl. 277, 283 (1994) (citing Living Faith, Inc. v. Comm‘r, 950 F.2d 365, 372 (7th Cir.1991)).
“In applying the operational test, courts have relied on what has come to be termed the ‘commerciality’ doctrine.” Airlie, 283 F.Supp.2d at 63. The major factors courts have considered in assessing commerciality are: “the particular manner in which an organization‘s activities are conducted, the commercial hue of those activities, and the existence and amount of annual or accumulated profits.” B.S.W. Group, 70 T.C. at 358. Courts have further considered, among other faсtors, “competition with for-profit commercial entities; [the] extent and degree of below cost services provided; pricing policies; and [the] reasonableness of financial reserves,” as well as “whether the organization uses commercial promotional methods (e.g., advertising) and the extent to which the organization receives charitable donations.” Airlie, 283 F.Supp.2d at 63; accord Nonprofits’ Ins. Alliance, 32 Fed.Cl. at 283. Some of these factors lead the Court to conclude that the FTM is shrouded with a “commercial hue.”
1. The FTM‘s non-solicitation of charitable contributions
Although the FTM contends that the “source of an organization‘s funding is not determinative of whether it is entitled to tax-exempt status,” asserting instead that “it is the use of the funds that is germane,” Pl.‘s Mem. at 12, it seemingly misunderstands the IRS‘s argument. The IRS is not taking issue with the propriety of a separate business, trust, or fund being managed collectively to finance charitable activities; rather, the IRS is pointing to
2. The FTM‘s profit margin is significant
The FTM urges the Court to find that “[w]hat matters ... is not the volume of business or the amount of ‘profits,‘” but rather “[t]he organization‘s charitable purpose and the absence of personal profit.” Id. at 9. The Court certainly recognizes that the amount of profits will not always be dispositive of the presence of a non-exempt purpоse, but it is not convinced that profit margins are of no consequence in this case. It is, in fact, one of several factors from which the true purpose of an organization may be inferred, and when considering the “totality of the circumstances,” certain factors, such as profits, may have added significance. Airlie, 283 F.Supp.2d at 65. As previously noted, it is difficult to escape the obvious correlation between increasing profits and the founder‘s increasing salary derived from these funds. And when this fact is viewed in light of other factors, such as the absence of solicitation of charitable contributions, the FTM‘s profit margin begins to аppear more a product of a growing commercial enterprise than a tool for expanding the pooled investments that might enable beneficiaries to reap a greater return or enjoy reduced fees.
3. The FTM‘s services viewed as a commercial product
The IRS contends that the FTM “act[s] as an adjunct to [Mr.] Macy‘s private elder law practice, reaching only the ‘select group’ of the relatively affluent disabled to whom trustee services might be provided profitably.” Gov‘t‘s Mem. at 26. Because the FTM‘s response relies only on the premise that no beneficiaries were referred to Mr. Macy‘s practice by or from the trust, the Court remains skeptical as to the possibility that the FTM‘s services are being offered as a commercial product by Mr. Macy‘s firm and other local practitioners.
With respect to providing legal services to beneficiaries, the FTM states that
Mr. Macy does provide such services on occasion, exclusively in cases where his attorney-client relationship was established prior to the formation of the trust account for the individual. Such cases arise because Mr. Macy refers his own disabled clients to the pooled trust if they meet the criteria of [the] FTM‘s charitable class. Mr. Macy has never become the attorney for any beneficiary
IV. CONCLUSION
For the foregoing reasons, the Court finds that summary judgment must be granted in favor of the United States because of the FTM‘s inability to demonstrate that it is operated solely for exempt purposes, and that its net earnings do not provide a private benefit to any individual.
SO ORDERED this 24th day of September, 2012.5
REGGIE B. WALTON
UNITED STATES DISTRICT JUDGE