Orange County Agricultural Society, Inc. v. Commissioner of Internal Revenue

away,” April dated “right judgment from the 1989 is the mistake King to confirm mailgram listing appellate jurisdiction. lack of sent a dismissed for Philip Evans omitting any properties, but affected No costs. hap- What expiration dates. reference point is a source of contro- pened after this King Gary

versy. Burger contends Hardart, Forst, for Horn & outside counsel 1, which requested a revised Schedule Ev- sent, complete expi- prepared ans properties. all Horn & ration dates for agreed disputes Hardart both that it ever revised 1 in to insertion of this Schedule ORANGE COUNTY AGRICULTURAL Gary Agreement and that Settlement SOCIETY, INC., Petitioner-Appellant, any authority to act for it. Forst had obviously is rele- “Revised” Schedule COMMISSIONER OF INTERNAL parties vant to the issue whether REVENUE, Respondent-Appellee. 1 dates to have tended Schedule maintains significance. Horn & Hardart No. Docket 88-4161. expiration dates in Phil- that the absence Appeals, United States ip mailgram means that Schedule Evans’ Second Circuit. only significance identify is the four- l’s in the teen franchises referred to Settle- Argued Dec. 1989. Agreement. Burger King If intended Decided Jan. 1990. 1, however, prepare a revised Schedule only mailgram function of the was to original acknowledge the error Thus, questions factual exist

Schedule behind the concerning the circumstances preparation of revised Schedule and the (or thereof) agreement lack to re- parties’ original all of which place the Schedule parties’ regard- intent are material to the ing the franchise terms.

CONCLUSION Agreement is parties’ Settlement ambiguous regarding the term of Horn & franchises, court

Hardart’s and the district correctly Burger King’s motion for denied agree-

summary judgment. Because the ambiguous, examination of extrin- ment is proper to determine the in- sic evidence evidence, parties. The extrinsic tent of the however, conflicting, and raises factual grant

issues that render the district court’s summary motion for of Horn & Hardart’s judgment inappropriate. The amended fi- court dated judgment

nal of the district May therefore vacated to the 1989 is granted extent that it Horn & Hardart’s motion, summary judgment and the case is Burger King’s appeal remanded for trial. Jay Cohen, Walden,

Ronald (John N.Y. Thomas, H. Gubits, Walden, Jacobwitz and N.Y., counsel), for petitioner-appellant. Murray Horwitz, Div., S. Dept, Tax Justice, Washington,' (Peter Scott, D.C. K. Acting Counsel, I.R.S., Chief Shirley D. Peterson, Gen., Atty. Allen, Asst. Gary R. Pomerance, Robert Div., S. Dept, of Justice, D.C., Washington, counsel), respondent-appellee. OAKES,

Before Judge, Chief PRATT, Judge, SAND,* Circuit and District Judge.

SAND, Judge: District Orange County Agricultural Society, Inc. (“Society” “Taxpayer”) commenced this action in the United States Tax pur- 7428(a) suant to section of the Internal seeking Revenue Code1 a declaratory judg- that, contrary ment to the determination of Revenue, Commissioner of Internal it qualified remained as a tax-exempt orga- nization under section After tri- al, Court, Jacobs, J., Julian I. sus- tained the Commissioner’s determination and held that longer no so qualified. We affirm.

BACKGROUND incorporated in the State York promote New in 1866 to the inter- agriculture

ests of and horticulture Or- ange County, New York. Since Tax- payer annually sponsors Coun- (“Fair”) ty which includes activities such exhibiting as the and judging of ani- mals, garden farm products, arts, and * Sand, noted, Honorable Leonard B. United States Dis- Unless otherwise all referenc Judge trict for the Southern District of New (26 es are to the Internal Revenue Code of 1954 York, sitting by designation. U.S.C.), as amended. receipts the net paid as as well goods crafts, sewing canned rides, music, Speedway be divid- entertain- at the shall contests, concessions carnival derby. Situated Taxpayer. a demolition OCF and equally ed clay, oval is a fairgrounds races, actually operates the While OCF used since has been (“Speedway”) which racetrack, main- Taxpayer wets down The Fair races. for automobile stand-by to un- emergency crew tains an 43.5 August on early and July in late repairs, pays for all elec- dertake electrical Taxpayer in Middle- acres of land owned cleanup provides for the repairs, trical and Fair Prior to town, York. New Since repair guardrails and fences. and of Fair days; since for was held nine 24 to 25 races has scheduled OCF days. twelve held for has been April Saturday nights from year on each race- the automobile Taxpayer leases Wednesdays during well as on October as County Orange grandstand track sched- Only three or four of the the Fair. (“OCF”), which Inc. Speedway, the Fair year each are uled races while potential Taxpayer from to insulate formed progress. inis times, major a shareholder At all liability. Taxpay- following chart summarizes The OCF. all of the stock in owned Taxpayer years ending its fiscal er’s revenues for the rent- provides The current lease period through October equal Taxpayer shall payments due al Revenue Service by the Internal covered received OCF receipts of all the balance (“I.R.S.”) Taxpayer: audit of are expenses after all its sources from all of activity was not furtherance which during the parking provide To additional contravention adjacent exempt purpose fairs, acres of Taxpayer leases 90 1.501(c)(3)-l(c) Income Improve- of the of Section land from Middletown-Wallkill (“M-W”), for-profit a Corporation Regulations. by Taxpayer’s is owned corporation. M-W made loans organization The shareholders, ap- who own largest three corporations terest, security or notes Taxpayer’s percent of proximately 70 through common related to which it was also Taxpayer president of The stock. stock, resulting such action ownership of M-Wof president as the served serving a in the rent, pays the Taxpayer 1979. As 1976and thereby interest and public rather than land it on the leases real estate taxes of Section requirements contravening the $28,000 year. per M-W, approximately the Income 1.501(c)(3) l(d)(l)(ii)of — unse- made numerous has Taxpayer also Regulations. M-W. loans to cured interest-free trial, sustained the Tax Court Following a to its paid dividends has not M-W exempt status Taxpayer’s the revocation shareholders. County Agri grounds. both on its fiscal auditing Taxpayer for After Commissioner, 55 Inc. v. Society, cultural 1977, through Commissioner years (CCH) 1602 T.C.M. Taxpayer’s revoked Internal Revenue 501(c)(3)on two exemption under DISCUSSION separate grounds: tax-exempt 501(a) status confers Section associated organization was operated ex- organized and corporations enterprise, race track operation of a charitable, clusively against potential educational and liability arising from specified exempt purposes other conducting within of automobile races at the 501(c)(3), meaning provided Speedway. organization’s no net earnings Orange County, 55 T.C.M. at 1604. any private inures to the benefit of share- indeed concedes that OCF was its holder or has individual. Therefore, alter ego. despite the existence demonstrating

burden of that it entitled entities, corporate two there is no dis- pursuant to section pute was associated in the 217(c),Tax Rule Court Rules of operation of a enterprise. Ade- Procedure; Practice and Bubbling see also quate support also for the Tax exists Love, Well Church Universal Inc. v. Court's conclusion Taxpayer’s involve- Commissioner, 104, (9th 670 F.2d 106 Cir. racing ment the in Speed- activities the 1981). way was in not furtherance of its stated exempt purpose (i.e., promote agricul- A. Non-Exempt Purpose Substantial ture and horticulture in Orange County). The first by issue addressed the Tax Taxpayer advances the contention Taxpayer “op meets the whether that it is entitled to the protec safe harbor 501(c)(3). exclusively” erated test of section 513(d)(4), tion offered section pro which According Treasury Regulations: organization vides that an will not lose its organization regarded An “op- will be as conducting qualified exclusively” erated for one or more ex- public entertainment A public activities. empt purposes only engages primari- if it activity entertainment is defined in section ly in accomplish which activities one or 513(d)(2)(A)as: exempt purposes specified more of such [A]ny entertainment or recreational ac- in organization An will tivity of a traditionally kind conducted at regarded not be so if more than insub- expositions fairs or promoting agri- stantial of its activities is not in cultural and educational purposes, includ- exempt purpose. furtherance of an ing, to, any not limited activity but one of Treas.Reg. 1.501(c)(3)-l(c)(l). pres § purposes the of which is to attract the single ence of a non-exempt purpose, if public to expositions fairs or pro- or to nature, substantial in destroy will the ex mote breeding the of animals or the de- emption. Better Business Bureau Unit velopment products equipment. or States, 279, 283, 112, ed 326 U.S. 66 S.Ct. Qualified public activity entertainment 114, (1945). 90 L.Ed. 67 public cludes activity entertainment con- We review the Tax Court decision for conjunction ducted “in expo- with” a fair or clear error. The conclusion orga that an 513(d)(2)(B). sition. Taxpayer argues § operated nization is for a substantial non that all of the activity constitutes exempt purpose finding is a of fact entitled permissible pre-fair post-fair hype nec- to deferential By review. See Church essary organize, operate promote Mail, Commissioner, Inc. v. 765 F.2d large such public fair. (9th 1985); 1390 Cir. Ohio Teamsters Educ. agree We that the few Safety & Training Trust Fund v. Com (and races during held the arguably missioner, (6th Cir.1982). 692 F.2d those immediately prior thereto) are The record supports the Tax Court’s find- qualified public entertainment activities Taxpayer’s involvement op- disregarded should have been when the eration of the racetrack was extensive: Tax Court considered Taxpayer’s exempt totality of the inescapably facts 67-216, status. See Rev.Rul. 1967-2 C.B. leads us to the conclusion that the ar- (organization ag- conducts annual rangement Society the and OCF fair with ricultural entertainment and was more than of a lessor and les- recreational public facilities to attract the see. In reality, corporate qualifies OCF was but a exemption); S.Rep. No. 94- shield designed protect Society Sess., the Cong., Cong. 94th 2d U.S.Code “unrelated business racing income as the reprinted p. News & Admin. than 511 rather re- races, under income” The other 57, 639-41. 1976-3 C.B. In exempt sup- status. Taxpayer’s voke within however, fall do not Taxpayer cites sever- argument, of its port Indepen County & Ohio See definition. applica- rulings that tax considered al Societies, Delaware Agricultural dent income tax unrelated business tion Commissioner, 43 T.C.M. County Fair v. however, all rulings, as- Those provisions. 1135-36, n. 8 question sumed Speedway when at the races held Those a tax-ex- first instance as qualified which being held—some not Fair was definition empt entity and focused or before three months much as as were Rev.Rul. income. unrelated business public entertain not the Fair —were after university (lease 80-298, C.B. 197 1986-2 intend they were not activity because team in- professional football stadium Those Fair. to the public ed to attract business; does unrelated trade volves qualified as be classified also cannot races issue); directly exemption tax address not they activity because entertainment public (unrelated 60-86, C.B. 198 1960-1 Rev.Rul. with” conjunction “in were non-ex- applies tax where business deciding Therefore, whether when Fair. percent of an- activity constitutes empt non in substantial engaged directly income; address tax does not nual have should activity, the Tax exempt Court 57-313, issue); 1957-2 exemption Rev.Rul. to and prior held races only the considered income tax business (unrelated C.B. Treas.Reg. also the Fair. after activity consti- non-exempt applies where for ex (dual assets use of 1.513(d)(4)(iii) receipts; does gross of not percent tutes non-exempt purposes). empt and issue). exemption Tax- directly tax address than However, other assuming anything argument ignores payer’s from the revenues disproportionality, gross imposes the that section 511 language of after held before only races those “any only tax income business unrelated three Just still be substantial. would fairs exempt ... from ... which year were races each or four reason of by this subtitle under taxation rested burden Fair. The during the annual busi- 501(a).” the unrelated Before section dispropor a Taxpayer to show with taxpayer must applies, tax income ness and concession the race share of tionate entity. tax-exempt See Rev. aas qualify at the races earned were revenues (religious 78-385, 1978-2 C.B. Rul. in fact if this were during the an can broadcast broadcasting organization addition, proper for it In case. commercially-spon- amount of insubstantial by contributions to consider losing exempt its programs sored expenses and start-up to OCF's substantially not status, the revenues but up of the and clean maintenance to the subject to purpose are exempt to its related evi examining all of the Speedway. After tax). At the income business the unrelated record, affirm the we dence enacted, the Senate 511 was time in Society’s finding “[t]he Court’s relation- explained the Finance Committee racing activi in the automobile volvement require- and the tax the new ship between insubstan- of the benchmark ties exceeded 501: ments of section (CCH) T.C.M. County, 55 tiality.” tax intended it is not In fact Bar Master Associated e.g., at 1604. See business unrelated imposed on America, v. Inc. Beauticians bers & tax-exempt on the any have effect will 53, 68-69 Commissioner, 69 T.C. organiza- organization. An status approx exemption where (revocation of tax enact- to the exempt prior tion which derived revenues percent imately 30 continuing the same bill, if this ment of activity). non-exempt this exempt after activities, still be would manner In a similar law. becomes if the bill argues that Taxpayer also prior exemption denying any reasons in non-ex engaged it was found that I.R.S. continue would bill of this enactment taxed have I.R.S. should activity, the empt justify of exemption denial after the whether the full amounts passage. bill’s loaned to M-W have been or will ever be repaid. The support record also does not S.Rep. Sess., Cong., No. 81st 2d U.S. Taxpayer’s argument that some of the Cong.Serv.1950, 3053, p. Code reprinted in loans were in fact prepayment of rent. Thus, 1950-2 C.B. non-exempt substantial can- activities Courts have frequently held that loans not avoid the revocation of advantageous extended on by terms an ex- simply paying the unrelated busi- empt organization to its founders or share- tax, ness income a tax which holders, we note Tax- them, or to entity controlled payer pay not did until the offer Com- private indicate inurement in violation of missioner’s adverse determination 501(c)(3): as to ex- empt status. Although control of financial decisions by individuals who appear per- to benefit Earnings B. Inurement of sonally from certain expenditures does Benefit Private necessarily indicate inurement of Alternatively, even Taxpayer’s if private benefit individuals, those involvement the racetrack activity other coupled factors with little or no facts in during than immediately preceding its the administrative record to indicate the annual Fair not reach a did level of sub reasonableness appropriateness stantiality, we find no error in the Tax the expenses are sufficient to convince finding “part Court’s Society’s us that there prohibitive is indeed private earnings to the inured benefit of inurement. interests ... in contravention of section Unitary Mission Church Commission 501(c)(3).” Orange County, 55 T.C.M. er, (1980); 74 T.C. see also Found 1605; see Treas.Reg. also Scientology Church v. United 1.501(c)(3)-l(c)(2). An will not States, 490, 1197, 188 Ct.Cl. 412 F.2d qualify status if even a (1969). persuaded We are Taxpay small private inures to a emphasis er’s on the absence of dividend individual. See Church Scientology of payments to the shareholders of M-W. Commissioner, 823 F.2d California The relationship between M-W and Tax (9th Cir.1987), denied, cert. 486 payer enabled those shareholders to main U.S. S.Ct. L.Ed.2d 214 tain equity their par interests a 90-acre (1988). A finding private inurement cel of vacant any land free of cost to them. the primarily Tax Court is a factual find Taxpayer has not met its burden to refute ing, again we review for clear error. the inference of financial benefit to M-W. proof See id. 1317. The burden of is on The Tax Court’s finding of inure to demonstrate that insiders ment clearly is not erroneous. do not benefit tax-exempt orga from the nization, CONCLUSION especially where the facts indicate transactions arguably not on length arm's judgment of the Tax Court is af- id.; Church, terms. Bubbling Well firmed. 105; 670 F.2d at Commissioner, Parker v. (8th Cir.1966), 365 F.2d cert. PRATT, de GEORGE C. Judge, Circuit nied, 385 U.S. 87 S.Ct. 17 concurring: L.Ed.2d 674 disagree IWhile majority in its conclusion stipulated “nonexempt-purpose” record is- indicates sue, agree I with its conclusion on made several interest-free loans “inurement” issue and therefore to M-W concur obtaining any written se judgment. curity or even written evidence of in debtedness. While some loan repayments made,

have been repayments do not amounts, match the loan total amount loaned exceeds the repaid. total There is no evidence indicat- record

Case Details

Case Name: Orange County Agricultural Society, Inc. v. Commissioner of Internal Revenue

Court Name: Court of Appeals for the Second Circuit

Date Published: Jan 19, 1990

Citation: 893 F.2d 529

Docket Number: 587, Docket 88-4161

Court Abbreviation: 2d Cir.