The Henry E v. United States
| Decision Date | 07 September 2010 |
| Docket Number | NO. 03-CV-2526,NO. 2009-5122,2009-5122,03-CV-2526 |
| Parties | THE HENRY E. AND NANCY HORTON BARTELS TRUST FOR THE BENEFIT OF CORNELL UNIVERSITY, BY KENNETH G. BARTELS, JOHN B. LOEHMANN, PHILIP H. BARTELS, INGE T. REICHENBACH, AND JOHN F. MURPHY, TRUSTEES, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Federal Circuit |
Philip H. Bartels, Shipman & Goodwin LLP, of Greenwich, Connecticut, argued for plaintiff-appellant.
Jennifer M. Rubin, Trial Attorney, Appellate Section, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With her on the brief were JOHN A. DiCiCCO, Acting Assistant Attorney General, and KENNETH L. Greene, Attorney.
Appeal from the from the United States Court of Federal Claims, Judge Lawrence J. Block.
Before Prost, Mayer, and Schall, Circuit Judges.
This is a tax refund suit. it was filed by a taxpayer that qualifies as a tax-exempt organization under I.R.C. § 501(c), The Henry E. and Nancy Horton Bartels Trust for the Benefit of Cornell University ("Cornell Trust" or "Trust"). As the name suggests, the Trust was formed to financially support Cornell University. We must decide whether this tax-exempt organization owed unrelated business income tax ("UBIT") on income resulting from the sale of securities it purchased on margin. After paying the UBIT, the Trust filed this refund claim in the United States Court of Federal Claims. The Court of Federal Claims denied the claim, concluding that the proceeds from the margin-financed trades were taxable as income from debt-financed property and thus income from an unrelated trade or business, which is subject to the UBIT. I.R.C. §§ 512(b)(4), 514.
The Trust now appeals. Before this court, the Trust argues that the Court of Federal Claims misinterpreted the relevant provisions of the Internal Revenue Code ("Code" or "tax code"). Because we agree with the trial court that securities purchased on margin are "debtfinanced property," and thus "unrelated business taxable income" within the meaning of I.R.C. § 512 and § 514, we affirm.
The relevant facts are simple and undisputed. The taxpayer is a trust that was formed to support Cornell University. Shortly after its formation, the Internal Revenue Service ("IRS") granted the Trust's application for tax-exempt status under I.R.C. § 501(c)(3).
This case arises from some of the Trust's investment activities during the 1999 and 2000 tax years. During those years, the Trust invested in stocks purchased "on margin." In other words, the Trust used money borrowed from its broker to complete the stock purchases. The Trust subsequently sold the stocks.
When the Trust filed its "Exempt Organization Business Income Tax Return" for the 1999 tax year, otherwise known as its Form 990T, the Trust reported the income from the sale of the margin-financed securities as capital gains, without reporting any associated income tax liability. After an IRS audit, the Trust paid $48,770 in taxes on the margin sales for the 1999 tax year. For the 2000 tax year, the Trust reported income from the sale of the margin-financed securities as capital gains and paid the associated UBIT of $39,479.
The Trust subsequently filed amended Forms 990T for the 1999 and 2000 tax years. These forms claimed a total refund of $88,249 for UBIT payments made by the Trust on the sale of the margin-financed securities. After the IRS denied the refund claims, the Trust filed this suit in the Court of Federal Claims.
Both parties moved for summary judgment. In a clear, thorough, and insightful opinion, the Court of Federal Claims granted the government's motion. Itruled that the Trust's income from securities purchased on margin was by definition unrelated business taxable income under I.R.C. § 514. The Trust timely appealed.
We have jurisdiction under 28 U.S.C. § 1295(a)(3).
We review grants of summary judgment by the Court of Federal Claims without deference. CNG Transmission Mgmt. VEBA v. United States, 588 F.3d 1376, 1378 (Fed. Cir. 2009). Questions of law, such as the proper interpretation of a statute, are reviewed de novo. Consolidation Coal Co. v. United States, 528 F.3d 1344, 1347 (Fed. Cir. 2008). Here, the only issue in dispute is the proper interpretation of "unrelated business taxable income."
Organizations otherwise exempt from federal taxation pursuant to § 501(c) remain subject to tax on their "unrelated business taxable income." I.R.C. § 511(a). Unrelated business taxable income is generally defined as "the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b)." Id. § 512(a)(1). Section 513 defines "unrelated trade or business" to include "any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501." Id. § 513(a). The related Treasury Regulation further explains that a trade or business is "relatedto exempt purposes, in the relevant sense, only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes (other than through the production of income)." 26 C.F.R. § 1.513-1(d)(2).
This case turns on I.R.C. § 514 and § 512(b)(4), which modify the computation of "unrelated business taxable income" under § 512(a)(1) when income is from a particular source, namely "debt-financed property." See I.R.C. §§ 512(b)(4), 514(a). As relevant here, § 514 provides that "[t]here shall be included with respect to each debtfinanced property... an item of gross income derived from an unrelated trade or business." Id. § 514(a)(1) (emphasis added). Moreover, § 512(b)(4) requires that "in the case of debt-financed property (as defined in section 514) there shall be included, as an item of gross income derived from an unrelated trade or business, the amount ascertained under section 514(a)(1), and there shall be allowed, as a deduction, the amount ascertained under section 514(a)(2)." Id. § 512(b)(4) (emphasis added). "Debt-financed property" is defined as "any property which is held to produce income and with respect to which there is an acquisition indebtedness (as defined in subsection (c)) at any time during the taxable year." Id. § 514(b)(1); see also 26 C.F.R. § 1.514(b)-1(a).1 In other words, § 512(b)(4) and § 514(a) together define an additional category of unrelated business taxable income, debt-financed property, which is accordingly subject to the UBIT. For items within this category, § 514 nullifies § 512(b)'s general exemption of dividends, interest, royalties, and the like from the UBIT. See id. § 512(b)(4); Henry E. & Nancy Horton Bartels Trust for the Benefit of the University of New Haven v. United States (Bartels Trust for New Haven), 209 F.3d 147, 150-51 (2d Cir. 2000); Kern Cnty. Elec. Pension Fund v. Comm'r, 96 T.C. 845, 850-51 (1991).
As used in § 514, "acquisition indebtedness" means "the unpaid amount of... indebtedness incurred by the organization in acquiring or improving [debt-financed property]." I.R.C. § 514(c)(1)(A). Acquisition indebtedness does not include "indebtedness the incurrence of which is inherent in the performance or exercise of the purpose or function constituting the basis of the organization's exemption, such as the indebtedness incurred by a credit union described in section 501(c)(14) in accepting deposits from its members." Id. § 514(c)(4).
On appeal, the crux of the dispute is whether the Trust's income from its securities purchased on margin is subject to the UBIT. The Trust argues that the UBIT does not apply because: (1) doing so is contrary to congressional intent; and (2) investing in securities is not a "trade or business" under the tax code.
For the following reasons, we reject these arguments. The language of § 512(b)(4) and § 514 is plain and unambiguous. It is undisputed that to purchase securities on margin, the Trust borrowed funds. "[I]ndebtedness [was thus] incurred by the organization in acquiring" these securities. Id. § 514(c)(1). Accordingly, under § 514(c), these securities were subject to acquisition indebtedness and constitute "debt-financed property" within the meaning of § 514(b)(1). See Bartels Trust for New Haven, 209 F.3d at 150-51; Mose & Garrison Siskin Mem. Found., Inc. v. United States, 790 F.2d 480, 483-84 (6th Cir. 1986); Elliot Knitwear Profit Sharing Plan v. Comm'r, 614 F.2d 347, 350-51 (3d Cir. 1980). As the Court of Federal Claims correctly recognized, § 514(a) and § 512(b)(4) treat income the Trust derived from selling these securities as "an item of gross income derived from an unrelated trade or business," and therefore unrelated business taxable income under § 512.
Notwithstanding the clear language of § 514 and its straightforward application to these facts, the Trust argues that the UBIT requires a showing of unfair competition because Congress's "sole" purpose in enacting the UBIT was to prevent tax-exempt organizations from gaining an unfair competitive advantage over taxable entities.
We are not persuaded. To determine Congress's intent, we begin with the text of the statute. Sharp v. United States, 580 F.3d 1324, 1237 (Fed. Cir. 2009). When a statute's language is plain, our sole function is to enforce the statute according to its terms. Id.; see also Jimenez v. Quarterman, 129 S. Ct. 681, 685 (2009); Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000). Here, Congress...
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