FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JOHN STAHL, No. 10-35006
Plaintiff-Appellant,
v. D.C. No.
2:08-CV-00170-FVS
UNITED STATES OF AMERICA,
OPINION
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Washington
Fred L. Van Sickle, District Judge, Presiding
Argued and Submitted
November 1, 2010—Seattle, Washington
Filed November 29, 2010
Before: Betty B. Fletcher, Ferdinand F. Fernandez, and
Jay S. Bybee, Circuit Judges.
Opinion by Judge Fernandez
18867
STAHL v. UNITED STATES 18869
COUNSEL
Gary C. Randall and Eric J. Sachtjen, Workland & Wither-
spoon, PLLC, Spokane, Washington, for the plaintiff-
appellant.
Patrick J. Urda, Department of Justice, Tax Division, Wash-
ington, D.C., for the defendant-appellee.
18870 STAHL v. UNITED STATES
OPINION
FERNANDEZ, Circuit Judge:
John Stahl, a member and president of the Stahl Hutterian
Brethren (“SHB”), appeals the district court’s grant of sum-
mary judgment to the United States on his complaint for a
refund of personal income taxes. He asserts that because SHB
is a 26 U.S.C. § 501(d) corporation and because the medical
and meal expenses of its employees are deductible at the cor-
porate level, he has overpaid his personal income taxes. The
district court declared that he was not an employee of SHB.1
We reverse and remand.
BACKGROUND
SHB was organized to enable its members to live in accor-
dance with the tenets of the Hutterite tradition. The Hutterite
tradition is rooted in sixteenth century Germany. In accor-
dance with their religious beliefs, SHB members live in a col-
ony, and currently the SHB colony includes about 65
members. They are all part of the extended Stahl family,
which includes eight brothers, two sisters, their spouses, and
their children.
SHB is a 26 U.S.C. § 501(d) nonprofit apostolic corpora-
tion. 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 lia-
bility is reduced when deductions are allowed at the corporate
level.
SHB is engaged in the business of farming. It farms 30,000
acres of land and it produces dairy products and a variety of
1
Stahl v. United States, 673 F. Supp. 2d 1233 (E.D. Wash. 2009) (Stahl
I).
STAHL v. UNITED STATES 18871
crops.2 SHB earns substantial income selling most of its pro-
duce and dairy products to other businesses and at farmers
markets. It achieves this with the help of its members and a
few part time employees, whom it hires on an as needed basis.
Hutterites disavow individual property ownership, so SHB
does not pay a salary to any of its members. Moreover, the
members do not contribute to or collect Social Security bene-
fits. All of SHB’s property is maintained by it and is used for
the benefit of its members. SHB provides for the members’
personal needs, such as food, shelter, clothing, and medical
care.
According to the bylaws of SHB, any member may be
expelled. Expulsion may occur for a variety of reasons,
including: the member’s refusing to obey SHB’s rules; the
member’s “failing to give and devote all his or her time,
labor, services, earnings and energies” to SHB; and the mem-
ber’s “failing to do and perform the work, labor, acts, and
things required of him or her.” If a member is expelled, he
forfeits all interest in SHB’s property and leaves with nothing
but the clothes on his back.
Stahl brought this action for the purpose of obtaining an
income tax refund because, he asserts, corporate level income
should have been reduced for tax purposes before it was
passed through to him. He insists that the cost of meals and
medical expenses of SHB’s employees was an ordinary and
necessary business expense. The government argued to the
district court that none of the Hutterite members, including
Stahl, are employees for tax purposes and that should end the
inquiry. The district court agreed with the government, and
this appeal followed.
2
In addition to potatoes, the farm produces peas, beans, hay, sweet corn,
grain corn, and wheat.
18872 STAHL v. UNITED STATES
JURISDICTION AND STANDARDS OF REVIEW
The district court had jurisdiction pursuant to 28 U.S.C.
§ 1346(a)(1). We have jurisdiction pursuant to 28 U.S.C.
§ 1291.
We review the district court’s grant of summary judgment
de novo. See Mangum v. Action Collection Serv., Inc., 575
F.3d 935, 938 (9th Cir. 2009). “ ‘An order granting summary
judgment will only be affirmed if the evidence, read in the
light most favorable to the non-moving party, demonstrates
the absence of a genuine issue as to any material fact, and the
moving party is entitled to judgment as a matter of law.’ ” Id.
We also review the district court’s denial of a cross-motion
for summary judgment de novo. Avery v. First Resolution
Mgmt. Co., 568 F.3d 1018, 1021 (9th Cir. 2009).
The taxpayer bears the burden of persuasion in tax refund
actions. Durando v. United States, 70 F.3d 548, 550 (9th Cir.
1995). In particular, “an income tax deduction is a matter of
legislative grace and . . . the burden of clearly showing the
right to the claimed deduction is on the taxpayer.” Interstate
Transit Lines v. Comm’r, 319 U.S. 590, 593, 63 S. Ct. 1279,
1281, 87 L. Ed. 1607 (1943); see also Meridian Wood Prods.
Co., Inc. v. United States, 725 F.2d 1183, 1189 (9th Cir.
1984).
DISCUSSION
[1] Clearly enough, SHB is not an ordinary commercial
enterprise because it is operated, ultimately controlled by, and
largely populated by Hutterian brethren. That puts it in a
unique category; it is a “religious or apostolic” corporation,
which means that its members must “include . . . in their gross
income their entire pro rata shares, whether distributed or not,
of the taxable income” of the corporation. 26 U.S.C. § 501(d).
We have explained the purpose of that provision by quoting
the pertinent part of the legislative history as follows:
STAHL v. UNITED STATES 18873
“It has been brought to the attention of the com-
mittee that certain religious and apostolic associa-
tions and corporations, such as the House of David
and the Shakers, have been taxed as corporations,
and that since their rules prevent their members from
being holders of property in an individual capacity
the corporations would be subject to the
undistributed-profits tax. These organizations have a
small agricultural or other business. The effect of the
proposed amendment is to exempt these corporations
from the normal corporation tax and the
undistributed-profits tax, if their members take up
their shares of the corporations’ income on their own
individual returns. It is believed that this provision
will give them relief, and their members will be sub-
ject to a fair tax.”
Kleinsasser v. United States, 707 F.2d 1024, 1026 n.1 (9th
Cir. 1983).
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.
[2] As we see it, our determination must be driven by the
Supreme Court’s explication of the meaning of “employee”
for federal purposes. Absent some explicit Congressional
determination to the contrary, the Court has told us to use the
following approach:
“In determining whether a hired party is an
employee under the general common law of agency,
we consider the hiring party’s right to control the
manner and means by which the product is accom-
plished. Among the other factors relevant to this
18874 STAHL v. UNITED STATES
inquiry are the skill required; the source of the
instrumentalities and tools; the location of the work;
the duration of the relationship between the parties;
whether the hiring party has the right to assign addi-
tional projects to the hired party; the extent of the
hired party’s discretion over when and how long to
work; the method of payment; the hired party’s role
in hiring and paying assistants; whether the work is
part of the regular business of the hiring party;
whether the hiring party is in business; the provision
of employee benefits; and the tax treatment of the
hired party.”
Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323-24,
112 S. Ct. 1344, 1348, 117 L. Ed. 2d 581 (1992). While Dar-
den was not a tax case, it did rely in part on a revenue ruling,
which does, of course, apply in the tax area,3 and we also have
applied the Darden factors to a tax case.4 We see little reason
to eschew using that formulation in our consideration of
whether Stahl was an employee of the business enterprise
SHB operated. As we see it, the fact that the individual Hut-
terites also play, worship, eat and live together as a matter of
their personal beliefs does not detract from the fact that SHB
is, among other things, a very successful business.5
3
See Rev. Rul. 87-41, 1987-1 C.B. 296, 298-99.
4
See Prof’l & Exec. Leasing, Inc. v. Comm’r, 862 F.2d 751, 753-54 (9th
Cir. 1988) (deduction for payments to benefit plans for alleged employ-
ees).
5
We recognize that two district courts have suggested the contrary.
However, we think that they allowed themselves to be diverted from the
employment issue by their focus on the reasons that groups of this kind
come together in the first place to perform the main functions of life,
including maintaining an employment that enables them to support them-
selves and their families. See Wollman v. Poinsett Hutterian Brethren,
Inc., 844 F. Supp. 539, 542 (D.S.D. 1994); Israelite House of David v.
United States, 58 F. Supp. 862, 863-64 (W.D. Mich. 1945).
STAHL v. UNITED STATES 18875
A. Control in General
[3] Although no factor is decisive,6 the right of SHB to
control the day-to-day activities of those who work for it is fun-
damental.7 The right to control is, essentially, the right to
direct what the alleged employee shall do and the details of
how he shall do it;8 it does not require that the alleged
employer actually exercise that right in any particular circum-
stance.9 While the government suggests that SHB does not
really exercise control over its workforce, on its face that con-
tention is highly unlikely; could it be that an operation which
farms 30,000 acres and generates substantial income is run in
a manner where workers simply do what they wish and come
and go at will? One would intuit not, and the record does not
belie the intuition.
SHB has a management hierarchy and benefits from the
division of labor at the management level. The SHB members
govern themselves by deciding matters by a majority vote of
the voting members,10 and at the head of SHB is the president.11
The president oversees the finances of the corporation and
decides what crops should be planted and where. Below the
president are managers, who oversee SHB’s farming opera-
tions. There are eight managers, three irrigation managers,
three mechanics, and two woodworkers. There is also one
person in charge of dairy production. The managers are
elected based on how they perform, and they may choose to
stand down, or if necessary, be replaced by a majority of the
voting members. Finally, there is a “head cook” who has two
assistants.
6
Darden, 503 U.S. at 324, 112 S. Ct. at 1349.
7
Professional Leasing, 862 F.2d at 753.
8
Id.
9
Id.
10
Not all members are active members, and not all active members are
voting members.
11
The president is elected by the board of directors.
18876 STAHL v. UNITED STATES
All SHB members have to work in the colony. Each mem-
ber is assigned a task by a manager, based upon the member’s
interests, but, while there are no formal rotations, members
cannot change their tasks without asking their managers or the
president for permission.12
Although, technically, the work hours are not fixed, the
members do follow a daily work routine. SHB members usu-
ally eat breakfast at 6:30 a.m. during the summer and at 7:00
a.m. during the winter. “[R]ight after breakfast, [the members]
get moving.” Lunch is usually served at 11:30 a.m., although
during harvest season it is often taken out to the fields. For
most of the tasks, work continues until the sun goes down.
Some tasks, such as irrigation, may not end until after sunset.
Generally, each member will continue his task until it is fin-
ished.
Each member may receive between three weeks to one
month of vacation. The president must approve vacation
requests, and members do not usually take their vacations dur-
ing the harvest season.
[4] In short, SHB does exert control over its workers,
members or not. They are told what to do, when to work, and
whom to ask for “permission” to change tasks or to take vaca-
12
The district court was concerned about the lack of some of the more
rigid formalities that exist in other work places. For example, it observed
that members are not required to seek permission before taking a sick day
unless the assigned task is pressing. Stahl I, 673 F. Supp. 2d at 1236. That,
however, does not seem overly peculiar to us. The district court also
observed that the tasks are assigned based upon the members’ interests,
and can be reassigned accordingly. Apparently, the court inferred from
those observations that SHB does not control its members, but that the
members work because they are “self-motivated.” However, those obser-
vations confuse SHB’s business judgment for a lack of control. Moreover,
modern management experts are of the opinion that considering a work-
er’s interests is often a good management technique. See Peter F. Drucker,
The Practice of Management 300 (1954) (“Our experience indicates that
what a man is good at is usually the thing he wants to work at . . . .”).
STAHL v. UNITED STATES 18877
tions.13 In the long run, the amount of control seems very like
that which is exerted over employees of a more traditional
employer. Perhaps it is exercised with a more gentle and con-
cerned hand, but that is not antithetical to an employment
relationship. The control factor favors Stahl.
B. Tools and Instrumentalities
[5] SHB furnishes to its workers, including its members,
all of the tools and equipment necessary to its business opera-
tion. Those include “[t]rucks, tractors, diggers, balers, tillage,
. . . [and] [e]very tool a mixed farming operation needs.” This
factor favors Stahl.
C. Location of Work
[6] Virtually all work is performed on SHB’s farm. That
which is not is performed for the benefit of the farm operation
by workers traveling for that purpose. This factor favors
Stahl.
D. The Right to Discharge
[7] SHB’s bylaws make it clear that it has the right to dis-
charge its members for “failing to do and perform the work,
labor, act and things requested of him or her.” The district
court brushed this theory aside, and found that in practice
“SHB would not expel a delinquent member from the colony
because he performed a job incompetently.” Stahl I, 673 F.
Supp. 2d at 1238. The district court did not cite any authority
or fact in support of that finding. Rather, its reasoning appar-
ently flows from the religious aspect of SHB and from the
observation that an expelled member would take nothing
13
We note that the record does not specifically state when the workers
perform their tasks, but in the dawn to dusk operation of a farm, that
appears to be dictated by uncontrollable circumstance — the ineluctable
forces of nature.
18878 STAHL v. UNITED STATES
away from the colony except his clothes. As the district court
viewed it, the dismissal mentioned in the bylaws is really a
form of religious excommunication, rather than termination
from a job. “Only the member who breaks faith with his fel-
low members will be expelled.” Id.
There is no evidence to support those district court find-
ings. True enough, no member has ever been “fired” by SHB
(according to Stahl, one member of a sister colony has been
expelled). That, however, does not mean that no member may
be dismissed, even if that is both expulsion and discharge
from employment. As the bylaws state, SHB has the right to
discharge a member for failing to do his or her job.
We do recognize that the district court could look beyond
the bylaws to see whether other facts rule out the theoretical
possibility of a discharge. In Professional Leasing, 862 F.2d
at 752, for example, the taxpayer was in the business of leas-
ing professionals to businesses. At issue was whether the pro-
fessionals in question were employees of the taxpayer.
Regardless of the precise terms of their contracts, we looked
to the true substance of the relationship, and determined that
they were not employees. Id. at 754.
Here, however, we fail to see how SHB’s control over
those who work for it is illusory. If anything, the relationship
between SHB and its members enhances the amount of con-
trol SHB may exert over its workers. So does the catastrophic
consequence of being terminated for failing to work. In all
likelihood, the fact that nobody has ever been expelled from
SHB is not because SHB lacks the right to do so, but because
every member is dedicated and has thus far given satisfactory
attention to the job. The relevant inquiry is not why these
individuals are such good workers, but whether SHB may dis-
charge them if they cease to perform. The bylaws say “yes,”
and the facts do not contradict that. This factor favors Stahl.
STAHL v. UNITED STATES 18879
E. Permanency of the Relationship
[8] To the extent it is relevant here, it cannot be doubted
that the individual members work permanently at SHB. Per-
haps that is more true of them than for most workers these
days, although extremely long term employment relationships
have never been rare. This factor favors Stahl.
F. Regular Business of SHB
[9] SHB is in the business of farming, and it cannot be
doubted that the members work on (or at least for) the farm-
ing business. While members do engage in other activities, so
do typical common law employees. The evidence does not
indicate whether separate activities go on during what would
be a normal work day, but they do, surely, take place on the
farm property. That hardly shows that the members do not
work to make the farming enterprise a successful business.
Nor is it significant that SHB also hires seasonal employees
to assist with the farming operation. What is significant is that
the SHB members do work on the farm, and the United States
does not dispute that they are the driving force of the farming
business. This factor favors Stahl also.
G. Assignment of Additional Projects
[10] As already indicated, the SHB members work perma-
nently at and for SHB’s farming enterprise, and the managers
assign tasks to the SHB members on an ongoing basis. This
factor favors Stahl.
As noted singly, the above seven factors all favor Stahl’s
contention that he, and the other Hutterites, are employed by
the SHB business. Do any factors detract from that? Well,
yes.
H. Method of Payment
[11] SHB does not pay wages to its Hutterite workers, and
they would not want wages. SHB does provide for all of the
18880 STAHL v. UNITED STATES
members’ personal needs, including food, clothing, housing,
medical care, and education, but it does not treat those as
wages (it does not pay payroll taxes for them). Moreover, the
amount of benefits does not appear to depend on the type of
work performed. That the SHB members do not get paid is
significant.
But, consider: If the members were paid wages in the usual
sense, they would merely donate them back to SHB itself;
their religious beliefs demand that. Moreover, because SHB
is a § 501(d) organization, the wages would be deducted by
SHB, and that would decrease the distributed income accord-
ingly. That is part of the Gordian knot that Congress cut when
it adopted the section. It does not demand a conclusion that
the members are not employed by SHB at all; it simply under-
scores the unique nature of their employment.
Still and all, it must be said that this does favor the govern-
ment’s position.
[12] Similarly, it cannot be doubted that SHB does not
withhold taxes, including Social Security taxes, or withhold
workers’ compensation or unemployment insurance. As to
Social Security taxes, at least, there is no dispute that Hutteri-
ans are by their faith forbidden to receive Social Security ben-
efits. That, itself, may explain why SHB does not withhold
Social Security and other taxes, although it may not excuse
the failure. The government points out that even if that is true,
SHB should have followed certain formalities to opt out of
participation in the Social Security system. Perhaps the
United States is correct. See, e.g., 26 U.S.C. § 1402(g). But
even if SHB did violate some law or rule of that nature, the
details of that are not before us, and do not directly affect the
issue that is before us.14
14
The government’s argument that SHB might have violated one or
more laws of the State of Washington by failing to pay its members mini-
mum wages is also unavailing. SHB’s state law violations, if any, are not
the subject of this litigation.
STAHL v. UNITED STATES 18881
On balance, the individual Hutterites, who work for the
SHB business, should be seen as common law employees of
SHB insofar as they perform the work of that business. They
are permanent workers on SHB’s grounds and SHB can both
insist that they perform their assigned tasks at the proper
times and can direct the detail of that performance. Despite
the fact that SHB and those members who work for it have a
myriad of interconnected relationships, one of those relation-
ships is operation of and working in a business. That connec-
tion is most like the relationship between an employer and
employee, and should be so treated for tax purposes.
[13] That said, just how any particular claimed deduction
should be treated at the corporate level remains to be seen.
For example, whether, and to what extent, meal expenses can
be deducted is a complex issue of its own;15 it is one that the
district court should resolve in the first instance. It can do so
upon remand.
CONCLUSION
[14] SHB is a Hutterian corporation, which like others of
its kind, is treated as a 26 U.S.C. § 501(d) entity. By its very
nature, it is not exactly like an ordinary business corporation;
nor is it like the more common 26 U.S.C. § 501(c)(3) organi-
zations. Nonetheless, we see no reason to hold that its Hutter-
ite workers are not employed by the SHB business when, as
here, they essentially meet the definition of common law
employees, even if they have many other relationships among
themselves and with SHB. Thus, the district court erred when
it held to the contrary and granted summary judgment to the
15
See Moss v. Comm’r, 758 F.2d 211, 213 (7th Cir. 1985) (stating that
deducting meal costs “is all a matter of degree and circumstance”); see
also Dobbe v. Comm’r, 80 T.C.M. (CCH) 577, 583 (2000) (holding that
the corporation had the burden of apportioning meals between those that
were a legitimate business expense and those that were not), aff’d on other
grounds, 61 F. App’x 348 (9th Cir. 2003).
18882 STAHL v. UNITED STATES
government. “Employment” is the sole issue before us, and
we will not divagate into others; we leave those to the district
court in the first instance.
REVERSED and REMANDED.