(CN) – Members of a Hutterite commune that operates a 30,000-acre farm in Washington state are employees in the legal sense and could be eligible for corporate tax deductions, the 9th Circuit ruled, reviving the leader’s bid for a tax refund.
The federal appeals court in San Francisco reversed a federal judge’s ruling that the commune’s members were not employees, which cut short sect leader John Stahl’s quest for an income tax refund.
Stahl, president of the Stahl Hutterian Brethren, in Ritzville, Wash., sought a refund for the cost of meals and medical expenses for the commune’s members, claiming the Brethren — whose 65 members are all part of the extended Stahl family — is a nonprofit, Apostolic corporation and thus eligible for corporate deductions.
Hutterites are similar to the Amish and the Mennonites in that they eschew individual property, including salaries, and live in rural communes dedicated to a common religious and social goal. The sect traces its roots back to 16th Century Germany.
Stahl’s group runs a large farm and dairy, from which it “earns a substantial income selling most of its produce and dairy products to other business and at farmers markets,” according to the ruling.
Though the group’s members receive no pay for their work and do not contribute to or collect Social Security benefits, all of their food, shelter, clothing and medical care is provided.
Apostolic corporations such as Stahl’s typically maintain a common treasury and do not pay income tax. The members pay personal income tax on their pro rata shares of the corporation’s income, and a member’s tax liability can be reduced when deductions are allowed at the corporate level.
Stahl argued that the cost of meals and medical expenses for the group’s members was an ordinary business expense of the farming enterprise. The government countered that the group’s members are not employees for tax purposes.
The federal district court sided with the government and dismissed Stahl’s tax complaint.
But a three-judge panel reversed on appeal, finding that, while the commune “is not exactly like an ordinary business corporation,” the Stahl Hutterian Brethren’s (SHB) members are still employees as defined by the Supreme Court.
“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,” Judge Ferdinand Fernandez wrote. “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 relationships is operation of and working in a business. That connection is most like the relationship between an employer and employee, and should be so treated for tax purposes.”
However, the panel stopped short of determining the legality of Stahl’s requested deductions.
“Just how any particular claimed deduction should be treated at the corporate level remains to be seen,” Fernandez wrote, citing meal expenses as an example of a “complex issue” that should be determined on remand.
The 9th Circuit reinstated Stahl’s request for a refund and remanded.