Page 123 - JoFA_2022

TAX MATTERS

A tale of two industries is not necessarily itself an educational support its position that the purpose of

Total net income or loss of partnerships organization, but a “recognized univer- the formal-instruction requirement is to
in finance and insurance rose 3.3% from sity” that incidentally operates a museum ensure that Sec. 170(b)(1)(A)(ii), as the
2018 to 2019, while that of partnerships is one. Tax Court stated in Brundage, 54 T.C.
in real estate and rental and leasing fell The district court held that Mayo met 1468 (1970), “could not reach very far,
by 57%. Net income of all partnerships the statutory requirements and that the if at all, beyond schools, colleges, and
decreased 14%. regulation’s requirements of a primary universities” (Brundage, at 1474).
function of presenting formal instruc- ■ Action on Decision 2021-04;
$500
tion and any other activity being no Mayo Clinic, 997 F.3d 789 (8th
more than incidental exceeded the IRS’s Cir. 2021)
$400 authority to interpret the statute.
Holding: In reversing the district — By Paul Bonner.
court, the Eighth Circuit held that
$300 the regulation unreasonably limited Paradise postponed
Billions educational organizations under Sec. Taxpayer’s organic oasis
170(b)(1)(A)(ii) to those whose primary
$200 function is presenting formal instruction. was not yet a going concern,
That provision, promulgated in 1958, the Tax Court holds.
“has no long history of congressional
$100 acceptance,” the court stated. Nonethe- The Tax Court held that a taxpayer’s
less, the regulation’s distinction between farming venture was still in its startup
primary and merely incidental activities phase in the tax year at issue, denying
$0 has a valid role in interpreting the claimed business expense deductions.
2018 2019
statute, the court said. Facts: Vardan Antonyan bought 10
■ Finance and insurance The regulation and statute must be acres in the Mojave Desert of Southern
■ Real estate and rental and leasing
read in the context of Sec. 501(c)(3)’s California, intending to develop it
broad view of a tax-exempt organization’s and rent parcels to farmers. Antonyan
Source: IRS, “Partnership Returns, Tax Year 2019,”
Statistics of Income Bulletin, Fall 2021, Figure D. being organized and operated exclusively created a business plan for the develop-
for a qualifying charitable purpose, the ment, which he called Paradise Acres,
court said, noting that “exclusively” has that included building a barn, obtain-
or on account of, certain debt-financed generally not been construed literally ing a certificate of compliance with
real property. Qualified organizations but as allowing some other purposes, so organic farming standards from the U.S.
include, under Sec. 514(c)(9)(C)(i), long as they are not substantial in nature Department of Agriculture, installing
educational organizations described in but are incidental to an organization’s an irrigation system, and constructing a
Sec. 170(b)(1)(A)(ii) (and certain affili- primary, qualifying purpose. road to the tract. Before 2015, he began
ated support organizations). The IRS’s nonacquiescence: In its installing a rainwater collection system
An educational organization under Action on Decision, the IRS criticized and tank. He mapped the acreage and
Sec. 170(b)(1)(A)(ii) is any educational the Eighth Circuit’s finding that the planted a cactus garden and trees.
organization that normally maintains formal-instruction requirement had no In 2015, Antonyan incurred expenses
a regular faculty and curriculum and long history, stating that Congress has of beginning to build the barn and
normally has a regularly enrolled body amended Sec. 170(b) “numerous times” road, working on those projects only on
of pupils or students in attendance at the since 1958 without overruling the regu- weekends, since he continued working
place where its educational activities are lation. Second, the formal-instruction full time as an engineer. Antonyan and
regularly carried on. requirement is based in the statute’s his wife filed a joint individual income
Regs. Sec. 1.170A-9(c)(1) further requirements of a faculty, curriculum, tax return for 2015 that included a net
delineates an educational organization and place of student attendance, the loss by Paradise Acres on Schedule C,
under Sec. 170(b)(1)(A)(ii) as one whose IRS stated. Third, the Service contended Profit or Loss From Business, of more than
“primary function is the presentation of that the Eighth Circuit did not consider $25,000.
formal instruction.” Any noneducational the IRS’s arguments regarding over a The IRS determined a deficiency,
activities may be no more than inci- dozen Code sections that cross-reference disallowing business deductions for car
dental to the organization’s educational Sec. 170(b)(1)(A)(ii) (many of which and truck expenses and travel and other
activities. For example, the regulation predated the regulation’s 1958 publica- expenses. The taxpayers petitioned the
states, a museum operated by a school tion). These provisions, the IRS argued, Tax Court.

30 | Journal of Accountancy March 2022