85 T.C. 9">*9 Respondent determined the following deficiencies in petitioner's income tax:

The issues for decision are: (1) Whether the farming operations conducted by petitioner (an organization exempt from income tax pursuant to section 501) ¹ during the years 1977, 1978, and 1979 constitute the conduct of an unrelated trade or 85 T.C. 9">*10 business within the meaning of section 513, and (2) if the farming operations constitute an unrelated trade or business, whether substantially all of the work in carrying on the trade or business was performed without compensation.

1985 U.S. Tax Ct. LEXIS 63">*69 FINDINGS OF FACT

This case has been submitted for decision under Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and accompanying exhibits are so found and are incorporated herein by this reference.

Petitioner St. Joseph Farms of Indiana Brothers of the Congregation of the Holy Cross, Southwest Province, Inc., was incorporated under the Indiana General Not-For-Profit Corporation Act, Ind. Code Ann. sec. 23-7-1.1-1 et seq. (Burns 1972), on July 22, 1965. Petitioner is exempt from taxation as a member of the U.S. Catholic Conference, which has been granted a group exemption under section 501(c)(3) as a religious organization. Where an organization is granted a group exemption, the articles of incorporation of each subordinate organization are not separately examined.

The Congregation of the Holy Cross was founded in France during the troubled period following the French Revolution, and was permanently established in the United States in 1841. ² Until 1955, the Holy Cross Brothers had only one province in this country. In 1955, the U.S. province was divided into three separate provinces: (1) The Southwest Province, (2) the Midwest Province, and (3) 1985 U.S. Tax Ct. LEXIS 63">*70 the Eastern Province. Although geographically petitioner falls within the Midwest Province, it was given to the Southwest Province in order to provide that province with a source of income.

The original purchase of the land for petitioner was made in 1867. Since that date, the Holy Cross Brothers have operated St. Joseph Farms. Within the last 15 to 20 years, St. Joseph Farms was expanded through the acquisition of a section of land known as St. Bernard's Farm.

In 1956, the appraised value of St. Joseph Farms was approximately $ 721,000. As is true for many other commercial farming operations that have been in existence for an extended 85 T.C. 9">*11 period of time, the farm has appreciated substantially in value over the years.

At present, petitioner's farm operation consists of approximately 1600 acres of land. Of this total acreage, approximately1985 U.S. Tax Ct. LEXIS 63">*71 1300 acres are planted in corn, wheat, and soybeans. Additionally, there is a feedlot for approximately 500 beef cattle.

Besides several outbuildings which are used as storage sheds for equipment, a machine shop, and shelter for the cattle, the physical plant includes corn-drying facilities and several large storage silos.

There are two houses on the property. One house contains a chapel, offices, living quarters, kitchen, dining area, and a recreation room for the Brothers, and the other house contains an office, library, and recreation room, and additional living quarters.

Petitioner owns all of its own farm equipment. Petitioner's equipment includes three large, four-wheel drive, enclosed-cab tractors; four smaller tractors; a combine; a semi-tractor with three different trailers; a crane used for digging ditches; and an assortment of plowing, seeding, and fertilizing equipment. In addition, petitioner owns several cars and smaller trucks.

Some of the corn raised by petitioner is used for cattle feed. The remaining corn and soybeans, wheat, and cattle are marketed from a study of market trends, which are followed on a daily basis with quotes from the Chicago Board of Trade1985 U.S. Tax Ct. LEXIS 63">*72 and the Mercantile Exchange by way of radio broadcast and the Wall Street Journal. Other factors that are figured into the marketing of petitioner's products are how soon a commodity needs to be moved, and transportation costs to the market. In addition, the farm manager maintains close contact with area farmers and agricultural experts in the marketing of grain and livestock. Long-range forecasts are reviewed through farm magazines.

In taxable years ended June 30, 1978, and June 30, 1979, petitioner participated in certain farm price support programs administered by the Agricultural Stabilization and Conservation Service of the U.S. Department of Agriculture. These programs provide certain benefits (i.e., land diversion payments, commodity loans, target price protection, and certain authorized disaster payments) to farmers who plant one or more program crops (wheat, corn, grain sorghum, barley, or 85 T.C. 9">*12 oats) and participate in and comply with the acreage reduction and land diversion program. Petitioner's participation in these programs resulted in its receipt of subsidies of $ 10,605 for fiscal year 1978 and $ 11,253 for fiscal year 1979. Petitioner's stated reason for 1985 U.S. Tax Ct. LEXIS 63">*73 participating in the programs is as follows:

The Internal Revenue Service has asked for an explanation of St. Joseph Farms' participation in government sponsored farm programs such as the Payment-In-Kind (PIK) presumably because such participation would appear to be motivated by maximizing the profits for the farms. These government programs are set up as an essential part of supporting farm prices across the nation thus insuring the survival of a substantial number of marginal farming operations. If St. Joseph Farms did not participate they would be acting in defiance of this governmental purpose. They could not maintain any credibility among neighboring families or the regional farming community if they refused to participate in these programs. As the director of St. Joseph Farms stated, "There is no way I would have planted fence row to fence row in 1983. There is a human dimension here. I would not want to be guilty of driving young kids away from the farms."

Membership and directorship in petitioner are limited to the Brothers of the Holy Cross that are assigned to the farm by the Provincial Superior of the Southwest Province. A Brother's assignment to any type of work 1985 U.S. Tax Ct. LEXIS 63">*74 or to a particular location is determined by the Provincial Superior and may be changed at any time. The authority of the director of the farm or of any other provincial endeavor is subject to that of the Provincial Superior. Budgets for all of the works of the province, including the farm, must be approved by the Provincial Superior and his council. In addition, the Provincial Superior and his council must approve certain policies. The director of the farm can make day-to-day decisions with respect to the operation of the farm without reference to the Provincial Superior, provided that those decisions do not impinge upon the budgetary and financial control reserved to the Provincial Superior and his council. Any profit realized by petitioner in a given year is forwarded to the Southwest Province the following year unless the funds are needed to make acquisitions of equipment which have been duly authorized.

The Brothers of the Holy Cross take a vow of poverty which is described in the Statutes of the Proceedings of the General Chapter of 1975 of the Congregation of Holy Cross as follows:

85 T.C. 9">*21 In making his vow of poverty, the religious acknowledges that all income accruing1985 U.S. Tax Ct. LEXIS 63">*75 from his work, even supererogatory work, gifts occasioned by his services or by his priestly or religious character, and gifts meant to provide for his personal needs, belong to the congregation (can. 580,2; 594,2).

As for property which comes to the religious after his first commitment, he must cede the administration of it in conformity with statute 17 (can. 569,2). Inheritances, legacies and gifts which are intended by their very nature or by the donor to constitute or increase the patrimony of the religious are presumed to be personal; the authorization of the local superior or director is required to accept or renounce such an inheritance or legacy. As for gifts, this permission is required only for their acceptance.

No superior may permit a religious to use his personal property for himself since it is exclusively from the common funds that provision is to be made for the needs of all (can. 594,1).

Before his perpetual profession, a religious must make a will that meets the requirements of civil law and covers all the property he already owns or may later acquire (can. 569,3). Before first commitment, he must cede for the entire period of his commitment the administration1985 U.S. Tax Ct. LEXIS 63">*76 of his property to whom he wishes, determine how it is to be used, and dispose of its income in favor of some charitable work or in favor of anyone he wishes except himself, unless he wishes to add it to his patrimony (can. 569,1). These acts of cession and disposition must be made in instruments having binding force before the civil law, with the stipulation that they are revocable.

Any change in these arrangements or in his will requires the permission of the superior general, or of the provincial if he has been so delegated (CA 17). To dispose of his property in view of some consideration, or to change his will in an urgent case when it is not possible to have recourse to a higher superior (can. 583,2), as well as for all acts required by civil law, the permission of the local superior or director of the residence suffices.

At the time of his admission to the novitiate, the candidate must sign a legal document stating that he renounces all right to receive compensation for himself or his family for the time passed in the congregation, for services rendered or for any other benefit which the congregation may have been able to gain from him.

After advising the provincial, a religious1985 U.S. Tax Ct. LEXIS 63">*77 who is perpetually professed may renounce all or part of his patrimony (PC 13; NPC 24). This must be done in conformity with civil law. If the renunciation is made in favor of the congregation, the contract of renunciation must include provisions by which the property will be restored, on presentation of a written request, in case he should leave the congregation for any reason whatever.

No salaries are actually paid to the Brothers, despite the terminology used in petitioner's financial reports and returns. Household expenses and each Brother's personal expenses are totaled, and then this figure is allocated to either the farm or cattle operation under the heading of "salary" on petitioner's financial reports and returns. The allocation is based on the total time each Brother spends with either operation. In 85 T.C. 9">*14 addition, petitioner is assessed $ 1,650 each year for each brother by the Southwest Province. The assessment is reported as "Charge for Member Serv."

The Brothers who reside on the farm receive food, clothing, shelter, and medical care, regardless of whether they are involved in farm operations or other work of the religious community. The South-West Province1985 U.S. Tax Ct. LEXIS 63">*78 has elected under the FICA regulations ³ to make FICA payments for the Brothers at the farm based upon average living expenses. Petitioner's explanation for the Brothers' participation in FICA is as follows:

The Brothers of Holy Cross participate in Social Security because such participation was made available to them by a special provision allowing coverage of members of a religious order who are under a vow of poverty. The history of F.I.C.A. Sec. 3121(r) makes it clear that Congress was allowing coverage of those who do not get personal compensation for their labor. In fact, the Regulations Sec. 31.3121(i)-4 set up a fictional "wage" and compute the contribution for all Brothers at the same amount no matter what the work of each Brother (including Brothers who are going to school instead of working).

The Brothers' daily schedule at the farm is as follows:

1985 U.S. Tax Ct. LEXIS 63">*79 At various times during the year, this schedule is modified to accommodate seasonal changes and the observance of religious holidays.

Between 12 and 14 of the Brothers engaged in the operation of the farm. These brothers provide approximately 91 percent of the full-time labor and perform approximately 94 percent of 85 T.C. 9">*15 the total hours worked. The balance of the labor required to run the farm is provided by part-time outside help.

A priest, who is a member of the priests' society of the Holy Cross, lives with the Brothers on the farm and serves as chaplain. The chaplain performs sacerdotal functions such as celebrating Mass and administering the sacraments. He receives a check for $ 900 for each 6-month period. The actual charge is $ 1,450 every 6 months, but $ 550 is deducted for room and board.

Apart from the farming activity, the Brothers often provide counseling on individual spiritual problems, matters of personal faith, and troubled family situations. They do not maintain office hours but are generally available to those seeking counseling. In response to a questionnaire ⁴ circulated among the neighboring community and inquiring as to the benefits to the community1985 U.S. Tax Ct. LEXIS 63">*80 that have resulted from the presence of St. Joseph Farms and the Holy Cross Brothers, the following responses were received:

A. From my own personal experience, when I was younger one of the Brothers taught me religious classes. I then received my sacraments, Holy Communion and Confession.

B. They have the respect of anyone and everyone that knows the operation. Truly a guiding light to a true Christian way of life. Anyone knowing their operation and ways has had his life enriched.

D. Personally we are Hindus by religion. We learn more about Christianity and Christians whenever we visit the Brothers at St. Joseph Farms; the more we associate with them, the more we like and respect Christianity and Christians.

E. Religiously I, and also my family, by joining the Brothers at prayer both at mealtimes and chapel, have come to understand more the community of man and also to learn first-hand about the Brothers of Holy Cross.

F. When our family has had major medical problems the Brothers at St. Joseph's1985 U.S. Tax Ct. LEXIS 63">*81 Farm have always helped us with their words and prayers. We have joined them in Mass and prayer in their chapel and are always welcome. They have given us gifts of handsome rosaries which our whole family use.

G. It has always been spiritually uplifting to witness the Brothers and the Holy Cross Community at work among the people of St. Joseph County. The fact that the Brothers are working primarily out of a religious motivation 85 T.C. 9">*16 rather than financial has to be a powerful force in arranging one's own priorities. It is extremely important to have this source of highest motivation at work among the people each day. [Emphasis in original.]

H. The willingness of the Brothers to lend a helping hand to someone in time of need. The Brothers have shown spiritual support when tragedy strikes a neighbor, such as visiting the ill in hospitals on a consistent basis. Also inviting people who are alone to share a holiday with them. They have sponsored neighborhood gatherings for various occasions. When there is a death in the family, the Brothers had special prayers for us.

J. The warm and1985 U.S. Tax Ct. LEXIS 63">*82 generous feeling from all of the very fine men at the farm has served as an example to us in our everyday endeavors. The religious atmosphere, ever present, is a thing, we have observed, many imitate.

K. THEY SHOW A VERY GOOD EXAMPLE OF LIVING A GOOD LIFE. They give food to eat to a few old lonely men from this area who had no one to share important holidays with. A close neighbor of ours has been in the hospital a month and now in a nursing home over a month with a very serious stroke. Many times when we had gone to see our mutual friend, some of the Brothers were there to try to comfort and cheer him. AND IT CERTAINLY HELPED. [Emphasis in the original.]

L. The Brothers of Holy Cross or St. Joseph Farm are always ready to help a neighbor anytime day or night seven days a week. Just give them a call ph 272-0962. Someone will always answer.

N. They've always1985 U.S. Tax Ct. LEXIS 63">*83 been ready and willing to help me in any way. They never would take any pay either. I cannot tell all the ways they've helped.

O. I feel that the lifestyle of the Brothers at St. Joseph Farm is a spiritual example to the community. I personally am able to attend mass at St. Joseph Farm especially during Lent when I can't find a Mass elsewhere at the right time. Also, I have always felt free to speak with some of the Brothers about my own personal spiritual needs and thoughts.

There are a total of 167 professed Brothers in the Southwest Province. The numbers of candidates entering the novitiate each year for the last 10 years are as follows:

The Southwest1985 U.S. Tax Ct. LEXIS 63">*84 Province pays income taxes for those Brothers of the Province who work for organizations which are not exempt from tax under section 501(c)(3).

85 T.C. 9">*17 Not all of the units of the Southwest Province are self-sustaining. Regular financial subsidies are made to several apostolic works in which the Brothers are engaged.

OPINION

Respondent determined that petitioner's farming activity constitutes an unrelated trade or business within the meaning of section 513 and, therefore, determined deficiencies in petitioner's income tax, for taxable years ended June 30, 1977, June 30, 1978, and June 30, 1979, under section 511. Petitioner contests respondent's determination on the following three alternative grounds: (1) The farming activity does not constitute a trade or business within the meaning of section 513; (2) even if the activity is deemed to be a trade or business, the activity was substantially related to petitioner's exempt purposes and therefore does not constitute an unrelated trade or business under section 513; and (3) because substantially all of the farm work was performed without compensation, petitioner's farming activity is not an unrelated trade or business under the exception1985 U.S. Tax Ct. LEXIS 63">*85 provided in section 513(a)(1).

Section 511 ⁵ imposes a tax on the unrelated business taxable 85 T.C. 9">*18 income of State colleges and universities and of organizations otherwise exempt from tax under section 401(a) and 501(c). Sec. 511(a). "Unrelated business taxable income" is defined by section 512(a)(1) to mean "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."

1985 U.S. Tax Ct. LEXIS 63">*86 Section 513(a) defines an "unrelated business trade or business" as follows:

SEC. 513(a). General Rule. -- The term "unrelated trade or business" means, in the case of any organization subject to the tax imposed by section 511, 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 of such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function described in section 501(c)(3)), except that such term does not include any trade or business --

(1) in which substantially all of the work in carrying on such trade or business is performed for the organization without compensation; or

(2) which is carried on, in the case of an organization described in section 501(c)(3) or in the case of a college or university described in section 511(a)(2)(B), by the organization primarily for the convenience of its members, students, patients, officers, 1985 U.S. Tax Ct. LEXIS 63">*87 or employees, or, in the case of a 85 T.C. 9">*19 local association of employees described in section 501(c)(4) organized before May 27, 1969, which is the selling by the organization of items of work-related clothes and equipment and items normally sold through vending machines, through food dispensing facilities, or by snack bars, for the convenience of its members at their usual places of employment; or

(3) which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.