Source: https://law.justia.com/cases/federal/appellate-courts/F2/958/122/371366/
Timestamp: 2019-07-17 21:16:55
Document Index: 320730478

Matched Legal Cases: ['§ 170', '§ 170', '§ 170', 'art. 4413', 'art. 4413', '§ 170', '§ 501', '§ 501', '§ 509', '§ 4940', '§ 4940', '§ 509', '§ 170', '§ 170', '§ 22', '§ 170', '§ 170']

Texas Learning Technology Group, Petitioner-appellant, v. Commissioner of Internal Revenue, Respondent-appellee, 958 F.2d 122 (5th Cir. 1992) :: Justia
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Texas Learning Technology Group, Petitioner-appellant, v. Commissioner of Internal Revenue, Respondent-appellee, 958 F.2d 122 (5th Cir. 1992)
US Court of Appeals for the Fifth Circuit - 958 F.2d 122 (5th Cir. 1992)
This is an appeal from the Tax Court's decision in a declaratory judgment action. The Appellant filed a suit for declaratory judgment in the Tax Court after the Commissioner of the Internal Revenue Service ruled that the Appellant is not a "political subdivision" under § 170(b) (1) (A) (v) of the Internal Revenue Code. The Tax Court agreed with the Commissioner that Appellant is not a "political subdivision." The Appellant now appeals the Tax Court's decision.
After the Commissioner of the Internal Revenue Service ruled that the Appellant, Texas Learning Technology Group (TLTG), did not qualify as a political subdivision under § 170(b) (1) (A) (v), TLTG filed a suit for declaratory judgment in the Tax Court, requesting a ruling that it qualifies as a "political subdivision" and is thus excepted from "private foundation" status and its requirements. The case went before the Tax Court without a trial pursuant to Tax Ct.R. 122, based upon the pleadings, the administrative record, and a partial stipulation of facts filed by the parties. The Tax Court found that TLTG failed to qualify for an exemption from "private foundation" status as a "political subdivision" under § 170(b) (1) (A) (v) because it was not authorized to exercise "sovereign power."1 TLTG now appeals the Tax Court's ruling.
TLTG is an unincorporated association that was created by an interlocal agreement among eleven Texas public school districts. The eleven school districts entered into the agreement pursuant to the Interlocal Cooperation Act, Tex.Rev.Stat.Ann. art. 4413(32c) (Vernon 1976). The Interlocal Cooperation Act allows any local government to "contract or agree with one or more local governments to perform governmental functions and services under the terms of [the] Act." Tex.Rev.Stat.Ann. art. 4413(32c) (4) (a). Hence, the school districts, as local governments, formed a contract creating TLTG in order to fund, organize, and manage projects designed to improve the public education curriculum in Texas.
TLTG's tax exempt status is not at issue in this appeal. TLTG challenges only the Tax Court's conclusion that TLTG is not a political subdivision within the meaning of § 170(b) (1) (A) (v).
TLTG is a § 501(c) (3) organization and any § 501(c) (3) organization is presumed to be a "private foundation" unless it qualifies under one of the exceptions to "private foundation" status listed in § 509(a). As long as an organization is classified as a "private foundation," it is subject to certain excise taxes for self-dealing, speculative investing, lobbying, and other restricted activities. See 26 U.S.C. §§ 4940-4945 (1989). Tax exempt organizations that are classified as "other than private foundations" are not subject to the requirements of §§ 4940-4945.
Under § 509(a) (1), an organization described in § 170(b) (1) (A) (i)-(vi) is excepted from private foundation status. Subsection (v), the subsection TLTG seeks to avail itself of, requires by way of § 170(c) (1) that TLTG be "a state, a possession of the United States, or any political subdivision of any of the foregoing...." Thus, to escape private foundation status by way of subsection (v), TLTG must be a "political subdivision" of the state of Texas.
In Commissioner of Internal Revenue v. Shamberg's Estate, 144 F.2d 998 (2nd Cir. 1944), cert. denied 323 U.S. 792, 65 S. Ct. 433, 89 L. Ed. 631 (1945), the Second Circuit addressed whether interest on the New York Port Authority's bonds was excludable from gross income under § 22(b) (4) of the Revenue Acts of 1936 and 1938. The court found that the New York Port Authority was a political subdivision of New York and New Jersey because it was created by a contract between the two states and maintained many sovereign powers including the power of eminent domain and police power (the police power consisted of the power to subpoena, the power to issue orders and enforce orders against persons within its jurisdiction, and the power to maintain a uniformed police force). The only one of the three generally recognized sovereign powers that the New York Port Authority did not maintain was the power to tax. In response to the argument that the Authority was not a political subdivision because it was not authorized to tax citizens the court wrote:
In Commissioner of Internal Revenue v. White's Estate, 144 F.2d 1019 (2d Cir. 1944), cert. denied, 323 U.S. 792, 65 S. Ct. 433, 89 L. Ed. 632 (1945), the Second Circuit considered whether the Triborough Bridge Authority (Authority) was a political subdivision in order for the interest on its bonds to be tax-exempt. The court found that the Authority was a political subdivision of the State of New York because the Authority was "plainly a subdivision of state government empowered to exercise governmental functions on behalf of the City of New York...." White, 144 F.2d at 1020. The Authority maintained the power of eminent domain, and the power "to make use of city agents, employees, and facilities, and to issue bonds for constructing the bridges." Id.
Seagrave, 38 T.C. 247 (1962). According to Seagrave and several later opinions, the delegation of traditional sovereign authority is the crucial factor in determining whether an organization is a political subdivision. See Philadelphia Nt'l. Bank v. United States, 666 F.2d 834, 839 (3rd Cir. 1981) (holding that Temple University was not a political subdivision because sovereign power had not been delegated), cert. denied, 457 U.S. 1105, 102 S. Ct. 2904, 73 L. Ed. 2d 1314 (1982); Old Colony Trust Co. v. United States, 438 F.2d 684 (1st Cir. 1971) (holding that a hospital was not a political subdivision in part because it did not exercise any sovereign powers).
TLTG concedes that it does not possess the power of eminent domain, the power to levy or collect taxes, or the power to issue government bonds. (Appellant's Br. at 11). TLTG argues, however, that its power to establish, regulate, and distribute curricula to the school districts constitutes sovereign police power. (Appellant's Br. at 24). The limited authority that TLTG is authorized to exercise regarding the content of public school curriculum, does not constitute police power. See Philadelphia Nt'l Bank v. United States, 666 F.2d 834 (3rd Cir. 1981), cert. denied, 457 U.S. 1105, 102 S. Ct. 2904, 73 L. Ed. 2d 1314 (1982).
TLTG argues alternatively that it should be classified as a political subdivision because it is an "integral part" of its member school districts, which, as the Government concedes, are political subdivisions. TLTG cites several cases in which courts have held that a division of a larger entity was entitled to share the tax-exempt status of the larger entity because the division was an "integral part" of the larger entity. It is true that an "integral part" of a larger entity is entitled to share in the larger entity's tax-exempt status. See, Hospital Bureau of Standards and Supplies v. United States, 158 F. Supp. 560, 141 Ct. Cl. 91 (1958); Estate of Philip R. Thayer v. Commissioner, 24 T.C. 384 (1955); Squire v. Students Book Corp., 191 F.2d 1018 (9th Cir. 1951). It is not true, however, that TLTG is an integral part of a political subdivision. The most that can be said for TLTG in this connection is that it may be integrally related to several political subdivisions. Such a relationship does not automatically entitle the integrally related entity to be classified as a political subdivision.
We find that a political subdivision, within the meaning of § 170(b) (1) (A) (v), must possess recognized sovereign power. TLTG does not maintain any recognized sovereign powers and therefore is not a political subdivision within the meaning of subsection (v). For this reason, we AFFIRM the opinion of the Tax Court.
The IRS originally stated that TLTG could avoid "private foundation" status by meeting the "public support" test under § 170(b) (1) (A) (vi), for charities that receive most of their funding from governmental units. (TLTG receives almost all of its funding from the school districts which are governmental units.) TLTG wants to escape "private foundation" status only by means of subsection (v) and not subsection (vi), because under subsection (vi), TLTG's finances would be examined periodically to determine whether it continued to satisfy the "public support" test