
USCA1 Opinion

	




                              _________________________          No. 97-1319                     STATE POLICE ASSOCIATION OF MASSACHUSETTS,                               Petitioner, Appellant,                                         v.                          COMMISSIONER OF INTERNAL REVENUE,                                Respondent, Appellee.                              _________________________                       APPEAL FROM THE UNITED STATES TAX COURT                            [Hon. Thomas B. Wells, Judge]                              _________________________                                       Before                          Selya and Lynch, Circuit Judges,                         and Pollak,* Senior District Judge.                              _________________________               Alfred                        J.                            O'Donovan, with whom   Michelle                                                             H.                                                                 Blauner and          Shapiro, Haber & Urmy were on brief, for appellant.               Teresa                        T.                            Milton, Attorney, Tax Division, U.S. Dep't of          Justice, with whom                             Loretta C. Argrett                                              , Assistant Attorney General,          and Kenneth L. Greene, Attorney, Tax Division, were on brief, for          appellee.                              _________________________                                   August 20, 1997                              _________________________          __________________          *Of the Eastern District of Pennsylvania, sitting by designation.                    SELYA,                           Circuit Judge                                       . In this case, the Commissioner of          the Internal Revenue Service (the Commissioner) issued a deficiency          notice to the State Police Association of Massachusetts (the          Association) for income taxes allegedly due but unpaid. When the          Association protested, the Tax Court sided with the Commissioner.          See State                     Police                            Ass'n                                  of                                     Mass. v. Commissioner, 72 T.C.M. (CCH)          582 (1996) (Tax Ct. Op.). The Association appeals, contending that          the Tax Court erred both in finding that the deficiency assessment          was timely and in holding that certain of the Association's          activities gave rise to liability for unrelated business income          tax. We affirm.          I. BACKGROUND                    The Association is a labor organization, and, as such, is          exempt from income taxes under 26 U.S.C. S 501(c)(5) (1994). The          purpose of the organization is to represent its members in          bargaining over the terms and conditions of their employment and to          promote a fraternal spirit among members. Virtually all the          troopers who are eligible to join the Association do so.                    During the years at issue, the Association published an          annual yearbook, known as                                    The                                       Constabulary. The yearbook consisted          of photographs, articles, display advertisements, and a business          directory. We describe     infra the sales effort (which the          Association in more salubrious times called the "earnings program")                                             From this point forward, we will refer to the applicable          provisions of the Tax Code, as they appeared on the date(s) in          question, by using the preface "IRC." To illustrate, 26 U.S.C. S          501(c)(5) will be cited as IRC S 501(c)(5), and so on and so forth.                                          2          and the mechanics of publication and distribution. It is enough          for now to say that the earnings program proved to be aptly named:          gross receipts related to the publication of The Constabulary for          the years at issue totalled $8,788,211. Of this amount, the          Association retained somewhat over 40% (the precise percentage          varied from year to year, and is of no consequence here). The          Association paid no tax on the income.                    It is said that all good things come to an end. Federal          law requires that an otherwise tax-exempt organization must pay          federal income tax on income derived from business ventures which          are not substantially related to its tax-exempt purpose(s).   See          IRC S 511. After due investigation, the Commissioner concluded          that the Association had violated this stricture because the sale          of advertising in                            The                                Constabulary yielded taxable income. Acting          on this conclusion, the Commissioner issued a deficiency notice          seeking $1,352,433 in taxes due for the tax years ended April 30,          1986 through April 30, 1989, the three months ended July 31, 1989,          and the tax years ended July 31, 1990 and 1991, along with          additions to tax and penalties totalling $711,075.                    Displeased by this turn of events, the Association          brought suit in the Tax Court under IRC S 6213(a) to obtain a          redetermination of the taxes allegedly due. It claimed that, for          certain tax years, the notice of deficiency had been issued beyond          the applicable limitation period; and that, on a broader plane, the          activity cited by the Commissioner _ the solicitation, sale, and          publication of display ads and listings in The Constabulary _ did                                          3          not constitute an unrelated trade or business regularly carried on,          and that, therefore, the income derived from that activity was          exempt from tax. The Tax Court rejected both of these theses and          sustained the Commissioner's determination of the existence and          extent of the deficiency (although it eliminated the additions to          tax and the penalties). See Tax Ct. Op. at 589, 594. This appeal          ensued.          II. THE PUTATIVE TIME BAR                    The Association claims that the statute of limitations          bars the collection of taxes as to some or all of the affected          periods. The relevant facts are not in dispute. On August 3,          1992, the Association and the Commissioner, through their          authorized representatives, executed a form entitled "Consent to          Extend the Time to Assess Tax" (the Form). The Form, a copy of          which is reprinted in the appendix, permitted the Commissioner to          assess income tax on or before April 30, 1993, for the contested          periods through July 31, 1989. The Commissioner assessed the taxes          allegedly due for these periods by issuing a deficiency notice on          April 22, 1993. The applicable limitation period is three years.          See IRC S 6501(a). If the Form sufficed to extend the limitation          period, then the deficiency notice was timely as to all the tax          years at issue; if not, the Commissioner's claim for certain          periods is probably time-barred.                    The Association advances a purely linguistic argument on          this point. It notes that the text of the Form provides for an          extension of the limitation period solely with respect to tax due                                          4          on "any return(s) made" by the Association during the periods in          question. The only returns so made were information returns, on          Form 990, entitled "Return of Organization Exempt from Income Tax."          By definition, no tax could possibly be due on an information          return. Taking this literal view, the Association contends that          the Form did not extend the limitation period at all.                    The Tax Court refused to swallow this slippery syllogism.          It impliedly found the language of the Form ambiguous and construed          it as broad enough to include not only taxes due on returns made          but also taxes due on returns deemed to be made.  See Tax Ct. Op.          at 589. Ascertaining the ambiguity  vel non of a writing requires          a court to ask and answer a question of law, and, therefore, we          review this conclusion de novo. See IRC S 7482(c)(1);                                                                see                                                                    also                                                                         RCI          Northeast Servs. Div.                               v.                                   Boston Edison Co.                                                   , 822 F.2d 199, 202 (1st          Cir. 1987).                    The Tax Court's rendition withstands scrutiny. Tax forms          are rarely models of syntactical clarity, and the Form signed by          the parties is no exception. The Tax Court read the phrase          "return(s) made" as encompassing returns deemed to be made. This          construction strikes us as reasonable.                    Words must be read in context. Though a plain vanilla          reading of the Form would support an inference that the parties          wished to extend the limitation period for assessing taxes due on          actual returns filed for the applicable periods, the context casts          a different light on the phrase "return(s) made." When one takes          into account that the only "returns made" were information returns                                          5          on which no tax could conceivably be due, and that the signatories          to the Form knew as much, the ambiguity of the phrase becomes          apparent.                    Our thinking runs along the following lines. It would be          nonsensical to extend the limitation period for assessment of taxes          due on a return on which, by operation of law, no tax conceivably          could be due. The law, in turn, should be reluctant to insist that          courts construe a document in a way that leads to an absurd or          nonsensical result. Indeed, the maxim   ut res magis valeat  quam          pereat teaches that a written instrument ordinarily should be given          a meaning that will make it legally functional rather than a          meaning which will render it legally dysfunctional.  See 3 Arthur          Linton Corbin, Corbin on Contracts S 532 (1960); see also Blackie          v. Maine, 75 F.3d 716, 722 (1st Cir. 1996). Thus, the very          implausibility of the Association's proposed construction suggests          that the phrase "return[s] made" must have some other meaning.                    This conclusion is fortified by the wonted operation of          the relevant provisions of the Internal Revenue Code.          Specifically, a return relative to the unrelated business taxable          income of a normally tax-exempt organization (a so-called "990-T"          return) is deemed made, for purposes of starting the running of the          limitation period, when the information return (a so-called "990"          return) is in fact made.    See California                                                      Thoroughbred                                                                    Breeders          Ass'n v. Commissioner, 47 T.C. 335, 338 (1966) (construing IRC S          6501(g)(2)). Without this rule deeming the Association's 990          return to be a 990-T return, the statute of limitations that the                                          6          Association seeks to invoke would, presumably, not yet have begun          to run. The Association thus seeks to link the two forms for the          purposes of starting the limitations period, but would have us          decouple the forms in reviewing its agreement to extend that          period. Perhaps more important, reading the Form against the          backdrop of the  California                                       Thoroughbred                                                     Breeders rule suggests          another (broader) meaning for the phrase "return(s) made" _ a          meaning which extends to returns deemed made _ and thus highlights          the ambiguity of the Form.                    That ends the matter. The presence of an ambiguity          permits a reviewing court to examine extrinsic evidence in an          effort to clarify the intent of the parties.                                                       See                                                           Smart v.                                                                    Gillette          Co.               Long-Term                         Disability                                    Plan, 70 F.3d 173, 179 (1st Cir. 1995);          RCI               Northeast, 822 F.2d at 202. Here, the extrinsic evidence is          telling: the Association's reading of the Form contradicts what          even the Association admits was the parties' mutual intention _ to          extend the limitation period as to any unrelated business income          tax that might be due for the affected periods.                    We need not linger. We resolve contractual ambiguity in                                             The court below suggested that, if it were unable to construe          the language in the Form to give effect to the parties' discerned          intention, it could reach the same result by reforming the          instrument.  See Tax Ct. Op. at 589 n.4. In general, reformation          is available when a writing is clear on its face (i.e.,          unambiguous) but nonetheless misstates the parties' intent.  See,          e.g.,                United States                             v.                                 Lumbermens Mut. Cas. Co.                                                        , 917 F.2d 654, 658          (1st Cir. 1990);                           Rocanville Corp.                                           v.                                               Natural Gas Pipeline Co.                                                                      , 823          F.2d 92, 94 (5th Cir. 1987);   see also Restatement (Second) of          Contracts S 155 (1979). The doctrine can be applied in tax cases.          See, e.g., Woods v.  Commissioner, 92 T.C. 776, 782-83 (1989).          However, because we uphold the Tax Court's implicit finding that                                          7          favor of effectiveness, accept the discerned intent of the parties,          endorse the Tax Court's interpretation of the phrase "return[s]          made," and hold that the Form extended the limitation period as to          the assessment of unrelated business income tax. The notice of          deficiency was, therefore, timely as to all the contested tax          years.          III. THE MERITS                      The gravamen of the Commissioner's case is the charge          that the activity undertaken in connection with publication of                                                                         The          Constabulary generated unrelated business taxable income. The          allegation that an activity engaged in by a tax-exempt organization          gives rise to unrelated business taxable income requires proof of          three components. The Commissioner must demonstrate (1) that the          activity comprises a trade or business, (2) which is regularly          carried on, and (3) which is not substantially related to the          organization's tax-exempt purpose.  See United States v. American          Bar Endowment, 477 U.S. 105, 110 (1986); see also IRC S 513(a).                                         A.                    At the gateway to this issue, the parties dispute the          standard of review. The Association asserts that the Tax Court's          findings _ that publication of                                        The                                            Constabulary involved a business          regularly carried on  _ are subject to de novo review. The                                        the Form is ambiguous, we need not reach the reformation issue.               The Association does not mount a challenge on the third prong          of the tripartite test, instead conceding that if the activity          amounts to a regularly conducted trade or business, it is, as the          Tax Court found, not substantially related to the Association's                                          8          Commissioner maintains that these findings are entitled to greater          deference.                    Congress has directed the courts of appeals to use the          same standards in reviewing Tax Court decisions that traditionally          are used in appellate review of district court decisions in civil          actions tried without a jury. See IRC S 7482(a). Consequently, we          evaluate the Tax Court's findings of fact under the clearly          erroneous standard. See                                   Commissioner v.                                                   Duberstein, 363 U.S. 278,          291 (1960); Manzoli v. Commissioner, 904 F.2d 101, 103 (1st Cir.          1990); see  also Fed. R. Civ. P. 52(a). This mode of review          requires us to accept the Tax Court's credibility determinations          and its findings about historical facts unless, after careful          evaluation of the evidence, we are left with an abiding conviction          that those determinations and findings are simply wrong.      See          Reliance Steel Prods. Co.                                   v.                                       National Fire Ins. Co.                                                            , 880 F.2d 575,          576 (1st Cir. 1989). Notwithstanding the clearly erroneous rule,          however, the Tax Court's ultimate conclusions (e.g., whether the          facts, as found, are legally sufficient to demonstrate that the          Association engaged in a trade or business) are conclusions of law,          and are therefore subject to de novo review.                    On the merits, the Association advances two challenges:          it asserts that the activities in question did not constitute a          trade or business, and that in all events those activities were not          conducted with the requisite regularity. We address these          challenges sequentially.                                        tax-exempt purpose.  See Tax Ct. Op. at 591.                                          9                                         B.                    The operating paradigm permitted the Association to          exercise significant control over the sales effort, the handling of          the funds generated, and the publication of    The  Constabulary.          Under this paradigm, the Association contracted with an outside          firm (originally Brent-Wyatt East, and later R.H. McKnight Co.) to          publish the yearbook and recruit telemarketers. These          telemarketers were considered joint employees of the Association          and the outside firm.                               Groups of eight to twelve callers worked out          of field offices selected by the outside firm with the          Association's approval and solicited local and national businesses          within geographic areas demarcated by the Association. In so          doing, they utilized a canned solicitation format approved by the          Association, introducing themselves as calling on behalf of the          Association. Troopers monitored all solicitations to make certain          that the sales staff did not trespass into forbidden terrain. The          Association also retained the right to inspect, without prior          notice, the field offices from which solicitations took place.                    Prospective customers were offered the opportunity to          purchase display advertisements and listings. Displays ranged in          size from one-sixth of a page to a full page, and, at the          purchaser's option, could contain text, logos, slogans, borders,                                             We describe the relationship as it existed through mid-1990,          under contractual arrangements with Brent-Wyatt East. Although the          contract signed with McKnight on June 20, 1990, contained some          variations, the Tax Court supportably found that these changes were          largely cosmetic and did not alter the essential character of the          relationship.  See Tax Ct. Op. at 585.                                         10          and blocking. The fee charged for a display advertisement or a          directory listing varied in direct proportion to the size of the          display or listing and to the number of editions in which it          appeared.   The Constabulary was arranged so that displays were          interspersed with editorial matter, and the publication contained          a so-called "Index to Advertisers." Listings were arranged by type          of product or service in a separate business directory section.                    Payments for ads sold were made to the Association and          the Association deposited the receipts in its account. It made          weekly accountings _ retaining a stipulated percentage "off the          top" for itself, paying set percentages of the gross receipts to          the telemarketers and to the outside firm, defraying the costs          associated with solicitation and publication _ and kept any excess.                    The Association published  The  Constabulary annually.          Association members acted as the editorial staff, writing and          editing articles for the publication and approving the contents of          the finished product. The Association distributed the yearbook          free of charge at various state troopers' barracks, the          Association's annual picnic (the "Police Chase"), and other          occasions. Copies were sometimes sent to advertisers.                    Based on this scenario, the Commissioner's theory is that          the Association _ which from time to time called The Constabulary          an "ad book" and which, in its contract with Brent-Wyatt East,          referred to the latter's assignment as "marketing advertising" _                                             The Association produced five regional editions with common          editorial material.                                         11          engaged in the business of selling advertising. The Association          counters that it did not engage in that business; in its view, the          displays and listings were not advertising at all, but merely a          means of identifying sponsors. The Tax Court rejected this          contention, see Tax Ct. Op. at 590, and so do we.                    Even a cursory glance at the yearbook, the pricing          structure, and the terminology used by the Association belies the          belated claim that the ads and listings were not "advertising" as          that term is commonly understood. Nor is the Association's          attempted recharacterization made any more palatable by its          reliance on Proposed Treas. Reg. S 1.513-4, 58 Fed. Reg. 5690, 5690          (1993). The proposed regulation describes the permissible contents          of acknowledgements of sponsorship payments; it allows value-          neutral descriptions of a sponsor's products or services, and logos          or slogans "that are an established part of a sponsor's identity."          See id. S 1.513-4(c). We need not decide, however, whether the          materials in The Constabulary meet these exacting criteria; the          proposed regulation, by its terms, does not apply to periodicals          produced by tax-exempt organizations.  See id. S 1.513-4(a).                    Putting the proposed regulation to one side, the          Commissioner's appraisal of The Constabulary's contents comports          with common sense: the displays look like ads, the directory          listings function as guides to products and services, and the          Association itself, at least during the first four years of the          undertaking, consistently referred to the displays and listings as          ads rather than as acknowledgements. That appraisal also is                                         12          supported by well-reasoned precedent.                    Fraternal Order of Police, Etc.                                                   v.                                                       Commissioner, 87 T.C.          747 (1986), aff'd, 833 F.2d 717 (7th Cir. 1987) (FOP), which also          involved the solicitation and sale of insertions in a publication          sponsored by a tax-exempt policemen's organization, bears a strong          resemblance to the case at bar. The Tax Court found that the          activity in question amounted to an unrelated business. 87 T.C. at          757. The Seventh Circuit affirmed this finding. 833 F.2d at 721-          22. The similarities are striking. There, as here, the          publication included display ads (using logos, slogans, and          blocking), a directory section, and a message asking readers to          patronize the businesses listed therein.     See id. at 719-20.          There, as here, the size of an insertion was directly proportionate          to the price charged.    See id. at 721. There, as here, the          sponsoring organization, prior to the time the Commissioner came          calling, characterized the disputed activity as advertising.  See          id.                    Given these similarities, FOP is powerful authority for          the Commissioner's position that the activity here in question          comprises a separate, unrelated business. We consider         FOP          correctly decided, and we find unconvincing the Association's          attempts to distinguish it.  Consequently, we hold that the Tax                                             In striving to reach escape velocity from                                                          FOP's precedential          orbit, the Association relies heavily on its presentation of expert          testimony at trial. But this testimony was discounted by the Tax          Court because the expert was dismally uninformed. See Tax Ct. Op.          at 589-90. That determination was well within the trier's purview.          See              Seagate Tech., Inc.                                 v.                                     Commissioner, 102 T.C. 149, 186 (1994).                                         13          Court did not commit clear error in finding that the Association's          solicitation, sale, and publication of displays and listings in                                                                         The          Constabulary constituted the business of advertising.                    The Association's fallback position is its claim that the          Commissioner erred in treating the outside firms (Brent-Wyatt East          and McKnight, respectively) as agents of the Association (and,          thus, in attributing these firms' activities to the Association).          To bolster this claim, the Association stresses that the contract          documents required these firms to operate as independent          contractors. It follows, the Association says, that even if the          cited activities constituted the business of advertising, the          business belonged to the outside firms.                    We are not persuaded. In the first place, an independent          contractor can be an agent if, and to the extent that, the          contractor acts for the benefit of another and under its control in          a particular transaction. See Restatement (Second) of Agency SS 2,          14N (1957). In the second place, the label which contracting          parties place on their relationship is not decisive of their status          vis-a-vis third parties.  See Board                                               of                                                  Trade v. Hammond                                                                    Elevator          Co., 198 U.S. 424, 437 (1905). Either way, answering the question          that the Association raises requires that we examine the substance          of the contracting parties' relationship.                    In this analysis, no single factor is dispositive.  See          Labor                 Relations                           Div.                                of                                   Constr.                                            Indus. v. International                                                                    Bhd.                                                                          of          Teamsters, 29 F.3d 742, 748 (1st Cir. 1994). Rather, the nature of          the relationship between the Association and the outside firms                                         14          depends on a myriad of factors, including control over the manner          and means of performing the work, the skill required, the method of          payment, the duration of the relationship, and similar factors.          See,               e.g.,                     Saenger Org., Inc.                                       v.                                          Nationwide Ins. Licensing Assocs.,          Inc., ___ F.3d ___, ___ (1st Cir. 1997) [No. 96-2197, slip op. at          12];               Speen v.                        Crown Clothing Corp.                                           , 102 F.3d 625, 629-30 (1st Cir.          1996). The relevant factors here, taken as a whole, solidly          support the Tax Court's determination that the outside firms acted          as the Association's agents.                    First and foremost, the manner in which the Association          conducted its affairs undercuts its claim that it lacked the          requisite degree of suasion over the outside firms' activities.          The Association retained very tight control over the method and          manner of solicitation, the ingredients of the sales pitch, the          identity of the solicitors, the financial aspects of the          arrangement, the use of its name, the advertising formats, and the          contents of the yearbook. We refer the reader who hungers for a          blow-by-blow account to the details set out in the opinion below.          See Tax Ct. Op. at 584-85. Without belaboring the point, it is          enough to say that the record reveals an ample factual predicate          for the finding that an agency relationship existed between the          Association and the outside firms.                                         C.                    The Association's final contention is that, even if its          activities comprise a business attributable to it, that business          was not carried on regularly. To buttress this contention, the                                         15          Association makes two separate, but related, arguments.                    Its first asseveration rests on the decisions in                                                                    National          Collegiate Athletic Ass'n                                   v.                                       Commissioner, 914 F.2d 1417 (10th Cir.          1990) (NCAA), and Suffolk                                     County                                            Patrolmen's                                                        Benevolent                                                                   Ass'n v.          Commissioner, 77 T.C. 1314 (1981). These decisions are inapposite.          In each instance, the advertising activity was tied to the program          for a specific event.   See  NCAA, 914 F.2d at 1420 (collegiate          basketball tournament);                                  Suffolk County                                               , 77 T.C. at 1316 (vaudeville          show). Thus, resolution of those cases depended on Treas. Reg. S          1.513-1(c)(2)(ii), which specifically provides that "publication of          advertising in programs for sports events or music or drama          performances will not ordinarily be deemed to be the regular          carrying on of business." That regulation is of no assistance here          because the Tax Court found specially that the Association's          publication of                         The                             Constabulary was not linked to the occurrence of          a specific event, see Tax Ct. Op. at 593, and the Association has          not challenged that finding in this venue.                    We hasten to add, moreover, that the mode of analysis          used in NCAA and Suffolk County cannot be employed here. Because          those cases each involved a particular event, they looked to the          time frame of the event in determining the regularity with which          the business was carried on.    See  NCAA, 914 F.2d at 1422-23;          Suffolk County                       , 77 T.C. at 1322-24. In a case like this one, where                                             It is interesting to note that Proposed Treas. Reg. S 1.513-4          draws a clear distinction between periodicals and material          published in connection with a specific sponsored event. We find          the distinction significant.                                         16          the publication of an ad book is not pegged to a particular event,          a court must assay the activities which collectively comprise the          business, and look to the overall time frame in which they          occurred. For present purposes, that means the time frame in which          the Association solicited, sold, and published advertising.   See          Treas. Reg. S 1.513-1(b) (noting that the activities of soliciting,          selling, and publishing advertising collectively constitute a          business). Those activities persisted for approximately 46 weeks          a year.   See Tax Ct. Op. at 593. This is more than sufficient          regularity by any standard.                    The Association next argues that it did not regularly          engage in a business because it did not carry on the advertising          activity with the same entrepreneurial zeal that might typify a          commercial operator. But this is an ill-conceived comparison.          Although the purpose behind the unrelated business income tax is to          create a more level playing field between taxed and tax-exempt          enterprises, competitive similarities are not the only factors to          be taken into account.     See  FOP, 833 F.2d at 722-23. The          applicable regulation stipulates that the activity in question must          be judged "in light of the purpose" of the tax, but it does not          require that either actual competition or competitive equality be                                             To be sure, the Association argues that the time frame is much          shorter because, although solicitation and sales transpired 46          weeks a year, publication occurred within a very narrow temporal          window. This argument is disingenuous. Treas. Reg. S 1.513-1(b)          refers to the activities of soliciting, selling, and publishing          advertising as a singular business. That business must be          regularly carried on, but there is no requirement that each task          within the scope of the business must be carried on regularly.                                         17          shown. Treas. Reg. S 1.513-1(c)(1).                    In this instance, the Association carried on its          activities in a systematic and well-organized fashion, with a          clearly defined profit motive. Given the limitations of clear-          error review, we cannot disturb the lower court's finding that the          Association's activities were sufficiently regular to bring them          within the ambit of the regulation.  See Tax Ct. Op. at 593.          IV. CONCLUSION                    We need go no further. While the Association makes          several other arguments, none requires discussion; each of them is          either adequately treated in the Tax Court's opinion, or obviously          incorrect, or both. It suffices to say that the Commissioner's          determination of the tax due and owing rests on a sturdy factual          and legal foundation.          Affirmed.                                         18
