Judicial Indignation, Feeders and Unrelated Income in the Irish Tax System
A Vision Ireland Charity Shop in Mullingar, County of Westmeath, Ireland
I told you some time ago that the U.S. is an outlier when it comes to the taxation of feeders and unrelated business income. A feeder is an ordinary business wholly owned by a charity. An unrelated business is just an in-house feeder conducted by an organization with a substantial charitable purpose. A feeder’s sole purpose is to raise funds for a charitable activity carried on by its parent. In either case, U.S. law taxes the profits even though they are used for a charitable purpose. Prior to 1954, feeders and unrelated businesses were tax exempt. NYU inherited all the stock of Mueller Macaroni and successfully defended tax exemption on the profits under the so-called “destination of income” test. Congress thought tax exemption for feeders generated unfair competition. So it enacted IRC 502 and 511. The provisions make the U.S. an outlier relative to England and her former colonies, including New Zealand, Ireland, and Australia. None of those countries tax unrelated business or “charity shops,” which are fairly normal retail shops owned by charities. Naturally, charity shops are ubiquitous in those countries. They sell mostly donated second hand stuff. The taxing authorities in those countries are apparently unconcerned about unfair competition and there is no great outcry by for-profit sellers.
In Ireland last month, the destination of income test was even applied to property taxation in what is being hailed as a landmark decision. Indeed, the decision is probably the first anywhere in England or her former colonies applying the destination of income test to property taxation. The Valuation Tribunal, Ireland’s property tax court accepted that feeders are exempt from the income tax by virtue of the destination of income test, but rejected the assertion that feeder organizations should be immune from property taxation for the same reason. The Valuation Tribunal relied on clear UK authority denying property (but not income) taxation under the destination of income test. The Irish High Court, a first level appellate tribunal, nevertheless reversed.
Here is a brief summary: The National Counsel for the Blind, Ireland (NCBI) is a tax exempt charity that owns more than 120 charity shops in Ireland. Until the High Court Ruling, those shops annually paid about $2.1 million Irish ($2.8 million U.S.) in “commercial rate” – the Euro phrase for property taxes. NCBI – now known as Vision Ireland — asserted that its charity shops should be exempt from property tax for the same reason they are exempt from income tax — that the income derived from the property is entirely dedicated to charitable use. The Valuation Tribunal rejected the assertion stating that it was insufficient for property tax exemption that all profits went to the charitable parent. It reasoned that charity shops engaged in normal commercial activities and that property tax exemption would foster unfair competition. In reversing, the High Court rejected clear UK authority to that affect and upon which the Valuation Tribunal relied. Here are a few excerpts from the High Court decision:
31. The essence of the Appellant’s case is that the proper test requires a focus on the purpose or objective of the Appellant in using the property as it does rather than the Appellant’s actual use of the property. The Appellant maintains that while the use of the shop is undoubtedly for retail, the purpose of this use is charitable because it is used to generate funds to provide services and supports to the blind and vision impaired, and in consequence the Appellant is not subject to a requirement to pay rates.
. . .
94. I have concluded that the Tribunal applied an incorrect test in assessing whether the relevant property is or is not rateable and has failed to follow relevant authority of the Irish Superior Courts in this regard. In particular, the Tribunal has wrongly focused on what the relevant property is being used “as” (retail), rather than asking itself “why” the Appellant is engaging in that use or its purpose in so doing (to fund charitable activities). The approach of the Tribunal in this regard is contrary to a line of Irish authority culminating in the decision of the High Court in St Vincent’s Healthcare.
It’s true that England exempts feeders from income but not property tax. The High Court admitted as much — citing Oxfam v Birmingham City District Council — but then rather indignantly chastised the Valuation Tribunal for “preferring” English Law over what it considered the High Court’s own binding Irish precedent. “How dare you, Sir!” said the Court:
45. In the absence of circumstances where a judgment may be lawfully departed from in accordance with doctrines of precedent and stare decisis, the High Court judgment states the law in this State and is binding on the Tribunal. The Tribunal cannot lawfully prefer a contrary decision of the UK House of Lords, even dealing with similar legislative provisions, where it does not represent a statement of the law in this jurisdiction. Where the Tribunal elects to follow its own decisions in reliance on UK authority even though this runs counter to the jurisprudence of the Irish courts, then the Tribunal errs in law.
46. Insofar as the Respondent intended to suggest . . . that I should not lightly depart from the decision of the House of Lords in the Oxfam Case and should provide good reasons for any decision to do so, I wish to record that unlike the position when I am asked to depart from a decision of a fellow High Court judge, there is no duty on me to follow a decision of an English court interpreting and applying English law (even where the provisions may be in similar terms) nor to explain a refusal to do so, particularly where in so doing I am relying on relevant and binding Irish authority. The Oxfam Case does not enjoy precedential value in this jurisdiction. While reference to case-law from other jurisdictions may have persuasive value and may even be very helpful in the development of our domestic jurisprudence by enriching legal argument and improving judicial reasoning, they enjoy no special authority. Quite simply the Oxfam Case does not, nor does it purport to, pronounce on Irish law
darryll k. jones