Appeal by the Commissioner of Internal Revenue from a deficiency judgment of the United States Tax Court against taxpayer of $3,394 rather than $12,653 as sought by the commissioner. Judge Mansfield dissents in a separate opinion.
Mansfield, Pierce, and Pratt, Circuit Judges. Mansfield, Circuit Judge (dissenting).
The issue before us is not only one of first impression; it is also of considerable financial significance to many of our colleges and universities. When a tax-exempt organization uses one of its facilities, as in this case a fieldhouse, for both tax-exempt purposes and for the production of unrelated business income, what portion of its indirect expenses such as depreciation may it deduct from its unrelated business income pursuant to I.R.C. § 512 (1982)? May it allocate those expenses, as prescribed by Treas. Reg. § 1.512(a)-1(c), on any "reasonable" basis? Or must it first establish, as the commissioner here argues, that the expense would not have been incurred in the absence of the business activity? Finding no conflict between the regulation and the statute and finding no error in the determination of the tax court that RPI's method of allocation was reasonable, we reject the commissioner's position and affirm the tax court's judgment, which approved apportioning the fieldhouse's idle time in proportion to the hours devoted to exempt and not exempt uses.
The facts are undisputed. Rensselaer Polytechnic Institute (RPI) is a non-profit educational organization entitled to tax-exempt status under I.R.C. § 501(c)(3). It owns and operates a fieldhouse which it devotes to two broad categories of uses: (1) student uses, which include physical education, college ice hockey, student ice skating, and other activities related to RPI's tax-exempt educational responsibilities; and (2) commercial uses, which include activities and events such as commercial ice shows and public ice skating, that do not fall within its tax-exempt function. For fiscal year 1974, the net income from commercial use of the fieldhouse constituted "unrelated business taxable income" which was subject to taxation under I.R.C. § 511(a)(1).
The dispute is over the amount of unrelated business tax due from RPI for 1974 and, since there is no disagreement over the gross income, $476,613, we must focus on the deductible expenses. The parties have classified RPI's applicable deductible expenses in three groups. The first group, "direct expenses", are those that can be specifically identified with particular commercial uses. For the year in question direct expenses amounted to $371,407, and the parties have always agreed to their deductibility.
The second group, "variable expenses", are those which vary in proportion to actual use of the fieldhouse, but which cannot be identified with particular events. They were originally in dispute before the tax court, but neither side has appealed that part of the decision below which (a) found the total variable expenses to be $197,210; and (b) allocated them on the basis of actual use, as claimed by RPI, rather than total availability, as claimed by the commissioner.
This appeal involves the third group, "fixed expenses", which do not vary in proportion to actual use of the facility. The amounts of fixed expenses incurred with respect to the fieldhouse were stipulated to be:
Salaries and fringe benefits $59,415
Repairs and Replacements 14,031
Operating Expenditures 1,356
Narrowly stated, the issue is how these fixed expenses should be allocated between RPI's dual uses: the exempt student use and the taxable commercial use. RPI contends it is entitled to allocate the fixed expenses on the basis of relative times of actual use. Thus, in computing that portion of its deductible expenses, RPI multiplies the total amount of fixed expenses by a fraction, whose numerator is the total number of hours the fieldhouse was used for commercial events, and whose ...