that such deductions "would but encourage continued violations."
The critical significance of support from tax deductions is in effect recognized by the Commissioner, and in the general context of school segregation, in his denial of deductions to contributions to segregated schools that have significant state involvement. What stops him from extending disallowance to the schools like those involved in the case at bar is not unawareness of the significance of deductions, but rather certain legal conclusions, including conclusions as to the scope of his authority under the Code.
Our findings do not depend, however, only on general tendencies. We find pertinence in, and adopt, the findings of the court in Coffey, available on the evidence incorporated into the papers now before us, concerning the private segregated schools that have flourished in the wake of desegregation rulings, that - "The formation and operation of the new schools have been on the thinnest financial basis." 296 F. Supp. at 1392.
The papers before us include depositions of officials of Cruger-Tchula Academy and Central Holmes Academy, who testified that while their schools were established in the thought of meeting operating expenses by tuitions, the plans made for capital financing for building the structures involved, were based on contributions.
Even at a time when Mississippi state grants for tuition were available the officials of the private segregated schools considered it important to obtain the support involved in the obtaining of certification of tax exemption. This was in part based on what the officials termed the psychological help to the school, from the public reaction to what was considered an approval by the Federal Government. In present context we focus on the view of the school officials that the granting of the Federal tax exemption would be a "significant factor" that would "aid the school in obtaining finances."
The charitable deduction is not only significant in providing the capital for the establishment of the segregated schools but in extending the breadth of the segregation that the schools could effectuate. This is borne out by the letter of the Directors of the Central Holmes Academy, dated April 18, 1969, soliciting contributions to the scholarship fund. This letter, introduced at deposition,
explains that State tuition grants are no longer available and "* * * unless we receive substantial contributions to our Scholarship Fund there will be many, many students, whose minds and bodies are just as pure as those of any of their classmates and playmates * * *, who for financial reasons alone, will be forced into one of the intolerable and repugnant 'other schools', * * * or into dropping out of school entirely * * *" The letter emphasizes to the reader that "donations to the school are deductible from your gross income for tax purposes."
The importance of tax-exemption rulings issued by defendant officials and the recourse to segregated private schools as a dual segregated school system is borne out by the records of the Internal Revenue Service
with respect to rulings issued since 1954 to private schools in Mississippi. No applications were filed until 1963 when one application was filed in July, within months after the first school desegregation suit was filed in Mississippi (in March 1963). In the summer of 1964 the Evers desegregation ruling took effect.
In 1964, six applications were filed, all between August 28, 1964, and December 14, 1964; all were approved in 1964. Subsequent approvals were: In 1965, six. In 1966, none due to the freeze. In 1967, nine approvals issued August 2, 1967, and three thereafter. In 1968 six. Between January 1 and June 30, 1969, there were five. These data confirm the significance of the aid of tax exemptions, deductions and pertinent rulings, to the private segregated schools of Mississippi.
Significance of Federal Government Support
We have taken into account that what is involved in the case before us is the Federal Government, and not the States, and that there is no allegation or evidence that it is the purpose of the Federal statute or regulations to foster segregated schools. These considerations do not undercut the plaintiffs' claims.
The due process clause of the Fifth Amendment does not permit the Federal Government to act in aid of private racial discrimination in a way which would be prohibited to the States by the Fourteenth Amendment. Bolling v. Sharpe, 347 U.S. 497, 74 S. Ct. 693, 98 L. Ed. 884 (1954).
The issue of purpose may be decisive in demonstrating unconstitutionality when a governmental purpose to foster segregation is affirmatively shown, but the lack of segregative purpose on the part of the Government does not avoid the constitutional issue if the Government action materially supports a program of school segregation.
There is substantial support for the conclusions that the validity of tax exemption and deductibility of contributions are to be determined on the basis of (1) their practical tendency to increase the incidence of private discrimination, and (2) whether the discrimination so augmented frustrates the exercise of fundamental liberties. As already noted in Coffey v. State Educational Finance Commission, supra, the court focused on the "impact" of the tuition grant statute and concluded that "the statute * * * encourages, facilitates, and supports the establishment of a system of private schools operated on a racially segregated basis as an alternative available to white students seeking to avoid desegregated public schools." Id. 296 F. Supp. at 1392.
The Coffey opinion relies on Burton v. Wilmington Parking Authority, 365 U.S. 715, 81 S. Ct. 856, 6 L. Ed. 2d 45 (1961) which held that state action was established in the leasing of restaurant space in a parking facility run by a state agency. In that case the Court pointed out that the lack of discriminatory motive, and the "good faith" of the State did not negative unconstitutionality where it had elected to make a lease to a private company engaging in discrimination and had thereby "elected to place its power, property and prestige behind the admitted discrimination." (365 U.S. at 725, 81 S. Ct. at 862).
In Simkins v. Moses H. Cone Memorial Hosp., 323 F.2d 959 (4th Cir. 1963), cert. denied, 376 U.S. 938, 84 S. Ct. 793, 11 L. Ed. 2d 659 (1964), the Court, noting the generally benevolent purpose of the Hill-Burton Act (for better health facilities), nevertheless found a denial of constitutional rights when Federal funds were used to support a private hospital that discriminated against Negro patients. The Cone case involved an outright grant of Federal funds. It provides substantial support for a similar ruling in a case of a "matching grant," which is in effect the impact of a Federal tax credit or deduction.
The Internal Revenue Service has not remained aloof from the possibility that tax benefits must be denied to schools that propose an operation violative of constitutional rights. Its answers to plaintiffs' interrogatories reveal that following the policy announcement in the August 2, 1967 press release, the Service has centralized all applications for rulings by schools that are "apparently found to be operated on a segregated basis." The Service requires "information with regard to the relationships of individual schools with state and local units of the Government."
Specifically the institution is required to state whether it has sought or intends to seek funds from Federal, State, county or local governments, or any "support in the nature of facilities, the use of facilities, or in any other form from any State or local government." An audit procedure, with provision for field examination, has been established for use in regard to private schools as to which exemption rulings have been issued.
The approach of the Service underlying its ruling recognizing exemption may be illustrated by the typed paragraph added to the form letter addressed August 2, 1967, to the Cruger-Tchula Academy Foundation:
The conclusions in this ruling are based on the Service's understanding that the operations of your school do not involve State Action constituting a violation of the Constitution or laws of the United States. Further, in the event of legislative developments, or judicial interpretations - constitutional or otherwise - respecting the legality or educational qualification of your purpose or manner of operation which affect your eligibility under section 501(c) (3) of the Code, this ruling shall cease to be of effect.