The opinion of the court was delivered by: RICHEY
This case is before the Court on Cross Motions for Summary Judgment. The Plaintiff seeks a refund of $13.16 in employment taxes paid in the first quarter of 1973 on the ground that the Plaintiff is a charitable and educational organization described in section 501(c) (3) of the Internal Revenue Code of 1954
which is exempt from income tax under section 501(a) of the Code. The Plaintiff also seeks to enjoin the Defendants from refusing to rule that the Plaintiff is exempt from federal income taxes under section 501(c) (3) of the Internal Revenue Code and qualified to receive deductible charitable contributions under section 170(c) (2) of the Code. For the reasons discussed below, the Court finds that the Plaintiff is entitled to a refund of employment taxes for the first quarter of 1973 on the grounds that its activities and purposes entitle it to section 501(c) (3) recognition and qualify it to receive deductible contributions under section 170(c) (2). The Court also finds that in light of the special and extraordinary circumstances of this case and the Supreme Court's standard in Enochs v. Williams Packing Co., 370 U.S. 1, 8 L. Ed. 2d 292, 82 S. Ct. 1125 (1962), the Plaintiff is entitled to the injunctive relief that it seeks.
The Plaintiff was incorporated under the laws of the District of Columbia as a non-profit corporation on February 19, 1970, under the name "Project on Corporate Responsibility, Inc." Its purpose was to engage in and conduct educational and charitable activities on a non-profit basis to improve and better the conditions of American life and institutions by promoting the development of increased responsibility and awareness on the part of corporate entities and decision-makers to use the corporate institution and power to better the social welfare, particularly in the areas of minority group problems and employment discrimination, pollution, and utilization and conservation of national resources -- economic, human, natural and otherwise.
On September 3, 1970, the Plaintiff filed an Application for Exemption under its former name, "Project on Corporate Responsibility, Inc." The Plaintiff sought an Internal Revenue Service ruling that it was exempt from federal income taxes as a charitable and educational non-profit corporation under § 501(c) (3) and thus entitled to receive deductible contributions under § 170(c) (2). During the process of considering the Plaintiff's application, the Defendants' representatives posed questions regarding the Plaintiff's activities, to which the Plaintiff responded by submitting supplemental information on April 16, 1971, June 2, 1971, August 18, 1971, August 18, 1972, September 27 and October 24, 1972.
The responses of August 18, 1972, and thereafter followed on June 9, 1972 conference with the Defendants' representatives who informally expressed the view that the Plaintiff would qualify as a tax exempt organization if the Plaintiff would cease to participate in its proxy contest activities. As the Plaintiff had a pressing need for an expeditious and favorable ruling by the Service, its attorneys informed the Defendants' representatives that the Plaintiff would comply with all of the Defendants' requested or suggested modifications in order to obtain one. In response to the view expressed at the conference, the Plaintiff altered its corporate name1a and charter, and undertook to conduct only those activities which the Defendants' representatives informally indicated would be in full compliance with exempt status under section 501(c) (3).
The Plaintiff's amended application stated its activities would continue to focus both on corporate involvement in various social problems and conditions, and on the social impact of various corporate policies, but that after August 18, 1972, these purposes would be realized entirely by sponsoring and performing research, conducting educational programs, issuing publications, conducting public interest litigation and other such related activities which the IRS employees indicated were clearly consistent with exempt status. All future proxy contest activities would be undertaken by the Plaintiff's sister organization, the Project on Corporate Responsibility, Inc.
On June 29, 1973, Plaintiff's counsel sent the Court a letter listing several indicia that White House influence may have been used to induce the IRS to enter the unfavorable ruling even though the Service had given all indication that it would enter a favorable ruling. Plaintiff's counsel pointed to: (1) The testimony of John W. Dean III before the Senate Select Committee on Presidential Campaign Activities, in which Mr. Dean submitted several memoranda dated in August and September, 1970 and in the fall of 1971 which indicated that attempts were made to use IRS administrative actions against tax exempt organizations, described as "left wing" or "activist," whose views the White House found offensive;
(2) the extreme delay, two years and eight months, in processing the application, and the fact that the ruling was finally rendered only after this suit was instituted, and the fact that the final ruling was totally contrary to the views expressed by the IRS representatives at the June 9, 1972 meeting; and (3) the fact that Mr. Roger V. Barth, Deputy Counsel of the Internal Revenue Service, a political appointee and addressee of one of the memorandum described in (1) supra, was in charge of processing the ruling request in its concluding stages, despite the fact that he had no ordinary responsibility for the ruling processes, no special background in tax exempt organizations law, and had performed a number of functions for the White House at the Internal Revenue Service.
In response to this letter the Court held a hearing and entered an order on July 6, 1973 allowing the Plaintiff to conduct discovery on the question of political intrusion or influence in the processing of the Plaintiff's application. The Order allowed for depositions, interrogatories or the production of (1) IRS documents and files which pertained in any way to the Plaintiff's application for an exempt ruling, which were not privileged; and (2) all documents, memoranda, and other writings in the White House's possession on June 29, 1973, relating to the Plaintiff or which mentioned the Plaintiff and which were not privileged. The Defendants were further ordered to give the Plaintiff prompt access to all materials within the scope of the July 6 Order.
Pursuant to this Order, the Plaintiff was allowed to inspect the IRS files relative to the Plaintiff's application for exemption and copy those documents which showed some form of impropriety, if the Defendants agreed the documents showed some impropriety.
While inspecting the file, the Plaintiff discovered seven pages of hand-written notes by Mr. Richard Cox
with the notation " perhaps White House pressure."
The files also disclosed certain unusual procedures in the final processing of the application.6a Since the Internal Revenue Service's principal concern with the Plaintiff's application was a novel question -- whether the Plaintiff's proxy contest activities in pursuance of a charitable purpose disqualified it from exempt status, the IRS referred the Plaintiff's application through channels to the Interpretative Division of the Chief Counsel's Office. Thereafter, IRS notified the Plaintiff that it was considering an unfavorable ruling because of the Plaintiff's proxy contest activities. The Chief Counsel scheduled the conference of June 9, 1972 referred to supra to discuss the proposed ruling. At the conference, the Plaintiff's representatives indicated they would eliminate the Plaintiff's participation in the proxy contests and would limit its activities to those which the IRS representatives indicated were compatible with exempt status -- educational activities, research, and public interest litigation in the area of corporate social responsibility, within the meaning of the public interest law firm guidelines set forth inRevenue Procedure 71-39, 1971-2 C.B. 575. Following submission of additional information which indicated compliance with the IRS representatives' requested modifications, a favorable ruling letter was drafted in the fall of 1972 by the Rulings Section of the Exempt Organizations Branch and referred to the conference and Review Staff of the Exempt Organizations Branch. At this point in time, all disqualifying aspects of the Plaintiff's former operations had been eliminated and the "novel" question the case presented was moot, and the Plaintiff was in compliance with IRS standards for exempt status.
Having learned that a favorable ruling was contemplated for the Plaintiff, on January 16, 1973, Mr. Lee H. Henkel, Chief Counsel of the Internal Revenue Service, requested to see the file before such a ruling was issued. Pursuant to this direction the Exempt Organization Branch forwarded the Plaintiff's file again to the Interpretative Division of the Chief Counsel's Office. Upon completion of the review there, the file was forwarded to the Deputy Chief Counsel and Mr. Henkel on February 20, 1973, with a memorandum stating unanimous approval of the proposed favorable ruling. The memorandum also stated that the Plaintiff was willing to make any further changes to be in compliance with exempt status requirements.
Between the date of this memorandum and the date of this suit the file contains no indication of any differing opinion within the IRS concerning the application nor of a reconciliation conference, which would have been the normal procedure where there is a ruling entered which is contrary to the one recommended. Also during this time, the Plaintiff's attorney, although he contacted the IRS frequently on the application's status, was never informed of the need to make any changes in the Center to resolve any legal problems the IRS may have encountered. Following the institution of this suit, a General Counsel's Memorandum, stating an adverse position regarding the application was prepared by the Chief Counsel's Office. An adverse ruling letter was issued to the Plaintiff on May 16, 1973.
It appears that during the period of inactivity (February 20 -- May 2, 1973), the file was referred to Mr. Roger V. Barth, then Deputy Chief Counsel and a political appointee. About April 25, 1973, Mr. Barth referred the file to a Mrs. June Norris, then employed in the Office of the Director of the Miscellaneous and Special Provisions Tax Division, under the Assistant Commissioner (Technical). Although she had neither direct or indirect responsibility to the Chief Counsel, nor any prior involvement regarding the application, it was Mrs. Norris, who working on her own time, at home, prepared by May 1, 1973, the draft of an adverse ruling approximately 80 pages in length. The draft appears to have been the basis in part for the adverse ruling ultimately issued by the IRS.
On July 31, 1973, the Plaintiff ceased all operations. Its operations had been on a curtailed basis prior to this.
B. Discovery on the Issue of White House Interference in Internal Revenue Service's and Treasury Department's Considerations of Tax Exempt Organizations.
The question of political influence or political considerations intruding into the Internal Revenue Services' consideration of the Plaintiff's exemption application has loomed large in this case. The Plaintiff submitted eight interrogatories regarding this issue on May 16, 1973. The Defendants had not responded by July 6, 1973. On that date, the Court issued its general discovery order, ordering that the Plaintiffs be allowed prompt access to all documents and files of the Internal Revenue Service "in any way appertaining to" the Plaintiff's application for exemption and all documents, memoranda and other writings in the possession of the White House relating to the Plaintiff. The Court's Order was prompted by specific indicia of White House interference in the IRS' decisions, which were brought to the Court's attention in the Plaintiff's letter of June 29, 1973, supra at 867.
At a hearing on July 18, 1973, on the Motion to Compel Answers to the Plaintiff's Interrogatories,
the Court specifically indicated the breadth of the search it wanted the Defendants to undertake regarding this issue.
Subsequent to the Court's Order the Defendants conducted two separate searches of the "White House Files." The first by Bruce A. Kehrli, who stated in an affidavit that his search had failed to reveal any materials in the files and records of the White House relating to or mentioning the Plaintiff. The Plaintiff's deposition of Mr. Kehrli, taken July 17, 1973, indicated that his search was limited not only regarding the particular files he investigated but also in the scope of the subject matter of his search.