mention the fact that since they were not raised in the Ruling Letter, they could not have been the basis for the exemption denial. Litigation in the public interest is a recognized charitable activity. Rev. Proc. 71-39, 1971-2 Cum. Bull. 575. Those public interest law firms which meet the requirements of Section 3 ofRevenue Procedure 71-39 are entitled to an Advance Exemption Letter. The Plaintiff met every guideline and is, and was, entitled to an advance ruling letter.
The three requirements which the Defendants now say the Plaintiff's public interest litigation program failed to meet,
appear to have been created for this case. Nowhere doesRevenue Procedure 71-39 require: "objectivity" in suit selection, a separate "independent" board to govern policies and programs, or that the subject matter of the suit involve charitable activities. What theRevenue Procedure 71-39 does say is that the area of representation may be in some specific area of public concern or "more broadly upon any subject of public interest as determined by the applicant." Sec. 2.01 (emphasis added). This language does not say that only those suits whose subject matter involves charitable activities will be recognized as public interest litigation, nor can it be read to require "objectivity" of an undefined nature. There has been no allegation that the suits, undertaken since the Plaintiff's reorganization, have not been in the public interest or have not met the spirit and letter ofRevenue Procedure 71-39. Furthermore, under Sec. 3.05 of the Revenue Procedure, the only requirements of the board which is responsible for the policies and programs of the organization is that it be representative of the public interest, and that it not be controlled by employees or persons who litigate on behalf of the organization or by any organization that is not itself a § 501(c) (3) organization. The Plaintiff's sixteen member Board of Directors meets these criteria. See, Memorandum: Here We Stand, supra, at 16-17. There has been no allegation that it is not representative of the public interest. And without affirmative proof to the contrary, it is impossible to infer that four Board members who are also employees "control" the Board.
The Plaintiff's litigation program so obviously meets the guidelines ofRevenue Procedure 71-39, it appears that the Defendants were grasping at straws when they raised points two and three. As it has been said before, the Plaintiff's relationship with its sister organization, who can carry on proxy contests: their interlocking directorate, sharing of personnel and office space, is what the Defendants relied upon to make their initial denial. Evidently the Service envisions the Plaintiff and the Project as one entity since they have the same purposes and goals, and participate in several of the same type of activities (education and research)
to achieve those goals.
The Defendants admit, however, the fact that a charitable organization is affiliated with a non-charitable organization is not necessarily fatal to charitable qualification. Ruling Letter at 28. The Service permits interlocking directorates and overlapping personnel, between a charitable organization and its non-charitable affiliate. See, Rev. Rul. 54-243, 1954-1 Cum. Bull. 92; Rev. Rul. 58-293, 1958-1 Cum. Bull. 146; Rev. Rul. 63-252, 1963-2 Cum. Bull. 101; Rev. Rul. 66-79, 1966-1 Cum. Bull. 48.
The Plaintiff and the Project are two separate organizations: separately registered, separate bank accounts and holding themselves out as separate entities.
If interlocking directorates and overlapping personnel do not destroy the separateness of a charitable organization and its non-charitable affiliate, then the fact that the Plaintiff may represent the Project in the litigation aspect of its activities does not make the two entities one. It has long been recognized that a solid demarcation line is drawn between an attorney and his client in the attorney-client relationship.
There remains one final point which the Defendants use to justify the Plaintiff's exemption denial. Like all of the other grounds which have been advanced, this one is also without a legal basis even assuming the Defendants' allegations are true.
The Defendants maintain that the Plaintiff has financially supported the Project and its activities. They have two alternative arguments as to why this justifies disqualification for exemption: Such support allows the Plaintiff's tax-free revenues to enrich a non-charitable organization, or in the alternative, such support contributes to proxy contests, which are non-charitable activities, and thus the Plaintiff is not operated exclusively for charitable purposes.
As evidence of their allegation, the Defendants have attached exhibits collected in a six-week audit of the Plaintiff and the Project covering the period from August 14, 1972 to July 31, 1973. Assuming the Defendants' factual allegations are true, $89.16 is the amount that the Plaintiff has contributed to the Project's benefit in the first quarter of 1973.
The Defendants' Revenue Rulings as well as case law clearly permit charitable organizations to contribute their proceeds both to individuals, Rev. Rul. 56-304, 1956-2 C.B. 306;
Rev. Rul. 72-559, 1972-2 C.B. 247; and to non-charitable activities in the furtherance of its charitable purposes; Rev. Rul. 73-313, 1973-30 I.R.B. 15; Rev. Rul. 71-29, 1971-1 C.B. 150; Rev. Rul. 62-78, 1962-1 C.B. 86; Edward Orton, Jr., Ceramic Foundation, 56 T.C. 147 (1971). Not only is the amount that the Plaintiff contributed to the Project so miniscule, particularly in comparison to overall expenditures of $80,000 plus, but any contribution to the Project's activities would be in furtherance of the Plaintiff's purposes as both seek the same goal -- increased corporate social responsibility. There has been no allegation that the Project has done anything other than pursue its purposes in good faith. The complaint is with the means the Project uses to achieve those goals. The means that the Project has used to attain these goals differ from those of the Plaintiff in one principal respect -- the use of proxy contests.
Even if the Defendants remain steadfast in their determination that proxy contests are not charitable activities (see footnote 21, supra), in light of the holdings and clear language of Revenue Rulings 73-313, 72-559, and 71-29, supra, and Orton, supra, this is irrelevant to the exemption question. The means employed by the charitable organization to achieve its purposes do not make the end results uncharitable. So it is in this case. Proxy contests are the instruments, both legal and not against public policy, which can be used to achieve the Plaintiff's purposes.
Assuming, however, for the sake of argument, that proxy contests cannot be considered charitable activities. The Plaintiff's contribution to an organization conducting activities not in the furtherance of the Plaintiff's exempted purposes has been so insubstantial
that this is a totally insufficient argument to legitimize an exemption denial. Treas. Reg. § 1.501(c) (3)-1(c) (iv). See, Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279, 90 L. Ed. 67, 66 S. Ct. 112 (1945); Monterey Public Parking Corp. v. United States, 321 F. Supp. 972, 975 (N.C. Cal., 1970) aff'd, 481 F.2d 175 (9th Cir. 1973); St. Louis Union Trust Co. v. United States, 374 F.2d 427 (8th Cir. 1967); Dulles v. Johnson, 273 F.2d 362 (2nd Cir. 1959); Seasongood v. Comm'r, 227 F.2d 907 (6th Cir. 1955).
Taking all of the Defendants' allegations at their face value and examining them in light of Treasury Regulations and Rulings as well as the case law, it is self-evident that the Defendants' exemption denial is without basis in the law. The Plaintiff has met the requirements necessary for exemption status and is entitled to a refund of the employment taxes it paid in the first quarter of 1973. Furthermore, since the Plaintiff's purposes and activities were the same throughout the period of the audit, as it was the first quarter of 1973, the ruling letter's denial of exemption had no more legal basis than the denial of the refund.
IV. The Court Has the Power to Grant the Plaintiff Injunctive Relief Under the Standard of Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 8 L. Ed. 2d 292, 82 S. Ct. 1125 (1962).
As further relief, the Plaintiff seeks to enjoin the Defendants from failing to classify the Plaintiff as a tax-exempt organization entitled to receive tax deductible charitable contributions under § 170(c), on the grounds that the Plaintiff needs this assurance to receive sufficient contributions to survive. Should their relief be limited to a refund of employment taxes, the Plaintiff maintains it is without adequate remedy at law, as there is no guarantee that the Defendants will consider the Plaintiff eligible to receive deductible contributions for those years subsequent to the ones involved in this litigation (First quarter 1973).
The Court finds that under the standards of Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 8 L. Ed. 2d 292, 82 S. Ct. 1125 (1962), the Court has jurisdiction to enter an injunction to prevent the Defendants from denying the Plaintiff its tax exempt status for as long as its operations do not conflict with its amended exemption application. The Court's finding does not preclude the Defendants from examining the Plaintiff's future operations and revoking this exemption on the proper grounds.
The anti-injunction statute, 26 U.S.C. § 7421(a)
does not bar equitable relief where the case comes within the ambit of the Williams Packing exception, supra. The central purpose of the statute is to prevent judicial interference in the collection of lawful revenues. 370 U.S. at 7-8. Therefore, if the assessment has any legal foundation, litigation prior to the collection would interfere in the prompt legal collection which the statute seeks to prevent. The twofold criteria of Williams Packing provides for an exception which does not collide with the statute's central purpose. For the taxpayer to maintain a suit under Williams Packing (she) must show not only irreparable harm but (she) must also demonstrate that under no circumstances could the Government ultimately prevail.
In this suit, the Plaintiff has fully demonstrated the illegality of the collection, irreparable injury and extraordinary circumstances. To deny the Plaintiff an equitable remedy in this case leaves it at the mercy of an all-powerful government without an adequate remedy at law. Granting injunctive relief in this case in no way burdens the government, and provides the Plaintiff with its only remedy at law.
It in no way burdens the government with litigation as the government would have been involved in litigation in this case in any event. The case was properly before the Court as a suit for refund of the payment of social security taxes. Determining the question of whether the Plaintiff was eligible for a refund involved the basic issue: whether the Plaintiff is a tax-exempt organization. Once the question is decided here, and the Plaintiff's operations continue as represented in the amended application, then the question is res judicata in all other suits regarding the issue of exemption for this Plaintiff conducting these activities. Thus there can be no additional litigation burden placed upon the Defendant.
Nor does the injunctive relief interfere with the prompt collection of legal revenues. Since the Plaintiff is entitled to exempt status under the law,
and as long as the Plaintiff continues to maintain its operations in accord with its representations in its amended exemption application, the government is not legally entitled to collect revenues from it. If there is no legal entitlement to revenues, then a suit to prevent collection of those revenues cannot be a suit interfering with the collection of legal revenues, as forbidden by the statute.
Finally, since there is no possibility that the government will ultimately prevail on the exemption question as long as the Plaintiff's operations continue as outlined in the amended application, injunctive relief is essential to prevent irreparable harm to the Plaintiff. If the Plaintiff must be limited to a suit for refunds it will be irreparably harmed. It will have to re-establish its eligibility to receive deductible contributions each taxing period. It will be forced to incur heavy burdens in both time and money in repeated litigation. But more importantly, the Plaintiff will suffer the ultimate irreparable harm of probable extinction. Without the requested injunctive relief the Plaintiff will have no guarantee of receiving deductible contributions under § 170(c). These constitute the Plaintiff's life-blood. Without them, the Plaintiff more likely than not will suffer the same fate it did on July 31, 1973. No suit for a refund can recoup this loss, or repair this harm.
The extraordinary circumstances of this case provide an additional basis for the understated need for injunctive relief. Overlooking for the moment the admitted fact under Rule 37(b) (2) (A) that the Plaintiff was denied a favorable ruling because it was singled out for selective treatment for political ideological and other improper reasons which have no basis in the statute and regulations (See Section III, supra) other factors indicate that the Defendants did not have "clean hands" in their dealings with the Plaintiff. The application underwent an extremely protracted processing period, despite the Defendants' knowledge of the Plaintiff's pressing need to obtain a ruling as quickly as possible to be able to continue its operations. The Plaintiff had indicated repeatedly its willingness to modify its operations to conform to the Defendants' requests and requirements. In fact, the Plaintiff had made all the changes that the Defendants' representatives specified were necessary to receive exempt status. After the application was amended, the Plaintiff again and again requested that the Defendants' representatives contact it if further modifications were necessary, or if the Plaintiff's application presented any legal problems to the Defendants. The Plaintiff was never informed of any problem with its application.
Furthermore, the decision of the usual review panels was to issue a favorable ruling. That was the decision, until the personal intervention of the Chief Counsel and his Deputy, both political appointees. The Plaintiff's file was referred to another IRS employee who was not within the exempt corporations branch, had not been previously involved in the case, and was not under the direct supervision of the Chief Counsel. This employee made the first draft of a negative ruling in the case. Working at home after work, she prepared an eighty-plus page ruling letter in less than a week's time. This draft was used as the basis of the final IRS ruling issued on May 16, 1973. This was not the ordinary or usual treatment of tax exemption applications.
In this suit, the Plaintiff has fully demonstrated that it fits the exception to 26 U.S.C. § 7421(a) as specified in Williams Packing. Therefore, the Court is empowered to render equitable relief. The Court finds that the facts and circumstances of this case require that the Court enjoin the Defendants from denying the Plaintiff's recognition as a § 501(c) (3) tax-exempt organization entitled to receive tax-deductible contributions under § 170(c), so long as it maintains its operations according to its representations in its amended application.
The Court shall enter this day an Order in accord with this Opinion.
Center on Corporate Responsibility, Inc., Plaintiff v. George P. Shultz, Donald C. Alexander and the United States of America, Defendants.
U.S. Court of Appeals, Dist. Col. Circuit.
Memorandum to the United States Court of Appeals for the District of Columbia Circuit Regarding the Denial of Executive Privilege Invoked in the Instant Case
Upon review of the four documents submitted by Mr. J. Fred Buzhardt for in camera inspection with the claim of executive privilege1b this Court finds that the claim is not proper and that the documents are properly discoverable. The Court submits this statement of reasons for its findings to the United States Court of Appeals for the District of Columbia Circuit in accordance with the instructions of that Court in Nixon v. Sirica, 487 F.2d 700 (1973).2a
The documents in question consist of memoranda between White House staff members relating to the recommendations and attempts to use the Internal Revenue Service in a selective and discriminatory fashion against those tax-exempt organizations which express opposition to the policies and programs of the Administration.
In determining whether the claim of executive privilege is applicable in this case, the Court has weighed the need and relevance of the documents against the disruption to the decision-making processes within the President's office by the disclosure of confidential documents. The suit involves the alleged misconduct or perversion of power by government officials. The documents provide evidence of such allegations and are therefore relevant to the adjudication of this suit. Wood v. Breier, 54 F.R.D. 7, (1972), at 12, and cases cited therein. To prevent discovery in such circumstances under the claim of executive privilege would allow the White House to cover up all evidence of its corruption and perversion of power when the Court is investigating such abuses. Committee for Nuclear Responsibility, Inc. v. Seaborg, 149 U.S. App. D.C. 385, 391, 463 F.2d 788, 794 (1971). The Court, therefore, finds the documents are properly discoverable, and requests your instruction and direction in the premises.
Upon consideration of Plaintiff's Motion for Summary Judgment and brief and affidavits in support thereof, Defendants' Opposition to the Motion for Summary Judgment and brief, affidavits and exhibits in support thereof, and the arguments and representations of counsel for Plaintiff and counsel for Defendants, and in accordance with this Court's Memorandum Opinion of even date, it is by the Court, this 11th day of December, 1973,
ORDERED that Plaintiff's Motion for Summary Judgment is in all respects granted; and it is further
ORDERED, ADJUDGED AND DECREED THAT
(a) Plaintiff is an organization exempt from federal income taxes under section 501(c) (3) of the Internal Revenue Code of 1954, and qualified to receive deductible charitable contributions under section 170(c) (2) of the Code,
(b) Defendants are hereby enjoined from refusing to rule that 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,
(c) Plaintiff is entitled to recover from Defendant, United States of America, $13.16 in employment taxes plus interest on the ground that Plaintiff is a charitable and educational organization described in section 501(c) (3) of the Internal Revenue Code which is exempt from income tax under section 501(a) of the Code.