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April 18, 1979


The opinion of the court was delivered by: PRATT


This is a suit for declaratory judgment pursuant to section 7428 of the Internal Revenue Code as amended by section 1306 of the Tax Reform Act of 1976, 90 Stat. 1717. *fn1" / Plaintiff seeks a ruling declaring that it is a tax-exempt organization described in section 501(c)(3) of the Internal Revenue Code of 1954. Defendant, in opposition, asserts that the plaintiff is precluded from qualifying as a charitable organization under section 501(c)(3) because it has not established that it administers a nondiscriminatory admissions policy. *fn2" / This ultimate issue is before us on cross-motions for summary judgment.

 Factual Background

 The pertinent facts are as follows. Plaintiff was formed as a non-profit private school foundation to operate elementary and high schools in Prince Edward County, Virginia. On June 1, 1959, the plaintiff filed its first application with the Internal Revenue Service (hereinafter referred to as the "Service") whereby it sought a ruling from the Service that it was a tax-exempt organization within the terms of section 501(c)(3). By letters of August 6, 1959 and June 10, 1960, the Service tentatively ruled that plaintiff was a tax-exempt organization and qualified for favorable tax treatment. Plaintiff filed a second application for a ruling on its tax-exempt status on August 17, 1960. The Service responded to the plaintiff's application with a letter on December 22, 1961, indicating that no change in plaintiff's tax-exempt status had occurred since the Service's earlier tentative ruling.

 In 1970, the Service announced a new policy to be applied when determining the tax-exempt status of private schools. Under such policy, the Service would not recognize the tax-exempt status of a private school unless the school adopted and administered a non-discriminatory admission's policy and publicized that policy to the community served by the school. See Revenue Ruling 71-447, 1972-2 C.B. 230;Revenue Procedure 75-50, 1975-2 C.B. 587. The plaintiff was advised by the Service of its new policy on November 30, 1970. By letter of December 29, 1970, the plaintiff's president responded that the school would continue to have its applications for admission judged by plaintiff's Board of Directors or its agents, and that the plaintiff did not intend to change its existing practices.

 In support of its motion for summary judgment, the defendant contends that the only issue presented for resolution by plaintiff's complaint is whether the Service properly concluded that plaintiff is an organization qualifying for tax-exempt status within the meaning of section 501(c)(3). Relying on its contention that schools with discriminatory admissions policies are excluded from those organizations described in section 501(c)(3), the defendant argues that it properly revoked the plaintiff's tax-exempt status because of the plaintiff's failure to affirmatively establish or publicly avow that its admissions policy is nondiscriminatory.

 Plaintiff, on the other hand, seeks to challenge the Service's constitutional and statutory authority for revoking plaintiff's tax-exempt status. Specifically, plaintiff contends theRevenue Procedure 75-50, which requires an organization to publicize its policy of nondiscrimination in order to retain its tax exemption, violates the First and Fifth Amendments to the Constitution, as well as the mandates of the Administrative Procedure Act, the Internal Revenue Code of 1954, and the Service's own regulations. In addition, plaintiff argues that the Service has exceeded its authority by attempting to revoke plaintiff's tax exemption retroactively from November 30, 1970.

 Before addressing these issues, a brief discussion of the jurisdictional basis for this suit and of our scope of review is appropriate.

 Section 7428 Proceedings

 Section 7428 of the Internal Revenue Code was enacted to provide a remedy for resolving disputes concerning the initial or continuing qualification by the Secretary of the Treasury of an organization as a tax-exempt organization described in section 501(c)(3) of the Code. The enactment of Section 7428 was Congress' response to two Supreme Court decisions denying equitable injunctive relief to organizations seeking to restrain the IRS from withdrawing favorable tax-exempt ruling letters. H.Rep.No. 94-658, 94th Cong., 1st Sess. 282 (1976); S.Rep.No. 94-938, 94th Cong., 2d Sess. 585 (1976); see Bob Jones University v. Simon, 416 U.S. 725 (1974); Alexander v. "Americans United," Inc., 416 U.S. 752 (1974). The Senate Committee reporting the bill that eventually emerged as section 7428 noted that, although the tax status of an organization is defined by statute and does not depend on the position of the IRS, most organizations find it imperative to obtain a ruling letter from the Service to assure its potential donors that their contributions to the organization will be deductible. S.Rep.No. 94-938, at 585. Noting that the degree of bureaucratic control over an organization's tax-exempt status was susceptible to abuse without review, the Senate Committee recommended the declaratory judgment procedure as a means of enabling an organization to obtain a judicial determination of its own tax-exempt status. Id. at 586-91.

 While providing a remedy to organizations for contesting the Service's tax-exempt status classifications, Congress apparently contemplated that the judicial proceedings would be limited to a judicial review of the Service's ruling for error primarily based upon the administrative record and evidence presented by the organization to the Service. Id. at 588.

 Our jurisdiction therefore is limited to a review for error of the Service's revocation of plaintiff's favorable tax-exempt ruling. The burden of establishing whether plaintiff is an organization described in section 501(c)(3), furthermore, rests with the plaintiff. Animal Protection Institute v. United States, 42 A.F.T.R. 2d 78-5850 (Ct. Cl. Tr. J. Op., Sept. 19, 1978). With these principles in mind, we turn to the arguments presented by the parties.

 Private Schools Administering Racially Discriminatory Admissions Policies Are Excluded From Organizations ...

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