Head asked Raven's Hollow whether AFI owed it for any unbilled expenditures, which, if billed and paid, would generate funds allowing Raven's Hollow to pay Mr. Frayer for consulting services equal to the amount of the loan due. AFI's A.R. 22 at 95-96. After billing AFI and receiving payment, Raven's Hollow then was able to issue two checks to Mr. Frayer, equal to the amount of his loan. Id. at 96. Without payment from AFI, Raven's Hollow would not have been able to pay the fee.
Subsequently, "New" Raven's Hollow was formed in May, 1977, ("old" Raven's Hollow had dissolved) and was authorized to sell stock to raise capital. Mrs. May owned a corporation named Roldiva, Inc. In July 1977, Roldiva purchased 50% of Raven's Hollow's stock, on the advice of Mr. Frayer, which amounted to $ 800,000. At the time, Mr. Frayer knew that Raven's Hollow was insolvent. The $ 800,000 was transferred through the bank account of Mr. Frayer.
With this infusion of funds, "New" Raven's Hollow began to Pay off the "old" corporation's debts. Raven's Hollow paid AFI $ 290,445 on its account, and AFI then transferred $ 290,000 to the Airlie Trust. AFI, in turn, forgave $ 33,672 in accrued interest to June 1, 1977, "because of the unlikelihood of repayment." AFI's A.R. no. 22 at 86. AFI had transferred the "old" corporation's promissory note for $ 509,555 to the trust; Raven's Hollow paid that amount, then, directly to the trust. Thus, the entire $ 800,000 from Mrs. May ended up in the nonexempt trust, even though the rent due was owed to AFI.
Raven's Hollow also benefitted from transfers of property. In 1974, AFI acquired 53.18 acres of real estate known as the Blackwell property. On May 24, 1977, Kimmaren Corporation authorized Dr. Head, its president, to purchase 50% of the outstanding stock of Raven's Hollow. Prior to purchasing the Raven's Hollow stock, Kimmaren Corporation and AFI exchanged parcels of land: AFI transferred the Blackwell property to Kimmaren and Kimmaren transferred a 53 acre parcel of land to AFI. Four days later, on July 14, 1977, Kimmaren Corporation, acting through Dr. Head, transferred the Blackwell property, originally held by AFI, to Raven's Hollow in exchange for 500 shares of stock (representing 50% ownership) in Raven's Hollow. The stocks were valued at $ 800,000.
No appraisals of the property transferred or received by AFI were prepared, and no evidence exists to show that the trades were for equal value. In fact, AFI's return for 1977 shows a land asset value at the beginning of the year as $ 289,750 but at the end of the year the value is $ 83,080. Gov't. Trial Ex. 13(m) at Part II, line 31 (1977 Return of AFI, Form 990).
Both AFI and the government raise issues which must be resolved before the summary judgment motion can be reviewed.
A. AFI's arguments
The Court has already determined that the administrative record does include the criminal trial transcripts of Dr. Murdock Head as well as the grand jury materials as these were relied on by the IRS and were incorporated by reference in AFI's protest and in written correspondence between the IRS and AFI. See August 21 Order at 6-7; see also Tax Ct. R. 210(b)(10). In a new twist on an old argument, AFI argues that the testimony and exhibits from Dr. Murdock Head's criminal trials provide no support for the Government's summary judgment motion. First, AFI asserts that the criminal trial materials relate to a different time period than is relevant here. As the government admits, the relevant time period for the revocation decision is 1976 to 1980. AFI argues that the relevant time frame for the prosecution of Dr. Head, according to the indictment, was prior to January 1, 1976.
In the "Objects of the Conspiracy" section of the indictment, it states:
Beginning in or about September 1967 and continuing through in or about August 1977, the exact dates being to the Grand Jury unknown . . . MURDOCK HEAD did unlawfully, wilfully and knowingly combine, conspire, confederate and agree with Airlie Foundation, Raven's Hollow . . . unindicted co-conspirators herein . . . to commit offenses against the United States of America. . .
While there is some overlap of time, more importantly, as the evidence discussed supra shows, several of the events that occurred prior to 1976 and which were listed in the indictment had reverberations in subsequent years. For example, listed in the "Means and Methods of the Conspiracy" section of the indictment are references to the leases between Raven's Hollow and AFI (Gov't. Ex. 3 at P 4) and the payment of fees to Mr. Herbert Frayer which the IRS alleges later influenced Mr. Frayer's advice to a major contributor to Raven's Hollow (Id. at PP 15, 16, 17).
Second, AFI argues that the criminal case materials are "clearly hearsay" as to it, unless a particular exception overcomes their hearsay character. Certified transcripts of prior testimony may be used to support a motion for summary judgment when they are relevant. See International Distributing Corp. v. American Dist., 186 U.S. App. D.C. 305, 569 F.2d 136, 138 (D.C. Cir. 1977) citing 6 Moore, Federal Practice, (2ed. 1976). In addition, under Fed. R. Evid. 804(b)(1), former testimony is permitted if the party against whom the testimony is now offered, "or, in a civil proceeding, a predecessor in interest," had an opportunity and similar motive to develop the testimony. AFI was not only an inn indicted co-conspirator in Dr. Head's criminal trials, but Dr. Head controlled AFI. As such, AFI had an opportunity and similar motive as Dr. Head to develop the testimony at the criminal trials. In the alternative, the criminal case materials fall within the residual exception to the hearsay rule, Fed. R. Evid. 803(24),
or, within Fed. R. Evid. 801(d)(2), admissions of a party-opponent, when the testimony of employees of AFI is proffered. The criminal case materials are admissible against AFI.
AFI also argues that an affidavit of Leon Avery, IRS field officer, confirming what materials he reviewed, cannot be used to support a motion for summary judgment because it contains no claim of personal knowledge as to any fact other than that the affiant received certain documents. However, the function of the Avery Affidavit is not to resolve an issue of genuine fact but to state what information and documents Mr. Avery as an Exempt Organization Specialist reviewed for this case. In essence, Mr. Avery's Affidavit describes what is contained in the administrative record. Although sworn or certified copies were not attached to Mr. Avery's Affidavit when it was filed as a supplement to Defendant's Motion for Summary Judgment as required by Fed. R. Civ. P. 56(e), certified copies were attached to the motion itself.
Third, AFI argues that the "assortment of unauthenticated documents" are clearly inadmissible because they are without foundation; therefore, they are inadequate to support a motion for summary judgment. Government Exhibits 1 A.R. nos. 1 through 21, 25, 26, and 27 and Exhibits 12 through 38 are documents that government counsel obtained from the administrative file. Declaration of government counsel at P 2. The transcripts of the criminal trials are in certified form, certified copies having been obtained from the Clerk, United States District Court for the Eastern District of Virginia, Alexandria Division. Id. Finally, Exhibits 3, 4, 5, 6, 7, 8, and 11 are also in certified form, each having been certified by the Clerk of the appropriate district court. Id. The government also points out that most of the documents are records of AFI.
These exhibits and transcripts are a part of the administrative record. In a declaratory judgment action under 26 U.S.C. § 7428, the Court is to review the administrative record, which includes among others "all documents submitted to the [IRS] by the applicant . . . all protests and related papers submitted to the [IRS] . . . [and] all pertinent returns filed with the IRS." See Tax Ct. R. 210(b)(10) (definition of administrative record). Additionally, most of the documents, as listed supra, are certified by the appropriate district court, satisfying any issues of authenticity. Finally, use of "prior trial testimony and exhibits is proper in summary judgment cases." Bost Athletic Ass'n. v. Sullivan, 867 F.2d 22, 24 (1st Cir. 1989) (citation omitted).
Finally, AFI contends that while the government relies on AFI's Admissions (Gov't. Exhibit 2), these Admissions do not by themselves resolve any material fact. While they do authenticate some documents, AFI argues that they are as supportive of its position as that of the government; summary judgment, then, is not appropriate where contradictory inferences may be drawn from undisputed facts. All reasonable inferences from the facts are to be drawn in favor of the non-movant on a motion for summary judgment. That rule, however, does not mean that the government may not rely in its motion for summary judgment on AFI's Admissions. The question before the Court is whether these Admissions and the other evidence presented resolve material facts such that only issues of law remain.
In summary, the government has made an appropriate record for summary judgment.
B. Government's arguments
The government argues that it is not limited to the grounds identified by the IRS in the TAM or the compliance document filed with the court in October 1992 because this is a de novo proceeding. Instead, the government contends, its Statement of Material Facts is the basis for its motion. The government asserts that it may rely on the facts underlying issues 8, 9, and 10 of the TAM, even though the IRS determined that these issues were not a basis for revocation of AFI's tax-exempt status. Issues 8 through 10 dealt specifically with transactions between AFI and Raven's Hollow that occurred prior to January 1, 1970. The IRS' conclusion regarding these pre-1970 transactions reads as follows:
Inasmuch as section 503 of the code, as it applies to organizations described in section 501(c)(3), was made inapplicable by virtue of the provisions of the Tax Reform Act of 1969, we have concluded that it is not applicable to the facts presented.
TAM at 11.
AFI asserts, however, that because the Government failed to plead any new grounds, it has waived its rights to assert such new grounds. See Aero Rental v. Commissioner, 64 T.C. 331, 338 (1975) (issues raised for first time by brief not properly before the court; by not raising new issues, issues are waived). Specifically, AFI argues, issues 8 through 10 and the "potential for abuse" argument involving AFI and Raven's Hollow, which AFI contends was raised for the first time in summary judgment, cannot be relied upon by the government because the IRS did not rely upon these as a basis for revocation.
The IRS based its decision to revoke AFI's exempt status in part on the conclusion that AFI was serving the private interests of its founder and executive director, Dr. Head. See TAM at 10-11. While the IRS ultimately did not rely on Issues 8 through 10 for revocation, this was not a decision on the merits that all transactions between Raven's Hollow and AFI were exempt. A fair reading of the TAM makes clear that the IRS was relying on transactions between AFI and Raven's Hollow in making its revocation decision. See TAM at 5 (describing Raven's Hollow's lease of 200 acres from AFI, the use of the boat, and the Florida apartment) and at 9 (discussing how Dr. Head's private interests were served through the use of the boat, the apartment, and business relationship which existed between AFI and Raven's Hollow). The IRS concluded that
the evidence indicates that Mr. [sic] Head treated the Foundation as merely one part of his financial empire and utilized it for the private benefit of himself and his family. The cumulative effect of the transactions described above is that the Foundation was not operated exclusively for one or more exempt purposes since it was operated to a substantial extent for the benefit of private interests as opposed to the benefit of the public.
TAM at 11.
Therefore, the government has not asserted any affirmative defenses nor raised any grounds for revocation other than those grounds relied upon by the IRS in the final TAM. The Court's scope of review, then, is confined to the administrative record and the IRS' conclusions and grounds for those conclusions that revocation of AFI's exempt status was warranted. See Basic Unit Ministry of Alma Karl Schurig v. United States, 511 F. Supp. 166, 168 (D.D.C. 1981), aff'd., 216 U.S. App. D.C. 391, 670 F.2d 1210 (D.C. Cir. 1982). The Court, however, may make findings of fact which differ from the administrative record. Tax Ct. R. 217(b); see also Animal Protection Institute v. United States, 42 A.F.T.R.2d 78-5850, 5854 (Cl. Ct. 1978).
On a motion for summary judgment, the movant bears the burden of establishing that there is no material fact in dispute and that it is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). The party opposing the motion has the burden of showing that there is a genuine issue of material fact in dispute. In reviewing a summary judgment motion, courts consider whether the material facts necessary for decision have been adequately developed and "whether further litigation would put the parties to unnecessary expense and would also waste judicial resources." Universal Life Church, Inc. v. United States, 60 A.F.T.R.2d 87-5989, 5998 (Cl. Ct. 1987). Unless the nonmovant advances a plausible argument, evidence or averment that would create a genuine issue of material fact and justify a trial, the motion will be granted. Id. at 6002; see also Celotex, 477 U.S. at 322 (rule mandates entry of summary judgment against party who fails to make a showing sufficient to establish the existence of an element essential to that party's case and on which that party will bear the burden of proof at trial).
In a declaratory action following a revocation proceeding, the plaintiff, here AFI, bears the burden of proof in showing that it is entitled to tax exempt status. See Tax Ct. R. 217 (2)(i) ("The burden of proof shall be upon the petitioner as to jurisdictional requirements and as to the grounds set forth in the notice of determination."); Animal Protection, 42 A.F.T.R. at 78-5854. Because the defendant relies in its motion on the same reasons given in the TAM, "the burden is upon the plaintiff to show that defendant's determination is wrong." Basic Unit Ministry, 511 F. Supp. at 168 (citation omitted). As AFI is the non-movant, it is entitled to all justifiable inferences. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986) (citation omitted). However, as the party bearing the burden of proof at trial, AFI may not rest upon "mere allegations or denials," but must come forth with specific facts showing that there is a genuine issue for trial. See Celotex, 477 U.S. at 324.
A. Exempt Organizations
Certain organizations are exempted from taxation by Internal Revenue Code § 501(c)(3) when those organizations are
organized and operated exclusively for religious, charitable . . . or educational purposes, . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual, . . .