United States District Court, District of Columbia
EDUCATIONAL ASSISTANCE FOUNDATION FOR THE DESCENDANTS OF HUNGARIAN IMMIGRANTS IN THE PERFORMING ARTS, INC., Plaintiff,
UNITED STATES, Defendant.
Charles A. Murray, Law Offices of Charles A. Murray, P.A., Bonita Springs, FL, Kenneth W. Ravenell, Murphy PA, Baltimore, MD, for Plaintiff.
Joseph E. Hunsader, Andrew C. Strelka, Brittney N. Campbell, U.S. Department of Justice, Washington, DC, for Defendant.
REGGIE B. WALTON, District Judge.
The plaintiff, Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc. (" Foundation" ), brings this action under 26 U.S.C. § 7428 (2006) against the United States for a declaratory judgment finding that the Foundation is a tax-exempt organization under 26 U.S.C. § 501(c)(3) (Supp.2011). Following the submission of the parties' Joint Report, the Court ordered the parties to file briefs regarding the appropriate scope of review in an action challenging an exemption revocation under 26 U.S.C. § 7428. Upon careful consideration of the submissions by the parties  and the oral argument held on October 17, 2012, the Court concludes that the standard of review to be applied in this
proceeding is de novo, and that the scope of the Court's review is not limited to the administrative record.
In a letter dated October 29, 2004, the Internal Revenue Service (" IRS" ) recognized the Foundation as a tax-exempt organization under 26 U.S.C. § 501(c)(3). Am. Compl. ¶ 16; Def.'s Mem. at 5. The materials submitted by the Foundation in support of its request for tax exempt status indicated that it was created to provide scholarships to individuals who are the descendants of Hungarian immigrants who had participated in the performing arts. See Def.'s Mem. at 5; Pl.'s Mem. at 2. The IRS subsequently commenced an audit of the Foundation's 2005 tax return in order to investigate whether the organization was operating consistently with its stated purpose, Am. Compl. ¶ 9, ultimately concluding that the Foundation was created in order to avoid paying estate and generation-skipping taxes on the estate of one individual, Julius Schaller, and to finance the education of Mr. Schaller's relatives, Def.'s Mem. at 5-6.
On November 13, 2009, the Foundation received a letter from the IRS proposing to revoke its tax exemption, which included a Report of Examination explaining the basis for the IRS' proposed revocation. See Am. Compl. ¶ 10; Def.'s Mem. at 8. The Foundation subsequently filed a protest to the proposed revocation and requested consideration by the IRS Appeals Office. Am. Compl. ¶ 11; Def.'s Mem. at 8. The Foundation contends that at the administrative appeals conference it " refuted each material fact of the IRS' report of examination." Am. Compl. ¶ 11. The United States asserts that the Foundation did not provide the IRS with any additional documentation to support its claims in either its protest filing or during the appeals conference. Def.'s Mem. at 8. The IRS issued a final adverse determination regarding the Foundation's tax exemption, giving the following as the reason for its determination:
[The Foundation] [is] not described in section 501(c)(3) since [it] do[es ]not operate exclusively for an exempt purpose. [The Foundation] do[es] not serve a public interest but serve[s] private interests to a more than insubstantial degree. [The Foundation's] grants of scholarships in 2005 and 2006 were made only to descendants of the nieces and nephews of Julius Schaller.
Am. Compl. Ex. C at 1. The IRS applied the revocation of the Foundation's exemption retroactively to December 24, 2003. Id. It is undisputed, as indicated at the October 17, 2012 motion hearing, that the Foundation was not represented by counsel during the proceedings before the IRS.
The Foundation filed suit in this Court under 26 U.S.C. § 7428 seeking a declaratory judgment finding that it is a tax-exempt organization under 26 U.S.C. § 501(c)(3). Am. Compl. ¶ 1. Pursuant to the Court's July 19, 2012 order, Federal Rule of Civil Procedure 26(f), and Local Civil Rule 16.3(c), the parties filed a Joint Meet and Confer Statement, see Joint Report by the Parties at 1, in which they noted their disagreement about whether the Court's review was limited to the administrative record, id. at 3-6. The Court subsequently ordered the parties to simultaneously submit briefs addressing the applicable scope of review in this case. Order, August 9, 2012.
The parties agree that the applicable standard of review is de novo, Pl.'s Mem. at 5-6; Def.'s Mem. at 2, but part ways regarding whether the scope of review is confined to the administrative record, Pl.'s Mem. at 5; Def.'s Mem. at 2. The Foundation further argues that it is entitled to conduct discovery because the Court is not
limited to the administrative record. Pl.'s Mem. at 11-12. The Court held oral argument on the issue and reserved ruling at that time pending the issuance of this opinion.
The Foundation brings this action under 26 U.S.C. § 7428, which creates a declaratory judgment remedy in the case of an " actual controversy involving— (1) a determination by the Secretary— (A) with respect to the initial qualification or continuing qualification of an organization as an organization described in section 501(c)(3) ..." and vests concurrent jurisdiction over such an action in the United States Tax Court, the United States Court of Federal Claims, and the United States District Court for the District of Columbia. 26 U.S.C. § 7428(a). " A determination with respect to a continuing qualification" includes " any revocation." Id. A declaratory judgment " shall not be issued" under § 7428 unless the court determines that the plaintiff has exhausted its administrative remedies before the IRS. Id. § 7428(b). Section 7428 also provides that " a subpoena requiring the attendance of a witness at a trial or hearing may be served at any place in the United States" in an action brought in the United States District Court for the District of Columbia. Id. § 7428(d).
A. Applicability of Tax Court Rules and Practice
As an initial matter, the Foundation contends that the Court should follow the rules governing declaratory judgment actions under § 7428 adopted by the United States Tax Court. See Pl.'s Mem. at 6. The Foundation argues that Congress intended for this Court and the United States Court of Federal Claims to " accord special weight" to the rules and procedures of the Tax Court because at the time § 7428 was enacted, the Tax Court had already promulgated rules governing declaratory judgment actions pursued in that court. Id. The United States notes that the Tax Court Rules are not binding on this Court and does not explicitly urge the Court to adopt them in this proceeding, see Def.'s Mem. at 2, 10, but repeatedly references the Tax Court Rules and uses them to support its own arguments, see id. at 2-3, 10, 11.
The legislative history of § 7428 supports the Foundation's position that Congress intended that this Court and the Court of Federal Claims give special weight to Tax Court rules and its precedent in this area. Shortly before the enactment of § 7428, Congress had created a declaratory judgment remedy regarding the qualification of employee retirement plans and vested jurisdiction in the Tax Court. See H.R.Rep. No. 94-658, at 283 (1976), reprinted in 1976 ...