United States District Court, District of Columbia
EDUCATIONAL ASSISTANCE FOUNDATION FOR THE DESCENDANTS OF HUNGARIAN IMMIGRANTS IN THE PERFORMING ARTS, INC., Plaintiff,
UNITED STATES OF AMERICA, Defendant.
REGGIE B. WALTON, District Judge.
The plaintiff, Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc. ("Foundation"), challenges the Internal Revenue Service's ("IRS") decision to revoke its status as a tax-exempt organization under 26 U.S.C. § 501(c)(3). Amended Complaint for Declaratory Judgment ("Am. Compl.") ¶¶ 1, 12, 27-31. The IRS has moved for summary judgment, asserting that "there is no genuine issue as to any material fact, " and that "[t]he administrative record... amply supports the actions taken by the [IRS] to revoke [the] [Foundation]'s tax-exempt status." United States' Motion for Summary Judgment ("Def.'s Mot."), at 1. Upon careful consideration of the parties' submissions and the Administrative Record ("A.R."), the Court concludes for the reasons that follow that it must grant the IRS's motion.
Julius Schaller died in December 2003, Def.'s Facts ¶ 1; Pl.'s Facts ¶ 1, leaving a Last Will & Testament that appointed Barrett Weinberger and Frances Odza as joint executors of his estate, A.R. at 165. Following Schaller's death, Weinberger incorporated plaintiff Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc., for the purpose of "provid[ing] financial assistance to college students" who descend from "an immigrant from the Hungarian area of Eastern Europe" and are "involved in the performing arts." A.R. at 32. Weinberger listed himself, Odza, and Solomon Zieger as the Foundation's three corporate directors. A.R. at 48, 57. All three are descendants of Julius Schaller. A.R. at 123-24 (estate tax filing noting the familial relationship of each beneficiary to the decedent).
In June 2004, the Foundation "applied to the [IRS] for tax-exempt status, " Def.'s Facts ¶ 3; Pl.'s Facts ¶ 3, and following its review, the IRS determined that the Foundation qualified as an exempt organization under section 501(c)(3) of the Internal Revenue Code, A.R. at 98. After the IRS granted the Foundation tax-exempt status, the Schaller estate transferred $2, 595, 847 to the Foundation, and claimed a corresponding federal tax deduction that reduced Schaller's "[n]et estate tax[es]" and "[g]eneration-skipping transfer taxes" to zero. A.R. at 121, 171. Weinberger executed the "Gift Agreement" on behalf of both the Schaller Estate as its Executor and the Foundation as its President. A.R. at 188-91. This sole transfer from the Schaller estate constituted the Foundation's only donation and source of funding. Def.'s Facts ¶ 9; Pl.'s Facts ¶ 9.
In December 2004, the Foundation awarded financial scholarships to Michael Chase Weinberger and Adam Zieger for the 2005 calendar year, A.R. at 186, in amounts totaling approximately $146, 325, A.R. at 609. The following year, the Foundation again awarded scholarships to Michael Chase Weinberger and Adam Zieger, as well as Avraham Cashman Wachs, A.R. at 194, in amounts totaling $84, 162, A.R. at 610. Each of the scholarship recipients is a direct descendant of Julius Schaller. Def.'s Facts ¶ 16; Pl.'s Facts ¶ 16.
The IRS conducted an audit of the Foundation's activities, and based upon its findings, concluded that the Foundation "does not qualify for exemption... because it is organized and operated exclusively for the benefit of Julius Schaller's Will." A.R. at 617. Furthermore, the IRS determined that its revocation would apply retroactive to the date of the Foundation's inception "because it omitted and misstated material facts in its application for exemption." Id . The Foundation now brings this declaratory judgment action pursuant to 26 U.S.C. § 7428, challenging the IRS's determinations regarding its tax-exempt status. Am. Compl. ¶ 1.
II. STANDARD OF REVIEW
"An action for declaratory judgment under 26 U.S.C. § 7428 confers concurrent jurisdiction to the Court for Federal Claims, the United States Tax Court and the District Court to review a final determination by the Secretary of Treasury regarding the tax exempt status of an organization under § 501(c)(3)." Fund for the Study of Econ. Growth and Tax Reform v. IRS, 997 F.Supp. 15, 18 (D.D.C. 1998), aff'd, 161 F.3d 755 (D.C. Cir. 1998). "The standard of review in such cases is de novo and the scope of review is limited to the administrative record in the absence of a showing of good cause." Airlie Found. v. IRS, 283 F.Supp.2d 58, 61 (D.D.C. 2003) (citation omitted). "The Court, however, may make findings of fact which differ from the administrative record." Id. at 62 (citation omitted). And "while the court must review the IRS' determination de novo, the organization still carries the burden of demonstrating that it has met the requirement of the statute under which it claims tax exemption." Id . (citing Church of the Visible Intelligence that Governs the Universe v. United States, 4 Cl. Ct. 55, 60 (1983)); see also New Dynamics Found. v. United States, 70 Fed.Cl. 782, 799 (2006) ("The burden is on the applicant to establish that it meets [the] statutory requirements" for tax-exempt status). Thus, the taxpayer "must show both that it is entitled to the tax-exempt status and that the IRS' determination was incorrect." Airlie, 283 F.Supp.2d at 62 (citing Airlie Found., Inc. v. United States, 826 F.Supp. 537, 547 (D.D.C. 1993)). And in actions based upon 26 U.S.C. § 7428, "the [C]ourt shall grant summary judgment only if one of the moving parties, " id., shows that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law, " Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
A. The Foundation's Tax-Exempt Status
"Exemptions from income tax are matters of legislative grace which the courts have consistently construed strictly." New Dynamics, 70 Fed.Cl. at 799 (2006) (citing Trs. of the Graceland Cemetery Improvement Fund v. United States, 515 F.2d 763, 770 (Ct. Cl. 1975)). Pursuant to Sections 501(a) and (c)(3) of the Internal Revenue Code, an organization is exempt from federal income taxation if it meets three requirements: "(1) it is organized and operated exclusively for an exempt purpose; (2) its net earnings do not inure to the benefit of any private shareholder or individual; and (3) its activities do not... attempt to influence legislation." Family Trust of Mass., Inc. v. United States, 892 F.Supp.2d 149, 155 (D.D.C. 2012) (quoting Visible Intelligence, 4 Cl. Ct. at 61), aff'd 722 F.3d 355 (D.C. Cir. 2013). "Because the requirements are stated in the conjunctive they all must be met." Easter House v. United States, 12 Cl. Ct. 476, 483 (1987), aff'd, 846 F.2d 78 (Fed. Cir. 1988).
The IRS revoked the Foundation's tax-exempt status because it "d[id] not operate exclusively for an exempt purpose, " and instead "served private interests to a more than insubstantial degree'" because scholarships "were made only to descendants of the nieces and nephews of Julius Schaller." Def.'s Mem. at 16 (quoting A.R. 1023). "To be operated exclusively for exempt purposes, an organization must engage primarily in activities which accomplish at least one exempt purpose, " Visible Intelligence, 4 Cl. Ct. at 61 (citing 26 C.F.R. § 1.501(c)(3)-1(b)(1)(i)), with potential purposes including the following: religious, charitable, scientific, testing for public safety, literary, educational, or prevention of cruelty to children or animals, 26 C.F.R. § 1.501(c)(3)-1(d)(1)(i). While "an incidental non-exempt purpose will not disqualify an organization, ... a single substantial non-exempt purpose or activity will destroy the exemption, regardless of the number or quality of exempt purposes.'" Fund for Study, 997 F.Supp. 15, 19 (D.D.C. 1998) (quoting Airlie, 826 F.Supp. at 548); see also New Dynamics, 70 Fed.Cl. at 799 ("Exclusively' in this statutory context is a term of art and does not mean solely, '" but if "the organization's activities involve substantially non-exempt purposes, no tax exemption applies." (citations omitted)).
Treasury Regulations further specify that "[a]n organization is not organized or operated exclusively for one or more [exempt] purposes... unless it serves a public rather than a private interest." 26 C.F.R. § 1.501(c)(3)-1(d)(1)(ii). In other words, "it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests." Id .; see also Airlie, 826 F.Supp. at 549 ("[N]o part of an organization's net earnings may inure to the benefit of any private shareholder or individual." (citation omitted)). "The plaintiff bears the burden of proof ...