expediency. As a consequence, decisions have been made, and policies have been initiated, that evoke strong public criticism but are able to withstand the assaults because they are grounded on high principle. This is but another example of the

Administration's commitment to that approach.

Here, the principle involved is among the most fundamental to our system of democratic government. The first sentence of the Constitution declares: "All legislative powers herein granted shall be vested in a Congress of the United States which shall consist of a Senate and House of Representatives." This provision, and similar grants of power to the Executive and Judicial Branches in Articles II and III of the Constitution, reflect a scheme of checks and balances integral to freedom and ordered liberty. Under Article II of the Constitution, once the meaning of a law is discerned, the Executive is charged with its faithful execution. The Internal Revenue Service's practice since 1970 of denying tax exemptions to private schools that discriminate runs directly counter to that constitutional scheme. It opens the door for administrative agencies to "legislate" by administrative fiat, and, without guidance from Congress, to make fundamental policy decisions that impact directly on every citizen in this country. Such transgressions by the Executive on Congressional prerogatives are most inviting where the end being sought i.e., the removal of racial discrimination in our

educational institutions

11

is a common objective to which all

Branches of Government subscribe.

But, it is in precisely such

circumstances that we must be sure that principle wins out over emotion, no matter how difficult the decision may be.

Mr. Chairman, the power to grant or deny exemptions from taxation is legislative in nature. Congress has not yet authorized the Internal Revenue Service to withhold exemptions from private schools on the ground that they practice racial discrimination. The President has forwarded to the Congress legislation that would grant the IRS such authority. He has asked that you give this matter the very highest priority and enact the legislation as rapidly as possible.

This Administration is concerned with, and sensitive to, minority interests and civil rights concerns. In enforcing the many federal statutes that afford protections in this as well as other areas, we must, of course, uncompromisingly discharge our responsibility to uphold the Constitution and laws of this land. That responsibility cannot be carried out faithfully, and with full integrity, if we allow administrative agencies, no matter how well intended, to act on their own in seeking to achieve even the most laudable ends.

That was the fundamental issue in the Bob Jones and Goldsboro cases, and it was for the reasons that I have stated that the Department of Justice concluded as a matter of law, notwithstanding our repugnance for the racially discriminatory practices of the

two schools, that the IRS practice since 1970 could no longer be

supported.

Mr. Reynolds and I will be glad to answer any questions you may have.

An attachment to this statement, "Analysis of Legal Authorities for Possible Inclusion in a Prief," dated January 29, 1982, is included in the documents assembled by staff in the appendix to this hearing.7

Chairman ROSTENKOWSKI. Mr. McNamar, you may proceed.

STATEMENT OF RICHARD T. MCNAMAR, DEPUTY SECRETARY, DEPARTMENT OF THE TREASURY, ACCOMPANIED BY PETER WALLISON, GENERAL COUNSEL

Mr. MCNAMAR. I, too, can abbreviate my statement somewhat, but would appreciate the opportunity to take the committee through the part which I think is most germane. With me today from the Treasury Department is our General Counsel, Peter J. Wallison.

We are pleased to appear before the committee to present the views of the Treasury on the administration's bill. This bill would deny the benefits of tax-exempt status to organizations maintaining private schools that follow racially discriminatory practices.

Indeed, in light of the controversy that has developed in this area in recent weeks, we are especially pleased to have an opportunity to dispel some of the confusion and misconceptions regarding the policy of this administration both with respect to racially discriminatory schools and the appropriate role of the Internal Revenue Service.

At the outset, we wish to emphasize the following points:

The Reagan administration is unalterably opposed to racial discrimination in any form. Further, the administration endorses, in the strongest fashion, the principles of Brown v. Board of Education, that racial discrimination in education has no place in a free society and should not in any way be tolerated or encouraged by the Government.

Thus, the administration believes that racially discriminatory schools, and the organizations that maintain them, should not be recipients of tax deductible contributions. However, we recognize that protection must be accorded to the legitimate exercise of religious beliefs.

While the administration believes that the benefits of tax exemp tion should be denied to racially discriminatory schools, it also believes that such a position must be based on statute. However popular it would have been to come out the other way, we and the Justice Department are unable to find that Congress has yet authorized such action in the Internal Revenue Code.

It is not satisfactory to say that the tax laws permit the Internal Revenue Service to require that tax exempt organizations must comply with certain fundamental public policies. If we follow this approach, at any time the Service may go beyond racial discrimination and decide that some other policy-such as discrimination based on sex-requires the revocation of tax exemptions for schools which admit only women. Instead, we believe that Congress should authorize the denial of tax exemption based only on racial discrimination by passing a law to this effect. That is why the administration has submitted the bill that is before this committee today.

Against this background, I would like to turn to the rationale for the administration's decision which on the statement that was previously provided to you is at the top of page 10. The decision announced on January 8, 1982, had its origins in a policy determination by the Nixon White House in 1970. That decision directed the

Service to accede to the position of the plaintiffs in the first Green case in the Federal district court. This reversed the longstanding IRS opposition to involving the administration of the tax laws in the controversy surrounding racial discrimination.

Although this decision advanced a laudable goal, the 1970 decision was not soundly based on statutory law and the consequences of this expedient approach were finally recognized in late 1981 when the Treasury Department was required to approve the Justice Department brief which articulated the legal rationale adopted in 1970.

The Justice Department has prepared and delivered to the Treasury Department a memorandum of law which describes the legal deficiencies in the Service's position. As the Justice Department memorandum concludes, there is no adequate basis in law for the Service's position that it has the authority to select certain Federal public policies and impose these policies on tax exempt organizations.

Nor is there a legal basis for concluding that the IRS has the statutory authority to invoke section 501(c)(3) and the attendant denial of deductions under section 170 to any school or university that violates the civil rights laws. The Justice Department memo makes clear that there is no statutory language or congressional direction, no legislative history, and no definitive Supreme Court opinion, that authorizes or requires the IRS to revoke the tax exemptions of schools that do not comply with Federal public policy or otherwise violate the civil rights laws.

The committee should note that there is no question that the Internal Revenue Service was under tremendous pressure to adopt the view it took in 1970, and has acted professionally and responsibly. However, the "public policies" rationale the Service adopted was a post hoc legal justification for a prior policy action.

In making the Treasury's policy decision we were faced with a classic moral dilemma. "Does the end justify the means?" That is, does the attainment of a good end or objective (eliminating discrimination) justify the endorsement of a theory that we regarded as unauthorized by law? This ethical dilemma has been long settled in all civilized societies. The answer is clearly "No."

In addition, in the United States we have consistently adhered to the trite-sounding but immutable principle that we will have "a government of laws and not of men," and that is what this matter is all about. Should administrators and executives of the law be free to define "public policy" in the absence of legislative authority duly enacted by Congress? Again, the answer is "No."

The implications of continuing the policy of allowing the IRS to determine on its own those public policies denying tax exemptions was well stated by the district court in the Bob Jones case. There, the judge pointed out that section 501(c)(3) does not endow the IRS with authority to discipline wrongdoers or to promote social change by denying exemptions to organizations that offend Federal public policy? Who decides? With a change of Federal public policy, the law would change without congressional action—a dilemma of constitutional proportions. Citizens could no longer rely on the law of section 501(c)(3) as it is written, but would then rely on the IRS to tell them what it had decided the law to be for that particular day.

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Our laws would change at the whim of some nonelected IRS personnel, producing bureaucratic tyranny.'

For example, if we were to endorse the theory on which the Service was proceding before the Supreme Court, what would prevent the Service from revoking the tax exempt status of Smith College, a school open only to women? Does sex discrimination violate a clearly enunciated public policy? Apparently someone in the State of Massachusetts thinks so, because litigation on this issue is currently going forward in the State courts of Massachusetts.

What about religious organizations that refuse to ordain priests of both sexes? And could the Commissioner decide that if black Muslim organizations refuse to admit whites they should be denied a tax exempt status because they discriminate?

Further, should the IRS Commissioner be permitted-in the absence of legislation-to determine what is national policy on abortion? Should hospitals that refuse to perform abortions be denied their tax exempt status? Or, reading Federal policy another way, should hospitals that do perform abortions be denied their tax exempt status?

These extremely difficult but real issues illustrate the need for congressional action on the question of tax exempt schools which discriminate on the basis of race. Here perhaps we have a national consensus which should be embodied in statute so that the Internal Revenue Service has appropriate guidance. To leave the judgment solely to the Service is not the responsible course.

It is simply because these issues are so difficult and fundamental to our society that they should not be left to an administrative determination by employees of the Federal Government, but rather should be determined by the elected representatives of the American people. It is for this reason that the administration has developed and proposed the administration's bill which is designed to give a clear congressional mandate on these matters.

Thus, the administration urges the Congress to exercise its authority and responsibility to provide guidance on these matters so that there will be a basis in law to deny tax-exempt status to educational institutions that discriminate on the basis of race.

Finally, I turn to a description of the administration's bill, which is before the committee this afternoon. Section 1 of tha bill directly addresses the issue before us. Specifically, a new section 501(j) would be added to the Internal Revenue Code to deny 501(c)(3) treatment and 501(a) treatment if the school practices racial discrimination.

Failure to be described in section 501(c)(3) also means that the organization is not within the exemptions from Federal social security and employment taxes provided in the code. Correlative changes are made to the income, estate, and gift-tax deduction sections to provide that no deduction will be allowed for contributions to such organization.

The organizations covered are defined in new section 501(j)(1) to include those that maintain a regular faculty and curriculum, and normally have a regularly enrolled body of students in attendance at the place where its educational activities are regularly carried on. Generally, this is the same definition as appears in code section 170(b)(1)(A)(ii), and parallels the class of schools covered by the