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Questions 3 and 4. Has either school paid their FICA tax and would they be due a refund if they are eventually declared tax exempt or haven't they paid the tax in dispute and would have to pay back taxes if they are found to be tax exempt? What amount of FICA payroll taxes are in dispute in these two cases? Answer. At dispute in the Goldsboro Christian Schools case is that organization's claim for a refund of $1,187.39 in FICA taxes for the years 1970 through 1972. The United States has filed a counterclaim which includes $80,393.72 in FICA and income tax withholding for the years 1970 through 1972. The amount of FICA tax involved in the Government's counterclaim is not separately stated in the Service's records. If found not to be tax exempt, the Goldsboro Christian Schools could be liable for the back taxes set forth in the counterclaim. Again, because of section 6103 and because the Bob Jones case deals with Federal unemployment tax liability, we are unable to respond to this question with respect to Bob Jones University.
Question 5. If Congress did not act on this issue and the IRS took the position that it didn't have the authority to deny tax-exempt status to not only the two schools in question, but also to all similar schools, what would be the annual revenue loss to the social security trust funds? How many schools would be involved?
Answer. We are unable to give a definite answer to this question. Our records do not reflect the number of non-exempt organizations operating racially discriminatory private schools which currently participate in the social security system, nor do our records indicate the amount of social security contributions made by such organizations.
Chairman ROSTENKOWSKI. Mr. Commissioner, would you care to summarize your statement?
Mr. EGGER. I assure you it will be short. I have a longer statement which I would like to put in the record, but I have a shorter statement.
Chairman ROSTENKOWSKI. Your entire statement will appear in full in the record.
STATEMENT OF ROSCOE L. EGGER, JR., COMMISSIONER OF INTERNAL REVENUE, ACCOMPANIED BY KENNETH
CHIEF COUNSEL, INTERNAL REVENUE SERVICE Mr. EGGER. Which I would like to go through because it brings out a bit of perspective on this problem that I don't think has been brought out heretofore. Let me say that section 501(c)(3) of the code provides for exemption of organizations that are organized and operated exclusively for religious, charitable, or educational purposes. This basic language in the code had its origin in our tax laws in the Tariff Act of 1894, and has remained largely unchanged since then. Until the 1950's, the Service interpreted this language quite literally in determining whether an organization was entitled to exemption.
In particular, in the case of organizations described as charitable, in order to qualify as "charitable," the organization had to demonstrate that it provided aid to the poor and distressed regardless of other qualifications.
An entirely different approach was taken in the estate tax area, that is, with respect to charitable deduction for estate tax purposes. There, the term "charitable" was interpreted broadly so as to include organizations generally deemed to be beneficial to the community. In retrospect, it is difficult to understand how such different views of almost identical statutory language remained unreconciled for so many years.
By the 1950's the Service's narrow interpretation of the term "charitable" in the income tax area had become very difficult to
defend. In a 1953 case, for example, the Tax Court rejected this interpretation and held that an organization operating a public beach qualified for charitable exemption. The court held that the word "charitable" was not limited solely to relief of the poor, but included organizations that promoted the general social welfare such as promotion of health, lessening the burden of government, easing neighborhood tensions, combating juvenile delinquency, et cetera. Throughout the early 1950's, the Service was faced with the necessity to categorize a rapidly increasing number of organizations that were formed to deal with a variety of social, economic, and governmental issues.
The problem, of course, was that many of these organizations, although seemingly quite beneficial to society, did not fit within any specific category set forth in the statute.
The first steps toward the Service's current interpretation of section 501(c)(3) were taken in 1959. The inability of the Service to deal with the problems of classifying this new generation of social institutions required a rethinking of the narrower interpretations placed on the code section.
The result of this reconsideration led to an expansion of the interpretation of the term "charitable." In effect, the Service adopted in the income tax area the interpretation that it had long followed in the estate tax area. This change was made by adopting the regulations as they exist today. These regulations make it clear that the term "charitable" is used in section 501(c)(3) in its generally accepted legal sense. Thus, charity is far more than the relief of poverty and includes, in addition to some of the other purposes specifically identified in the statute, many others that have been recognized by the courts as legally charitable.
Change in the regulations in 1959 had little, if anything, to do with the private school area. In fact, there were probably few, if any, in the IRS or Treasury that had any idea that the newly adopted interpretation of section 501(c)(3) would have any real bearing on the exemption of schools. What was foreseen was that the new interpretation recognized that there was a basis for the exemption of many types of charities not literally described in the statute. Thus, for example, under the 1959 regulations, exemption was made available more generally to hospitals and old-age homes. Exemptions were also granted to environmental groups, public interest law firms, and historic preservation societies.
In retrospect, it might have been better if the Service and the Treasury had at that time referred this entire issue to Congress instead of developing a solution by changing the regulations. Many problems would surely have been avoided had the Service obtained from Congress at that time the precise statement with respect to the types of organizations to be exempted and a clear statement of the standards to be observed in applying the exemption rules. At the time, however, changing the regulation undoubtedly appeared to offer a solution to the problem. These amendments brought the administration of the income tax area in line with that in the estate tax area and provided a framework for dealing with the many difficult questions facing the Service.
Moreover, subsequent rulings were widely accepted as a pragmatic way for the Service to proceed in the exemption area. In
other words, a reasonable way was found to adopt a legal theory upon which to base many decisions which were, for the most part, universally accepted as desirable.
It was not until the 1960's, when the Service first faced the problem of segregated schools, that there was any significant criticism of its broadened interpretation of section 501(c)(3). However, once again, an expanded definition was necessary. To deal with this problem, it became necessary to read the Code section as applying the charitable concept to other exempt purposes specifically set forth in the statute. These were hard cases, and here for the first time the application of the principles of the common law of charity were employed in a restrictive way rather than in a liberalizing fashion.
The dilemma facing the Service and the emotional level of the debate was exacerbated significantly in 1978 when the Service announced substantially revised proposed procedures. There was a huge outcry. Thousands of communications received by the Service were strongly opposed to the procedures. Probably no other event has had such a material effect on this whole problem as these proposed rules, which were widely perceived as an unauthorized, aggressive, "guilty until proven innocent" intrusion by the Service in that area.
As a follow-up development, Congress passed the Dornan-Ashbrook appropriation riders. These riders made it clear that the Service could not implement its proposed procedures, but did not resolve the question of how the exemption statute should be interpreted. The many difficult issues were thus left to the administration and for the courts to resolve.
When I said at the beginning of these remarks that I wanted to put the school problem in context, I meant it should be seen not as an isolated issue, but as part of a continuing evolution of dealing with a long list of problems in the exemption area. Most of the current, nontechnical views of the schools probably are not really the result of informed opinions on how the exemption statute should be construed, but the result of strongly held social and moral convictions.
The fact remains, however, that for the IRS the authority to proceed depends upon proper interpretation of the statute. It is the statute that the IRS must look to in determining what, if any, role it has in resolving the school problem.
Let me summarize my feelings this way: We have had essentially the same exemption statute for over 80 years with relatively little guidance from Congress on how it should be applied. On the basis of this statute and the historical interpretation which I outlined, we have recognized exempt status under the charitable classification some 300,000 organizations of a nearly limitless variety. Many of these could not have been so identified on the basis of the narrow interpretation of the statute which was applied prior to 1959. We have encountered many interpretative difficulties, and we are certain to encounter many more in the future.
There certainly will be new types of organizations, serving the evolving needs of society, and for which there will be no precedent in the exemption area. Similarly, there will be groups with purposes totally repugnant to law and public policy seeking haven in
the exemption statute and the dilemma will continue. But this dilemma neither began with nor will it end with the segregated schools issues.
The problem has, however, called into serious question the Service's legal authority for expanding the interpretation of the Code in the fashion I have described because of the many concerns expressed, not only in the area of race discrimination in educational institutions, but in other potential problem areas. This administration, following a searching review of the legal basis for Service action, concluded that the Service is without the authority to interpret section 501(c)(3) to deny exemption to private schools on the basis of racial discrimination. Accordingly, it has sought to deal immediately and directly with this particular issue through its proposed legislative enactment. We welcome explicit congressional guidance and sanction in this area. We all recognize this is not a total solution to the entire problem, but it does deal immediately with a problem, which has severe and grave consequences.
That is the end of the statement I will make here. I will be glad, with Mr. Gideon, to attempt to answer any questions you or the committee has to ask.
[The prepared statement follows:]
ROSCOE L. EGGER, JR.,
OF INTERNAL REVENUJE
I APPRECIATE THE OPPORTUNITY TO APPEAR TODAY TO DISCUSS THE SERVICE'S ADMINISTRATION OF THE LAW WITH RESPECT TO TAX EXEMPTION FOR RACIALLY DISCRIMINATORY PRIVATE SCHOOLS AND
DEDUCTIBILITY OF CHARITABLE CONTRIBUTIONS TO THEM.
SERVICE INVOLVEMENT IN THIS AREA BEGAN AFTER THE SUPREME COURT 1 DECISIONS IN BROWN V. BOARD OF EDUCATION AND BOLLING V. SHARPE
THE 1960S RULED THAT GOVERNMENT AID TO THESE RACIALLY DISCRIMINATORY
PRIVATE SCHOOLS VIOLATED THE EQUAL PROTECTION CLAUSE OF THE
RROWN V. BOARD OF EDUCATION, 347 U.S. 483 (1954); ROLLING V.
GRIFFIN V. ROARD OF SUPERVISORS OF PRINCE EDWARD COUNTY,
379 F. 2ND 49 (4TH CIR. 1964); POINTDEXTER V. LOUISIANA FINANCE
ASSISTANT COMMISSION, 273 F. Supp. 933 (EN LA 1967), AFFD. PER