THE LEGISLATION PROPOSED BY THIS ADMINISTRATION TO ADDRESS THE ISSUE WE ARE DISCUSSING WILL PROVIDE A NATIONAL STANDARD FOR THE DENIAL OF TAX EXEMPTION TO RACIALLY DISCRIMINATORY SCHOOLS. IT IS NOT INTENDED TO AND DOES NOT RESOLVE THE DIFFICULT DEFINITIONAL PROBLEMS INHERENT IN THIS AREA OF THE CODE, SUCH AS DEFINING BROAD GENERAL TERMS SUCH AS "CHARITABLE" AND "EDUCATIONAL."

REFORE CLOSING, I WAS ALSO ASKED TO COMMENT ON THE PLANS OF

THE IRS WITH REGARD TO EXISTING REVENUE RULINGS AND PROCEDURES DEALING
WITH RACIAL DISCRIMINATION AND SCHOOLS. CONSISTENT WITH THE

GOVERNMENT'S FILING IN THE SUPREME COURT AND MY INSTRUCTIONS FROM
THE TREASURY DEPARTMENT, IT IS MY INTENTION TO REVOKE THOSE
REVENUE RULINGS AND PROCEDURES AND IT IS OUR INTENTION TO RESTORE
TAX EXEMPT STATUS TO THE ROB JONES AND GOLDSBORO INSTITUTIONS
PENDING ENACTMENT OF THE ADMINISTRATION'S PROPOSED LEGISLATION.

FINALLY, I WANT TO EMPHASIZE THAT THE ROLE OF THE SERVICE
IS AND HAS ONLY BEEN TO ADMINISTER THE EXISTING TAX LAWS.
WE LOOK
TO THE STATUTES, THEIR LEGISLATIVE HISTORIES, AND THEIR JUDICIAL
INTERPRETATION. OUR RESPONSIBILITY IS CONFINED TO ENFORCING AND
INTERPRETING WHAT IS IN THE INTERNAL REVENUE CODE.

I WILL BE PLEASED TO ANSWER ANY QUESTIONS YOU MAY HAVE CONCERNING THE SERVICE'S ADMINISTRATION OF THIS AREA SINCE I TOOK OVER DIRECTION OF THE INTERNAL REVENUE SERVICE.

Chairman ROSTENKOWSKI. Are there any questions?

Mr. RANGEL. I would like to ask whether or not the Service has granted tax exemption to Bob Jones University and Goldsboro schools?

Mr. EGGER. No, we have not.

Mr. RANGEL. Your statement indicated on page 17, "This administration, following a searching review of the legal basis for Service action, concluded that the Service is without authority to interpret section 501."

Were you involved in that searching review?

Mr. EGGER. I was involved in many of the discussions in late December, early January, yes.

Mr. RANGEL. And counsel?

Mr. GIDEON. Yes.

Mr. RANGEL. Neither one of you reached the same conclusions after you went through your searching reviews?

Mr. EGGER. I did not.

Mr. GIDEON. I did not.

Mr. RANGEL. You had a meeting with several Members of Congress supporting the administration's views and indeed did respond to them at every occasion where it was warranted, indicating that your view was in conflict.

Is that correct?

Mr. EGGER. That is correct, Mr. Rangel.

Mr. RANGEL. My last question is that there has been quite a bit of testimony about legal documents that have been worked on that caused the administration to change its view from last December to early January.

Neither one of you, nor the Service, participated in preparing a legal document for the administration to reach the decision that they reached. Is that right?

Mr. EGGER. We prepared brief memoranda for the purpose of telling the Secretary and the Deputy Secretary of the issue. They were not intended as exhaustive legal analysis.

Mr. RANGEL. Thank you, Mr. Chairman.

Chairman ROSTENKOWSKI. Mr. Jacobs will inquire.

Mr. JACOBS. I will pass to Mr. Jenkins.

Mr. RANGEL. Let me say the hypothetical I said earlier as to if these people were the Commissioner of IRS, and I think your response then, Mr. Chairman, was they didn't want to say anything that would have an effect on your integrity.

I would want to state for the record that it has been my view, the records, that you have conducted yourself in the highest fashion of a public official. I did not want the witness' response to believe that. That was not my intention.

Mr. EGGER. I never had any thought they would.
Mr. JENKINS. Thank you, Mr. Chairman.

Commissioner, earlier I raised a question with the administration as to what they would do with the applications now pending in the absence of any congressional action, and they indicated that those would be issued if we did not act.

Now, I am concerned about charitable organizations.

As I understand the existing law, basically what you do in every revenue routing in making a determination on whether or not an

organization is charitable under 501(c)(3), is that you in almost every ruling the organization activities will be considered permissible under this section 501(c)(3).

You have one, two, three: One, the purpose of the organization is charitable; two, the activities are not illegal, contrary to a clearly defined and established public policy; three, or in conflict with an express statutory restriction.

Now, the problem that I have-and maybe you can expound upon this-is the definition in your future determinations of what is charitable. Will the Service have to then disregard this provision dealing with public policy in the absence of statutory language?

Mr. EGGER. There is some confusion about the public policy as such in the charitable area. It is my intention and my understanding that the real debate here, legal debate, goes to the question of whether or not the broader common law of charities interpretation can be applied to any of the terms in 501(c)(3), other than charitable, so that it wouldn't apply in the case of educational, or in the case of religious organizations, which would be qualified as such. However, in the case of charitable organizations, my understanding and my intention is to apply the regulations as they presently

exist.

Mr. JENKINS. So you would still take into consideration public policy on those organizations?

Mr. EGGER. Yes.

Mr. JENKINS. You would recognize national public policy even though there is no statute?

Mr. EGGER. I believe charitable is defined in the regulations in its generally accepted legal sense.

Mr. JENKINS. So, we would recognize national public policy in charitable organizations, but we would not recognize public policy in educational, is that right?

Mr. EGGER. That is correct. It is a very narrow legal issue of whether the broader concept of charity can apply to all of the other six exempt purposes.

Mr. JENKINS. I am pleased that you said you will take into consideration national public policy in charitable. I was concerned that I could foresee, in the absence of explicit statutory language, the Service having to grant thousands of exemptions to so-called charitable organizations, where their purpose was absolutely opposite from national public policy. That bothered me.

Mr. EGGER. I would like to ask the counsel if he has anything to add to that?

Mr. GIDEON. No, I think that the Commissioner has correctly stated our position at this time.

Mr. JENKINS. Thank you.

Chairman ROSTENKOWSKI. Mr. Jacobs will inquire.

Mr. JACOBS. Mr. Commissioner, my friend, Mr. Martin, alluded to my earlier suggestions about a comparability of the social security benefits and their tax exemption, with the denial of exemptions to schools who segregate, in that there wasn't specific statutory language in either case.

I believe Mr. Martin said, after all, people who pay in social security and then get the benefit, they are only getting back what they

paid in. I think in most cases-currently, anyway-people do actually get more dollars back than they paid into social security.

I believe it was also correct to say that in the case of Federal pensions, up until the point that you start receiving more than you paid in, you are not taxed for the money that is paid to you, the civil service annuities.

Isn't that specifically provided for by statute?

Mr. EGGER. Yes.

Mr. JACOBS. Well, where are we, then? Aren't you painted into a little bit of a corner? What do I tell my parents? Are they going to have to change their budget a little bit on their social security now?

Mr. EGGER. To the best of my knowledge, it is not my intention to do anything about social security except to continue to treat it as nontaxable.

Mr. JACOBS. You don't feel a little locked in by this precedent now that you can't suck something out of your paw if it isn't absolutely clear English in the statute?

Mr. EGGER. I do not feel locked in on that subject matter, Mr. Jacobs.

Mr. JACOBS. Do you feel locked in on the other subject that it must absolutely be written in the statute before you can deny an exemption for one of the more un-American practices of racial segregation?

Mr. EGGER. What is here is just the normal followon from debate that has been present in the statute for a long, long time and heretofore we have resolved most of these issues, as we did in 1959, on an expedient basis.

No one objected at that time because by and large the results of it were acceptable to everyone and they offended almost no one. I think now that we got into a controversial area, the debate now comes out.

Mr. JACOBS. Who objected to the policy this time?

Mr. EGGER. Well, I think there has been a raging debate here in the Congress over the procedures that we were to follow, certainly since 1978, as well as in public-

Mr. JACOBS. No, I mean the procedure of determining discrimination, but who objected to denying exemptions where, in fact, discrimination was fairly determined to exist?

Mr. EGGER. No one that I know has objected on that ground. What they have done is to go back and search out whether or not we really had the proper legal authority to-

Mr. JACOBS. Do you have the proper legal authority to suspend taxation and social security benefits for those who are receiving back more than they paid in?

Mr. EGGER. I don't think so.

Mr. JACOBS. You don't have authority for that?

Mr. EGGER. No, if I understand your question correctly.

Mr. JACOBS. Do you find any statutory authority for not taxing those social security payments?

ic

Mr. EGGER. Not specifically in the statute, no. But the histor

Mr. JACOBS. You are in a pretty awkward spot, it seems to me. Taking the exactly opposite position, in fact people might get a

little suspicious because in the one case minorities are involved, in the other case there are an awful lot of good Republicans who get social security benefits.

It might be a little bit awkward to go to the service-and IRS does stand for Internal Revenue Service, and I would hate for people to believe it stands, say, for Institute of Racial Segregation-but a lot of people are beginning to wonder, especially when you have cases like this where the facts are about the same and your conclusions are exactly opposite.

Mr. EGGER. I know of no one in the IRS that stands for that.

Mr. JACOBS. I don't know about anyone. I am talking about not who but what. I am talking about the policy. The IRS is a what, not a who, and you are known by your policies. Actions speak louder than words.

I add to what Mr. Rangel said. I am persuaded that I am right in admiring you as a reasonable public official yourself, sir.

Mr. SHANNON. Mr. Egger, did you have any discussions prior to January 8 with anybody in the administration outside of the Internal Revenue Service about this pending decision?

Mr. EGGER. Well, I was involved in a number of meetings that included people from the Department of Justice.

Mr. SHANNON. Anybody from the White House?

Mr. EGGER. No.

Mr. SHANNON. Anybody from the Treasury Department, Treasury and Justice?

Mr. EGGER. Secretary McNamar, Peter Wallison, his deputy, people from the tax policy area.

Mr. SHANNON. What was your advice to them?

Mr. EGGER. My position was as stated here, I believed the case should go forward. I believed the Supreme Court should rule on the issues, for our guidance.

Mr. SHANNON. It was sufficient legal authority for you to maintain those regulations, pending the decision by the Supreme Court? Mr. EGGER. I believed so.

Mr. SHANNON. Thank you very much.

Chairman ROSTENKOWSKI. Mr. Martin will inquire.

Mr. MARTIN. Thank you very much.

I want to thank my colleague from Indiana for helping to clarify the vote on the parties opposed to social security benefits. I would ask the Commissioner whether the basis for the regulation for exempting social security benefits from taxation is based on the ruling by the U.S. Supreme Court regarding the constitutionality of the social security legislation?

Mr. EGGER. Since I am personally not familiar with that, Mr. Martin, I am going to ask my attorney here if he has a comment on that.

Mr. GIDEON. I would like-

Mr. MARTIN. I would say you are planning to look into that in response to Mr. Rangel's question. I would be delighted if you would share a copy or send a letter at the same point.

Mr. EGGER. Certainly.

Mr. MARTIN. I note that you indicate that Secretary McNamar was correct when he summarized your position which was to prefer to go forward with the case. Nevertheless, as I understood some of