STATEMENT OF JOHN S. NOLan, Chairman, SECTION OF TAXATION, AMERICAN BAR ASSOCIATION

This statement is submitted by John S. Nolan, Chairman of the Section of Taxation of the American Bar Association on behalf of the Section but not on behalf of the Association or any other part thereof. In the interests of avoiding repetition, we have attempted to confine our comments to aspects of the school exemption issue within the special expertise and concern of tax lawyers.

It is the position of the Section of Taxation that:

1. Present law is clear, without further action by Congress, that tax exemption under Section 501(c)(3) must be denied to schools that operate on a racially discriminatory basis.

2. Legislation with respect to Section 501(c)(3) that merely restates law that is already clear is unnecessary. To the extent that legislation imposes burdens retroactively on taxpayers who are not covered by existing law, such action violates fundamental rules of fairness and justice.

3. It is premature for Congress to legislate before the Supreme Court has taken action in the pending Bob Jones and Goldboro cases, as such action could moot or change the need for legislation.

4. At the present time, the Section of Taxation opposes any action beyond a joint resolution by Congress supporting and ratifying the interpretation of law by the Internal Revenue Service and the courts. No more formal legislation should be enacted until the Supreme Court acts on the pending cases.

1. THE LAW

Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1971), aff'd per curiam, 404 U.S. 997 (1971), squarely establishes that the Internal Revenue Service has not only the right but the duty to deny tax exemption to racially discriminatory schools. This has been followed in Bob Jones University v. United States, 639 F.2d 147 (4th Cir. 1980), rehearing and rehearing en banc denied April 18, 1981; Goldsboro Christian Schools, Inc. v. United States, F.2d (4th Cir. 1981); and Prince Edwards's School Foundation v. United States, 478 F. Supp. 107 (D.D.C. 1979), aff'd by unpublished order No. 79-1622 (D.C. Cir. June 30, 1980), cert, denied, No. 80-484, February 23, 1981.

There is no contrary authority. In its October 1981 brief on petition for certiorari, the United States correctly conceded the correctness of these decisions. The point primarily at issue before the Supreme Court in the current cases is whether a First Amendment claim would override the Green rule and permit racial discrimination based on religious grounds. It would be helpful to all concerned to have this issue resolved.

Congress in effect ratified Green v. Connally in 1976 in adding Section 501(i) to the Internal Revenue Code to apply a prohibition against discrimination to social clubs after a District Court decision (McGlotten v. Connally, 388 F. Supp. 448 (D.D.C. 1972)) went the other way. Indeed, Congressional proponents of recent action restricting expenditure of appropriated funds in support of expanded 1978 guidelines were careful to announce they were not attacking pre-1978 rulings implementing Green v. Connally. See, e.g., 125 Cong. Rec. H5879, 5882 (daily ed. July 13, 1979); 125 Cong. Res. H5982 (daily ed. July 16, 1979).

Against this background, it cannot be seriously asserted that there is any doubt about the power and duty under the law as it exists today, to deny tax exemption to schools which discriminate.1

2. RETROACTIVE TAX LEGISLATION

As shown in the attached Exhibit A, it has been a long-standing principle of the Section of Taxation that retroactivity of tax legislation beyond the current year is undesirable. In general, Congress has followed the same rules. With respect to Section 501(c)(3), there is no need for Congress to venture into the thicket of retroactivity. The law with respect to tax exemption for racially discriminatory schools is clear. Enactment of retroactive legislation can only add confusion. To the extent that there are problems that require resolution, they can best be handled on a prospective basis after the Supreme Court deals with the pending case.

1 In its Description of S. 103 and S. 449 Relating to Tax Exempt Status of Private Schools (JCS-13-79, Apr. 26, 1979), the Staff of the Joint Committee on Taxation advised Congress that "the illegality of granting tax exemption to racially discriminatory private schools generally is acknowledged" (p. 25).

3. POSSIBLE SUPREME COURT ACTION

The Supreme Court may decide to hear the Bob Jones and Goldsboro cases despite the Government's present decision not to argue applicable law or may take other steps which would materially change the legislative situation. Congress should not rush to take action which may be unnecessary. The waiting period would permit more deliberate consideration of the difficult details of legislation in such a sensitive and difficult area.

4. JOINT RESOLUTION

Under existing circumstances, a joint resolution by Congress supporting the existing interpretation of Section 501(c)(3) that schools operating on a racially discriminatory basis are not entitled to tax exemption would be appropriate. No additional legislation is necessary at this time.

EXHIBIT A

AMERICAN BAR ASSOCIATION, SECTION OF TAXATION

RESOLUTIONS HAVING CONTINUING EFFECT

1.

2. Resolved. That the Section of Taxation adopts the following set of principles for guidance of the Council and committees, with respect to retroactive revenue legislation:

1. Retroactive imposition of tax liability is undesirable. Such action should generally be opposed whether a large or small segment of the tax-paying public would be affected.

2. Retroactivity limited to the current year may be justified in such matters as rates or personal exemptions which are not likely to influence taxpayer conduct. On the other hand, a retroactive tax is in principle not justifiable on the ground that existing law afforded a "loophole" or "unintended benefit." Nor is it material that the "loophole" is contrary to an established administrative policy and has been disclosed only recently by a generally unexpected court decision. In the area of socalled "technical" amendments, there is no objection to retroactive amendments which can be properly characterized as "clerical," "typographical" or "grammatical," but this does not extend to substantive amendments which are stated to "clarify" or "reflect" a supposed "Congressional intent" under the existing statute.

3. Retroactivity is determined with reference to the date upon which the amendment beomes law. It is reognized that in some cases publicity attendant upon a proposed amendment may induce taxpayers to take advantage of an existing "loophole." Nevertheless, the foreclosure of such last-minute tax avoidance is considered less important than the preservation of the principle that a taxpayer may rely upon an existing statute in planning his affairs.

4. A change in the current tax treatment of an item attributable to a transaction completed in a prior year may involve factors akin to retroactivity. One example is the taxation of the current installments of a previously consummated installment sale. Another example is the taxation of the current income of a trust created in a prior year. In determining whether retroactivity in this borderline area is justified, the factor of taxpayer reliance upon prior law should be balanced against such factors as equality among taxpayers and administrative convenience.

5. In the case of "relief" legislation, the considerations involved in fixing effective dates are quite different from those in the case of amendments which impose or increase a tax. The basic consideration in relief cases is Congressional discretion in determining whether there should be a remission of an unwarranted exaction under existing law, and such a determination will not normally be subject to adverse criticism. On the other hand, the Section should continue its long-established policy of not making any affirmative recommendation for retroactive relief except in the rare case involving extreme inequity.

6. If a provision is considered in the nature of "relief" to the majority of taxpayers affected, but if it may adversely affect some other taxpayers, it should not be made retroactive unless an election is afforded to avoid any adverse effect.

7. When prior law is doubtful, the existence of even a prospective amendment will often have some effect upon judicial interpretation of that prior law, as an indication either that Congress was reinforcing what it originally intended the statute to mean, or that Congress was acknowledging that the prior law was different from the amendment. Occasionally the statute, and more often a committee report, will

state that no inference as to prior law shall be drawn from the amendment. Although such an expression of Congressional self-restraint may not be too helpful, it is not subject to criticism. On the other hand, a statement in the committee report that a prospective amendment is intended to "reflect existing law" is an indirect attempt to legislate retroactively.

Section, 8/23/58.

Hon. WILLIAM FRENCH SMITH,

COMMON CAUSE, Washington, D.C., January 26, 1982.

Attorney General, Department of Justice, Washington, D.C.

DEAR MR. ATTORNEY GENERAL: I write on behalf of Common Cause to protest the Administration's recent actions undermining the Internal Revenue Service policy of denying tax exempt status to private schools which discriminate on the basis of race. The Administration's approach to this issue has been legally wrong, and procedurally indefensible. No legislation is needed to validate the long-standing IRS policy, which has a solid basis in law and has been tacitly approved by Congress. Singling out this IRS policy from all other analogous interpretative rulings, and claiming that it, alone, needs specific Congressional action before it can be enforced is itself discriminatory.

Further, there appears to be no justification for the Administration's decision to grant favored tax exempt status to Bob Jones University and Goldsboro Christian School. Nothing relevant to the tax laws distinguishes these two schools from many others similarly situated-except the judicial ruling that they are not tax exempt. If the other segregated institutions are to be denied a tax exemption, the same policy should apply to Bob Jones University and the Goldsboro Christian School. The Administration's determination to grant them favored status seems to be only a device for circumventing the Judiciary by mooting a successful legal case, vacating an important lower court decision, and avoiding a Supreme Court ruling.

The Treasury Department's view that it need not deny tax exemptions to segregated schools is plainly contrary to judicial precedents. In 1971, a three-judge district court permanently enjoined the Department from granting tax exempt status to private schools in Mississippi which engage in racial discrimination. Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1971) (three-judge court), aff'd mem. sub nom. Coit v. Green 404 U.S. 997 (1971). Although the wording of that injunction is technically limited to schools located in Mississipi, the court left no doubt that its reasoning and its declaration of law applies nationwide. Judge Levanthal, writing for the court, stated:

"To obviate any possible confusion, the court is not to be misunderstood as laying down a special rule for schools located in Mississippi. The underlying principle is broader, and is applicable to schools outside Mississippi with the same or similar badge of doubt." 330 F. Supp. at 1174.

The three-judge court anticipated the danger of weakening actions by the Treasury Department. In ruling that declarative and injunctive relief were necessary despite the Department's voluntary agreement to change its policy, the court noted: "If defendants' construction were discretionary, it could be changed in the future. We think plaintiffs are entitled to a declaration of relief on an enduring, permanent basis, not on a basis that could be withdrawn with a shift in the tides of administration, or changing perceptions of sound discretion." 330 F. Supp. at 1170-71.

The Treasury Department explains its recent "change of perceptions" by referring to your advice as Attorney General that there is insufficient statutory basis in the tax code for the Treasury to continue to deny the exemptions. This advice flies in the face of precedent.

In Green v. Connally, supra, the three-judge court concluded, after extensive analysis, that denial of tax exemptions to discriminatory institutions was not only authorized, but required, by the current tax provisions. 330 F. Sup. at 1164. To do otherwise, the court said, would "frustrate" long-standing federal public policy against support for racial segregation of schools. Id. at 1164. Further, the court held that any contrary construction of the tax code-such as that now adopted by the Treasury Department-would "raise serious constitutional questions." Id. The court held that "it would be difficult indeed to establish that such support can be provided consistently with the Constitution." Id. at 1165; see also Green v. Kennedy, 309 F. Supp. 1127 (D.D.C. 1970). The Supreme Court affirmed this decision. Coit v. Green, 404 U.S. 997 (1971).

The Fourth Circuit reached precisely the same result in Bob Jones University v. United States, 639 F. 2d 147 (4th Cir. 1980), cert. granted 50 U.S.L.W. 3278 (U.S. Oct.

13, 1981). The court relied heavily upon the reasoning of the Green case to conclude that the IRS acted within its statutory authority in denying tax exempt status to a racially discriminatory school. The court held that the government's interpretation of the tax code to deny such an exemption was supported by the statute's "purpose and history," and was consistent with "government policy against subsidizing racial discrimination in education, public or private." Id. at 151. It is this decision which the government now seeks to have the Supreme Court vacate as moot.

One more point is exceedingly important. Surely you will agree that under our system of government it is ultimately for the Judiciary to rule upon whether the Treasury as authority to rule upon whether the Treasury has authority to withhold tax exempt status from a school that engages in racial discrimination. Two courts have held that it does have that authority. As a former Solicitor General of the United States I realize that there are occasions on which a responsible law officer feels that he cannot in good conscience defend a lower court decision favorable to the Government. I assume that that was your position on the merit in this case, even through it seems to me to fly in the face of reason and justice. But surely, on that assumption, the only proper course was to ask the Solicitor General to file a confession of error, stating that you believe the judgment below to be erroneous, explaining your reasoning, and submitting the issue to the Supreme Court for its decision. If no one else was willing, you could have filed such a confession of error as Attorney general. Seeking to moot the case by give in these two taxpayers preferential treatment, however well intended, is bound to appear as deliberate effort to avoid a judicial ruling.

I submit that the suggestion of mootness should be withdrawn, and that any question concerning the correctness of that judgment should be submitted to the decision of the U.S. Supreme Court.

The Treasury Department's assertion that there is a need for congressional guidance at this time is also without foundation. The non-exemption policy implemented by the Treasury Department in 1971 was followed for eleven years by both Republican and Democratic administrations, and with the full knowledge of Congress. Particularly in light of the judicial decisions which had construed the current code to support and authorize that practice, Congress' failure to amend the statute over the past decade must be considered as expressing agreement with the Treasury Department's policy. See, e.g., Helvering v. Winmill, 305 U.S. 79, 83 (1938). Congressional action would be necessary only to change the Department's long-standing practice, not, as you suggest, to continue it. Indeed, Congress has approvingly noted the judicial decisions_requiring the denial of tax exemptions to segregated schools. Both the House and Senate reports on a 1976 tax bill cite the Supreme Court affirmance of Green v. Connally, supra, and state that racial discrimination is "inconsistent" with an education institution's tax exempt status. S. Rept. No. 94-1318, 94th Cong., 2d Sess 8 n.5 (1976); H.R. Rep. No. 94-1353, 94th Cong., 2d Sess. 8 n.5 (1976). The Internal Revenue Service, in its day-to-day administration of the tax code, makes countless determinations on the scope and application of the law, including questions of whether exempt status in justified in light of clear national policies. See, e.g., Revenue Ruling 80-278, 1980-2 C.B. 175; Revenue Ruling 80-279, 1980-2 C.B. 176; Revenue Ruling 76-204, 1976-1 C.B. 152; Revenue Ruling 75-384, 1975-2 C.B. 204. In Revenue Ruling 76-204, for example, exemption was granted on the ground that "the organization is enhancing the accomplishment of the express national policy of conserving the nation's unique natural resources." (Emphasis supplied.) In Revenue Ruling 75-384, on the other hand, exemption was denied to an organization formed to promote world peace and disarmament by nonviolent direct action including acts of civil disobedience on the ground that the organization's activities "demonstrate an illegal purpose which is inconsistent with charitable ends.' (Emphasis supplied.) In addition to these recent "published" rulings, many "private letter rulings" have proceeded on a similar analysis. All of these authorities take various national policies into account in passing upon the issue of exemption.

Such decisions applying fundamental national policies are routinely made without recourse to Congress. The Treasury Department has now singled out one policy relating to the tax treatment of segregated schools and imposed upon it the unique obstacle of requiring express congressional approval. In singling out this one policy as requiring specific congressional approval, the Administration is imposing an unwarranted and perhaps unconstitutional burden on the federal government's antidiscrimination policies. In an analogous situation, the Supreme Court has held that the imposition of special burdens on those seeking governmental relief against racial discrimination is itself a violation of the Equal Protection Clause. Hunter v. Erikson, 393 U.S. 385, 391 (1969).

Thus, the Administration's actions in these cases, unless corrected, will have two distressing consequences. Despite belated protestations, it will encourage discriminatory racial policies regugnant to most Americans. It will also foster the widespread cynicism that results when the chief law officer of the United States puts himself in a position of seeming to grant special favors to two taxpayers in an effort to circumvent the rule of law.

Sincerely,

ARCHIBALD Cox, Chairman.