STATEMENT OF MICHAEL I. SANDERS My name is Michael I. Sanders. I am a practicing lawyer in Washington, D.C. I have specialized in federal tax matters, first as a trial attorney with the Department of Justice, then with the Treasury Department in the Office of Tax Legislative Counsel and since 1970, in private practice. I have long been an active member of the Section of Taxation of the American Bar Association, and am past Chairman of the Committee on Exempt Organizations. I am also an adjunct professor at Georgetown University Law Center, where I teach tax exempt organizations in the graduate tax program. I am neither a constitutional nor a civil rights lawyer; nevertheless, in my experience as a practicing lawyer and as a professor of exempt organizations, I have reviewed the statutory and judicial history involving tax exemption for racially discriminatory private schools. I am testifying today in my individual capacity. In 1970, the Internal Revenue Service determined that racially discriminatory private schools are not entitled to tax exemption under Section 501(c)(3) of the Internal Revenue Code. This decision was originally made at the highest levels of the Nixon administration, at a time when a three-judge federal panel in Green v. Connally had issued a preliminary injunction prohibiting the Service from granting tax exemption to discriminatory private schools in Mississippi. The Green court subsequently made the injunction permanent with respect to Mississippi schools and stated that "the Service would be within its authority in including similar requirements for all schools of the nation". The Green deci sion was affirmed by the Supreme Court in 1971, was endorsed by Congress in 1976, and has been followed by every federal appellate court that has considered the issue. On October 13, 1981, the Supreme Court granted certiorari in two cases involving religious schools, Bob Jones University and Goldsboro Christian Schools, to consider a constitutional question that was discussed but not at issue in Green: whether the First Amendment permits tax exemption for religious schools that engage in racial discrimination as part of their religion. In a series of three announcements over the past month, the Administration has called into question the legal validity of Green and its progeny, accused the Service of "governing by administrative fiat", sought dismissal of the Supreme Court appeal in Bob Jones and Goldsboro Christian Schools, and asked Congress to adopt needless legislation. Specifically, the Administration 1/ o Informed Congress that the Service lacks legal authority to deny tax exemption to discriminatory private schools unless Congress passes new legislation. o Instructed the Service to withdraw its published rulings denying exemption to discriminatory private schools, but nevertheless not to grant exemptions to any schools except Bob Jones and Goldsboro Christian Schools pending Congress' consideration of the proposed legislation.1/ Effective October 1, 1979, certain IRS action regarding o Sought legislation which would merely confirm the correctness of the courts' and the Service's position since 1970 without providing additional guidance and without resolving the First Amendment issue that is before the Supreme Court in the Bob Jones and Goldsboro Christian Schools cases. o Asked the Supreme Court to dismiss as moot the appeals of Bob Jones and Goldsboro Christian Schools on grounds that their exemptions have temporarily been restored, and thereby attempted to preclude the Court from ruling on the First Amendment issue. The Administration's new position raises fundamental questions regarding separation of powers. The Administration has apparently misconceived the constitutional division of powers and the proper role of an executive agency--the Department of the Treasury--in carrying out its assigned function. Indeed, the action may be viewed as an attempt through "executive fiat" to manipulate the branches of government to achieve a result that would serve certain private purposes at the expense of the national welfare. [Footnote cont'd] private schools was stayed by Congress through amendments My testimony will address the legal issues with respect to tax exemption and discriminatory private schools. I will also consider the impact of the Administration's actions, including the proposed legislation and Supreme Court cases, and will focus on the role of the Service in enforcing the law. Finally, I will address the legal options that are available to achieve a uniform national policy on racial discrimination in education. II. Legal Issues With Respect to Tax Exemption for As a threshold matter, the Administration has challenged the Service's authority to promulgate and enforce rules which would deny exemption to discriminatory private schools. The starting point in analyzing the Administration's position is with Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1970), aff'd. sub. nom. Coit v. Green, 404 U.S. 997 (1971). In that case, the court interpreted Section 501(c)(3) in light of the well-established doctrine in Federal tax law that congressional intent in providing tax deductions and exemptions should not be construed as applicable to activities which are illegal or contrary to public policy. The court applied this public policy doctrine to balance congressional intent to provide favorable tax benefits to educational organizations against the strong Federal policy against racial discrimination in education as reflected in the Civil Rights Act of 1964 and Supreme Court decisions such as Brown v. Board of Education, 347 U.S. 483 (1954). The court concluded that "[u]nder the conditions of today [the Internal Revenue Code] can no longer be construed so as to provide to private schools operating on a racially discriminatory premise the support of the exemptions and deductions which Federal tax law affords to charitable organizations and their sponsors".2/ The court also recognized that the common law of charitable trusts which underlies Section 501(c)(3) may provide a second "public policy" basis for denial of exemption. Under the common law, trusts which qualified as "charitable" were accorded special benefits designed to protect their existence. Since the rationale for such preferred treatment was that the trusts were organized and operated for purposes which benefited the public, a trust which operated in a manner which was illegal or contrary to public policy would not be considered "charitable". Accordingly, the court observed that it is appropri ate to interpret Section 501(c)(3) to require that an organization must be considered "charitable" under common law standards in order to qualify for exemption.3/ The Green court also recognized a third argument in support of the Service's position--that the Constitution prohibits 2/ 3/ 330 F. Supp. 1150, 1164 (1971). This interpretation has been challenged by religious |