were not using their special curricula as a subterfuge to avoid admitting minority students; nonetheless, individuals associated with Hebrew schools and others testified at the hearing that they did not feel this provision was entirely adequate because such schools would generally have no minority enrollment. Thus it was suggested that it was difficult to feel sure that a near or total absence of minority students could ever be regarded as "significant minority enrollment" even with consideration being given to the effects of special programs and special curricula. The Oversight Subcommittee staff believes that the provisions in the proposed Procedure, properly administered, would be adequate to exempt from the reviewable category non-discriminatory schools that have few or no minority students as a result of curricula that appeal only to groups that are not composed of a significant number of minority students. However, it also seems appropriate to respond to the concern expressed. This end could be accomplished by adding a statement to Section 3.03(b) to the effect that there is no generally applicable minimum number or percentage of minority students that must be enrolled in order for a school's minority enrollment to be significant. Such language would serve to empha size that in some situations no inference of racial discrimination is supported by the existence of a very small minority enrollment, or even the total absence of minority enrollment. It is important to convey that, as the courts have held, an inference of discrimination will not be supported by racial composition statistics, when the apparent disparity of these statistics has an explanation unrelated to racial discrimination. Another part of Section 3.03(b) allows individual private schools to aggregate their minority student enrollment for purposes of the significant minority student enrollment criterion, if they are a part of a system of commonly supervised schools, as long as certain conditions are met. This provision could allow whole school systems to pass muster under the proposed Revenue Procedure even though they were made up of separate schools that were substantially composed of minority children in some and non-minority children in others. Such a division into individual schools may very well be innocent of intentional racial discrimination notwithstanding the existence of such racial concentrations. This principle is well recognized in the public school desegregation cases. The critical factor, therefore, is making sure that such a provision only permits schools to be considered on a system-wide basis when their division into schools is innocent of a racially discriminatory purpose. The revised version of the proposed Revenue Procedure does appear to have sought this result. However, the Subcommittee staff believes that, because of the possibility of abuse and the present breadth of the provision, it is advisable to add language to the provision to narrow its terms and to improve the provisions' parallel to those applicable to public school systems. Specifically, language should be added that: (1) would only permit enrollment aggregations between schools of the same educational level; (2) would not allow aggregations for schools that serve overlapping geographical areas and systems where the schools serve non-contiguous areas; (3) would not allow enrollment aggregations on a system-wide basis where there is evidence that the area served by various private schools has been racially gerrymandered; and (4) would not allow aggregations where a system of commonly supervised schools was created merely in order to come within the aggregation provision. 2. "In Fact" Relationship to Public School Desegregation: Section 3.03 (c) sets forth the third criterion which establishes the parameters for determining whether the creation or substantial expansion of a private school was related in fact to public school desegregation. In present form, Section 3.03 (c) states that as a general rule, the formation or substantial expansion of a private school at the time of public school desegregation will be considered to be in fact related to the desegregation of the public schools. The subsection continues by stating that evidence will be considered to determine the lack of an in fact relationship and then sets forth seven facts that tend to indicate the absence of an in fact relationship, as well as seven facts that tend to indicate the existence of an in fact relationship. Section 3.03 (c) raises two questions. First, would the general rule apply even though the facts are inconclusive? Second, is the Service or the private school responsible for establishing the absence or existence of an in fact relationship? In regard to the first question, it is at least theoretically possible that the application of the fourteen facts as well as other relevant facts may result in an inconclusive finding as to whether the formation or substantial expansion of a private school was related in fact to public school desegregation. If that occurred, an in fact relationship would be presumed under the terms of the revised proposal. The Subcommittee staff believes this implied presumption is inappropriate on its face and that it has the practical effect of placing more weight on the other two factors, i.e., those relating to the time of formation and the level of minority enrollment. Consequently, the Subcommittee staff recommends the elimination of this general rule. As to the second question, Section 3.03(c) of the revised Procedure states that the "Service will consider evidence" concerning an in fact relationship and that the determination must be based on objective evidence. However, the proposal is ambiguous in terms of whether the Service will gather and assess such evidence or whether a private school will be required to present evidence to the Service concerning the lack of an in fact relationship. Commissioner Kurtz implied at the Subcommittee's hearing that it was anticipated that the IRS itself would gather and assess evidence relating to an in fact relationship. The Subcommittee staff recommends that the proposal be clarified to insure that it is the Service's responsibility to gather and assess any such evidence. As discussed in detail in the Appendix, this change would bring the proposed Procedure in line with existing legal precedents which would require that the burden to rebut an inference of discriminatory intent would be placed on a school only after a searching inquiry had been made as to the justification for that inference, based on the existence of an in fact relationship. These two recommended changes to Section 3.03(c) are crucial, in the opinion of the Subcommittee staff, in order to conform the proposed Procedure to existing legal precedents, to answer the legitimate criticisms raised by private school representatives, and to fairly balance the burdens of proof, as well as administrative-type burdens, between the IRS and affected private schools. C. Definition of Community Section 3.04 of the revised proposed Revenue Procedure sets forth the definition of the "community" served by a private school that is used for purposes of determining whether the school has a significant minority enrollment. It is not clear that the present definition would operate fairly in a number of cases raised during the Subcommittee's hearings. If One example is where two private schools are located in different public school districts, but in fact appeal to the same type of students and are in direct competition with one another. the public school districts have substantially different racial compositions, the two schools would have to meet quite different tests under the "safe harbor" test. Assuming neither one had very many minority students, one could argue that one school would be treated more harshly than the other. There are several ways of solving this problem, none of which is perhaps totally satisfactory. The alternative that seems to work the best is one that would change the definition of community to include only those districts from which a substantial percentage of students are enrolled; thus if a school did not enroll 20 percent of its students from the district where it is located, that district would not be counted in the measurement for purposes of applying the safe harbor rule. Another problem situation occurs where a school enrolls students from across the nation and thus does not draw 20 percent of its students from any school district. This might be the case for certain "prep" schools or schools having a national reputation. In such situations, the present definition would nonetheless measure the school's minority enrollment based on that of the community where the school was located. A more equitable approach would be one providing that, where a school does not enroll a substantial percentage of its students from any one school district, community would be defined in terms of the states from which the school enrolls a substantial percentage of its students. These changes are intended to more fairly and accurately measure a school's actual community in a variety of diverse situations where the school's physical location is not reflective of the actual community it intends to serve. At the same time, it was believed equally important to retain objective tests in this section, which is designed to determine numerical compliance with the safe harbor test in measuring significant minority enrollment. The staff considered the special problems pertaining to certain church-related schools, and these are discussed in Section G, titled "Other Issues." D. Examples of Actions and Programs Reasonably Designed to Attract Minority Students Even though a private school is determined to be an adjudicated or reviewable school under Section 3 of the revised proposed Revenue Procedure, that determination in and of itself does not mean that the tax-exempt status of the private school will be automatically revoked. If an adjudicated or reviewable school can show that it has undertaken actions or instituted programs reasonably designed to attract minority students, the private school will be considered to have a racially non-discriminatory policy as to students (Sections 4.01 and 4.02). Section 4.03 of the proposal sets forth the following six examples of such "actions and programs": 1. 2. Active and vigorous minority recruitment programs, Publicized offering of tuition waivers, scholar- |