3.

4.

5.

6.

Employment of, or substantial efforts to recruit,
minority teachers or other professional staff.

Participation with integrated schools in sports,
music, and other events or activities.

Special minority-oriented curriculum or orienta-
tion programs.

Minority members of the board or other governing
body of the school.

At the Subcommittee's hearings, Commissioner Kurtz was asked on several occasions whether schools would implicitly be expected to undertake all or most of these efforts to demonstrate their good faith intentions. The Commissioner responded that all a school's actions would be weighed in balance with all other factors and that a negative inference would not necessarily be drawn from a school's failure to undertake any particular action.

Despite such reassurances, representatives of private schools continued to express concern that they would be expected to undertake all, or at least most, of these actions, without regard to such realistic considerations as whether the school could financially afford the action or program, such as scholarships or tuition aid. The staff concluded that this section of the proposal could be redrawn to be responsive to these very real concerns while retaining the basic notion of refuting an inference of discrimination by objective acts and representations.

First, the staff concluded that the examples set forth were not all of equal weight. Specifically, the first example essentially incorporates the present requirements of Revenue Procedure 75-50 and as such it describes singularly important activities in efforts to enroll minority students. It might also be noted that lack of financial resources is not an adequate explanation for not undertaking these actions. Therefore, added weight and

emphasis should be given to these very important factors. This could be done by breaking the first example into its three component parts, or some other step that makes clear their preeminence.

Another corrective measure would be to expand the examples to include such things as making the private school's facilities available for use by the community on an integrated basis and participating in academic programs with integrated schools. Further, because of the strong criticisms expressed about the example relating

to minority-oriented curriculum and the fact that there is no specific legal precedent for this action, that portion of example 5 could be deleted.

Finally, consideration should also be given to adding clarifying language to the final paragraph of Section 4.03 which at present states that the failure of such actions or programs in obtaining some minority enrollment within a reasonable period of time will be a factor in determining whether the actions are adequate and undertaken in good faith. For example, a statement could be added to the effect that the examples given are illustrative only, in order to make clear that there is no penalty attaching to the absence of any specific example and to additionally emphasize that the list of examples is neither exhaustive nor exclusive. This would respond to the concerns expressed by some witnesses. A further clarification of IRS's intent to look to the specific circumstances surrounding each school could be achieved by adding a statement that the IRS will, in assessing adequacy and good faith of a school's efforts, give consideration to circumstances which may make such actions or programs ineffective or infeasible. In this regard, testimony was received at the Subcommittee's hearings to the effect that many private schools have financial constraints which influence their ability to offer scholarships or provide similar aid and, further, that in some communities the commitment to the public schools held by minority members is so strong as to make any efforts by private schools ineffective. While these factors may be difficult ones to assess, it is also clear that in making determinations about good faith efforts, the IRS should consider whether the school's failure to obtain minority enrollment is due to factors beyond the school's control.

E.

Deductibility of Contributions and Deferral of Final Revocation of Tax-Exempt Status ("Grace Period")

Section 5.03 of the proposal states that the IRS will apply Revenue Procedure 72-39 in order to determine the deductibility of contributions made to adjudicated or reviewable schools. In order to guarantee administrative uniformity in the treatment of this question, and consistent with our understanding of IRS's intentions,

Section 5.03 should be modified to make clear that advance assur

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ance of deductibility with respect to contributions to a particular school will continue until after National Office review of a case and will be suspended only with National Office approval. further clarify Section 5.03 of the proposal, an explicit reference to Section 7428 (c) of the Internal Revenue Code should be included so that it will be abundantly clear to affected schools that in the event a private school seeks a declaratory judgment of its tax-exempt status, the provisions of Section 7428, which provide some protection for the deductible status of contributions made during the challenge period, will be applied.

Section 5.04 of the proposal establishes general guidelines to be followed for the processing of proposed revocations of the tax-exempt status of private schools. The second paragraph of that section provides that if a school requests that final revocation be delayed and sets forth actions already taken and to be undertaken in good faith, the Service will consider a delay in appropriate

cases.

In the event that the Service did delay final revocation on the request of a private school, the Service would in effect be granting the school a "grace period" to allow the school to establish a racially non-discriminatory policy during that period. The August, 1978 version of the proposed Revenue Procedure contained rather extensive and explicit grace period provisions; however, the original version also provided that advance assurance of deductibility of contributions would be suspended during the grace period. At the Subcommittee's hearings, several witnesses stated that the grace period provisions should have been retained, but that advance assurance should not be suspended until the final determination of a school's exempt status has been made by the Service. On the other hand, some witnesses felt that schools should not be allowed any more time to come into compliance.

On balance, it seemed to be the majority view that voluntary compliance should be encouraged. Thus, it was the staff's opinion that the Procedure should be clarified so that it makes explicit that "grace periods" are to be allowed and that any potential abuse

could be foreclosed by limiting the grace period to a reasonable length, normally not to exceed two school years. Further, the proposal should make clear that as long as a private school undertakes actions in good faith during the "grace period", advance assurance of deductibility should not be suspended.

These changes would guarantee schools a middle course between going to court and acquiescing in a revocation. If a school is interested in achieving compliance and submits a satisfactory plan of action to the IRS, it seems reasonable to allow deductible contributions to a greater degree than would be provided if the school merely relied on its rights under Section 7428. It is also our understanding that, even in the absence of these revisions, the IRS would generally not revoke advance assurance during the deferral period provided for in the February version of the proposed Revenue

The Subcommittee staff firmly believes that if the proposed Revenue Procedure were changed to incorporate the foregoing recommendations, it would be in conformity with existing legal precedents; it would be more clear in terms of its operation and application to schools; it would be more equitable as to private schools generally and as between particular private schools; and, finally, it would substantially reduce burdens, administrative and otherwise, placed on affected private schools.

1. Issues Affecting Church-Related Schools: The Subcommittee staff also studied at length the problems raised at the Subcommittee's hearings by certain church-related schools. As discussed at greater length in the briefing memorandum on First Amendment concerns (Appendix, p. 23), while our analysis concluded that the Procedure should apply to religious private schools, the degree of required accommodation is less clear. While the staff did not offer recommendations for changes to the proposed Procedure in this area, our analysis is presented here in the interests of providing more complete information on the issues that were considered in depth.

With specific reference to the terms of the revised proposed Revenue Procedure, the staff considered whether an additional example should be added to Section 3.03(b) concerning special circumstances which limit a school's ability to attract minority students in order to make clear that the Service was to consider whether a religious school's ability to attract minority students was limited by its non-discriminatory practice of accepting only students who belonged to the religious denomination or the church. Such a practice would have been considered non-discriminatory when the denomination and the sponsoring church itself were clearly open to all without regard to race. This would have borrowed a */ standard presently articulated in Revenue Procedure 75-50.

The Subcommittee staff concluded that the addition of such language would lead to other serious difficulties. First, in spite

of its apparent simplicity, application of this standard would require the IRS to make a very difficult factual determination, namely, whether a school's sponsoring church or denomination is truly open to all on a non-discriminatory basis. The proposed Procedure generally attempts to determine a school's racial policies by having an examiner seek answers to a series of small questions. The addition of this standard would undermine such an approach by requiring an examiner to determine, with little or no guidance, an ultimate question of discrimination or not.

Second, it is sometimes very difficult to tell whether a school does or does not select its students on the basis of membership in a religious denomination or unit.

For example, fundamentalist Christian schools very often do not limit their students to members of a particular church. However, they quite often require that all students ascribe to certain religious beliefs. These required beliefs are sometimes general in nature, sometimes very specific. In order to determine if a school in fact selects students on the basis of membership in a particular religion, an

"A school that selects students on the basis of membership in a religious denomination or unit thereof will not be deemed to have a discriminatory policy if membership in the denomination or unit is open to all on a racially non-discriminatory basis." Revenue Procedure 75-50, Section 3.03.