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1. THE PROPOSED REVENUE PROCEDURE IS UNAUTHORIZED BY ANY ACT OF CONGRESS A Revenue Procedure is intended as law for a nation of 220 million people. All would agree that the proposal before your Subcommittee today is one of extreme importance. The IRS claims it is that. Čertainly it pertains to such weighty matters as racial discrimination, the ongoing life of churches, liberties of parents, revenues for our Government, tax liabilities of citizens, and the operating of thousands of schools. It would be astonishing to imagine that any such measure would be put forward unless it were clearly authorized by the Congress. It would be more astonishing if the proposal were founded on a flotsam of inferences from Supreme Court decisions, predictions as to how the Court will "surely" act, IRS's own precedents, official gossip about the fundamentalist schools, and the subjective social views of brother citizens who happen to be public servants. Yet that, unhappily, is the case. Chief among the reasons advanced in support of the IRS assertion that it possesses the necessary authority to adopt the Procedure is the claim that the affirmance, by the United States Supreme Court, of the decision of the Federal District Court for the District of Columbia in the case of Green v. Connally, acts as an unassailable stamp of approval upon IRS's present interpretation of Section 501. Yet the Supreme Court, in 1974, noted that IRS had reversed its position during the course of the Green litigation, and because of that reversal, its affirmance in Green lacked "the precedential weight of a case involving a truly adversary controversy". 416 U.S. 725, 740 (fn. 11) (1974). The Court flatly stated that "The question of whether a segregative private school qualifies under 501(c)(3) has not received plenary review in this Court". Ibid.

IRS has misread the plain language of Section 501(c)(3) in urging that all religious organizations also exhibit all of the elements of a common law charitable organization, including conformity to the "public policy" of the day, in order to be considered exempt under that Section. Section 501(c)(3) exempts organizations organized for religious or charitable purposes, not organizations organized for religious and charitable purposes. There is thus no basis whatever, in the language of the Section, for importing the common law of charities into the Section's requirements. Yet this IRS has admittedly done.


Apart from the threshold problem of lack of statutory authority for the Proposed Revenue Procedure, is a series of features of the proposal which render it inescapably unconstitutional.

Many-perhaps most-religious schools are not part of any "system" of "commonly supervised" schools. They exist instead as integral parts of the religious teaching mission of independent churches. Yet IRS, in its proposal, accords a degree of latitude to those church-schools which are part of a "system" which it does not similarly accord to independent church schools. The question is thus presented: May the religious liberty of any church be made to depend upon its being part of a "system"? It is plain, however, that government may not condition religious liberty upon conformance to a scheme of ecclesiastical organization favored by government. IRS, to unconstitutional effect, persists in its failure to recognize that churchschools exhibit few, if any, of the characteristics of the public schools. For instance, a church-school does not "draw" (as, in a critical passage, IRS assumes) its students from public school grades. A church-school has no power of assignment of students. Rather, it is parents who enroll children in church-schools, and IRS has not the slightest power to regulate parents in choosing the schools in which their own children shall enroll. This the parents do, typically, for a variety of reasons, though invariably for the positive reason of desiring the child to become fully a Christian, and to benefit from the hard work, discipline and religious formation which the church-school fosters. Should, incidentally, IRS attempt to sift parental motives so as to distinguish religious from secular motivations, it would thereby violate the Establishment Clause of the First Amendment.

Too, IRS continues to fashion its own home-made concept of the "community" served by a church-school. Church-schools-be they Amish, or Fundamentalist Christian, or whatever-serve their own faith communities, and not any given geographical region, as IRS supposes.

The error in this designation of "community" by IRS becomes the cause of burden upon the religious liberties of these church-school faith communities when IRS attempts to force them to be related to enrollment patterns in public school districts in order to avoid the opprobrium of being designated a body which is presumptively racially discriminatory, i.e., a "reviewable school".

But should a church-school lie in an IRS target area, and should it not meet IRS minority enrollment standards, it is prima facie discriminatory and thus, in most instances, threatened with economic extinction. To escape this fate, a church-school

must demonstrate its willingness to entirely subserve its religious requirements as to enrollment, evangelization, use of religious trust funds, teacher qualifications, curriculum, and overall direction to the secular requirements of IRS in those critical areas of the church's religious mission. This would be violative of religious liberty and thereby unconstitutional-were the IRS standards fixed and readily knowable by the church, but alas, they are not. Instead, IRS holds itself to no standard but its own judgment of what constitutes "all the applicable facts and circumstances" involved. IRS has listed some, but not all, of those facts, and has left itself a free hand in weighing whatever facts and circumstances it determines are "applicable" in any given situation. This in itself, violates due process.


A loss of exemption from income taxation is a serious burden to a church-school. Avoidance of that loss may not be made to depend upon conformity by a church to a favored government policy, or upon abandonment of a constitutional right, without a clearly expressed Congressional mandate which itself represents the least restrictive means of achievement of, not just a legitimate government interest, but of a "compelling state interest", Sherbert v. Verner 374 U.S. 398 (1963). The IRS proposal is neither clearly mandated by statute, nor preservative of rights of religious minorities.

If, based solely upon IRS administrators' interpretations of Supreme Court decisions, IRS may fasten this Proposed Revenue Procedure on religious schools, there is plainly no reason why, in succeeding years, the administrative imagination should not produce further and worse intrusions upon those schools. The words of Madison, in his great Memorial and Remonstrance, are here apt:

[It is proper to take alarm at the first experiment with our liberties... The freemen of America did not wait till usurped power had strengthened itself by exercise and entangled the question in precedent. They saw all the consequences in the principle, and they avoided the consequences by denying the principle." James Madison, A Memorial and Remonstrance, II Madison 183-191. (Emphasis supplied.)


When the Commissioner of Internal Revenue issued his original proposed revenue procedure on August 21, 1978, Mr. Sanders and I participated in the preparation of a statement submitted to the Commissioner. Our statement had as its most fundamental point that the Commissioner clearly had the right, and indeed the duty, to take appropriate steps to insure that private schools which practice racial discrimination in violation of the law do not enjoy tax exempt status. We continue to subscribe to that principle. We start with what appears to be axiomatic: The Internal Revenue Code has provided for many years for certain tax benefits for those organizations which satisfy the congressional standards set out in the Code. Throughout that period the Code has imposed upon the Commissioner of Internal Revenue the obligation to enforce those provisions, just as he has the obligation to enforce all other Code provisions.

Section 501(c)(3) is of course the charitable organization provision which defines those organizations which are exempt from tax on their income; deductibility of contributions to such organizations is determined under Section 170(c)(2). There is nothing new about the Commissioner's obligation to monitor the activities of all (c)(3) organizations to determine their qualification for receipt and retention of the relevant tax benefits. Nor is there anything new about the Commissioner's frequent activity in this general area and more particularly with regard to tax exempt schools.

In terms of recent years, the Commissioner's effort took the form of IRS News Releases of July 10 and 19, 1970, which were followed by Revenue Rulings 71-447 and 72-54. The purpose of all of these pronouncements was to articulate the basic requirement that tax exemption required private schools to operate in all respects in a manner which did not discriminate on the basis of race, color, or other elements of ethic origin.

These rulings were issued in the context of judicially ordered efforts to desegregate public schools throughout the country and the related attempt to satisfy the educational requirements of some segments of the population by the establishment of private schools. It was in that context that various court decisions confirmed the long-standing principle that an organization which operates illegally or in a manner contrary to public policy is not "charitable" and therefore not entitled to benefits of Federal income tax exemption. Ould v. Washington Hospital for Foundlings, 95 U.S. 303 (1877); Girard Trust Co., v. Commissioner, 122 F. 2d 108 (3rd Cir. 1941). In view

of the well-defined public policy against racial discrimination reflected in the Civil Rights Act of 1964 and cases such as Brown v. Board of Education, 347 U.S. 483 (1954), and Swann v. Charlotte-Mecklenberg Board of Education, 402 U.S. 1 (1971), courts have applied the above-described principle over the past several years to deny tax exemption to private schools which practice racial discrimination. Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1971), aff'd per curiam sub nom. Coit v. Green, 404 U.S. 997 (1971). It is thus clear to us that the Internal Revenue Service has a legal duty to deny the benefits of Federal income tax exemption to private schools which practice racial discrimination.

There are some who dispute this on the basis of the footnote in the Supreme Court's 1974 decision in Bob Jones University v. Simon, 416 U.S. 725, where the Court noted that the Green v. Connally decision "lacks the precedential weight of a case involving a truly adversary controversy." Although that comment was truly dictum to the issue before the Court, considerable stress is placed on the footnote by those who contend that the Supreme Court has not "really" decided the basic question.

We suggest several clear and fully dispositive answers.

1. It appears that there has been only one Federal Court decision' subsequent to Green v. Connally which dealt squarely with the precise question with which we are concerned today: is a private school which engages in racial discrimination entitled to tax exemption under Section 501(c)(3)? In that decision (Goldsboro Christian School v. United States, 436 F. Supp. 1314 (E.D.N.C. 1977)) the Court held specifically that the answer is in the negative:

"Since benefit to the public is the justification for the tax benefits, it would be improper to permit tax benefits to organizations whose practices violate clearly declared public policy. It cannot be assumed that Congress intended to confer this encouragement, however indirect, to organizations which actively violate declared national policy. While there is no specific language in the statute to the effect that an organization satisfying one or more of these qualifying purposes is excluded because its practices violate public policy, this limitation has been held to be inherent in and compelled by both common rules of statutory construction and congressional intent.'

The second answer to those who rely on the 1974 footnote dictum is provided by Congress itself. This appears in connection with Public Law 94-568 enacted October 29, 1976, to add Section 501(i) to the Code, denying tax exemption under Code Section 501(c)(7) to social clubs which practice racial discrimination. In making that change, the Finance Committee (Senate Report No. 94-1318, 1976-2 C.B. 601) made clear the congressional intention to overrule the Federal District Court decision in McGlotten v. Connally, 338F Supp. 448 (D.D.C. 1972). In explaining that purpose the Committee report makes equally clear the congressional intent to treat the Supreme Court decision in Green v. Connally as the law applicable to private schools, i.e. that tax exemption is not available to such schools which practice racial discrimination. The Committee report goes on to say that the purpose of the new provision regarding social clubs was to bring them into line with "national policy" against racial discrimination.

To make the same point in a different way: since Congress understood Green v. Connally to establish the rule that private schools which practice racial discrimination are not entitled to tax exemption, there is no need to say so in the Code, but since the McGlotten decision announced the opposite rule as to social clubs, an amendment to the Code was the only means available to the Congress to impose the same condition upon social clubs as Green v. Connally imposed upon private schools, namely that tax exemption required compliance with the strong national policy against racial discrimination.

The Commissioner has now made the determination that experience under the existing pronouncements proves their inadequacy. I have no way of evaluating that experience and the related determination, but given the Commissioner's threshold


1 Advocates of the proposition that the Commissioner does not have the power to act cite the post Green v. Connally decision by Federal District Court after remand from the Supreme Court in the Bob Jones University case. But that case (No. 76-775 (D.S.C. filed December 26, 1978)) did not involve the question with which we are concerned, and indeed specifically distinguished (and in effect approved) the Goldsboro decision. Thus: "The secular interest being advanced in Goldsboro could be considered compelling, for that interest concerned granting blacks equal access to educational institutions, an interest which this Court earlier recognized was in keeping with clearly declared public policy. On the other hand, this Court can discern no public policy of comparable magnitude with respect to the prohibition of discrimination by private institutions on the basis of the race of one's spouse or companion. Thus, revocation of the plaintiff's tax exempt status after May 29, 1975, constitutes an unconstitutional infringement of plaintiff's right to the free exercise of its religious beliefs."

determination, it is his prerogative-and indeed, his obligation-to adopt such measures as in his judgment are deemed necessary or desirable to insure that schools which discriminate do not enjoy tax-exempt status.

The proposal creates two categories of schools whose tax exempt status is conditioned upon their showing the absence of the prohibited discriminatory policy by satisfying one of two sets of standards. The Revenue Procedure states that experience indicates the need for that special burden in the case of adjudicated schools. Assuming the absence of any evidence that the school has dropped its discriminatory practices, we have no problem with that determination.

The justification for the same rule as to reviewable schools is stated to be the "badge of doubt" standard enunciated in Green v. Connally. This appears to be a justifiable exercise in judgment on the part of the Commissioner.

Since we do not purport to be expert in the area of civil rights, we are not in a position to evaluate the Commissioner's judgment in proposing specific criteria for determining the presence or absence of a non-discriminatory policy. We suggested, however, as to the Commissioner's original proposal, that the question did not appear to lend itself to precise categorization, that failure to meet specified standards should therefore not mean automatic loss of tax exemption by reviewable schools as originally defined, and that instead each such school should have the opportunity to show its non-discriminatory policy by its own facts and circumstances, that separate rules were appropriate for specialized schools, and that except for those reviewable schools which were not making a good faith effort to comply with the proposed guidelines, there should be no announcement of suspension of advance assurance of deductibility.

We are pleased to say that the Commissioner has seen fit to adopt, to varying extents, at least the primary thrust of each of those suggestions. Accordingly, subject again to our disclaimer regarding specific guidelines, we endorse the substance of the current proposal.

1. A pervasive theme of the current proposal is an emphasis on facts and circumstances, as opposed to specific standards which require compliance. This emphasis is apparent in two key respects, first with regard to the definition of a reviewable school (Section 3.03), and second in formulating the guidelines for determining whether a reviewable school engages in discrimination (Section 4.02).

2. In the former respect the proposal relies upon facts and circumstances in connection with applying two of the three elements of the definition of a reviewable school. As to the guidelines, the proposal states the rule in very simple terms: a reviewable school need only "show that it has undertaken actions or programs reasonably designed to attract minority students on a continuing basis". The proposal then goes on to give examples.

We believe that this is a realistic and practical approach to the problem: the Commissioner has provided helpful guidelines to the schools and to revenue agents. These guidelines appear to be reasonable and workable.

3. At the same time the proposal makes several other noteworthy procedural changes. These include the elimination of (a) the originally proposed two-year grace period and (b) a special rule for the application of Revenue Procedure 72-39 (announcement of withdrawal of assurance of deductibility prior to final determination of revocation). We believe these two changes to be sound: the new facts and circumstances tests appear sufficiently flexible to warrant reliance upon the normal rules for audit and deductibility.

4. It is equally noteworthy that the Commissioner proposes to coordinate at the National Office the review of certain actions in the field. This too appears to be a sound approach, at least during a transition period following the adoption of a final rule.

As noted at the outset, we believe that the current proposal represents a significant improvement over the original suggestion, and in substance, we support the current proposal.

Senator PACKWOOD. Next, we will take Mr. Kelly and Mr. Weniger.


Mr. KELLY. My name is William Kelly, superintendent of Christian Unified Schools in San Diego. I represent the Association of Christian Schools International. Our offices are in Whittier, Calif.

We represent some 1,000 schools around the country with approximately 180,000 students.

The average school size is 218 students.

We have been operating for well over 15 years now. We do not allow any school with our constituency to discriminate. We have an open admissions policy. This is carried out, in fact.

Some of our schools are highly integrated; others are not. Geographic differences, makeup of the community, a number of factors would go into creating a situation in which a number of our schools as a matter of fact, hundreds of our schools would fall through the cracks in these proposals.

The sole purpose of our schools is to integrate a deep conviction about Jesus Christ into every segment of our curriculum. We do not apologize for that; we are fundamentally religious. The whole purpose of our ministry, the whole focus of our commitment, is religious.

We do not exist for secondary educational purposes.

Interestingly enough, the largest professional group representing our schools represents children from public schools, administrators, teachers, families; 80 percent of our schools are operated by churches; 20 percent on an independent basis. Even though they are operated by independent boards, they are deeply and fundamentally committed to the church.

We feel that our schools are as much a part of the local church as its choir or any other facet of the church's ministry.

Our young people are taught to obey the authority over them and to have a high regard for discipline and self-esteem. We do believe that there is a fundamental difference between public schools and tax-exempt Christian schools. We do not have an issue with IRS and their imposition of these guidelines on nonreligious schools. However, we do take issue with its action against religious schools because of the interference in the church-state separation. Because we are an integral part of the Church, IRS puts itself into a position of being just one step short of racially integrating the congregation of our churches. We feel that schools are the biggest and, as such, such an entanglement should be avoided. We also feel that it would be better that IRS should establish procedures in dealing with these schools that are found to be in violation of the law, rather than attempting to define the law.

As far as I am concerned, from the testimony today, that there are only 20 schools in the country that have been found to be in violation of the law. We take no issue with IRS in its attempt to remove the tax-exempt status of those schools. We do feel that it is fundamental in the language of section 301.5, definition of minority. IRS defines, or outlines, that a minority must be composed of minority students or minority groups within that particular community that are apt to be discriminated against.

In the community that I represent, there are Hispanics and blacks. We can go very easily and conveniently into the black community with our program, because the black community is predominantly Protestant. When we go to the Hispanic community, we are forced into a situation where we actually begin to proselytize our Catholic brothers.

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