What IRS is really doing in effect, the bottom line, is we are going to be picking and choosing out of our Catholic churches in our communities. That is not going to sit too well with our Catholic brethren.

Commonsense should prevail in this situation. We feel that once a school has slipped into this category, their donor base will begin to be eroded. People would naturally suspect that their gift would be subject to challenge.

We are on a thin line between austerity and disaster. When you start tampering with our tax exemption, you are tampering with our very livelihood.

Over 90 percent of our schools are all independent. These schools cannot afford to hire accountants, attorneys, and professional staff to prove themselves otherwise.

Thank you.

Senator PACKWOOD. On the right of exemption-not church exemption, but tax deduction for a contribution to a church, the concept that the two are a part of a church and you cannot separate one from the other. You say:

The Internal Revenue Service has a right to impose a racial quota system on a Christian school, Catholic or Hebrew school only to the extent that the IRS has a right to racially balance the congregation of a church or synagogue.

Are you saying that the IRS or the Congress would have no right to remove the deductibility of contributions to a church if the church consciously practiced racial discrimination?

Mr. KELLY. Not being a constitutional attorney, I respond to that with personal conviction. I do not think that it would have that right.

Many of these schools are governed by common boards. The board of deacons may very well be the school board, so it is difficult to split the two apart. It is very difficult.

Senator PACKWOOD. That is the largest issue. It came to light in the House of Representatives hearing in February. I believe Commissioner Kurtz's response to that issue was that, in his opinion, IRS has the right to remove the tax-exempt status of a school, or of a church, whose practices are discriminatory.

I do not want to get mixed up on whether or not Congress has given the IRS the power.

Let me back up.

Frequently, when we have had tax reform hearings before this committee, tax reformers come forth saying no deductions for charity, no deductions for churches, $10,000 of income pays a 10-percent tax of $1,000; simple in their estimation.

If we accept that, obviously we are taking away the deduction for church contributions. I do not think anybody really questions the right of Congress to do that. Indeed, if we want to go to an income tax which does not allow any deduction, we have the legal power to do it.

Do we have the legal power to say we are simply going to permit charitable deductions?

We may not exercise it, but we probably do.

Do we have the right to prohibit charitable deductions to any group that may practice, or does practice, racial discrimination? The answer is no, we do not have that right and that power.

Mr. KELLY. That is correct. I do not know how you split the hair in such a fashion. Although it is totally repugnant to us to allow a school to be perpetuating racial discrimination.

Senator PACKWOOD. If you say that we do not have the right to do it, but I understand the courts to say that we do have the right, and the power to do it. I agree with you that most of the schools do not discriminate, but if we do not have the right to do it, how do we put into law or into regulations that fine line, of those schools that do discriminate, without undoing and impeding the operations of the rest?

Mr. KELLY. I have no specific answer for it. For example, in our local school situation, if we were to be guilty of discriminating against anyone, then I would feel perfectly at ease being taken into court and proving our innocence in court. The problem is with the regulations the way they are now, we have to prove our innocence. We have to go to court, in effect, without a complaint just because of the interpretation of a particular revenue agent.

That is something that we cannot control. He may feel that this particular law or regulation casts doubt upon our program. Therefore, in order to carry out his mandate, he must put us in this category of suspicion.

The American Civil Liberties Union and other organizations, I think, are still quite capable of providing financial support to parents who feel, in fact, that they are discriminated against in any one of our schools.

That has never been the case with any of the schools in my community, and I do not think that it would be. That is not a definitive answer, but it does lay the burden of proof upon the apparatus that is set up for that, rather than leaving it in the hands of the bureaucracy.

Senator PACKWOOD. Thank you very much.
Dr. WENINGER?

STATEMENT OF ARNO Q. WENIGER, JR., EXECUTIVE VICE PRESIDENT, AMERICAN ASSOCIATION OF CHRISTIAN SCHOOLS Mr. WENIGER. Thank you, Senator Packwood. I am Arno Q. Weniger, Jr., and I speak as vice president of the American Association of Christian Schools, which is comprised of almost 850 member schools across the country enrolling over 135,000 students. Our schools are located in 44 of our 50 States, and we have affiliated State chapters in 33 of these States.

If present trends continue, the American Association of Christian Schools will have over 1,000 schools next year with an enrollment of over 175,000 students.

Senator PACKWOOD. For the record, what is the difference between your association and that of Mr. Kelly's?

Mr. WENIGER. Basically we got started on the east coast and are moving west and they got started on the west coast and are moving east.

I have with us our tax counsel, William J. Lehrfeld who, for 6 years, worked for the Internal Revenue Service.

The American Association of Christian Schools is comprised of Christian schools, the great majority of which, perhaps 95 percent, are affiliated, controlled, and directed by individual local churches.

These schools are ministries of the local churches and are likewise administered by the deacons and pastors of the churches. Our schools are independent and autonomous. They seek fellowship with the American Association of Christian Schools which provides services and information along with the promoting of Christian education across America. Our association has no authority over any of our schools and therefore we are unable to speak directly for our schools. It must also be understood that these schools can only be looked at in the light of their relationship to the church. Almost without exception, the pastor of the church is the superintendent of the school.

Oftentimes he teaches a class or two, preaches in the chapel, and gives direction to the staff of the school. Deacon boards are school boards and business on behalf of the school is conducted along with the other business of the church. These schools are without a doubt as religious and spiritual as any function of the church.

I have spoken in many of these schools, their State association meetings, and as well their regional conventions from Fairbanks, Alaska to Miami, Fla., from the tip of Maine to the shores of northern California. I do not know of any school in our association who excludes any racial group. In fact, our schools are mixed with children of all races.

Admission to these church schools is based upon spiritual standards rather than ethnic background. Children must be willing to accept not only the spiritual and moral standards of the schools but their parents must, as well, agree to its importance in order to maintain enrollment in these church schools.

The parents of students enrolled in these Christian schools are not only paying taxes in support of the public school system but they are likewise paying tuition of considerable amount in order to see to it that their children are educated academically, morally, and spiritually. Our parents will continue to be willing to make a sacrifice for the sake of their children. Our schools do not accept government aid, refuse the title programs of the public school system, and wish to continue to be totally free and independent of bureaucratic control and funding.

Let me now speak concerning our opposition to the revised revenue procedure released February 9, 1979. This opposition was delineated by letter to the Internal Revenue Service, voiced at their hearings in December, reaffirmed in testimony before the House Ways and Means Subcommittee on Oversight on February 21, 1979, and is once again given before this committee.

It is our firm belief that the Internal Revenue Service has no constitutional authority for these revenue procedures. The application of these procedures to church-related and church-operated schools is an abridgment of the first amendment of the United States Constitution. In the light of the recent Supreme Court decision in NLRB v. Catholic Bishop of Chicago, it is apparent that it is the right of church-related institutions to manage their own affairs. "The values enshrined in the First Amendment plainly rank high in the scale of our national values."

It is also our feeling that the IRS has no statutory authority to impose this revenue procedure upon our church schools. In the words of William J. Lehrfeld, our legal counsel:

The Internal Revenue Service has no statutory authority to impose certain filing, recordkeeping notice procedures on churches which, as part of their ministry, happen to conduct an elementary or secondary school for the benefit of the children of its congregation or others.

Our schools are ministries of our churches and for the Internal Revenue Service to invoke these procedures upon our ministry, namely, our Christian school which meets Monday through Friday, leads us to believe that the Government could also impose these sorts of restrictions upon our other ministries. If our day schools must meet a certain racial mix, why not our Sunday nursery, or our bus ministry, et cetera.

To deny tax exemption based upon the criteria of this revenue procedure would be to deny tax exemption to our churches. Our churches do not hold tax-exempt status by virtue of governmental action, but hold that exempt status by its very nature. The Internal Revenue Service only recognizes that exempt status with the issuance of a letter of exemption. To deny that exemption based upon failure to meet this revenue procedure is a veiled threat to the church and is without a doubt an infringement on the free exercise of our religion.

If this revenue procedure were to continue to stand, it would be the beginning of a great profusion of governmental entanglement with religion. Not only would the Internal Revenue Service no doubt have reason to proliferate this entanglement but as well other governmental agencies would do likewise.

This revised revenue procedure has made an accommodation to certain classes of religious organizations and denied that exemption to others. Section 3.03(b) and 3.03(c)(6) exempt in essence Hebrew day schools, Moslem schools, and as well the Amish. Section 3.03(b) also makes accommodation for "a particular school which is part of a system of commonly supervised schools." With very few exceptions, only the Roman Catholic Church operates a system of schools. The revenue procedure clearly gives special status to these schools over other schools. It seems that it is the IRS feeling that those church schools which are of a longstanding practice of religion or which are part of a religious denomination are the only ones that deserve any first amendment protection because of special religious circumstances influencing student enrollment composition.

Our schools are predominantly independent of any denomination and the vast majority are operated as an inseparable ministry of the local church. Our schools are thoroughly religious. Every subject is based upon the Bible, and the student is taught that all truth comes from God. Many of our church schools are new and have recently been founded. The IRS is clearly guilty of discrimination against our independent church schools with the implementation of this revised revenue procedure.

We are in opposition to this revenue procedure because of its subjective nature and the great amount of authority and latitude given to the Internal Revenue Service. It is clear to us, and we would hope as well to the Government, that the Internal Revenue Service is hereby attempting to regulate bonafide churches and their ministries which they have established as an integral part of their religious purpose.

In as much as the Supreme Court determined in Regents of University of California v. Bakke that the racial quota system in a State-operated school was unconstitutional based upon the 5th and 14th amendments, it would seem even more unconstitutional in a church school in the light of the first amendment. How the Internal Revenue Service, the courts, or this Senate subcommittee can come to any other conclusion is beyond my comprehension.

In the light of our testimony of objection, may I state that we are not here today to quibble about inserting certain language into these proposals to make them more palatable to the Christian Schools of America. My forefathers, Baptists in Virginia, languished in jail until the establishment of that first amendment which reads, "Congress shall make no law respecting the establishment of religion or prohibiting the exercise thereof."

I respectfully urge this committee, and as well both Houses of Congress, to restrict the Internal Revenue Service from implementing these revenue procedures, particularly as they affect the Christian church-schools of our Nation, in the face of our Constitution and the first amendment.

Senator PACKWOOD. I fear you are inviting a problem for yourself when you say that they have no statutory authority, if indeed that is the case. Congress says that proper religious schools shall not discriminate and that we will give them statutory authority. Then you will have lost that upon which you base your argument.

Mr. LEHRFELD. That is quite true. We do not think that the Congress is inhospitable to churches.

Senator PACKWOOD. Not inhospitable to churches, but definitely inhospitable to racial segregation. Those are two constitutional problems coming together. I do not know how to predict the religious argument in terms that you have no right to ask this. Again, I do not like the regulations that I have seen to date. I do like the idea of religious nonpublic schools existing in this country. I think that they should be encouraged.

Mr. LEHRFELD. Let me pose this question, if you have a taxable church school, is it entitled to the ordinary and necessary business expenses?

Senator PACKWOOD. Taxable, or deductible?

Mr. LEHRFELD. I am talking about the taxability of the school. For example, as the Supreme Court has done, are the legal expenses and bookkeeping expenses deductible or nondeductible because of public policy considerations? The Supreme Court has stated that they are deductible, just as mentioned earlier. They are deductible.

This is a question of public policy directly affecting deductions. It is amorphous, to say the least, because I see no difference, as a tax lawyer, between an exemption, whether it is a personal exemption, or a corporate exemption. So that, if you deny the exemption, you may be likewise, at least logically, called upon to deny the deduction for the net expenses incurred by the school in running the school program.

If you give a deduction to the bookie for his net expenses in running his illegal activity, why would you not simply extend it to the taxable school? If you can extend the deduction, why are you not simply able to extend the exemption?