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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.

STATEMENT OF COUNSEL FOR AMERICAN ASSOCIATION OF CHRISTIAN SCHOOLS,

NORMAL, ILL.

This memorandum of law is counsel's statement for the American Association of Christian Schools, Normal, Illinois concerning the recently proposed revisions in the revenue procedures for private schools. The aim of the proposed procedure is to assure that private elementary and secondary schools are not conducting their educational programs on a racially discriminatory basis. However, the Congress, in its wisdom, has chosen to treat churches and church activities differently from the activities of all other exempt organizations. Consequently, as this memorandum will show, the Internal Revenue Service today has no statutory authority to impose certain filing, recordkeeping or notice procedures on churches which, as part of their ministries, happen to conduct an elementary or secondary school for the benefit of the children of their congregations or others.

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The American Association of Christian Schools does not support segregation of the races in education nor any other form of invidious discrimination. Every child, regardless of race, color, national origin, sex or religious belief, has a fundamental right to the best education his or her community, church or parents can provide. Today certain social trends and Constitutional strictures, such as the Establishment Clause of the First Amendment, have rendered public schools devoid of religious thoughts and principles. As a result, parents have turned to Christian schools, or any parochial school, to foster a Christ-centered philosophy and shun a humanistic or materialistic view of life.

II

Prior to World War II, federal courts made numerous decisions concerning certain organizations which fed their profits to charity and, on the basis of such activities, claimed that they were charitable organizations entitled to income tax exemption. See, Roche's Beach, Inc. v. Comm'r, 96 F.2d 776 (2d Cir. 1938). Most federal courts agreed with this claim and, at one point in time, so did the Internal Revenue Service. See G.C.M. 21610, C.B. 1939-2, 103. With the advent of the War, it became obvious that these court decisions had created serious possibilities for abuse as well as serious revenue losses. In 1942, the then Assistant Secretary for Tax Policy suggested to Congress that it impose a tax on certain organizations with certain forms of business income to prevent unfair competition between tax exempt entities and taxpaying entities. See Hearings Before Committee on Ways and Means (Revenue Revision of 1942), 77th Cong., 2d Sess., p. 89.

Congress expressed its reluctance because it had no information concerning the extent of the abuse potential and apparently urged the Internal Revenue Service to provide information. As part of its attempt to do so, the IRS published T.D. 5125, C.B. 1942-1, p. 101. In general terms, that regulation required information to be submitted as part of an exemption application and ruling process which the Internal Revenue Service had developed. The 1942 addition to the information return requirement was stated as follows:

All organizations claiming exemption under Section 101(5), (6), [now, IRC Sec. 501(c)(3)] except organizations organized and operated exclusively for religious purposes, (7), (8), (9), or (14), shall also file with the other information specified herein the return of information on Form 990 relative to the business of the organization of the last complete year of operation."

Apparently in response to criticism, the provisions of this regulation were modified later in the year by T.D. 5177, C.B. 1942-2, 123. The restated regulation provided:

"When an organization has established its right to exemption, it need not thereafter make a return of income or any further showing with respect to its status under the law, unless it changes the character of its organization or operations or the purpose for which it was originally created, except that every organization exempt or claiming exemption under Section 101(5), (6), except organizations organized and operated exclusively for religious purposes, (7), (8), (9), or (14) shall file annually return information on Form 990 with the collector for the district in which it is located the principal place of business or principal office of the organization; provided, however, that such return shall not be required of an organization which is

organized and operated exclusively for educational purposes, or educational and religious purposes, if no part of its net earnings or assets are distributable to any private shareholder in liquidation or otherwise and if, in the case of an organization privately owned or operated, the Commissioner is advised of any increase in the compensation of its owners, managers, trustees, or directors over the amount of such compensation for the last year for which its exemption under Section 101(6) was approved by the Commissioner. Form 990 will not be required of charitable organizations of the type exempt under the preceding sentence from the requirement of filing such returns, nor of separately conducted charitable organizations meeting the above conditions as to distributions and compensation nor of charitable organizations operated under the control of the state of any political subdivision thereof."

For reasons which are not entirely clear, the Congress chose to amend the statutory provisions governing return and recordkeeping requirements for all taxpayers in a way which relates to subsequent interpretations of the reporting requirements for exempt organizations. For further background, see Report of Committee on Exempt Organizations, ABA Tax Section, 22 The Tax Lawyer (Summer, 1969) at 1023-1025. Under the 1939 Code, there was generally provided the following:

§ 54. Records and Special Returns. (a) By taxpayer.-Every person liable to any tax imposed by this chapter or for the collection thereof, shall keep such records, render under oath such statements, make such returns, and comply with such rules and regulations, as the Commissioner, with the approval of the Secretary, may from time to time prescribe."

That particular provision is substantially the same as Section 6001 of the Internal Revenue Code of 1954, Notice of Regulations Requiring Records, Statements, and Special Returns.

Several years later, during the course of consideration of the Revenue Act of 1943, the Congress chose to override provisions of Section 54(a) of the 1939 Code, which had authorized the issuance of T.D. 5125 and T.D. 5177, by enacting into law an amendment to Section 54 dealing only with exempt organizations. The ostensible purpose was to obtain information concerning exempt organizations which might be engaging in tax evasion and avoidance inconsistent with the income tax exemption granted to them. See, e.g., H.R. 871, 78th Cong., 1st Sess. C.B. 1944, 901 at 920. See also, S. Rep. 627, 78th Cong., 1st Sess., C.B. 1944, 973 at 990. Section 54(f), as enacted into law in 1944 provided as follows:

"§ 54. Records and special returns. (a) By taxpayer. Every person liable to any tax imposed by this chapter or for the collection thereof, shall keep such records, render under oath such statements, make such returns, and comply with such rules and regulations, as the Commissioner, with the approval of the Secretary, may from time to time prescribe.

(f) By organizations. Every organization, except as hereinafter provided, exempt from taxation under section 101 shall file an annual return, which shall contain or be verified by written declaration that it is made under the penalties of perjury, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the provisions of this chapter as the Commissioner, with the approval of the Secretary, made by regulations prescribed, and shall keep such records, render under oath such statements, and make such other returns, and comply with such rules and regulations as the Commissioner, with the approval of the Secretary, may from time to time prescribe. No such annual return need be filed under this subsection by any organization exempt from taxation and the provisions of 101-(1) which is a religious organization exempt under Section 101(6)

Thus, it is clear from the original writing of Section 54(f), which became Section 6033 in the 1954 Code, that only the filing of a return was being precluded by Section 54(f) in the case of religious organizations. A religious organization exempt under Section 101(6) of the 1939 Code (now Section 501(c)(3) of the 1954 Code) would be required, by Section 54(f), to keep such other records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Commissioner, with the approval of the Secretary, could from time to time prescribe.

In 1954, when Section 54(a), among others, was given its own particular provision and set aside from other recordkeeping requirement provisions of Chapter 61 of the 1954 Code, the information return requirements as well as the recordkeeping and related requirements for exempt organizations, were codified as Section 6033. There is no reason to believe that the mere existence of separate Code sections in any way detracts from the obvious fact that Section 6033 provides a clear differentiation and

distinction between the Commissioner's powers over exempt organizations and those he might otherwise have under the more general provision of Section 6001. There is nothing in the legislative history of the 1954 Code, including Sections 6001 and 6033, which suggests that the 1939 exception (Section 54(f)) to the general recordkeeping and statement requirements (Section 54(a)) were not meant to continue to be exceptions when codified in different sections.

In 1969 Congress again reexamined the recordkeeping and similar requirements imposed upon exempt organizations by Section 6033. On August 2nd, Mr. Mills introduced the Tax Reform Act of 1969, H.R. 13270, which, among other things, had the effect of striking all exemptions from Section 6033 so that no organization would have any exemption from any of the stated provisions. The exemption provision in the House-passed version of the Tax Reform Act of 1969 was stated as follows: "(a) Organizations required to file.-(1) In general.-Every organization exempt from taxation under section 501(a) shall file * such other information for the purpose of carrying out the Internal Revenue laws as the Secretary or his delegate may by forms or regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary or his delegate may from time to time prescribe

(2) Exceptions from filing.-The Secretary or his delegate may relieve any organization under paragraph (1) to file an information return from filing such return where he determines that such filing is not necessary to the efficient administration of the Internal Revenue laws."

Again, following the direction of the 1939 Code, the discretion which the House initially was going to grant to the Secretary or his delegate was only to relieve certain organizations from filing returns and not from any other compliance requirement stated in the text of Section 6033(a)(1).

As a result of testimony from church organizations, the Senate Finance Committee redid the House version (H.R. 13270, Section 101(d)(1)). Hearings Before the Committee on Finance, U.S. Senate, 91st Cong., 1st Sess., at 2095 and 2100. The Finance Committee version of amended Section 6033(a)(2) stated:

"(2) Exceptions from filing.

"(A) MANDATORY EXCEPTIONS.- Paragraph (1) shall not apply to

"(i) Churches, their integrated auxiliaries, and conventions or associations of churches *

The Finance Committee did not alter the House-passed version of the discretionary exemption provision in their proposed Section 6033(a)(2). The Senate passed the Section 6033 amendments of the Finance Committee, which were ultimately passed by the full Congress. Today, Section 6033 clearly provides a mandatory exemption from the recordkeeping and all filing requirements contained in Section 6033(a)(1). Congress made a conscious decision not simply to exempt churches from the information return requirements, as it did under the 1939 Code and continues to do under certain discretionary exemption provisions of what is now Section 6033(a)(2)(B), but from all of the supplementary administrative powers granted IRS. One can argue interminably over questions of statutory construction. Such arguments have led courts to believe that certain construction maxims should be used where there appears to be a facial inconsistency between two separate provisions, such as Section 6001, which seems to grant a blanket privilege to the Internal Revenue Service to require certain information and Section 6033 which exempts churches from filing information or otherwise complying with the recordkeeping and return requirements imposed upon other exempt organizations. The construction maxim I refer to is "inclusio unius est exclusio alterius." When applied to the apparent contradictions between Section 6001 and Section 6033, the maxim suggests that if the statute specifically exempts certain organizations from the application of certain rules and requirements, another, more general statute cannot be construed to impose those same requirements. Thus, if churches are expressly exempted from recordkeeping requirements similar to those imposed upon all other taxpayers, this maxim of construction would prevent the government from urging that the scope in Section 6001, containing substantially the same language affecting all other taxpayers, is broad enough to apply to the exempted taxpayers.

As noted by the Supreme Court in Ford v. United States, 273 U.S. 593 at 612, "the *** maxim properly applies only when in the natural association of ideas in the mind of the reader that that which is expressed is so set over by way of strong contrast to that which is omitted that the contrast enforces the affirmative inference that that which has been omitted must be intended to have the opposite and contrary treatment." Churches are "omitted" from the operation of Section 6001. Consequently, churches are not obliged to file notices, make statements or go through the rituals prescribed by the "school" procedures which are imposed on schools not owned and operated by churches.

The Congress may choose to enact legislation to more narrowly restrict the exemption accorded churches, their conventions and associations, but as of this date it has chosen not to do so. In fact, the trend is in the other direction. Therefore, this Subcommittee should take its oversight responsibility to heart and determine whether or not the Internal Revenue Service is seeking to frustrate the laws of the land by ignoring Section 6033(a)(2)(A)(1).

III

The regime imposed upon exempt organizations, including the notice requirements for private letter rulings, reinforces the view that the Internal Revenue Service is to approach churches in a far more different posture than all other exempt organizations. This is underscored by the fact that, in 1969, the Congress chose to require new Section 501(c)(3) organizations to file a "notice" with the Internal Revenue Service that they were going to claim an exemption under Section 501(c)(3) of the Code. See, IRC Section 508(a). Failure to file a timely notice meant that such organizations, if described in Section 501(c)(3), would not be exempt from federal income tax during the untimely period (beginning with date of organization) and contributions made during the untimely period would not be deductible. See, IRC Section 501(d). Again, Congress chose not to impose the notice requirement on "new" churches organized after October 9, 1969.

As every sensible person realizes, the Internal Revenue Code grants exemptions from federal income tax as it does grant taxpayers the right to deduct contributions to churches, among others, for federal income, estate and gift tax purposes. While the Internal Revenue Service may suggest that the requirements of filing an application for exempt status and receiving a private letter ruling on such status, are a condition precedent to exemption, no serious person gives that idea any credence. Certainly the Congress did not in 1969 when, in commenting on proposed Section 508(a), it expressly provided, as follows:

"Present law. Under present law, an organization is exempt if it meets the requirements of the code, whether or not it has obtained an 'exemption certificate' from the Internal Revenue Service.” See, S. Rep. 91-552, 91st Cong., 1st Sess., C.B. 1969-3, 423 at 458.

In noting the fact that the Code grants exemption, not the Internal Revenue Service, the report underscored the fact that the private letter ruling system, used for all Section 501(c) organizations, is merely a practice of administrative convenience enabling the exempt organization and the Internal Revenue Service to have some satisfactory evidence of the apparent agreement between the parties as to the organization's status. The Finance Committee made it clear that churches were to be exempted from this ruling requirement along with the requirement that they rebut any presumption that they were "private foundations." (See Section 508(b) etc.).

"Conventions or associations of churches, whether or not the Treasury acts, should not be required to apply for recognition of their exempt status in order to be exempt from tax nor should they be required to file with the Internal Revenue Service to avoid classification as private foundations." See, S. Rep. 91-552, supra at 459.

These additional exemptions further underscore the strong desire of the Congress that churches not be subject to oversight and regulation which would otherwise apply to other exempt organizations enjoying essentially the same tax benefits of the Internal Revenue Code.

In one other fashion, the Congress asserted its right to grant to churches what it would otherwise withhold from all other exempt organizations. In H.R. 13270, the House of Representatives agreed that because churches were to become subject to the unrelated business income tax, a specific authority to examine churches in connection with such revenues, should be inserted in the Code. However, in Section 121(f) of the House version of H.R. 13270, the Ways and Means Committee inserted a restriction limiting that authority to the examination of the books of account of a church. Proposed Section 7605(c) only required a belief on the part of the Internal Revenue Service that the church was engaged in unrelated business activities and notified the organization, after a high-level clearance by Internal Revenue officials, that it intended to perform the examination. That version passed the Senate Finance Committee in substantially the same form, and today represents the first sentence of Section 7605(c). Nevertheless, Senator Wallace Bennett of Utah expressed obvious concern over the breadth of freedom apparently suggested by the Hcuse language and proposed an amendment which is now the second sentence of Section 7605(c).

"Mr. BENNETT. Mr. President, the other amendment refers to what I think is a desirable clarification of the language in the bill which, for the first time allows the Internal Revenue Service to audit churches.

"This has not been possible under previous law. And the language of the bill (Section 121(f) of H.R. 13270) I think, is too loose.

"The Treasury agrees with me. I am offering alternate language which adds on page 148, line 9 these limiting requirements:

"On page 148, line 9, strike out the quotation mark and add: No examination of the religious activities of such an organization [church, association or convention of churches] shall be made except to the extent necessary to determine whether such organization is a church or a convention or association of churches, and no examination of the books of account of such an organization shall be made other than to the extent necessary to determine the amount of tax imposed by this title.

"Mr. President, that is the title imposing a tax on unrelated business income. "There is a fear the language would open it up so that the IRS could go through all the churches books that pertain to religious activities.

"They did not intend to do this. Therefore, the IRS agrees with me that the limiting language will have uses. It is my understanding that the Chairman agrees with me and is willing to take the amendment to conference.

"Mr. LONG. I have no objection to the amendment, Mr. President."

See, Cong. Rec., Dec. 6, 1969 at S. 15951 (daily ed.).

The language seems on its face explicit that no examination of the religious activities can be made of a church except to determine if the organization is a "church." Thus, an examination cannot be made to determine compliance with other aspects of church activities, unless they directly infringe upon those considerations which cause a religious organization to be deemed by law to be a church. Obviously, the question next becomes what is a "church" for purposes of the Internal Revenue Code. In January 1978, the Commissioner of Internal Revenue observed in a speech to an audience of tax practitioners that the Internal Revenue Service had certain criteria for making findings of law that an organization was a church. As quoted from the Commissioner's speech, these criteria, which were never published as a regulation or ruling, are as follows:

"The determination of whether a particular organization is a church must, therefore, be made on a case by case basis. It may be helpful to list the characteristics we utilize: (1) a distinct legal existence (2) a recognized creed and form of worship (3) a definite and distinct ecclesiastical government (4) a formal code of doctrine and discipline (5) a distinct religious history (6) a membership not associated with any other church or denomination (7) a complete organization of ordained ministers ministering to their congregations (8) ordained ministers selected after completing prescribed courses of study (9) a literature of its own (10) established places of worship (11) regular congregation (12) regular religious services (13) Sunday Schools for the religious instruction of the young (14) schools for the preparation of its ministers. We are aware that few, if any, religious organizations-conventional or unconventional-can satisfy all of these criteria. For that reason, we do not give controlling weight to any single factor. This is obviously the place in the decisional process requiring the most sensitive and discriminating judgments. We are aware of this and that awareness is, perhaps, the best guarantee that we are trying to administer this difficult area carefully and evenly." See, I.R. 1930 reprinted in Prentice Hall Federal Income Taxes, Vol. 9 for 1978 at 154,820.

It is obvious from the foregoing that neither the Commissioner, nor common sense, believes that the race, color, or national origin of a religious organization's congregation, its ministers, or its employees or the children in its parochial school system have any weight in determining whether or not the organization is a "church." To my knowledge, neither the Internal Revenue Service nor any agency of government has suggested that a church may not, by law or by practice, limit its congregation to individuals of a certain race, color, or national origin. While few churches may do this, there is no legal precedent which supports the theory that race has a role in determining the legal status of the organization as a church. In fact, the precedent is decidedly against the IRS. See, Bob Jones University v. United· States, 43 AFTR 2d 79-587 (D.S.C. 1979).

Obviously, the next question to be addressed is what does the term "religious activities" embrace in the administration of IRC Sec. 7605(c). If we are to read the cases involving First Amendment freedoms, including the cases dealing with the Establishment clause, it is quite clear that church schools are religious activities. For example, in Lemon v. Kurtzman, 403 U.S. 602 (1971) at 616, the Supreme Court stated, as to Catholic parochial schools, as follows:

"On the basis of these findings the District Court concluded that the parochial schools constituted 'an integral part of the religious mission of the Catholic Church.'

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