sponse to the need for standards under which decisions can be made which are correct and defensible in litigation. The Service will administer the standards fairly and responsibly.

Senator BYRD. Thank you, Mr. Commissioner.

The committee permitted the witness to exceed the 10 minute. time limitation because the chair felt that his testimony was necessary in the detail that it went into, so a full understanding of what the Commissioner proposes could be had, and also because the Congressman and the Senator, taking a different view, had exceeded the limitation, but from here on out, the chair will have to enforce the time limitation which varies from case to case.

Mr. Kurtz, is it not correct that the IRS today and the law today requires, for the maintenance, of tax-exempt status that schools include a statement of nondiscriminatory policy in its by laws, that it mentions such a policy in publications and publicly announce a nondiscriminatory policy once a year?

Mr. KURTZ. That is correct, Mr. Chairman.

Senator BYRD. That has to be done right now?

Mr. KURTZ. Yes, sir.

Senator BYRD. Is it not correct that the IRS today, right now, has the administrative authority to deal with schools which practice discriminatory policies?

Mr. KURTZ. Yes.

The problem, if I may take a moment to elaborate on that, the problem is that we do not believe that the revenue procedure, in any way makes new law. It provides guidance for personnel and for the Service in administering this set of rules and in examining cases, and we believe it is based on existing case authority.

Today, a revenue agent examining a school on this issue, for example, would be free to read the cases that have been decided in the school discrimination area and to make decisions, but the guidance that exists today is not sufficiently clear to assure uniformity of administration. The original purpose of the revenue procedure was to provide sufficiently clear guidelines so that our personnel would be examining on a consistent basis and that all schools would be reviewed on a consistent basis.

Senator BYRD. Some of my colleagues in the Congress take the philosophical view that all income earned by an individual belongs to the Government except that which the Government permits the individual to retain. Is that your view?

Mr. KURTZ. No, it is not, Mr. Chairman. Let me say also that the substantive question involved in this revenue procedure does not in any way depend on whether one views tax exemption or deduction as a Federal grant or not. The revenue procedure is attempting to define the words in the Internal Revenue Code against the background of cases that have been decided.

The Internal Revenue Code, by its terms, grants an exemption to certain classes or organizations-not to all organizations, but to certain types of organizations, and the Internal Revenue Service is charged with the responsibility of administering that law. It has to decide in questionable areas just what the code means.

Under section 501(c)(3), which is the code section covering the exempt status for charitable organizations, the question is whether an educational organization which operates, let us say, in a com

pletely illegal way, is entitled to tax exemption. We believe it is quite clear that section 501(c)(3) requires not only that the organization provide some sort of education, but also in the overall broad sense, that it be charitable, which means that it not operate against well defined public policy.

Senator BYRD. If it is in operating in an illegal way, you have recourse today. You do not need additional regulations to act. Mr. KURTZ. We believe that this revenue procedure does not go beyond that.

Senator BYRD. Did I understand you correctly to say that you planned to review every tax exempt organization in the country? Mr. KURTZ. No, sir.

Senator BYRD. What did you say in your testimony?

Mr. KURTZ. What I said in my testimony was that in cases where the issue is whether or not a school is racially discriminatory the final determination will be reviewed in the national office.

The purpose of that is to try to assure a high degree of uniformity in administration. That is just on this issue.

Senator BYRD. I do not know of anyone in the Senate or the Congress who is seeking to advocate, justify, to bring about, or to maintain discriminatory practices in the schools. I do not know of anyone who takes that position.

I think the fear on the part of many Members of the Congress is that the Internal Revenue Service is taking the position that all schools are discriminating unless they prove they are not discriminating. This is a philosophy upon which French law is grounded: a person is guilty until he proves himself innocent. I have always thought that the American system was that an individual was innocent until the Government proved him to be guilty.

Mr. KURTZ. I agree with that, certainly.

Senator BYRD. Your regulations appear to go in the opposite direction.

Mr. KURTZ. No. I think there has been a considerable amount of misunderstanding about that, if I may say so. When any organization applies for a tax exemption as an initial proposition on the grounds that it is an educational organization or a hospital or a museum, or whatever, it must submit information which is adequate for the Service to make the determination that the organization does or does not fit within the statutory language.

Senator BYRD. This has all been done, has it not, by all of these groups?

Mr. KURTZ. There are two questions-applications and examinations. We have schools applying for tax exemption all the time. It is a continuing problem.

Senator BYRD. When they do, you examine them very carefully and make a determination.

Mr. KURTZ. Yes; that is correct.

After an organization is granted an exemption, then we also have a responsibility from time to time to examine that organization to see if it is being operated in a way consistent with the requirements of the law. In the course of that examination, we have to call upon the organization to submit certain information. They are the ones who possess the information and, in that sense, they must come forward with the information.

Yes; there is no presumption that they are qualified until they prove that they are, just as in any examination of any individual's income tax return, that individual has to come forward and substantiate deductions. The individual is the one who has the records. Senator BYRD. Senator Helms?

Senator HELMS. Thank you, Mr. Chairman. Let me reiterate my appreciation to you, sir, for inviting me to be here today. Before I begin questioning, I have a prepared statement. In the interests of time, I would like to ask that it be made a part of the record at the appropriate place.

Senator BYRD. Yes. It will be made part of the record. [The prepared statement of Senator Helms follows:]

DUE PROCESS FOR PRIVATE SCHOOLS

IRS ACTS WITHOUT SPECIFIC CONGRESSIONAL AUTHORITY

By Mr. Helms (for himself, Mr. Ford, Mr. Schweiker, Mr. Stevens, and Mr. Zorinsky):

S. 995. A bill to amend the Internal Revenue Code of 1954 to require the Secretary of the Treasury to obtain a judicial finding of racial discrimination before terminating or denying tax-exempt status to a private school on the grounds of racial discrimination; to the Committee on Finance.

Mr. HELMS. Mr. President, since the IRS announced its policy to deny tax-exempt status to private schools which allegedly operate on the basis of a policy of racial discrimination, it has done so without the legal authority of specific legislation. In a public statement made on January 9, 1978, IRS Commissioner Jerome Kurtz discussed the proposed regulations and admitted that the IRS has "almost no specific statutory guidance" in moving into this area. Instead, the IRS has argued that private schools must be treated as charitable organizations and has applied to them the common law principle that a charity must not operate illegally or contrary to public policy. The IRS has then defined this broad public policy mandate in terms of Brown against Board of Education and title VI of the Civil Rights Act of

1964.

In his testimony before the IRS public hearings on behalf of the National Committee for Amish Religious Freedom, the Association of Christian Schools International, Organized Christian Schools of North Carolina, and the North Carolina Association of Christian Schools. Mr. William B. Ball took issue with this theory by the IRS. Mr. Ball observed:

"The guidance (the Commissioner) said, has been derived from Brown v. Board of Education, and 'the broad national policy announced in the Civil Rights Act of 1964'. The Proposed Revenue Procedure also cites Norwood v. Harrison and Green v. Connally. I wonder why. These citations are simply not in point. What the IRS administrators have done here is to convert a thimble-full of assumed, but notexistent, statutory power into an ocean of regulation. The Proposed Revenue Procedure can only be described as 'home made' law. If it is desired to impose such restrictions on churches, then IRS must go to the lawmaker, the Congress, and make candid and public plea there-be willing to face the arguments of the people in that forum."

Similarly, in his testimony before the House Ways and Means Oversight Subcommittee, Dr. Robert Lamborn, executive director of the Council for American Private Education, considered the IRS theory and stated:

"This view is not supported by the legislative history of the act and has been soundly criticized by commentators. CAPE would vigorously oppose resting the authority of the IRS for the revenue rulings prohibiting racial discrimination in private schools on Title VI. If accepted, it would follow that other federal statutes which apply conditions to direct recipients of federal aid would also apply to private schools, a position which CAPE believes is legally insupportable and indefensible as a matter of education policy."

Dr. Lamborn continued in his testimony to call upon Congress to take the lead in setting fundamental policy in this important area and to provide explicit authority for the IRS position while limiting the discretionary power of the IRS to change or expand public policy applicable to tax-exempt private schools."

Another witness before the House Ways and Means Oversight Subcommittee, Dr. Mark I. Klein of the northern California district of the American Jewish Congress, observed:

"There is no compromise possible with the Internal Revenue Service on this issue which does not place our community, and others like ours totally innocent of racial discrimination, in grave danger in the future. We have no reason to question the good faith and intent of the current government, but the painful lessons of history teach that the future is always uncertain. These regulations probably exceed the Constitutional limits of the government's administrative powers.'

The theory put forth by the IRS to defend its proposed procedures represents a profound distortion of the administrative process. Administrative agencies, such as the IRS, operate by means of delegated power from Congress. They are creatures of Congress and receive their power to act only from specific statutes. It is fanciful to suggest that in the absence of specific statutory authority the IRS is empowered to act in tax matters on the basis of laws and court decisions dealing with public education. This distortion is compounded when an administrative agency seeks to regulate in an area affecting sensitive first amendment rights.

Indeed, Mr. President, it is more than curious that 2 years ago the IRS itself argued in Federal court against many of the very same procedures it now proposes. At that time, the IRS maintained that the legality of such procedures is highly doubtful. The IRS admitted, for example, that a private school may have few minority students because of many factors other than discrimination.

IRS ACTION DISTORTS INTERNAL REVENUE CODE

The IRS has responded to the absence of specific statutory authority from Congress by constructing a theory which substantially distorts the legislative intent and clear meaning of section 501(c)(3) of the Internal Revenue Code. IRS asserts that for a private school to qualify for tax exempt status under section 501(c)(3) it must be both a charitable and an educational organization. However, section 501(c)(3) lists the exempt purposes as being independent and separate. Nowhere in the statute can it be inferred that an organization seeking exemption must be both "charitable" as well as meet the requirements of one of the other listed purposes.

The enumeration of exempt purposes in section 501(c)(3) is plain and unambiguous. It states that organizations are exempt which are "organized exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes." By the rules of statutory construction, the word "or" must be read after each of the listed categories. This section is to be read to mean "religious OR charitable OR scientific OR educational".

Congress clearly did not intend that "religious" or "educational" purposes be included under or in addition to a requirement of a "charitable" purpose. If Congress had wanted to provide for the double test of charitable and one other listed purpose, it could have done so with language such as: "Organized and operated exclusively for charitable (including, religious, scientific, testing for public safety, literary, or educational) purposes."

However, Congress did not use this statutory construction.

One important reason for rejecting such statutory language is the fact that it misstates the purpose of a religious organization. A church or a church-related school is not organized and operated exclusively or even substantially for charitable purposes. Such an organization is organized in the exercise of constitutionally protected rights of worship and religion which may or may not include works of charity. As the Supreme Court recognized in Waltz v. Tax Commission, 397 U.S. 664 (1970), the tax exemption of religious organizations does not depend upon their serving some pragmatic community purpose.

The general IRS regulations dealing with section 501(c)(3) state with equal clarity: (d) Exempt Purposes-(1) In general

(i) An organization may be exempt as an organization described in section 501(c)(3) if it is organized and operated exclusively for one or more of the following purposes: (a) Religious,

(b) Charitable,

(c) Scientific,

(d) Testing for public safety,

(e) Literary,

(f) Educational, or

(g) Prevention of cruelty to children or animals.

(iii) Since each of the purposes specified in subdivision (1) of this subparagraph is an exempt purpose in itself, an organization may be exempt if it organized and operated exclusively for any one or more of such purposes. (emphasis supplied) 26 C.F.R. Sec. 1.501(c)(3)-1(d)(1), (2).

By basing its new revenue procedures on an interpretation of section 501(c)(3) which is unwarranted by its legislative history and its express terms, the IRS has overstepped its authority and usurped the authority of Congress. In Manhattan

General Equipment Co. v. Commissioner, 297 U.S. 129 (1935), the Supreme Court clearly set the limits of an agency's power:

"The power of an administrative officer or board to administer a federal statute and to prescribe rules and regulations to that end is not the power to make law-for no such power can be delegated by Congress-but the power to adopt regulations to carry into effect the will of Congress as expressed by the statute. A regulation which does not do this, but operates to create a rule out of harmony with the statute, is a mere nullity."

As the Supreme Court later ruled, "this reasoning applies with even greater force to the Commissioner's rulings". Dixon v. United States, 387 U.S. 68 (1965). By seeking to alter the law in this proposed revenue procedure, the IRS has unconstitutionally attempted to seize a power reserved solely to Congress.

IRS ACTION DISTORTS COURT DECISIONS

The IRS relies upon Norwood v. Harrison, 382 F. Supp. 921 (N.D. Miss. 1974) to support its contention that a private school can legally be denied a tax exempt status on the grounds of its racially discriminatory actions. However, the facts in Norwood differ from those involving the proposed IRS procedures in two substantial aspects.

First, unlike under the IRS procedure, the schools in Norwood were found to be operated in a racially discriminatory manner by a court. The court did not propose, as the IRS has done, to look to a "safe harbor test" or revoke the presumption of innocence on the basis of when the school was organized. It formulated a simple and constitutional test. It stated:

"It is important to emphasize that the ultimate issue . . . is not whether black students are actually enrolled at the school, but whether their absence is because the school has restrictively denied their access; simply, does the school have a racially discriminatory admissions policy?"

Second, the Government action involved in Norwood was not tax exemption, but a State financed textbook program. This is a fundamental difference in the facts of two situations. The Supreme Court has, for example, struck down State textbook programs for church-related schools while upholding the constitutionality of tax exemption of churches. In a constitutional sense, a tax exemption is not a subsidy. The theory, now adopted by the IRS, that a tax exemption constitutes just such a tax benefit was argued before the Supreme Court in Waltz v. Tax Commissioner, 397 U.S. 664 (1970) and was rejected. In his concurring opinion, Mr. Justice Brennan stated:

"Tax exemptions and general subsidies, . . . are qualitatively different. Though both provide economic assistance, they do so in fundamentally different ways. A subsidy involves the direct transfer of public monies to the subsidized enterprise and uses resources exacted from taxpayers as a whole. An exemption, on the other hand, involves no such transfer. It assists the exempted enterprise only passively, by relieving a privately funded venture of the burden of paying taxes... Tax exemptions, accordingly, constitute mere passive state involvement with religion and not the affirmative involvement characteristic of outright governmental subsidy."

It is interesting to note that in Norwood, the Court found two schools which had no minority students, but which had a nondiscriminatory admissions policy could not be forced to withdraw from the textbook program. This decision does not stand for the principle, as the IRS asserts, that a private school must undertake an affirmative action program to obtain minority students in order to convince government officials that it does not have a racially discriminatory policy.

The IRS relies upon the decisions of two Federal courts which have denied tax exempt status to organizations which maintain a policy of racial discrimination. Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1971), Goldsboro Christian Schools, Inc. v. United States, 436 F. Supp. 1314 (E.D.N.C. 1977). While these courts refused to accept the contention of the IRS that in enacting section 501(c)(3), Congress intended organizations to qualify under the common law of charitable trusts, they nonetheless terminated the schools' tax exemption on the basis that their activities violated Federal policy.

In coming to a decision in the Green and Goldsboro cases, the courts improperly extended the decision of the Supreme Court in Tank Truck Rentals v. Commissioner, 356 U.S. 30 (1958). First, the decision in Tank Truck concerned the legality of a taxpayer's deductions, not the tax exempt status of a private organization. Second, the taxpayer's conduct in Tank Truck involved violations of State law, not an ambiguous public policy as defined by the IRS.

The Tank Truck case involved a trucking company which encouraged its drivers to exceed speed limits in order to provide customers with faster service. The company would pay its employees' speeding tickets and then deduct the amount from its