ing qualification of an organization as an organization described in section 501(c)(3) of the Internal Revenue Code of 1954 which is exempt from taxation under section 501(a) of such Code, or which is described in section 170(c)(2)(B) of such Code, after the date of enactment of this Act.

Senator HELMS. Now, Mr. Kurtz and Mr. Chairman, on Tuesday of this week, I introduced S. 995, entitled "The Private School Nondiscriminatory and Due Process Act of 1979." In sponsoring this legislation, I have been joined by Senators Ford, Schweiker, Stevens, and Zorinsky.

This bill provides that allegations of racial discrimination as to students in a private school must be determined by declaratory action suit brought by the Secretary of the Treasury in a Federal district court in the district in which the school is located.

This assures elementary due process to a private school, including adjudication by the constitutional branch of government well versed in determining, on the basis of evidence, whether an organization, in fact, is discriminating. And I hope that Mr. Kurtz will furnish a written statement to the committee, Mr. Chairman, outlining the views of the Service with regard to the provisions of S. 995.

Senator BYRD. Would you submit that for the record?

Mr. KURTZ. Yes, sir.

Senator BYRD. Thank you.

[The following was subsequently supplied for the record:]

INTERNAL REVENUE SERVICE COMMENTS ON S. 995

S. 995 would prohibit the Government from denying or revoking the tax exempt status of a private school because of racial discrimination without first obtaining a declaratory judgment that the school is racially discriminatory in the United States District Court for the district in which the school is located. Section (c)(2) of S. 995 would require the Secretary to prove to the court by a "clear and convincing preponderance of the evidence" that the school is racially discriminatory. The Internal Revenue Service is opposed to S. 995.

Under the existing law, the Service first makes a final administrative determination; once that final administrative determination has been made, the taxpayer, or, in an exempt organization case, the organization claiming the exemption, can immediately seek judicial review. For organizations such as private schools claiming exemption under section 501(c)(3), once the Service has completed its administrative review and revoked or denied tax exemption (or fails to act within a 270-day period) the private school may bring a declaratory judgment action in court to challenge the adverse Service determination, or its failure to act. Internal Revenue Code § 7428. Moreover, in such a declaratory judgment action, the statute provides that even if the court upholds the revocation of exemption, contributors may continue to take tax deductions, within certain limits, for contributions made to the organization during the pendancy of the proceeding.

S. 995, on the other hand, would reverse current procedures and require the Service to obtain a federal court determination that racial discrimination has taken place in any and all cases before it could administratively deny or revoke exemption. Completion of the administrative review in such cases would therefore be conditioned on a final judicial determination. This would be a procedure completely unprecedented in the tax law.

We believe that the rights of organizations and contributors are already adequately protected under current provisions, allowing a declaratory judgment action after the Service has made its administrative determination, and that the reversal of these procedures prescribed by S. 995 is not warranted.

Moreover, the burden of proof specified under S. 995 which the Service would have to meet-“clear and convincing preponderance of the evidence”—is the level of proof required for civil fraud and certain extraordinary penalty-type excise tax provisions under the Internal Revenue Code. See Code § 7454(b), Tax Court Rule 142. In tax cases generally, the taxpayer or the organization claiming tax exemption must establish or verify entitlement to the particular tax benefit. The practical reason for this rule is because the taxpayer or the organization claiming exemption,

not the Government, has the information necessary to support the proper determination. An organization applying for exemption must show sufficient facts in its application to demonstrate it is entitled to the exemption, and if questions are raised in the application process or on examination concerning a particular aspect of its operation, the organization must provide adequate clarifying information or risk that the determination may be made against it with respect to that issue. Another major area of concern is section (f)(2) of the bill, which provides: "The term [racially discriminatory policy] does not include an admissions policy of a school which limits, or grants preferences or priorities to, its students to members of a particular religious organization or belief and does not include any policy or program of a school which is limited to, or required of, members of a particular religious organization of belief."

The effect of this provision apparently could be to exempt many, if not substantially all, church-operated or sponsored private schools from the requirement that the schools be racially nondiscriminatory in order to qualify for tax exemption and tax deductible contributions. For example, so long as a school granted preference in admissions to members of a particular religious organization or belief, it would apparently be considered racially nondiscriminatory even if the school or the religious organization actually maintained an overt policy or racial discrimination and denied admission on the basis of race.

Permitting such religious schools to engage in racial discrimination and to retain tax exempt status could raise serious constitutional questions.

The current position of the Service, as published in Revenue Ruling 75-231, 19751 C.B. 158, is that the strong federal policy against racial discrimination in education applies to all private schools, including church-affiliated or sponsored schools, and such schools are subject to the same nondiscrimination requirement to qualify for tax exemption. The proposed procedure does recognize that some private schools may have special programs or characteristics which may be attractive only to particular groups, and not to certain minority groups, and permits this to be taken into account.

S. 995 would also pose a number of technical and other problems which we would be pleased to comment on further at an appropriate time.

Senator HELMS. Now, Mr. Kurtz, I may plow some of the ground that you already discussed, and others, but just to put it in a composite, I will ask a series of questions.

The U.S. Commission on Civil Rights has stated that it is the responsibility of the Internal Revenue Service to terminate the taxexempt status of private schools on the basis of title VI of the Civil Rights Act of 1964. I assume that you agree with that?

[Pause.]

Mr. KURTZ. Actually-

Senator HELMS. I will be delighted if the answer is "no," you understand. [Laughter.]

Mr. KURTZ. How about if the answer is "maybe"?

Actually, what we are interpreting is section 501(c)(3) of the Internal Revenue Code, which we believe and the courts have said carries with it the overall requirement that an organization not violate sharply defined public policy. In the racial discrimination area, we are satisfied that there is a sharply defined national policy against racial discrimination going back 25 years.

Title VI, at least parts of title VI, are a part of the public policy in this country, but I would not want to endorse every provision of title VI as being a gloss on the Internal Revenue Code.

Senator HELMS. If we could proceed a bit further along these lines, the Commission has also recommended that the Service issue title VI regulations which define, in detail, the duties of all exempt private schools. Do you agree with that?

Mr. KURTZ. Regulations under title VI?

Senator HELMS. Yes, sir. Title VI regulations which define in detail the duties of all exempt private schools. Would you like to see a copy of the Commission's recommendations?

Mr. KURTZ. We have no intention at this time to issue regulations under title VI. We have no authority under title VI.

Senator HELMS. Mr. Chairman, I do not want to take a lot of time on this issue. I only raise it because Mr. Kurtz mentioned the Commission's report in his testimony.

The Civil Rights Commission has also urged that the IRS issue similar regulations concerning title IX and other matters. Do you agree, Mr. Kurtz, that the Service is so authorized and, if so, has the Service taken any action to draft such regulations?

Mr. KURTZ. Let me say that I am not familiar with those precise recommendations.

Senator HELMS. Let me say that I am not your adversary personally on this matter. If you would like to reflect upon these questions and respond to the committee and to me in writing, that would be fine.

Mr. KURTZ. I would be happy to do that.

Senator HELMS. I do not want to put you on the spot this morning.

Mr. KURTZ. I would be happy to submit responses for the record. Let me say generally we have no authority and no inclinations to issue regulations under any provision of the Civil Rights Act. That is not within our domain.

The only effect the Civil Rights Act, or any other piece of legislation, would have on this area is the extent to which it may contribute to defining what public policy is for purposes of the charitable limitation of section 501(c)(3).

Senator HELMS. All right.

In the preparation of your written response, you may want to consider page 5, paragraph 3, of your statement which you just have completed reading, since it refers to the Commission's recommendations.

Mr. Kurtz, in the 1977 case of Green v. Blumenthal, the Service argued against procedures similar to those it has now proposed. At that time, the Service maintained that it is apparent that many factors other than an intent to discriminate might account for a given school's establishment or expansion at a time of desegregation, and that the fact that a private school has an insubstantial minority enrollment may be accounted for on many grounds other than an attempt to discriminate.

Is that still the position of the Internal Revenue Service?

Mr. KURTZ. The revenue procedure does not assume conclusively that the formation or expansion of a school at or about the time of public school discrimination renders the school discriminatory and requires the removal of tax exemption. It is simply a factor. The revenue procedure would accommodate many explanations of why that has occurred.

Senator HELMS. Mr. Chairman, I have several other questions. Are you going to have another round, or shall I submit these in writing.

Senator BYRD. Let me ask one or two questions, then I will yield again to you.

Senator HELMS. I thank you.

Senator BYRD. Mr. Kurtz, does the Service believe that the Nation has already witnessed, or is about to witness, a substantial increase in racial discrimination on the part of private schools? Mr. KURTZ. I do not know how to answer that question, Mr. Chairman. I do not know what the future holds, nor in any reliable statistical way, what has occurred in the past.

Senator BYRD. What is the situation today, in your judgment? Mr. KURTZ. I think that we have seen situations where there are private schools which discriminate, but I do not believe that it is a pervasive problem and I cannot quantify it.

Senator BYRD. Is it pervasive, in your judgment?

Mr. KURTZ. I do not know.

Senator BYRD. Is there any authority under acts of Congress to require racial quotas?

Mr. KURTZ. For tax purposes, no. We do not, in this revenue procedure, establish racial quotas. We do not believe that would be appropriate.

Senator BYRD. You mentioned the 20 percent.

Mr. KURTZ. The 20 percent is not a quota, but rather a safe harbor. That is

Senator BYRD. That is if the school has 20 percent minority enrollment it is assumed not to be discriminatory?

Mr. KURTZ. That is correct, for examination purposes.

Senator BYRD. Thank you, sir.

Senator Helms?

Senator HELMS. You believe in due process, do you not, Mr. Kurtz?

Mr. KURTZ. Very strongly.

Senator HELMS. Would you have any objection personally to a private school having its day in court before the IRS cuts off its money?

Mr. KURTZ. The law now so provides, Senator Helms, that any private school or other organization which either applies for exemption, and has it denied, or applies for exemption and the Service does not act, or has an exemption revoked, is entitled to go into the Tax Court, the District Court for the District of Columbia, or the Court of Claims to contest that determination, prior to its becoming effective.

If it is a revocation proceeding, as a matter of fact, contributions within certain limits can continue to be made to that school during the pendency of that action until it is final.

Senator HELMS. The problem with that is it takes years and, as you say, there are limits on the contributions.

Mr. KURTZ. The deductibility of contributions, within certain limits, continues during the pending court action where the Service has revoked a prior exemption ruling.

Senator HELMS. AS Senator Byrd says, you put the schools in the position of having to prove themselves innocent. For example, the proposed revenue procedure speaks of requiring private schools to adopt minority curriculum and programs.

Mr. KURTZ. No, sir, it does not require the schools to do anything specific. I think what you are referring to are illustrations of actions which a school might undertake which might be indicative that the school does not have a racially discriminatory policy.

Senator HELMS. You acknowledge that implicitly as a requirement?

Mr. KURTZ. No; I do not. It is not a requirement.

Senator HELMS. You ought to see some of your people on a local level in action.

Mr. KURTZ. That is why we have provided for national office review in all of these cases, to make sure that the procedure is applied the way it reads, that is, that they are not requirements. Senator HELMS. Mr. Kurtz, would you explain where the Internal Revenue Service gets its authority to dictate particular curricula for private schools?

Mr. KURTZ. We do not dictate curriculum and do not have the authority to do so.

Senator HELMS. You do not even imply it?

Mr. KURTZ. No.

Senator HELMS. Is there any statutory authority by which the IRS may require an affirmative action program on the part of a private school?

Mr. KURTZ. Well, in particular situations the Federal courts have held that the circumstances surrounding the school's formation may require it to undertake activities which are designed to overcome the presumption of discrimination created by the circumstances of its formation.

In those particular circumstances, if you want to call that an affirmative action program, we feel we may, in those circumstances, be required by Federal courts to look at that, yes.

Senator HELMS. Mr. Kurtz, do you not see the tapestry that you are drawing?

Mr. KURTZ. I do see the tapestry I am drawing. I think it is a different one, Senator Helms, if I may say so, from the one that you are seeing.

Senator HELMS. It decidedly is. If such affirmative action programs are not to be applied to all new schools, how do you explain the language in sections 6 and 4 regarding applications for taxexempt status-which states that a school will be considered to have a racially nondiscriminatory policy if it can show that it has undertaken actions and programs reasonably designed to attract minority students.

Mr. KURTZ. What was the question?

Senator HELMS. The question is this: You say you do not impose, implicitly or otherwise, an affirmative action program?

Mr. KURTZ. I did not say that affirmative action programs may not be appropriate in certain cases. Those are cases where the circumstances of the school's formation are related to public school desegregation. Those are requirements which have been imposed by Federal courts in other cases, Norwood v. Harrison, for example. These rules are developed out of court cases defining what constitutes segregation in private schools.

Senator HELMS. Mr. Kurtz, I do not question your good faith one bit; you understand that, do you not?

Mr. KURTZ. Yes, sir.

Senator HELMS. If we can operate on that understanding, then we can get along.