To follow up what you just said, while a currently exempt school may appear to have an alternative to affirmative action in the matter of overcoming the presumption of discrimination, do not the procedures really limit the conclusions which may be made from the evidence presented by the schools? Mr. KURTZ. No. We assume, in particular cases, that all of the facts will be looked at in making this determination. I might say that the Service gains no advantage by claiming that a school, or any other organization, is not entitled to tax exemption because that issue ultimately will be decided by the courts. We have no interest in dragging people through the courts. We have no interest in losing cases, and the ultimate judgment on whether a school is entitled to tax exemption will be based on the court decisions. We believe that the revenue procedure attempts to put forth, in some way capable of uniform application, a distillation of what we believe courts have decided up until this time. We will have to look at cases as they come along and decide whether we are right. We believe that these are an accurate representation of where the courts are today. Senator HELMS. Mr. Chairman, I have no more questions if the Commissioner would expand in writing his answers to several of the previous questions as we discussed earlier. Mr. KURTZ. We would be pleased to respond, Senator Helms. [The following was subsequently supplied for the record:] COMMISSIONER OF INTERNAL REVENUE, Washington, D.C., June 27, 1979. Hon. JESSE A. HELMS, Washington, D.C. DEAR SENATOR HELMS: At the April 27 hearing on the proposed IRS procedure regarding racial discrimination and private schools, before the Subcommittee on Taxation and Debt Management, you asked me several questions regarding the applicability of Title VI and Title IX of the Civil Rights Act to the Service's administration in this area. As you indicated, the Civil Rights Commission, in a 1975 report, recommended that the Service issue regulations under Title VI and Title IX implementing the requirements of those statutes in the administration of the tax laws governing tax exemption. The Service has not issued such regulations, and there are no current plans to do So. I trust this is responsive to your concern, and if we can provide you with any further information, please let me know. With kind regards, Sincerely, JEROME KURTZ. Senator HELMS. If I could have one moment for comment? Senator HELMS. We are witnessing in this country a deterioration of the quality of education. I think that this decline is undeniable in the public schools. Every measurement that is available to me points to it. Here we have the anomaly of citizens of this country sacrificing, doing the best they can, doing without, in order to create schools which will offer an educational opportunity for their children while, at the same time, these parents are paying taxes to finance the Government schools. The Internal Revenue Service ought to have higher priorities than to harrass and intimidate, by implication or otherwise, these schools in order to enforce a self-styled public policy promoted without congressional authorization or direction. I have personal knowledge of several of these schools in my State and I know the intent, and I know the good faith of the people, and now they live under the threat of going to enormous expense to prove themselves innocent. Now, Mr. Chairman, I would feel a little bit better about these procedures if we had, in effect, legislation that you and I have often talked about, legislation to provide that when the U.S. Government-meaning the bureaucrats-bring actions against private citizens and lose, that these private citizens be reimbursed the cost of defending themselves. And I would feel a lot better about these procedures if they did not turn due process on its head by requiring people to prove they are innocent. I hope that my legislation to clearly define the role of the Service in these matters will be favorably considered by the Senate and the House of Representatives. Whether it is or not, I hope, Mr. Kurtz, that you really will be very careful about what you are doing, or those operating in your name are doing, to a very worthwhile enterprise in this country. I appreciate your coming here this morning. I appreciate your responding to my questions. Mr. KURTZ. Thank you, Senator Helms. Senator BYRD. To follow up on Mr. Helms' statement, you do have tremendous power. As a fellow Virginian, John Marshall, once put it, "The power to tax involves the power to destroy." I have had a number of conversations with you, and I am much impressed with you. I just wanted to express the view that I hope that the Internal Revenue Service will not become involved in politics. At one time, in another administration, there were charges along that line, and I think would be a very tragic thing if the Service did become involved in politics. I feel confident that, with you, it will not. I want to thank you for being here today. Mr. KURTZ. Thank you very much, Mr. Chairman. [The prepared statement of Mr. Kurtz follows:] STATEMENT OF JEROME KURTZ, COMMISSIONER OF INTERNAL REVENUE Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to appear here today to discuss the revised revenue procedure proposing guidelines to implement the Service's obligation to limit tax exemption to private schools that operate on a racially nondiscriminatory basis. The tax issue is a private school's entitlement to Federal tax exemption under section 501(c)(3) of the Internal Revenue Code. In addition to exemption from Federal income tax, qualification under this section allows contributions made to the organization to be tax deductible by the donors as charitable contributions under section 170(c)(2)(B) of the Code. Section 501(c)(3) exempts organizations "organized and operated exclusively for religious, charitable, or educational purposes.” An educational organization is not exempt under this section if it operates illegally or contrary to public policy. Racial discrimination in education is contrary to well established public policy. Under the law, the Service has an obligation to deny tax exemption to private schools that are racially discriminatory. Under the Code, a school is entitled to judicial review of any adverse IRS determination on exempt status. In the case of a court proceeding on a revocation, even if the revocation is judicially upheld, individ 1 Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1971), aff'd sub nom. Coit v. Green, 404 U.S. 997 (1971); Prince Edward School Foundation v. Commissioner, No. 78-1103 (D.D.C., filed April 18, 1979); Rev. Rul. 71-447, 1971-2 C.B. 230. ual contributors may deduct contributions up to $1,000 until the date of the court's decision. It may be useful to describe the history of the Service's involvement with racial discrimination by private schools claiming tax exemption. Racial discrimination in public education was ruled illegal and contrary to public policy in the 1954 Supreme Court decision of Brown v. Board of Education.2 In 1967, the Service announced the position that racially discriminatory private schools receiving state aid were not entitled to tax exempt status." Prior to 1970, however, the Service recognized as tax exempt racially discriminatory private schools that were not receiving state aid. That policy was challenged when the Service was sued by a number of black parents in Mississippi who asserted that no private school discriminating on racial grounds should be entitled to tax exempt status. In 1971, a three-judge Federal court in the case of Green v. Connally held that racially discriminatory private schools are not entitled to tax exemption under section 501(c)(3). The decision would apply to a school without regard to whether it was receiving state aid. The Supreme Court affirmed that decision. 4 During the Green v. Connally litigation, the Service announced its position that racially discriminatory private schools are not entitled to tax exemption. The Green decision took note of that position and went on to conclude that it was not only appropriate, but legally required. The Green court placed the IRS under a permanent injunction to deny tax exemption to schools in Mississippi that racially discriminate. The court also ordered the IRS to implement this order with regard to private schools located in Mississippi, the particular schools subject to the action, by requiring these schools to adopt and publish a nondiscriminatory policy, and to provide certain statistical and other information to enable the Service to determine if the schools are racially discriminatory. The Service examined private schools in Mississippi and, applying similar procedures nationwide, revoked the exemption of a number of schools that would not state that they had a nondiscriminatory policy. Since 1970 and the Green decision and injunction, the Service has taken a number of steps to implement the nondiscrimination requirement. In 1971, the Service published and explained generally the nondiscrimination requirement. In 1972, the Service published a Revenue Procedure setting forth guidelines for certain private schools claiming tax exemption to publicize a racially nondiscriminatory policy. That procedure provided several examples of methods by which publication could be made, but did not require the use of any particular method. In 1975, the U.S. Commission on Civil Rights criticized the absence of specific guidelines to identify schools which should be examined and to determine whether schools are discriminatory. The Service then published revenue procedure 75-50, which required all tax exempt private schools to adopt formally a nondiscriminatory policy; to refer to this policy in all brochures and catalogues; and, generally, to publish notice of this nondiscriminatory policy annually in a newspaper or by use of the broadcast media. In comments submittedon that procedure, the Civil Rights Division of the Department of Justice recommended that the Service adopt stronger guidelines focusing on a private school's history with respect to public school desegregation as well as its asserted policies. The Service also published a Revenue Ruling in 1975 clarifying its position that private schools operated by churches, like other private schools, may not retain tax exemption if they are racially discriminatory. Á 1977 district court decision is in accord with this position. 10 Another district court in the same circuit recently held that a particular private school, Bob Jones University, was a religious organization not subject to the nondiscrimination requirements applicable to educational institutions." The government considers this decision to be wrong, and is appealing it. In 1976, the Supreme Court decided the case of Runyon v. McCrary 12 which involved a proprietary, nonsectarian school that denied admission to blacks. The 'Brown v. Board of Education, 347 U.S. 483 (1954). 3 IRS News Release, August 2, 1967. 'Green v. Connally, 330 F. Supp. 1150 (D.D.C. 1971), aff'd sub nom. Coit v. Green, 404 U.S. 997 (1971). IRS News Release, July 10, 1970. "Rev. Rul. 71-447, 1971-2 C.B. 230. 'Rev. Proc. 72-54, 1972-2 C.B. 834. Rev. Proc. 75-50, 1975-2 C.B. 587. 'Rev. Rul. 75-231, 1975-1 C.B. 158. 10 Goldsboro Christian Schools, Inc. v. United States, 436 F. Supp. 1314 (E.D.N.C. 1977). 11 Bob Jones University v. United States, No. 76-775 (D.S.C. filed Dec, 26, 1978). 12 Runyon v. McCrary, 427 U.S. 160 (1976). Supreme Court held that the 1866 Civil Rights Act made it illegal for the school to deny admission to blacks. This decision would apply to a school without regard to whether it receives any Federal or State aid. The Runyon decision amplifies the strong public policy against racial discrimination in private schools and thus further supports the Service position that private schools that discriminate on racial grounds are not entitled to tax exemption under section 501(c)(3). In 1976, the plaintiffs in the Green case reopened that suit, asserting that the Service was not complying with the court's continuing injunction that Mississippi private schools which are racially discriminatory be denied tax exemption. In addition, a companion suit was filed, Wright v. Blumenthal, asserting that the Service's enforcement of the nondiscrimination requirement on a nationwide basis was ineffective. These two cases are now pending before the court. 13 This litigation prompted the Service once again to review its procedures in this area. It focuses our attention on the adequacy of existing policies and procedures as we moved to formulate a litigation position. We concluded that the Service's procedures were ineffective in identifying certain schools which in actual operation discriminate against minority students, even though the schools may profess an open enrollment policy and comply with the yearly publication requirement of Revenue Procedure 75-50. A clear indication that our rules require strengthening is the fact that a number of private schools continue to hold tax exemption even though they have been held by Federal courts to be racially discriminatory. This position is indefensible. Just last year, the U. S. Commission on Civil Rights criticized the Service's enforcement in this area as inadequate, emphasizing the continuing tax exemption of such adjudicated schools. The effect of current IRS procedures has been that the tax exemption of a school which adopts a nondiscriminatory policy in its governing instrument and publishes it annually will likely remain undisturbed unless some overt act of discrimination comes to the attention of the Service. Racial discrimination takes many forms. In the clearest cases, a school may have a stated policy of racial discrimination or may have turned away minority student applicants on racial grounds. The Service's existing guidelines would call for denial of exemption in such cases. However, Federal courts have also carefully scrutinized schools which while having a stated policy of nondiscrimination, were formed or substantially expanded at or about the time of public school desegregation in the community served by the school. Courts have held such schools discriminatory if the formation or expansion of the school was related in fact to public school desegregation, the school has an insignificant number of minority students, and the school has not taken active steps sufficient to convey to the minority community that minority students are wel come.14 Of course not all schools that discriminate racially have been adjudicated discriminatory by a court or agency; and the Service must conduct its own examinations in this area. In examining a nonadjudicated school, the Service should apply standards consistent with those used by courts in adjudicated racial discrimination cases. After reviewing the court decisions, the standards used in those decisions, and our existing guidelines, we concluded last year that more specific guidelines were needed to focus on certain schools' actual operations to verify if their actual practices conformed to their asserted policies. Last August, the Service published, in proposed form, a revenue procedure providing guidelines to be used in reviewing a school's racial policy. Many public comments were received and on December 5 through 8, we conducted a public hearing on the proposal. After reviewing the written and oral comments, we made substantial revisions in the proposal and issued it on February 9, again in proposed form, inviting written public comment. The comment period ended April 20 and we are now studying the suggestions made. The revised proposed procedure was designed to enable us to identify those racially discriminatory schools that we have had difficulty identifying under existing procedures. At the same time, the revised procedure was designed to avoid problems presented by the earlier proposal, which was not sufficiently flexible to take account of all relevant factors. The revised proposal gives greater weight to each school's particular circumstances, to avoid administrative denials of exemption to schools that are not in fact racially discriminatory. Discretion to take account of 13 Green v. Blumenthal, No. 1355-69, (D.D.C.); Wright v. Blumenthal, No. 76-1426 (D.D.C.). 14 Norwood v. Harrison, 382 F. Supp. 921 (N.D. Miss. 1974); Brumfield v. Dodd, 425 F. Supp. 528 (E.D. La. 1977). all relevant circumstances is essential to making accurate determinations in this area. The earlier proposal would generally have classified a school formed or substantially expanded at the time of public school desegregation as "reviewable" if its percentage of minority enrollment was less than 20 percent of the percent of school age minorities in the community. Such schools would have been required to show, by the existence of at least "four out of five" specific factors, that the relatively low level of minority enrollment was not due to racially discriminatory policies. The new proposal would not classify a school as "reviewable" unless the school meets three criteria. First, it must have been formed or substantially expanded at the time of public school desegregation in the community served by the school; second, it must have insignificant minority student enrollment; and third, its creation or substantial expansion must be related in fact to public school desegregation in the community. Whether a school has significant minority student enrollment depends on the school's particular facts and circumstances. For example, we modified the earlier proposal to provide that consideration will be given to any special circumstances limiting the school's ability to attract minority students, such as an emphasis on special programs or curricula which by their nature are of interest only to identifiable groups that lack a significant number of minority students, so long as such programs or curricula are not offered for the purpose of excluding minorities. In addition, we provide a safe harbor guideline—a school that meets the "20 percent test" is considered to have significant minority enrollment and will thus not be reviewable. Whether a school's formation or expansion was related in fact to public school desegregation also depends on all the circumstances. The proposal contains illustrative factors to be considered in making this determination. For example, whether or not the students enrolling in the private school were drawn from the public schools undergoing desegregation would be a relevant factor in making this determination. A school classified as "reviewable" under the new procedure will be considered racially discriminatory unless it has undertaken actions and programs reasonably designed to attract minority students on a continuing basis. The new proposal does not require "four out of five" specific types of actions to be taken in every case, but rather provides flexibility for the particular school to take action appropriate in its circumstances. This proposal contains examples of actions that a school might take. Some critics of the proposal have suggested that all reviewable schools would be required to take all the steps listed in the proposal in order to be tax exempt. This is not what the proposal provides. Those actions and programs are simply examples of actions and programs that could be reasonably designed to attract minority students on a continuing basis. To help assure that the procedure is being correctly and consistently applied, the new procedure provides for National Office review of all applications for exemption and of all examinations of private elementary and secondary schools. All actions, favorable or unfavorable, will be reviewed in the National Office. A school is also entitled to judicial review of any adverse Service action. The Internal Revenue Service must make administrative decisions one way or the other regarding the tax exempt status of private schools. If we take no action in this area, that itself is a decision. We proposed this Revenue Procedure as a reasoned response 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. The next witness is Hon. Arthur S. Flemming, Chairman, U.S. Commission on Civil Rights. Welcome, Mr. Flemming. We are glad to have you. STATEMENT OF ARTHUR S. FLEMMING, CHAIRMAN OF THE U.S. COMMISSION ON CIVIL RIGHTS Mr. FLEMMING. Chairman Byrd, members of the subcommittee, I am Arthur S. Flemming, Chairman of the United States Commission on Civil Rights. I appreciate the opportunity to appear before you this morning. As you know, the Commission on Civil Rights has been in continuous existence for over two decades. During more than half of the Commission's life, we have been extremely concerned with the |