Federal Government's tax policies respecting private schools whose operations conflict with the national policy of eliminating segregated education.

In 1967, the Commission published a report entitled "Southern School Desegration 1966-67" which reviewed the progress of Southern and border-State school districts in complying with the Brown decision. In assessing Southern school desegregation, we also examined the development of private schools to circumvent public school desegregation. The 1967 report concluded:

Many private segregated schools attended exclusively by white students have been established in the South in response to public school desegregation. In some districts such schools have drained from the public schools most or all of the white students and many white factulty members.

The Commission noted that many of the racially segregated private schools established in the South to circumvent public school desegregation had been accorded tax-exempt status by the Internal Revenue Service, and that Federal tax exemptions constituted a form of indirect Government assistance. Accordingly, the Commission recommended that the Secretary of the Treasury request an opinion of the Attorney General as to whether Federal law "authorizes or requires the Internal Revenue Service to withhold tax benefits presently being afforded by the Service to racially segregated private schools.

* *

In June 1971, a three-judge Federal District Court panel ruled on the merits of a suit by black Mississippi parents against the IRS to prevent the Service from granting tax exemptions to private schools in that state established as an alternative to desegregated public schools. During the litigation but prior to the court's decision in Green v. Connally, the IRS announced that:

It can no longer legally justify allowing tax-exempt status to private schools which practice racial discrimination nor can it treat gifts to such schools as charitable deductions for income tax purposes.

The service's new policy was based upon its interpretation that an organization practicing racial discrimination could not be considered "charitable" in the common law sense and therefore, racially segregated private schools could not qualify for exemption under the Internal Revenue Code.

In Green, the court reaffirmed the service's interpretation of the code as barring tax exemptions and deductions for charitable contributions made to racially discriminatory private schools. Such an interpretation was not only warranted by the common law of charitable trusts, according to the court, but also was necessary if the Internal Revenue Code was to be administered "in consonance with the Federal public policy against support for racial segregation of schools, public or private."

Although the court in Green upheld the policy of IRS respecting nondiscrimination by tax exempt schools, it found that the Service's procedure for enforcing that policy was not sufficient to adequately protect the rights of plaintiffs in the case. The court stated:

The history of state established segregation in Mississippi, coupled with the founding of new private schools there at times reasonably proximate to public school desegregation litigation, leaves private schools in Mississippi carrying a badge of doubt.

Accordingly, the court permanently enjoined the IRS from granting or continuing to recognize the tax exempt status of Mississippi private schools until the IRS first affirmatively determined, on the basis of objective racial data, that the schools are operated in a nondiscriminatory manner. In setting forth detailed procedures for the IRS to follow with respect to applications for tax-exempt status by Mississippi schools, the court emphasized that it was not "laying down a special rule for schools located in Mississippi."

The underlying principle is broader, and is applicable to schools outside Mississippi with the same or similar badge of doubt. Our decree is limited to schools in Mississippi because this is an action in behalf of black children and parents in Mississippi, and confinement of this aspect of our relief to schools in Mississippi applying for tax benefits defines a remedy proportionate to the injury threatened to plaintiffs and their class.

In 1973 and again in 1975, the U.S. Commission on Civil Rights published reports on the Federal civil rights enforcement effort, which included an evaluation of activities of the Internal Revenue Service. Both reports identified serious and pervasive deficiencies in the Service's approach to nondiscrimination enforcement with respect to the provision of tax-exempt status to private schools. Despite the holding of Green that the practice of discrimination disqualifies a private school for tax exempt treatment under the Internal Revenue Code, the Commission found that the Service had revoked the tax exemptions of few segregated schools.

Since 1970, when the IRS first adopted the position that racially discriminatory schools cannot legally qualify for preferential tax treatment under the code, the Service has revoked the tax exempt status of only 107 private schools. The vast majority of these revocations resulted from the open refusal of certain private schools to abide by the IRS's formal requirements pertaining to adoption and publication of nondiscriminatory admissions policies.

On August 22, 1978, the IRS published a proposed "Revenue Procedure on Private Tax-Exempt Schools" containing new guidelines the Service would apply in determining whether certain schools, which in the words of the Green decision "carry a badge of doubt," legally qualify for tax-exempt treatment. Following public comments on the August proposal, the Service published a revised proposed Revenue Procedure on Private Schools in February of this year. The Commission has provided comments to the IRS on both proposed Revenue Procedures. These comments support the basic position taken by the IRS and are designed to strengthen its role in dealing with this very important issue.

In concluding my prepared testimony, I would like to comment briefly on S. 103 and S. 449. Both measures have been referred to the Senate Committee on Finance for consideration, and both bills directly relate to the substantive matters I have addressed this morning.

S. 103 would prohibit the IRS, during calendar years 1979 and 1980, from issuing in proposed or final form regulations, revenue procedures, revenue rulings or other guidelines for determining whether educational institutions claiming tax exemption under section 501(c)(3) of the Internal Revenue Code are operating on a racially nondiscriminatory basis. The Commission opposes this legislation on the grounds that it would bar the IRS from taking actions which the Service may determine necessary to fulfill its

constitutional and statutory civil rights enforcement responsibil

ities.

The IRS is currently the defendant in a Federal suit which challenges the legal adequacy of the Service's present procedures and policies respecting nondiscrimination by private schools. If this legislation were enacted, the Service could not institute new policies and practices which the Federal courts might require. Such a restriction could, therefore, provoke a constitutional confrontation between the three branches of the Federal Government. Such a confrontation would involve not only the doctrine of separation of powers but also would directly relate to the manner in which the executive branch carries out its substantive constitutional obligations.

S. 449 would amend the Internal Revenue Code to specify that exemptions provided to organizations under Section 501(c)(3) and deductions for contributions to organizations that are tax-exempt under section 501(c)(3) shall not be construed as as the provision of Federal assistance. It is the position of this Commission that a Federal tax exemption is a privilege that confers financial benefits and thus constitutes an indirect form of Federal assistance. We believe that our position in this matter not only accords with fact but also is essential for effective implementation of the Federal policy against support of racial discrimination. In our view, S.449 legislatively contravenes fact and would, if enacted, seriously hamper civil rights enforcement. Accordingly, the Commission opposes this bill.

Senator BYRD. Thank you, Mr. Flemming.

Does the Commission 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. FLEMMING. The Commission hopes that we are not going to witness a substantial increase in discrimination on the part of the private schools. We do feel, however, that wherever discrimination exists, that that school should not be accorded the privileges of tax exemption.

Senator BYRD. I would like to say, as chairman of this committee, that I likewise believe the same thing and agree with you precisely on that point.

Does the Commission have evidence that there is an increase in racial discrimination in the private schools?

Mr. FLEMMING. The statistical evidence on this particular matter, is not satisfactory. I have listened to the testimony on the part of the Commissioner of the Internal Revenue. He indicated that they did not have statistical information along this line.

The Department of Health, Education, and Welfare likewise does not have statistical information along this line. What factual information we do have does indicate that the issue to which these revised procedures are addressed is a real issue.

Senator BYRD. You mentioned that a tax exemption is a Federal subsidy. Some of my Senate colleagues take the same view, calling it a tax expenditure.

That appears to me to be the philosophy that whatever a person earns belongs to the Government and whatever he is able to keep is only because the Government permits him to do so.

Is that your philosophy?

Mr. FLEMMING. No, Mr. Chairman. I would respond in the same way that the Commissioner of Internal Revenue did. I think that our philosophy is described quite accurately by the court in the Green decision where the Judge said:

Clearly the Federal Government could not, under the Constitution, give direct financial aid to schools practicing racial discrimination. But tax exemptions and deductions certainly constitute a Federal Government benefit and support. While that support is indirect, and is in the nature of a matching grant rather than an unconditional grant, it would be difficult indeed to establish that such support can be provided consistently with the Constitution.

Senator BYRD. Thank you, Mr. Flemming.

I want to say again that where there is discrimination in the private schools, or by private schools, then I think that the tax exempt status should be denied. I do not think, however, that the government should assume that all schools are discriminating until they prove otherwise. I suppose that is where you and I somewhat differ.

Mr. FLEMMING. Not necessarily. It seems to me that the procedures that are being proposed by the Commissioner of Internal Revenue do not proceed on that assumption. They say where certain factual situations exist, as far as the private schools are concerned, those situations raise a presumption and place upon the private school the obligation of presenting to the Commissioner of Internal Revenue evidence to rebut the presumption. Then the procedure outlines the kind of evidence that they would regard as acceptable. It seems to me that that is consistent with the normal procedures that are followed by the Internal Revenue Service.

Senator BYRD. Do you favor or oppose the quota system?

Mr. FLEMMING. This Commission has always taken the position that it is opposed to quotas in the area of affirmative action. We have put out a basic policy statement on affirmative action where we deal with the development of goals, the development of timetables, the development of action plans designed to bring about the achievement of timetables and the "good faith" efforts required to achieve the goals within the time set by the time tables.

We do not feel that the use of the 20 percent that is used in this proposed procedure constitutes a quota. I would concur wholeheartedly in Commissioner Kurtz's response to that question earlier in this hearing.

I appreciate the fact that there are differences of opinion on that, but after all, the Internal Revenue Service is not going to deny tax exemption on the basis of the 20-percent figure. Where that figure is not met, they provide the school with the opportunity of presenting additional evidence.

It is conceivable that a school could continue to have tax exemption on the basis of the evidence that it presented and still have an enrollment below the 20-percent figure. There is nothing absolute about that 20-percent figure at all. In that sense, we do not regard it as a quota.

Senator BYRD. I am glad to get your view in opposition to quotas. I am not sure there is much difference between quotas and goals. Mr. FLEMMING. I will be glad-

Senator BYRD. It is a question of phraseology.

Mr. FLEMMING. We have worked on this in the area of equal employment opportunities and it seems to me that there is quite a difference. I grew up at a time when quotas were very much in vogue as far as certain minorities in this country were concerned and where educational institutions would say, for example, that they would admit up to a certain number of persons from, for example, the Jewish community, and no more. That was a quota, saying we will go this far and no further.

In terms of the goals that are established under the goals of affirmative action, the test of whether or not an employer is living up to an affirmative action plan is whether or not, in good faith, that employer is pursuing an action program designed to help achieve the goal within the timetables that have been set.

The goal is never looked upon as an absolute figure, and certainly there is nothing suggested by the concept of a goal that would suggest that the employer stops at that particular point. If he reaches that, and goes beyond, that is great. Everybody will be very encouraged if the employer goes beyond the goal.

When I was growing up and going to college, I was very much aware of the existence of quotas as they applied to the members of the Jewish community. I resented and opposed them then, and I still resent them and would oppose them with all the vigor that I have.

Senator BYRD. I will join you with equal vigor-if I have equal vigor as you do, I will join you in that endeavor to oppose quotas wherever they exist, for whatever reason they exist. I just do not believe in quotas. There are some individuals who do, and that is all right.

Mr. FLEMMING. I think, Mr. Chairman, if you had the opportunity of examining the Civil Rights Commission statement on affirmative action you would see that it is very consistent with the position that I have taken, and in that particular statement, we make it clear that we are unalterably opposed to the concept of quotas. Senator BYRD. Thank you.

Mr. FLEMMING. You are welcome. It was a privilege to appear here before you.

Senator BYRD. I am delighted to have you and your associates. Mr. FLEMMING. I did not identify my associates. Mrs. Lucy Edwards, in charge of our congressional liaison activities and Mr. James Lyons, her associate.

Senator BYRD. We are glad to have both of you.

The committee is pleased to have now my colleague from Virginia, Senator Warner.

Welcome, Senator Warner. I am glad to have you.

STATEMENT OF HON. JOHN W. WARNER, A U.S. SENATOR

FROM THE STATE OF VIRGINIA

Senator WARNER. Thank you, Mr. Chairman. I shall be very brief.

I would like to request the committee's leave to include in the record a statement of my viewpoints.

Senator BYRD. Yes; it will be included.

Senator WARNER. I would just like to say basically that my philosophy coincides precisely with what I have heard this morning