Fund for the Study of Economic Growth & Tax Reform v. Internal Revenue Service

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 10, 1998 Decided December 8, 1998

No. 98-5105

The Fund for the Study of Economic Growth

and Tax Reform,

Appellant

v.

Internal Revenue Service,

Appellee

Appeal from the United States District Court

for the District of Columbia

(No. 97cv00747)

William J. Lehrfeld argued the cause for appellant. With

him on the briefs was Amber Wong Hsu.

Kenneth L. Greene, Attorney, United States Department of

Justice, argued the cause for appellee. With him on the brief

were Loretta C. Argrett, Assistant Attorney General, Wilma

A. Lewis, United States Attorney, and Thomas J. Clark,

Attorney, U.S. Department of Justice.

Before: Wald and Garland, Circuit Judges and Buckley,

Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge Wald.

Wald, Circuit Judge: The Fund for the Study of Economic

Growth and Tax Reform ("Fund") appeals the decision of the

district court upholding the determination of the Internal

Revenue Service ("IRS") that the Fund did not qualify for tax

exempt status under 26 U.S.C. s 501(c)(3) ("501(c)(3)"). In

order to qualify for tax exempt status under 501(c)(3), an

organization must be both organized and operated exclusively

for exempt purposes, charitable, educational, scientific, and so

forth. An organization is not operated exclusively for exempt

purposes if it is an "action" organization, defined in the

regulations as an organization which "advocates, or cam-

paigns for, the attainment" of legislation. Treas. Reg.

s 1.501(c)(3)-1(c)(3)(iv)(b). The IRS determined that the

Fund was an "action" organization because it advocated on

behalf of the repeal of the current tax code and the imple-

mentation of legislation embodying its proposals for a flat

tax.1 The district court agreed with the IRS that the Fund

__________

1 In its initial adverse determination letter, the IRS also indicated

that the Fund did not qualify for 501(c)(3) tax exemption because its

activities conferred a substantial private benefit on the Republican

party and its candidates. See Treas. Reg. s 1.501(c)(3)-1(d)(ii) ("An

organization is not organized or operated exclusively [for one of the

purposes listed in 501(c)(3)] ... unless it serves a public rather than

a private interest. Thus, to meet the requirement of this subdivi-

sion, it is necessary for an organization to establish that it is not

organized or operated for the benefit of private interests....").

The Fund argues that the IRS dropped this private benefit argu-

ment in its final determination and, hence, that the private benefit

argument should not have been considered by the district court.

The IRS argues that it did not drop the private benefit argument

and that, even if it did, it was permitted to reintroduce it before the

district court. Given the fact that the IRS and the district court

agreed on a separate ground for denial, namely, that the Fund was

was an "action" organization and, hence, was not qualified

under 501(c)(3). After careful review of the record, we find

that the district court did not err in so doing and we

accordingly affirm its decision upholding the IRS's denial of

tax exempt status under 501(c)(3).

I. Background

On April 3, 1995, the Republican leadership in Congress,

then-Senate Majority Leader, Robert Dole, and then-Speaker

of the House of Representatives, Newt Gingrich, announced

the formation of the National Commission on Economic

Growth and Tax Reform ("Commission") which was charged

with the task of designing a "flatter, fairer, and simpler"

system of taxation. Joint Appendix ("J.A.") at 91. Dole and

Gingrich appointed Jack Kemp as chair of the Commission,

who in turn established the Fund, a charitable trust which

was intended to be the legal entity providing the financial

support (through solicited donations) for the activities of the

Commission.

On June 12, 1995, the Fund submitted to the IRS an

application for recognition of exemption under 501(c)(3).2 In

its application to the IRS, the Fund stated that it had been

established to "fund the study, research and analysis of ideas

and proposals to reform the Nation's tax system" and that it

would "provide grants to nonpartisan individuals and entities

(including educational and scientific institutes) to research

__________

an "action organization," we find it unnecessary to resolve the

parties' dispute with respect to the private benefit aspect. Accord-

ingly, we do not address the issue of whether the private benefit

argument was properly before the district court nor do we address

the merits of the argument. Instead, we limit ourselves solely to

the issue of whether the Fund was an "action organization" and

failed on that basis to qualify for 501(c)(3) tax exemption.

2 Tax exempt status under 501(c)(3) is desirable because exempt

organizations are not subject to federal income tax under 26 U.S.C.

s 501(a) and because contributions to exempt organizations are tax

deductible under 26 U.S.C. s 170(c).

and analyze data on whether and to what extent the present

tax system burdens economic growth." Id. at 42.

From June to September of 1996, the Commission held a

series of public hearings around the country on the issue of

reforming the present tax system. The Commission also

requested responses of the American public through a survey

in "Sound Off" in Money Magazine which asked people how

they would reform the federal income tax system. Finally, on

January 17, 1996, the Commission published a report, "Un-

leashing America's Potential: A Pro-Growth, Pro-Family

Tax System for the 21st Century." The Commission issued a

press release to correspond with the release of its report,

stating that the Commission "today recommended to the U.S.

Congress and the President that the current Internal Reve-

nue Code be repealed in its entirety and replaced with a new,

simplified, single rate tax system with a generous personal

exemption." Id. at 202. The report itself also began by

stating that the Commission "recommend[ed] to the Congress

and to the President of the United States that the current

Internal Revenue Code be repealed in its entirety." Id. at

354. The report stated that the principles and recommenda-

tions contained therein comprised a "Tax Test" and asked

"that Congress not pass nor the President sign any tax

legislation that fails to pass this test." Id. The issuance of

the report was widely covered by the press. See id. at 420-

42.

By letter dated August 8, 1996, the IRS communicated its

initial adverse determination that the Fund did not qualify for

tax-exempt status. First, the IRS determined that because

the Fund's primary activity was to provide funding for the

Commission, the IRS would treat the Commission's activities

as those of the Fund.3 Next, the IRS found that the evidence

__________

3 The district court agreed with the IRS on this point, finding that

"due to the fact that the Fund exclusively supported the Commis-

sion, the activities of the Commission should be attributed to the

Fund." J.A. at 620. The Fund does not contest this finding on

appeal; accordingly, we also attribute the activities of the Commis-

indicated that the Commission was an "action" organization.

The regulations applicable to 501(c)(3) provide that an organi-

zation seeking 501(c)(3) status must be organized and operat-

ed exclusively for religious, charitable, scientific, testing for

public safety, literary, or educational purposes, or for the

prevention of cruelty to children or animals. Treas. Reg.

s 1.501(c)(3)-1(d)(1)(i). The regulations provide that an orga-

nization is not operated exclusively for exempt purposes if it

is an "action" organization. Treas. Reg. s 1.501(c)(3)-

1(c)(3)(i). An organization is an "action" organization if it has

the following two characteristics: "(a) Its main or primary

objective or objectives (as distinguished from its incidental or

secondary objectives) may be attained only by legislation or a

defeat of proposed legislation; and (b) it advocates, or cam-

paigns for, the attainment of such main or primary objective

or objectives as distinguished from engaging in nonpartisan

analysis, study, or research, and making the results thereof

available to the public." Treas. Reg. s 1.501(c)(3)-1(c)(3)(iv).

The IRS determined that the Commission met both prongs

of this "action" organization test because (a) it sought to

encourage the implementation of a flat tax, a goal that could

only be accomplished by legislation, and (b) it advocated for

this goal. J.A. at 540-43. In finding that the Commission

advocated, the IRS looked primarily to the final report issued

by the Commission, noting that "[b]ecause the final report is

virtually the only product of the Commission, the facts and

circumstances that lead us to conclude that its predominate

purpose is advocacy are centered in that document." Id. at

543. With respect to the report, the IRS concluded that it

"read[ ] like a brief or manifesto in support of a particular list

of tax law changes"; that it was drafted "to present the most

forceful arguments in favor of one point of view"; and that,

"as a whole," it was "a document rooted in advocacy...." Id.

at 542-43. The IRS's initial determination was therefore that

the Fund did not qualify for 501(c)(3) tax exemption because

it constituted an "action" organization.

__________

sion to the Fund for purposes of determining whether the Fund

qualifies for 501(c)(3) tax exemption.

The Fund responded to the IRS's initial adverse determi-

nation by letter dated October 15, 1996. A conference with

IRS officials to discuss the IRS's proposed denial was held on

November 8, 1996. On January 27, 1997, the IRS issued a

final adverse ruling denying the Fund's application for ex-

emption under 501(c)(3). The Fund responded by filing a

complaint in the district court below, seeking a declaratory

judgment under 26 U.S.C. s 7428, that it is a tax exempt

organization under 501(c)(3).4 The district court decided the

case on cross-motions for summary judgment.

Invoking de novo review, the district court sustained the

IRS's determination that the Fund did not qualify for tax

exemption because it operated as an "action" organization.5

__________

4 26 U.S.C. s 7428(a)(2) provides that the United States Tax

Court, the United States Claims Court, or the district court of the

United States for the District Columbia may make a declaration

with respect to the initial or continuing qualification of an organiza-

tion under 501(c)(3).

5 There appears to be confusion about the standard under which

lower courts review IRS determinations of tax exemptions under 26

U.S.C. s 7428 in terms of whether there ought be any deference

given to the IRS. There are cases holding that the standard of

review is de novo. See, e.g., Basic Unit Ministry of Alma Karl

Schurig v. United States, 511 F.Supp. 166, 168 (D.D.C. 1981), aff'd

per curiam, 670 F.2d 1210 (D.C. Cir. 1982). Other courts have said

that the review is not de novo, but in the context of discussing the

scope of review, rather than the standard of review. See, e.g.,

American Campaign Academy v. Commissioner, 92 T.C. 1053, 1063

(1989) ("In making our declaration, we do not, however, engage in a

de novo review of the administrative record.... Rather, we 'base

[our] determination upon the reasons provided by the Internal

Revenue Service in its notice to the party making the request for a

determination....' ") (quoting H.R. Rep. No. 94-658, at 288 (1976)).

In the instant case, the question of deference to the IRS proves not

to be significant because the district court agreed with the IRS

under de novo review that the Fund did not qualify for tax exempt

status under 501(c)(3). However, in a case where the district court

(or the Tax Court or the Claims Court, as the case may be)

disagreed with the IRS on the merits, it would be important for

that court to determine what if any deference is due to the IRS's

The Fund conceded that it met the first prong of the "action"

organization test, that is, that its policies could only be

achieved by way of legislation, and the court found that the

Fund met the second prong as well, that is, that it advocated

for the attainment of the legislation. The court made a

number of findings indicating that the Fund advocated. For

example, the court found that while the Fund organized

public hearings throughout the country, "the record show[ed]

that these were conducted to advance a particular political

message and to [provide] support for a cornerstone of the

Republican agenda in the 1996 elections." Id. at 622-A. The

court also noted that the speakers at these hearings "clearly

enunciated" the message of "mobilizing the majority in Con-

gress (a Republican Congress) to achieve a tax reform...."

Id. The court also took account of the press releases and

newspaper accounts covering the activities of the Commis-

sion, noting that the "record [wa]s replete with examples that

the Commission advocated a legislative agenda that favored

the repeal of the current tax code, and the installation of a

'flat tax,' " and that the "Commission admittedly relied on the

press for marketing and advertising of its objectives and

disseminating its proposed recommendation." Id. The court

also emphasized the timing of the entire endeavor, noting that

the Commission lasted no more than one year, a year in

which the "political environment [was] laden with tax reform

issues." Id. at 622-A-622-B. Finally, the court noted several

statements made by members of the Commission, and related

parties, including a statement by Senator Dole and Speaker

Gingrich, that the work of the final report " 'will surely serve

as a catalyst for congressional hearings and debate,' " id. at

623, and a statement by the Vice Chairman of the Commis-

sion that the final report " 'will guide the debate over tax

reform throughout this campaign year.' " Id. at 624.

Based on these findings, the district court concluded that

the IRS did not err in finding that the Fund was "actively

__________

determination. Because we need not decide the question of the

trial court's standard of review of IRS determinations in 501(c)(3)

cases for purposes of this appeal, we leave the issue open.

engaged in advocacy," holding that "the evidence on the

record supports a finding that the plaintiff is an 'action

organization' and is therefore barred from the privilege of tax

exemption." Id.

II. Discussion

A.Standard of Review

The IRS in its brief and the Fund at oral argument agreed

that the standard for our review of the district court's find-

ings is clearly erroneous. The case law on standard of review

in the 501(c)(3) context is quite clear: the determination of

whether an organization is organized and operated exclusively

for exempt purposes is a factual determination reviewed only

for clear error. See, e.g., Nationalist Movement v. Commis-

sioner, 37 F.3d 216, 219 (5th Cir. 1994) ("A finding that a

corporation is not operated exclusively for charitable pur-

poses cannot be disturbed unless clearly erroneous.");

Orange County Agric. Society, Inc. v. Commissioner, 893

F.2d 529, 532 (2d Cir. 1990) ("We review the Tax Court

decision for clear error. The conclusion that an organization

is operated for a substantial non-exempt purpose is a finding

of fact entitled to deferential review."); American Ass'n of

Christian Schools v. United States, 850 F.2d 1510, 1513 (11th

Cir. 1988) ("The district court's factual finding that the tax-

payer is not operated exclusively for religious purposes can-

not be disturbed on appeal unless clearly erroneous.");

Church By Mail, Inc. v. Commissioner, 765 F.2d 1387, 1390

(9th Cir. 1985) ("[The] factual finding [that an organization is

operated for a substantial non-exempt purpose] [is] reviewa-

ble under the clearly erroneous standard."); Granzow v.

Commissioner, 739 F.2d 265, 268 (7th Cir. 1984) (per curiam)

("The Tax Court's holding ... [that an organization was not

entitled to exemption] must be sustained on appeal unless

clearly erroneous.").6

__________

6 This standard of review with respect to the findings of the Tax

Court appears to have its origin in the jurisdictional statute provid-

ing review of Tax Court decisions. 26 U.S.C. s 7482 provides that

courts of appeals are to review Tax Court decisions "in the same

Moreover, even were we to characterize the district court's

determination that the Fund did not operate exclusively for

an exempt purpose as a mixed question of law and fact, the

Supreme Court has instructed us to review mixed questions

of law and fact in tax cases such as these under the clearly

erroneous standard. See Commissioner v. Duberstein, 363

U.S. 278, 289 n.11 (1960); see also Pullman-Standard v.

Swint, 456 U.S. 273, 289 n.19 (1982) (listing Duberstein as

example of where mixed question of law and fact is not

reviewed de novo).

Accordingly, whether the district court's findings in this

case are considered to be findings of fact or mixed findings of

fact and law, our review is on a clearly erroneous basis.

Here, however, the district court decided the case by way of a

grant of summary judgment, thereby presumably viewing its

finding that the Fund was an "action" organization as a

finding of law, not of fact. Because, as we have pointed out,

our review is on a clearly erroneous basis, however, we

__________

manner and to the same extent as decisions of district courts in civil

actions tried without a jury." This language mimics that of Rule

52(a)'s clearly erroneous standard and the Supreme Court has

interpreted 26 U.S.C. s 7482 as "in the most explicit terms at-

tach[ing] the identical weight [as Rule 52(a)] to the findings of the

Tax Court." Commissioner v. Duberstein, 363 U.S. 278, 291 (1960).

Of course, our review here is of the district court, not the Tax

Court. But the statute granting jurisdiction to the Tax Court, the

Court of Claims and the district court for the District of Columbia

with respect to 501(c)(3) claims, 26 U.S.C. s 7428, suggests that

these three courts are to be treated the same under appellate

review: "Any such declaration shall have the force and effect of a

decision of the Tax Court or a final judgment or decree of the

district court or the Claims Court, as the case may be, and shall be

reviewable as such." 26 U.S.C. s 7428(a)(2). Accordingly, our best

reading of 26 U.S.C. s 7482 and 26 U.S.C. s 7428 in combination is

that s 7482 instructs us to review the findings of the Tax Court

under the clearly erroneous standard and s 7428 instructs us to

treat the district court for the District of Columbia as if it were the

Tax Court, meaning that its findings must also be reviewed for clear

error.

believe that it would be more appropriate for future district

courts to decide 501(c)(3) issues at bench trials, rather than

on summary judgment. Nevertheless, although the court

below stated that it was deciding the case on summary

judgment, a reading of its decision and the record shows that

in fact the court decided the critical issue of whether the

Fund was an "action" organization on the merits.7 Thus, we

think that a remand is unnecessary, and we review the case

as if it had been properly structured and decided on the

merits.

B.Review of District Court's Findings

Given our deferential standard of review, and given the fact

that the burden is on the taxpayer seeking exemption to

demonstrate that it is in fact entitled to tax-exempt status, see

Granzow v. Commissioner, 739 F.2d 265, 268 (7th Cir. 1984)

(per curiam) ("Exemption from income taxation is a matter of

legislative grace. A taxpayer requesting an exemption must

demonstrate compliance with the specific requirements set

forth in the statute granting the exemption.... The party

claiming the exemption bears the burden of proof of entitle-

ment"), we have no difficulty in upholding the district court's

conclusion that the Fund advocated and hence does not

qualify for tax exempt status under 501(c)(3).

The regulations define an "action" organization as one that

"advocates, or campaigns for, the attainment of [legislation]

... as distinguished from engaging in nonpartisan analysis,

study, or research and making the results thereof available to

the public." Treas. Reg. s 1.501(c)(3)-1(c)(3)(iv)(b). While

there is no bright line distinguishing an organization which

advocates from an organization which engages in nonpartisan

analysis, study or research--and we do not attempt to draw

one here--we can in this case easily conclude that the district

court did not clearly err in finding that the Fund crossed over

the line into advocacy.8 The Commission existed for one

__________

7 There were no disputes as to the historical facts underlying the

district court's determination.

8 The Fund argues that it does not meet the "action" organization

test because it did not actively campaign for its proposed flat tax.

year--the year before the 1996 Presidential elections. It

studied one issue, an issue that was at the time a very central

and controversial political one. With great fanfare, the Com-

mission published a final report wherein it extolled the bene-

fits of the flat tax and "recommend[ed] to the Congress and

to the President of the United States that the current Inter-

nal Revenue Code be repealed in its entirety." J.A. at 354.

Moreover, the district court did not clearly err in concluding

that the Commission's activities were not mere "nonpartisan

analysis, study, or research and making the results thereof

available to the public." Treas. Reg. s 1.501(c)(3)-

1(c)(3)(iv)(b). Based on the record before us, the court could

reasonably conclude that the Commission had not set out to

study tax reform generally and only later concluded that a

flat tax was preferable to the present system of taxation.9

Rather, the indications are that the Commission assumed a

conclusion--the preferability of a flat tax--and then tried to

sell this conclusion both to Congress and the President, and

to the public more broadly. Of course, the Commission is

free to conclude that a flat tax is preferable to the present

system of taxation; and it is free to argue this position

vigorously to the Congress, to the President and to the

American public. However, as the Supreme Court has noted,

controversies such as these " 'must be conducted without

public subvention; the Treasury stands aside from them.' "

Cammarano v. United States, 358 U.S. 498, 512 (1959) (quot-

__________

However, the second prong of the test asks whether an organization

"advocates or campaigns" for legislation (emphasis added), indicat-

ing that a sustained, grass-roots campaign is not required and that

advocacy alone is sufficient.

9 We emphasize that our holding in this case is quite narrow. We

are not holding that any organization which studies an issue touch-

ing on legislation, reaches a conclusion with respect to that issue,

and then argues the merits of that conclusion must necessarily be

characterized as an "action" organization. We are simply holding

that an organization which assumes a conclusion with respect to a

highly public and controversial legislative issue and then goes into

the business of selling that conclusion may properly be designated

an "action" organization.

ing Slee v. Commissioner, 42 F.2d 184, 185 (2d Cir. 1930) (L.

Hand, J.)). The Fund has failed in this case to meet its

burden of demonstrating that it is entitled to tax exemption

under 501(c)(3) and the district court did not err in finding

that it was not so entitled. Accordingly, the decision of the

district court is affirmed.

So ordered.