Foundation of Human Understanding v. Commissioner

CHABOT, J., dissenting: Both parties agree that petitioner is not “a private foundation (as defined in section 509(a))” (sec. 7428(a)(1)(B)). Both parties agree that this is so because petitioner is “an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii))” (sec: 509(a)(1)). Respondent contends that this is so because petitioner is a publicly supported organization described in section 170(b)(l)(A)(vi); petitioner contends this is so because it is a church described in section 170(b)(l)(A)(i). No deficiency has been determined that would be affected by the resolution of this limited dispute; 1 the dispute is before us solely by way of our declaratory judgment jurisdiction.

The majority hold that we have declaratory judgment jurisdiction to resolve this dispute. I would hold that we do not. I dissent.

I. Background

Before 1974, the effect of the Anti-Injunction Act (sec. 7421(a) and its predecessors, dating back to 1867) and the Federal tax exception to the Declaratory Judgment Act (in 28 U.S.C. sec. 2201 , the exception having been enacted in 1935, one year after the enactment of the Declaratory Judgment Act) was to preclude declaratory judgment proceedings in Federal tax cases. Bob Jones University v. Simon, 416 U.S. 725 (1974);

In the Employee Retirement Income Security Act of 1974 (sec. 1041(a) of Pub. L. 93-406, 88 Stat. 829, 949), the Congress enacted section 7476 to authorize the issuance of declaratory judgments to resolve certain types of retirement plan disputes. In the Tax Reform Act of 1976 (secs. 1306(a) and 1042(d)(1) of Pub. L. 94-455, 90 Stat. 1520, 1717, 1637), the Congress enacted sections 7428 and 7477 to authorize the issuance of declaratory judgments to resolve certain types of charitable organization disputes and section 367 disputes. In the Revenue Act of 1978 (sec. 336(a) of Pub. L. 95-600, 92 Stat. 2763, 2841), the Congress enacted section 7478 to authorize the issuance of declaratory judgments to resolve certain types of municipal bond disputes.

In sections 7476, 7477, and 7478, the Congress gave declaratory judgment jurisdiction only to the Tax Court; in section 7428, the Congress gave this jurisdiction to the Tax Court, the Court of Claims (now, the Claims Court), and the District Court for the District of Columbia. In sections 7428, 7476, and 7477, trial court determinations are reviewable in the same Courts of Appeals to which other cases would go; in section 7478, trial court determinations are reviewable only by the Court of Appeals for the District of Columbia (sec. 7482(b)(3)). Each of these four declaratory judgment sections requires that there be “a case of actual controversy”; each then specifies what kind of controversy is a permissible declaratory judgment subject. Each of these four declaratory judgment sections specifies who may be a petitioner; in sections 7428 and 7478, there can be only one petitioner, while in sections 7476 and 7477 there are several potential petitioners as to any dispute. In sections 7476 and 7477, a petitioner is deemed to have not exhausted its administrative. remedies before the expiration of 270 days after its request for determination; in section 7428, a petitioner is deemed to have exhausted its administrative remedies upon the expiration of 270 days; in section 7478, a petitioner is deemed to have exhausted its administrative remedies upon the expiration of 180 days.

Each of the following statutes dealt with at least one of the declaratory judgment sections: the Tax Reform Act of 1976 (amended sec. 7476; enacted secs. 7428 and 7477), the Revenue Act of 1978 (amended secs. 7476, 7428, and 7477; enacted sec. 7478), the Federal Courts Improvement Act of 1982 (amended sec. 7428), the Deficit Reduction Act of 1984 (amended secs. 7476 and 7428; repealed sec. 7477), and the Tax Reform Act of 1986 (corrected a typographical error in sec. 7476). From the foregoing, I conclude that—

(1) the Congress has not swept away the general prohibitions on declaratory judgments in Federal tax cases;

(2) the Congress has provided for declaratory judgments only to resolve the categories of disputes specifically set forth in the provisions enacted into law; and

(3) the Congress has fashioned each of these provisions with a view towards the specific problem or problems it was then addressing; although the Congress used one general format for all four sections, the content of each portion was tailored to the problems to be addressed by that particular section; when the Congress modified its views it modified accordingly the section involved, to the point of repealing one of the declaratory judgment sections 8 years after enacting it.

Since the general prohibition on declaratory judgments in Federal tax matters remains in the statute, it is particularly important that we adhere closely to the Congress’ grant of jurisdiction in section 7428 as the Congress wrote section 7428.

II. Section 7428

Section 7428(a) 2 authorizes this Court, the Claims Court, and the District Court for the District of Columbia to issue declaratory judgments under certain circumstances.

The statute requires that there be “a case of actual controversy involving — (1) a determination by the Secretary * * * or (2) a failure by the Secretary to make a determination.” Each of the Internal Revenue Code declaratory judgment sections includes these specific requirements. Each of these sections then (i.e., after the words “a determination by the Secretary”) lists what controversies are cognizable under the particular section. None of the controversies listed in section 7428 is present in the instant case. In particular—

(1) the parties agree that petitioner qualifies “as an Organization described in section 501(c)(3) which is exempt from tax under section 501(a)” (sec. 7428(a)(1)(A));

(2) the parties agree that petitioner qualifies “as an organization described in section 170(c)(2)” (sec. 7428(a)(1)(A));

(3) the parties agree that petitioner is not “a private foundation (as defined in section 509(a))” (sec. 7428(a)(1)(B)); and

(4) it does not appear that either side contends that petitioner is “a private operating foundation (as defined in section 4942(j)(3))”.

Thus, although there clearly is a controversy between the parties in the instant case, that controversy (whether petitioner is a church, within the meaning of section 170(b)(l)(A)(i)) is not one of the list of controversies that the Congress gave us jurisdiction to resolve under section 7428.

Ordinarily, that would be the end of the matter and we would dismiss the case for lack of jurisdiction.

III. Friends of the Society of God v. Commissioner

Our precedents make it clear that, at times, the problem is more subtle. I agree with tlie majority that we can find useful guidance in our opinion in Friends of the Society of God v. Commissioner, 75 T.C. 209 (1980) (hereinafter sometimes referred to as Friends).

In Friends, the organization requested a ruling that it was tax-exempt as an organization described in section 501(c)(3), and also that it was not a private foundation because it was a church described in section 170(b)(l)(A)(i). The organization received a ruling that it was tax-exempt as an organization described in section 501(c)(3). The ruling also stated as follows ( 75 T.C. at 211 ):

Because you are a newly created organization, we are not now making a final determination of your foundation status under section 509(a) of the Code. However, we have determined that you can reasonably be expected to be a publicly supported organization described in sections 509(a)(1) and 170(b)(l)(A)(vi).

Accordingly, you will be treated as a publicly supported organization, and not as a private foundation, during an advance ruling period.

* * * * 4s % *

If you do not meet the public support requirements during the advance ruling period, you will be classified as a private foundation for future periods. Also, if you are classified as a private foundation, you will be treated as a private foundation from the date of your inception for purposes of sections 507(d) and 4940.

We held that in Friends that we had jurisdiction to determine whether the organization was a church described in section 170(b)(l)(A)(i).

The majority herein conclude that “our opinion in Friends * * * is controlling as to our jurisdiction in the instant case.” (See p. 1355) The majority conclude that our opinion in Friends leads to a conclusion that we have jurisdiction in the instant case. I agree that Friends gives us the answer to the' jurisdictional question in the instant case. However, I respectfully suggest that the majority have missed the point of our- opinion in Friends and, as a result, their conclusion is directly opposite to the one that Friends requires.

In Friends, we analyzed the basic dispute as follows ( 75 T.C. at 215 ): .

The parties in this case differ in their interpretation of the scope of the review available. Petitioner points out that the statute by its terms confers jurisdiction in cases “involving (1) a determination by ' the Secretary * * * (B) with respect ter the initial classification or continuing classification of an organization as a private foundation (as defined in section 509(a)).” Petitioner contends that respondent’s determination that it was not a church was made “with respect to” its initial classification as a private foundation. Stated generally, petitioner argues that the statute grants jurisdiction in all cases where the parties disagree about some aspect of a private ruling on an organization’s private foundation or tax-exempt status. [Emphasis in original.] - >

From thé foregoing, we derived the following rule ( 75 T.C. at 215-216 ) to apply to the facts in determining whether we have declaratory judgment jurisdiction:

We disagree for two reasons. First, section 7428(a) applies only “In a case of actual controversy.” Therefore, the statute cannot apply unless the taxpayer has received an adverse ruling. Second, the statute confers jurisdiction only with respect to four subsections of the Code — subsections 170(c)(2), 501(c)(3), 509(a), and 4942(j)(3). Since these four sections -are specifically enumerated, and declaratory judgments or injunctions are otherwise prohibited by section 7421(a) (Bob Jones University v. Simon, supra), it follows that the jurisdictional prerequisite for an action under section 7428(a) is an adverse determination under one of the four above-listed Code sections. See Ohio County &. Independent Agricultural Societies, Delaware County Fair v. Commissioner, 610 F.2d 448 (6th Cir. 1979), affg. an order of this Court dated July 14, 1977" (docket No. 4811-77X), cert. denied 446 U.S. 965 (1980). Section 170(b)(1)(A) is not among the listed subsections. Thus, in the circumstances- of this case, petitioner may not ask for a declaratory judgment that it is a church under section 170(b)(l)(A)(i) unless qualification as a church,has a direct bearing on petitioner’s foundation status under section 509(a). [Emphasis in original.]

Applying this rule to the facts in Friends, we point out that, although the ruling appeared to be favorable in form, in substance it was an unfavorable ruling as to the organization’s nonprivate foundation status. We noted that the ruling merely gave the organization a trial period to demonstrate public support under section 170(b)(l)(A)(vi) ( 75 T.C. at 216 ) and that the record in Friends suggested that the organization was not very likely to meet the public support requirements ( 75 T.C. at 217-219 ). Thus, the ruling that was issued was, as a practical matter, a ruling that the organization was (or shortly would be) a private foundation. We also noted that, if the organization were a church (sec. 170(b)(l)(A)(i)) then it would npt have to meet the public support test, and would not fee a private foundation. ( 75 T.C. at 219-220 .) Thus, we concluded as follows ( 75 T.C. at 220 ):

In other words, petitioner’s status as a church directly affects its qualification as a nonprivate foundation. In this context, petitioner’s church status is a justiciable issue under section 7428(a)(1)(B), which authorizes a declaratory judgment determining whether or not petitioner is a private foundation. [Emphasis in original.]

Now, let us apply in the instant case the learning of Friends. In the instant case, respondent issued a definitive ruling, not merely an advance ruling. Also, our findings in the instant case do not suggest that petitioner has any difficulty in meeting the public support requirements. Accordingly (in contrast to the situation in Friends), the ruling petitioner received is favorable both in substance and form on the question of whether petitioner is a private foundation.

In Friends, we noted the fact that “the ruling letter imposes terms on [the organization’s] foundation status which would not have been imposed upon a church.” ( 75 T.C. at 217 .) The majority point out (see p. 1355) that the same is true in the instant case. The majority in the instant case pass over the fact that, in Friends, the next 2Vz pages of the opinion (75 T.C. , at 217-220) explain why those particular “terms” made a practical difference in that organization’s ability to avoid private foundation status. In the instant case, the majority do not suggest that those “terms” make any difference at all in petitioner’s ability to avoid private foundation status.

In Friends, we noted as follows ( 75 T.C. at 213 ):

If petitioner is a church, it * * * would also be entitled other benefits unrelated to section 501(c)(3) or 509(a), primarily the relief from having to file annual information returns granted under section 6033(a)(2)(A)(i). 7

In the instant case, the majority also note some collateral effects of church status (see p. 1353). Although those (or other) collateral effects may be the real reason why there is an “actual controversy”, the mere existence of an actual controversy is not enough tq.give us jurisdiction. In Friends we held that the controversy must be one that “has a direct bearing” on the organization’s qualification or classification under one or more of the four sections listed in section 7428(a)(1). ( 75 T.C. at 215-216 .)

The approach of the majority in the instant case appears to be that we can resolve — in a declaratory judgment proceeding — any actual controversy about whether an organization is described in one rather than another of the first six clauses of section 170(b)(1)(A), even if that controversy is bottomed on collateral consequences instead of consequences affecting qualification or classification under one or more of the four sections listed in section 7428(a)(1). This approach would place before us many disputes that have nothing to do with the four sections listed in section 7428(a)(1). For example:

(1) The telephone excise tax provisions (secs. 4251 et seq.) include exemptions for hospitals “referred to in section 170(b)(l)(A)(iii)” (sec. 4253(b)) and educational organizations “described in section 170(b)(l)(A)(ii)” (sec. 4253(j)), but not for churches described in section 170(b)(l)(A)(i). If an organization receives a ruling that it is a church but not a hospital (or not an educational organization), then are we to take declaratory judgment jurisdiction because of the actual controversy that is based primarily on liability for the telephone tax? 3

(2) Section 403(b) provides for “tax-sheltered annuities” for employees of “an educational organization described in section 170(b)(l)(A)(ii)” (sec. 403(b)(l)(A)(ii)) if the annuities are bought by governmental employers. These annuities are not available for employees of other governmental institutions. All of these governmental institutions are described in section 170(b)(l)(A)(v), and so are section 509(a)(1) organizations, and so are not private foundations. If a governmental museum or a governmental hospital receives a ruling that it is a governmental unit, but it is not an educational organization, then are we to take declaratory judgment jurisdiction because of the actual controversy that is based primarily on availability of tax-sheltered annuities to employees? 4

(3) Under prior law, gross income did not include any amount received “(A) as a scholarship at an educational organization described in section 170(b)(l)(A)(ii), or (B) as a fellowship grant” (sec. 117(a)(1)). The exclusion was available, respondent ruled (Rev. Rul 60-130, 1960- 1 C.B. 46 ; Rev. Rul. 58-76, 1958- 1 C.B. 56 ), for fellowship grants by the American Cancer Society and the American Heart Association, for nondegree research work. The Congress has modified section 117 so as to allow the exclusion only for “a candidate for a degree at an educational organization described in section 170(b)(l)(A)(ii) (sec. 117(a)). If a public charity grant-making organization 5 refuses to make grants for studies at organizations that are not described in section 170(b)(l)(A)(ii), then will we take jurisdiction over controversies as to whether the organization qualifies under that provision even though respondent agrees that it also qualifies under clause (i), (iii), (iv), (v), or (vi) of section 170(b)(1)(A)? If we go that far, will we then also be willing to rule whether that organization issues “degrees” within the meaning of section 117?

The majority rely also on two sentences in CREATE, Inc. v. Commissioner, 634 F.2d 803 (5th Cir. 1981), affg. an unreported order of this Court. Respondent had ruled that CREATE was not a private foundation because it was a section 509(a)(3) organization and also because it was a section 509(a)(1) organization. Respondent ruled adversely to CREATE as to the treatment of certain contributions to it, but that adverse portion of the ruling did not affect CREATE’s status as not being a private foundation. After affirming our order that we did not have declaratory judgment jurisdiction to consider the dispute as to the treatment of the contributions that were the subject of the adverse portion of the ruling, the Court of Appeals noted a “caveat”, based on our opinion in Friends ( 634 F.2d at 812-813 ). If the Court of Appeals means that we can rule on other disputes where such rulings are necessary in order to decide one of the issues set forth in the statute, then I agree with the Court of Appeals’ dictum. However, if the Court of Appeals contends that the statute gives us declaratory judgment jurisdiction to decide collateral questions merely because there are actual controversies as to those questions, then I respectfully suggest that the Court of Appeals’ caveat is contrary to the statute. 6 We follow a Court of Appeals where that Court of Appeals has ruled in a manner that is clearly dispositive of the i^sue we face in the instant case, and the instant case is appealable to that Court of Appeals. Golsen v. Commissioner, 54 T.C. 742 , 756-758 (1970), affd. 445 F.2d 985 (10th Cir. 1971). See, e.g., David Metzger Trust v. Commissioner, 76 T.C. 42, 72-74 (1981), affd. 693 F.2d 459 (5th Cir. 1982). The issue in the instant case has not been clearly disposed of by the Court of Appeals for the Fifth Circuit, and this case is not appealable to that Court of Appeals.

IV. Conclusion

In sum, the opinion of this Court in Friends presented a careful analysis of the statute that the Congress chose to enact and explained why, in the setting of Friends, it became necessary for us to decide whether the organization was a church but only because that issue had to be resolved before we could decide the actual controversy as to whether the organization was a private foundation. In the instant case, there is no actual controversy as to whether petitioner is a private foundation. There is an actual controversy, but it is not as to any of the specific matters that the Congress addressed when it carved out exceptions to the prohibitions in the Declaratory Judgment Act (and, by implication, to the Anti-Injunction Act). Finally, decision of that issue would have no effect on any of the specific matters set forth in section 7428.

When we decide, in the instant case, whether petitioner is a church, we go beyond the jurisdiction that the Congress saw fit to grant us. I would not decide that question.

Respectfully, I dissent.

PARKER, J., agrees with this dissent.

Because of somewhat different rules under sec. 514(b)(3)(E), it is possible that this difference in status could affect a liability for unrelated business income tax. Another difference, in sec. 512(b)(14), applies only to years beginning before Jan. 1, 1976.

SEC. 7428. DECLARATORY JUDGMENTS RELATING TO STATUS AND CLASSIFICATION OF ORGANIZATIONS UNDER SECTION 501(c)(3), ETC.

(a) Creation of Remedy. — In a case of actual controversy involving—

(1) a. determination by the Secretary—

(A) with respect to the initial qualification or continuing qualification of an organization as an organization described in section 501(c)(3) which is exempt from tax under section 501(a) or as an organization described in section 170(c)(2),

(B) with respect to the initial classification or continuing classification of an organization as a private foundation (as defined in section 509(a)), or

(C) with respect to the initial classification or continuing classification of an organization as a private operating foundation (as defined in section 4942(j)(3)), or

(2) a failure by the Secretary to make a determination with respect to an issue referred to in paragraph (1),

upon the filing of an appropriate pleading, the United States Tax Court, the United States Claims Court, or the district court of the United States for the District of Columbia may make a declaration with respect to such initial qualification or continuing qualification or with respect to such initial classification or continuing classification. 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. For purposes of this section, a determination with respect to a continuing qualification or continuing classification includes any revocation of or other change in a qualification or classification.

See also secs. 410(c)(1)(B) and (d), 411(e)(1)(B), 412(h)(4), and 414(e); 508(c)(1)(A); 512(b)(14) and 514(b)(3)(E), 3309(b)(1); 5122(c); 6043(b)(1); and 7605(c).

Published rulings attempting to define when an organization qualifies under sec. 170(b)(l)(A)(iii) (or under sec. 503(b)(5), as in effect before the Tax Reform Act of 1969), include the following: Rev. Rul. 76-9, 1976- 1 C.B. 348 ; Rev. Rul. 75-295, 1975- 2 C.B. 437 ; Rev. Rul. 73-131, 1973- 1 C.B. 446 .

A published ruling dealing with the circumstances under which some activities of a private museum may be treated as an educational institution, although in a different context, appears as Rev. Rul. 76-167, 1976- 1 C.B. 329 .

Private foundations are likely to have the same concerns. See secs. 4941(d)(2)(G)(ii) (relating to self-dealing by Government officials) and 4945(g)(1) (relating to individual grants as taxable expenditures).

It is in this regard that I must respectfully disagree with Judge Williams’ dissenting opinion because of his reliance on Junaluska Assembly Housing, Inc. v. Commissioner, 86 T.C. 1114 (1986). In Junaluska, the Court gave the above noted “caveat” in CREATE, Inc. v. Commissioner, 634 F.2d 803, 813 (5th Cir. 1981), a construction that is outside the statute. That is, the Court decided the question whether the organization in Junaluska was a church within the meaning of sec. 170(b)(l)(A)(i) for purposes of deciding whether that organization escaped private foundation status because of sec. 509(a)(1) rather than section 509(a)(3). In that sense, Junaluska is similar to the instant case in that we should have declined to take jurisdiction over that additional question since both sides agreed that the organization was not a private foundation pursuant to sec. 509(a).

Notwithstanding my disagreement with Judge Williams on this point, it is clear that under both approaches taken in these dissenting opinions, the majority’s analysis in the instant case is incorrect. Thus, proper decision of the instant case does not turn on a reexamination of Junaluska.