Foundation of Human Understanding v. Commissioner

WILLIAMS, J., dissenting: A plurality of this Court hold

that section 7428(a)(1)(B) 1 grants jurisdiction to declare whether an organization is described in section 170(b)(1)(A). Judge Whitaker believes that section 7428(a)(1)(A) 2 grants jurisdiction to declare whether an organization described in section 501(c)(3) is a church. While Judge Whitaker’s approach is direct and less susceptible of producing unforeseeable collateral harm, like the plurality opinion it reverses this Court’s and others’ consistent interpretations of section 7428.

The rule applicable here is a general bar against declaratory judgments in Federal tax matters. Sec. 7421(a); Bob Jones University v. Simon, 416 U.S. 725 , 732 n. 7 (1974). It was in response to the Supreme Court’s observation in Bob Jones that Congress had “imposed an especially harsh regime on section 501(c)(3) organizations threatened with loss of tax-exempt status” in forbidding injunctive or declaratory relief that Congress enacted section 7428. S. Rept. 94-938, at 586, 1976-3 C.B. (Vol. 3) 624. The Senate Finance Committee report states,

This provision is intended to facilitate relatively prompt judicial review of the specified types of exempt organization issues; it is not intended to supplant the normal avenues of judicial review (redetermination of a deficiency or suit for refund of taxes) where those normal procedures could be expected to provide opportunities for prompt determinations. * * * [S. Rept. 94-938, at 588, 1976-3 C.B. (Vol. 3) 626.]

Section 7428 was designed, not to supplant the normal deficiency/refund litigation routes, but to make relief available in three courts where the Government challenged the tax-exempt status of the organization. Specifically, this Court, the Claims Court, and the District Court for the District of Columbia were given jurisdiction to declare the proper status of an organization as (1) tax exempt (section 501(c)(3)), (2) a qualified recipient of deductible charitable contributions (section 170(c)(2)), (3) an organization that is not a private foundation (section 509(a)), or (4) an operating foundation (section 4942(j)(3)). These four categories are the “specified types of exempt organization issues” over which we have jurisdiction. None of them is at issue in this case.

The plurality premise our jurisdiction on Friends of the Society of Servants of God v. Commissioner, 75 T.C. 209 (1980). I believe the plurality’s reliance on that case is not only misplaced but without foundation. Indeed, the plurality would overrule Friends. Specifically, the plurality’s opinion directly contradicts two principles of jurisdiction under section 7428, enunciated in Friends:

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 (6.th 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). [ 75 T.C. at 215-216 .]

First, there is no adverse ruling in this case. Second, section 7428 does not grant this Court, or any other, the authority to declare the status of an organization under section 170(b)(1)(A) where classification under section 509(a) is not at issue. An organization’s private foundation status is directly affected by whether it is classified under section 509(a)(1), section 509(a)(2), section 509(a)(3), or section 509(a)(4), and we have jurisdiction to give declaratory relief where the organization’s classification under one or more of the four paragraphs of section 509(a) is at issue. Junaluska Assembly Housing, Inc. v. Commissioner, 86 T.C. 1114 (1986). Petitioner’s classification is, however, not at issue. There is no actual controversy between the parties in this case with respect to petitioner’s proper classification under section 509(a), and the Fifth Circuit has stated the rule applicable to this case, which I believe to be correct: this Court does not have jurisdiction to give declaratory relief that has no present effect on a taxpayer’s classification under section 509(a). CREATE, Inc. v. Commissioner, 634 F.2d 803 (5th Cir. 1981). As in CREATE, Inc., the parties both agree that petitioner is properly classified as an organization other than a private foundation pursuant to section 509(a)(1). Regardless of whether a determination is made with respect to petitioner’s status as an organization described in section 170(b)(l)(A)(i) or section 170(b)(l)(A)(vi), petitioner’s classification as an organization described in section 509(a)(1) will not change. Therefore, pursuant to section 7428, this Court does not have jurisdiction to hear this case.

In CREATE, Inc., the Fifth Circuit did not state the exception crafted by the plurality, viz, where a petitioner receives “nonprivate foundation status, but upon a less advantageous basis” than the one requested, the Tax Court may entertain a suit (see p. 1352, emphasis added). In fact, the Fifth Circuit rejected the plurality’s standard as a standard for exercising jurisdiction. What the Fifth Circuit stated was—

If taxpayers could seek review of a negative holding by the Service on an alternative basis for classification as a nonprivate foundation, even though the negative holding had no effect on the actual classification, it could give rise to a significant volume of sec. 7428 litigation, some of which would be needless. In this case, for example, such litigation would necessarily involve a future course of events which may never come to pass. We do not think that sec. 7428(a)(1) demands such an outcome. [ 634 F.2d at 812 ; emphasis added.]

The Fifth Circuit then enunciated what we later specifically held in Junaluska: “that the receipt of a favorable ruling on a nonprivate foundation status that is a different and less advantageous status * * * will not defeat jurisdiction.” CREATE, Inc. v. Commissioner, 634 F.2d at 813 (emphasis added). Junaluska Assembly Housing, Inc. v. Commissioner, 86 T.C. at 1127 .

Private foundation status is an issue determinable solely within the confines of section 509(a). The parties agree that petitioner’s status is that it is not a private foundation pursuant to section 509(a)(1). That status is unaffected by any determination regarding the basis for its qualification as a section 170(b)(l)(A)(i) organization.

No authority supports the plurality’s reach through section 509(a) to the underlying section 170(b)(1)(A) basis for such status. In an analogous case under section 7428, the Sixth Circuit, affirming an unreported order of this Court, held that no case or controversy existed though an organization declared to be exempt under section 501(c)(3) also wanted to be declared a section 170(b)(l)(A)(v) organization so as not to be subject to the tax on unrelated business income. Ohio County & Independent Agriculture Societies v. Commissioner, 610 F.2d 448 (6th Cir. 1979). The Sixth Circuit refused to reach classification under section 170(b)(1)(A). The more favorable tax status sought, though the subject of a real dispute, was not within the purview of section 7428. Although the parties disputed the proper classification, it had no present effect on the organization’s status under section 501(c)(3). See also Eiry Trust v. Commissioner, 77 T.C. 1263 (1981).

Judge Whitaker in effect looks behind respondent’s section 501(c)(3) determination to declare not only that the organization is tax exempt as a religious organization but also that the organization is a church. 3 The plurality’s opinion reaches the same result, but, instead of directly holding that we can declare an organization’s church status under section 501(c)(3), the plurality strain section 509(a) to find our jurisdiction. The plurality have in effect incorporated sections 170(b)(l)(A)(i), (ii), (iii), (iv), (v), and (vi) into section 509(a)(1) notwithstanding that (a) some of these organizations are not section 501(c)(3) organizations (see, e.g., sec. 170(b)(l)(A)(v)), and therefore could not possibly be described in section 509, and (b) section 170(b)(1)(A) does not relate to the “specific types of exempt organization issues” addressed by Congress in the enactment of section 7428 but simply provides a 50-percent of adjusted gross income limitation on individuals’ charitable contributions.

Friends of the Society of Servants of God v. Commissioner, supra, should be distinguished. In that case, petitioner requested a definitive ruling under section 509(a)(1) as a church within the meaning of section 170(b)(l)(A)(i). Respondent issued an advance ruling that petitioner was an organization that was not a private foundation under section 509(a)(1) because he determined it to be an organization described in section 170(b)(l)(A)(vi). We held that the case presented an actual controversy because (a) respondent’s ruling was not a definitive ruling, (b) his determination that petitioner was an organization described in section 170(b)(l)(A)(vi) was not supported by the record, and (c) the advance ruling imposed additional requirements on petitioner which it was not likely to satisfy.

In this case, none of the Friends factors are present. Petitioner has received a final favorable ruling from respondent that petitioner is an organization other than a private foundation under section 509(a)(1) as an organization described in section 170(b)(l)(A)(vi). Petitioner has operated as such for many years. There is no indication that respondent’s determination that petitioner is not an organization described in section 170(b)(l)(A)(i) will result in petitioner’s failure to continue to qualify under section 509(a)(1). Petitioner has failed to make the minimal showing that respondent’s determination will have some present effect on its private foundation status.

The majority have extended our holding in Friends of the Society of Servants of God beyond the boundaries of the statute, in contravention of the well-settled principle that jurisdictional statutes are to be narrowly construed. See 13 Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction 2d, sec. 3522 (1984). The majority have opined on a matter not involving a “case of actual controversy.”

Hamblen, Swift, Jacobs, Wright, and Wells, JJ„ agree with this dissent.

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—

♦ * * * * its *

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

SEC. 7428(a). Creation of Remedy. — In 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),

I would point out, however, that just as there is no controversy between the parties as to the organization’s sec. 509(a)(1) status, there is no controversy between them as to the organization’s sec. 501(c)(3) status.