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ANIMAL PROTECTION INSTITUTE, INC. v. U.S., Cite as 42 AFTR 2d 78-5850, 09/19/1978 , Code Sec(s) 501
ANIMAL PROTECTION INSTITUTE, INC., PLAINTIFF v. U.S., DEFENDANT.
U.S. Court of Claims Trial Judge's Opinion, Trial Div.,
Decision against taxpayer in part.
42 AFTR 2d 78-5850, 78-2 USTC P 9709.
1. JUDICIAL PROCEEDINGS—Proceedings by taxpayers and third parties—declaratory judgments—Sec. 501(c)(3) status. In action for declaratoryjudgmentburden of proof was on taxpayer to prove IRS revocation of its exempt status was erroneous, and it couldn't urge new grounds which it didn't present in administrative proceedings. Subject to Sec. 7428 taxpayer could submit evidence additional to that in administrative record in support of its burden of proof and to refute IRS evidence. Federal Rules of Evidence would govern admissibility: mere fact that evidence was administrative record didn't establish truth of contents.
 This is a suit for declaratory judgment pursuant to the authority of section 7428 of the Internal Revenue Code and section 1507 of Title 28, United States Code, respectively added and amended by section 1306 of the Tax Reform Act of 1976, 90 Stat. 1717. In its petition plaintiff claims that it is a corporation organized and operated exclusively for the prevention of cruelty to animals and for educational purposes, no part of the net earnings of which inures to the benefit of any private individual, and that therefore contributions to it are deductible from income and it is exempt from corporate income taxes pursuant to Internal Revenue Code sections 170(a)(1) and (c)(2), and 501(a) and (c)(3). It seeks a declaratory judgment that the Internal Revenue Service erroneously revoked a ruling granting it exempt status.
At an early stage in the proceeding, on March 2, 1978, an order was entered requiring the parties to state their views as to the issues, "including specifically [pg. 78-5851] whether the principal issue is the correctness of the IRS determination on the administrative record before it, or whether either party may submit evidence of new or additional facts or to contest the facts in the administrative record," so that it can be determined whether there are issues of fact triable by this court. The responses and the subsequent conference with the parties held September 7, 1978, indicate that the parties are not in agreement with respect to the nature of the issues. The matter is one of first impression in this court.
This court has no general declaratory judgment jurisdiction (United States v. King, 395 U.S. 1 [ 23 AFTR 2d 63-1358] (1969)), and sections 7428 and 1507 deal with much narrower situations than does the declaratory judgment statute applicable to the district courts generally (28 U.S.C. §2201).
Section 7428(a) provides that in a case of actual controversy involving a determination or failure to make a determination by the Secretary of the Treasury with respect to the initial qualification or continuing qualification of an organization exempt from tax under section 501(a) and (c)(3) and contributions to which are deductible under section 170(a) and (c)(2) of the Internal Revenue Code, the TaxCourt, the Court of Claims or the District Court for the District of Columbia may make a declaration with respect to such initial or continuing qualification.1 Section 7428(b) requires that the petitioning organization first have exhausted the administrative remedies available to it within the Internal Revenue Service. It must allow the IRS at least 270 days to act on the request for a determination before filing a petition in court and it must file its petition within 90 days after an adverse determination. Section 7428(c) provides that contributions made during the pendency of a declaratory judgment proceeding contesting the revocation of an exemption ruling remain deductible (within limits) by the contributors irrespective of the final judgment.
To discern the congressional intent as to the nature of the judicial proceedings under this statute, resort must be had to the committee reports.
The committee reports2 stated that, although the tax status of an organization generally does not depend on the position of the IRS, as a practical matter most organizations hoping to qualify for exempt status and to obtain donations find it imperative to obtain a favorable ruling letter from the Service and to be listed in the Service's "blue book" (Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1954, Publication 78). Such an exemption letter and listing assure potential donors in advance that contributions to the organization will qualify as charitable deductions under section 170(c)(2). However, in Bob Jones University v. Simon, 416 U.S. 725 [ 33 AFTR 2d 74-1279] and Alexander v. "Americans United" Inc., 416 U.S. 752 [ 33 AFTR 2d 74-1289] (1974), the Supreme Court held that an organization could not obtain the assistance of the courts to restrain the IRS from withdrawing a favorable ruling letter or withdrawing its listing in the blue book. In effect, this meant that a judicial determination as to the organization's status could not be had by the organization or its contributors except in the context of a suit to redetermine a tax deficiency or to determine eligibility for a refund of taxes, and in the meantime the stream of contributions could dry up as a result of the withdrawal.
The enactment of the declaratory judgment statute was Congress' response to the Supreme Court's recommendation that the situation merited legislative mitigation of the harshness of the law on tax-exempt organizations relying on continuing contributions for their existence.3
Noting that in 1974 Congress had already conferred jurisdiction on the Tax [pg. 78-5852] Court to hear a declaratory judgment suit to test qualification of an employee retirement plan under tax law without necessity for the Service issuing a deficiency notice or a taxpayer suing for a refund, the committees proposed extension of such declaratory judgment procedure so as to enable an organization to obtain a judicial determination of its own status as a charitable organization, as an eligible charitable contribution donee, as a private foundation, or as a private-operating foundation. Although the retirement plan declaratory jurisdiction had been limited to the TaxCourt, Congress gave concurrent declaratory jurisdiction to the TaxCourt, the Court of Claims and the District Court for the District of Columbia.
The committee reports contemplated that the petitioner's case in the declaratory judgment proceedings be primarily based upon the evidence presented by the organization to the IRS, although the Commissioner of Internal Revenue would be permitted to present to the court additional reasons for disallowance of the exemption. Thus, as a part of the requirement that the petitioner first exhaust its administrative remedies the reports emphasized the importance of a full presentation before the various levels of the IRS and of supplying any reasonable additional information requested by the Service, to wit (S. Rep. No. 94-938, 94th Cong., 2d Sess. 585, 590; 1976-3 C.B., vol. 3, 623, 628):
Exhaustion of administrative remedies required.—For an organization to receive a declaratory judgment under this provision, it must demonstrate to the Court that it has exhausted all administrative remedies which are available to it within the Internal Revenue Service. Thus, it must demonstrate that it has made a request to the Internal Revenue Service for a determination and that the Internal Revenue Service has either failed to act, or has acted adversely to it, and that it has appealed any adverse determination by a district office to the national office of the Internal Revenue Service or has requested or obtained through the district director technical advice of the national office. To exhaust its administrative remedies, the organization must satisfy all appropriate procedural requirements of the Service. For example, the Service may decline to make a determination if the organization fails to comply with a reasonable request by the Service to supply the necessary information on which to make a determination.
In addition, the report emphasized the desirability of the other two courts following the TaxCourt's lead with respect to confining the proof to arguments considered previously by the Service except where the Service advances new arguments, and with respect to the burden of proof. The report stated (at 588 (1976-3, vol. 3 at 626)):
The court is to base its determination upon the reasons provided by the Internal Revenue Service in its notice to the party making the request for a determination, or based upon any new argument which the Service may wish to introduce at the time of the trial. The burden-of-proof rules are to be developed by the courts under their rule-making powers. Insofar as is practical, those rules should conform to the rules that the TaxCourt develops with regard to declaratory judgment suits as to the retirement plans, under section 7476 of the Code. (See e.g., Title XXI of the TaxCourt's Rules of Practice and Procedure.)
And the committees further noted that "In many cases [the facts as presented to the court] would be essentially the administrative record before the Internal Revenue Service; see e.g., paragraphs (5) and (6) of the prefatory note to title XXI of the TaxCourt's Rules of Practice and Procedure." Id.
The paragraphs of the TaxCourt's prefatory note to its preexisting rules on declaratory judgments on retirement plans, to which the committees alluded, stated in part (64 T.C. 1177, 1178-79 (1975)):
((5)) Declaratory judgment cases will usually be decided on the basis of the administrative record made in the proceedings within the Internal Revenue Service in connection with a request for a determination on the qualification of a retirement plan or amendment thereto. See Section 217. *** It should be noted that the definition of "administrative record" (see Rule 210(b)(3)) is not intended to be all-inclusive but it is essential that such record contain all the material upon which the Commissioner based his determination. See Rule 217(b)(1).
((6)) It is contemplated that after the administrative record has been filed and the issue joined (see Rule 214), the case will be placed on a calendar for submission to the Court (see Rule 212). Representations and other information contained [pg. 78-5853] in the administrative record will be assumed to be true for the purpose of decision. See Rule 217(b)(1). Ordinarily a trial will be held only with respect to a factual dispute in the administrative record or to resolve disagreement between the parties as to whether a particular item is a part of such record.
And the TaxCourt Rules themselves followed the same approach. Thus, Rule 217 provided (Id. at 1189-90):
Rule 217. Disposition Of Actions For Declaratory Judgment
((a)) General: Disposition of an action for declaratory judgment will ordinarily be made on the basis of the administrative record *** . Only with the permission of the Court, upon good cause shown, will any party be permitted to introduce before the Court any evidence other than that presented before the Internal Revenue Service and contained in the administrative record as so defined.
((b)) Procedure: (1) Disposition on the Administrative Record: *** The Court will thereafter issue an opinion and declaratory judgment with respect to the qualification of the retirement plan, based upon the assumption that the facts as represented in the administrative record as so stipulated or so certified are true and upon any additional facts as found by the Court if the Court deems that a trial is necessary. ***
((c)) Burden of Proof: (1) Parties Petitioner: The burden of proof shall be upon the petitioner *** as to those grounds set forth in the respondent's notice of determination that a retirement plan does not qualify. Where the respondent has determined that a retirement plan does qualify, the petitioner, and any party joining or intervening on his side, shall bear the burden of proof as to every ground on which he relies to sustain his position that such plan does not qualify. *** [Footnotes omitted.]
Following the enactment of the Tax Reform Act of 1976, the TaxCourt broadened its declaratory judgment rules, which had theretofore covered only retirement-plan-qualification issues, to cover also the initial or continuing qualification of exempt organizations and private foundations. (68 T.C. 1025 (1977).) With respect to its review of an initial determination that an organization is not exempt, the TaxCourt Rules indicate that except in the most unusual circumstances the question before it is only whether or not the determination of the Internal Revenue Service was correct on the administrative record before it and no additional evidence is to be received. The note to TaxCourt Rule 213 explains the difference between review of initial determinations and review of revocations as follows (Id. at 1042):
The primary guideline, shaping the rules of this Title relating to pleading by the Commissioner in cases other than those involving a revocation, is the acceptance by the Internal Revenue Service of the facts presented by a taxpayer for the purpose of obtaining a ruling on a retirement plan, *** or on an exempt organization or private foundation. In considering an application for such a ruling, the Commissioner accepts those facts without investigating them, and is not in a position ordinarily to know whether they are true or false. The basic rule therefore has been adopted here which permits the Commissioner to continue to accept such facts for the purpose of such declaratory judgment action, without making those facts binding on him in other respects. Under this Rule, the Commissioner may plead by admitting such facts only for the purpose of the pending action.
In cases involving a revocation, the procedure of the Internal Revenue Service preceding its determination is basically different, in that such revocations usually result from an audit, in the course of which the Service has made its own investigation of the facts. In such cases, the Service need not rely on the factual assertions of the petition but rather is in a position to make its independent evaluation of the facts, and disputes as to the facts may result in the action before the Court. A trial, therefore, may be necessary to resolve these factual disputes. ***
*** [W]ith the exception of factual disputes in revocation cases, the administrative record usually will constitute the sole basis on which the Court will make its decision in a declaratory judgment action. *** Except with respect [pg. 78-5854] to the contents of the administrative record or disputes as to the jurisdictional facts or in cases involving a revocation, it is not anticipated that there will be any occasion for a trial in such actions. ***
Rule 217. Disposition of Actions for Declaratory Judgment, provides (Id. at 1047-48):
(a) General. Disposition of an action for declaratory judgment, which does not involve a revocation, will ordinarily be made on the basis of the administrative record *** . Only with the permission of the Court, upon good cause shown, will any party be permitted to introduce before the Court any evidence other than that presented before the Internal Revenue Service and contained in the administrative record as so defined. Disposition of an action for declaratory judgment involving a revocation may be made on the basis of the administrative record alone only where the parties agree that such record contains all the relevant facts and that such facts are not in dispute.
And the note to that rule adds (Id. at 1048):
Although the Rule states that an action not involving a revocation will "ordinarily" be disposed of on the basis of the administrative record, there do not appear to be at this time any circumstances under which a trial will be held except as to disputed jurisdictional facts or to resolve disagreement between the parties as to the contents of the administrative record. It is expected that the Court's function will be merely to adjudicate whether the Commissioner's determination is erroneous *** upon the basis of the materials contained in the administrative record upon which the determination of the Commissioner was based. The facts and representations revealed by the administrative record will be assumed to be true for purposes of the proceeding, except of course as to ultimate conclusions and inferences that may be drawn therefrom or as to disputed jurisdictional facts. The entire second sentence and the word "ordinarily" in the first sentence appear in the Rule merely out of an abundance of caution to provide for the possibility of a trial on other facts or the presentation of evidence in the event that a situation not now contemplated might arise in which a trial would be appropriate.
The distinction in treatment under this Rule for cases involving a revocation results from the difference in processing of such cases by the Internal Revenue Service, which usually bases its determination of revocation on its own investigation rather than by accepting the facts asserted by the applicant and which go into the administrative record in other cases. ***
In Rule 217(b). Procedure, the TaxCourt notes again the difference in procedure between the review of the initial determination and review of the revocation determination, as follows (Id. at 1048-49):
Except in a case involving a revocation, the Court's decision will be based upon the assumption that the facts as represented in the administrative record as so stipulated or so certified are true and upon any additional facts as found by the Court if the Court deems that a trial is necessary. In the case of a revocation, the Court may, upon the basis of the evidence presented, make findings of fact which differ from the administrative record.
Rule 217(c), Burden of Proof, provides that the burden is on the petitioner as to the grounds set forth in the notice of determination and also where there is no determination prior to the bringing of the suit. On the other hand, the burden of proof is on the defendant as to any ground upon which it relies and which is not stated in the notice of determination, to wit (Id. at 1050-51):
(2) Other Actions. (i)Petitioner: The burden of proof shall be upon the petitioner as to jurisdictional requirements and as to the grounds set forth in the notice of determination. Where the Commissioner has failed to issue a notice of determination, the burden of proof shall be on the petitioner with respect to jurisdictional requirements, and also with respect to the date on which the request for determination, if any, was mailed to the Internal Revenue Service and the office to which it was mailed, and that no notice of determination has been issued by the Commissioner.
(ii) Respondent: The burden of proof shall be upon the respondent as to any ground upon which he relies and which is not stated in the notice of determination. If the respondent has not issued a notice of determination, he shall bear the burden of proof as to every ground [pg. 78-5855] upon which he relies to sustain his position, other than those matters as to which the burden is on the petitioner under subparagraph (2)(i) of this paragraph (c) where such a notice is not issued.
Under these circumstances, having regard to the committee reports in the legislative history of the statute and the emphasis placed by the committees on conforming the practice of this court to that of the TaxCourt and following the burden of proof rules provided by the TaxCourt, the court enters the following orders incident to the pretrial procedures and trial of this case:
(1.) The ultimate issue being whether the defendant properly revoked the plaintiff's exemption, to the extent that defendant has stated the grounds for such revocation in its determination letter, the burden of proof is on plaintiff to establish that such revocation was erroneous.
(2.) Plaintiff may not urge new grounds in opposition to the revocation which it did not urge in the administrative proceedings, as this would be contrary to the requirement of section 7428(b) that it have exhausted its administrative remedies, unless it had no fair opportunity to do so prior to receipt of the defendant's determination letter.
(3.) To the extent that defendant relies upon grounds to support the revocation which were not stated in the revocation letter, the burden of proof is on defendant.
(4.) The revocation letter which is attached to the plaintiff's memorandum of issues presented, filed June 15, 1978, sets forth the following grounds for the revocation:
((a)) The plaintiff organization was not operated exclusively for educational purposes within the meaning of section 501(c)(3).
((b)) Subsumed within ground (a) is the reason that plaintiff is an "action" organization, a substantial part of the activities of which is attempting to influence legislation by propaganda or otherwise.
((c)) Plaintiff was operated for the personal benefit of a private shareholder or individual, Mr. Mouras.
(5.) To the extent that plaintiff contended administratively that it is exempt as a corporation organized and operated "for the prevention of cruelty to *** animals" within the meaning of section 501(c)(3), defendant's failure to deal with that ground for exemption in its determination letter results in placing the burden of proof with respect to that issue on defendant.
(6.) Subject to reasonable restriction as to compliance with the requirement of section 7428(b) that plaintiff have made a bona fide effort to exhaust its administrative remedies, plaintiff is entitled to submit evidence at the trial in addition to that contained in the administrative record in support of its burden of proof and in refutation of defendant's evidence.
(7.) Defendant may submit evidence at the trial in addition to that contained in the administrative record in support of its burden of proof and in refutation of plaintiff's evidence.
(8.) The mere fact that items of evidence are contained in the administrative record does not establish the truth of their contents. Admissibility of such evidence for the purpose of establishing the truth of their contents will be governed by the Federal Rules of Evidence.
(9.) Additional and more precise rulings with respect to the admissibility of particular evidence will be made after completion of the pretrial submissions.
The statute also deals with the classification of a private foundation or a private operating foundation not pertinent here.2
H. Rep. No. 94-658, 94th Cong., 1st Sess. 282 (1976-3 C.B., vol. 2, 974); S. Rep. No. 94-938, 94th Cong., 2d Sess. 585 (1976-3 C.B., vol. 3, 623). Since the two reports are very similar with respect to the matters discussed herein, references hereinafter will be only to the Senate Report.3
The Senate Committee report quoted the following comment from Bob Jones University v. Simon, 416 U.S. 725, 749-50 [ 33 AFTR 2d 74-1279] (1974) (S. Rep. No. 94-938 at 586; 1976-3 vol. 3 at 624):
"Congress has imposed an especially harsh regime on §501(c)(3) organizations threatened with loss of tax-exempt status and with withdrawal of advance assurance of deductibility of contributions. *** The degree of bureaucratic control that, practically speaking, has been placed in the Service over those in petitioner's position [i.e., the position of Bob Jones University] is susceptible of abuse, regardless of how conscientiously the Service may attempt to carry out its responsibilities. Specific treatment of not-for-profit organizations to allow them to seek pre-enforcement review may well merit consideration."