Fund for the Study of Economic Growth and Tax Reform v. I.R.S.

Decision Date08 December 1998
Docket NumberNo. 98-5105,98-5105
Parties, 82 A.F.T.R.2d 98-7312 The FUND FOR THE STUDY OF ECONOMIC GROWTH AND TAX REFORM, Appellant, v. INTERNAL REVENUE SERVICE, Appellee.
CourtU.S. Court of Appeals — District of Columbia Circuit

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. § 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 campaigns for, the attainment" of legislation. Treas. Reg. § 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 implementation of legislation embodying its proposals for a flat tax. 1 The district court agreed with the IRS that the Fund 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 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, "Unleashing 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 Revenue 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 recommendations 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 indicated that the Commission was an "action" organization. The regulations applicable to 501(c)(3) provide that an organization seeking 501(c)(3) status must be organized and operated 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. § 1.501(c)(3)-1(d)(1)(i). The regulations provide that an organization is not operated exclusively for exempt purposes if it is an "action" organization. Treas. Reg. § 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 campaigns 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. § 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.

The Fund responded to the IRS's initial adverse determination 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 exemption 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. § 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 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 Congress (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 Commission, 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 Commission 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 ...

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