Houston Lawyer Referral Serv., Inc. v. Comm'r of Internal Revenue

• Decision Date: 19 January 1978
• Docket Number: Docket No. 7093-77X.
• Citation: 69 T.C. 570
• Parties: HOUSTON LAWYER REFERRAL SERVICE, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

69 T.C. 570

HOUSTON LAWYER REFERRAL SERVICE, INC., PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 7093-77X.

United States Tax Court

Filed January 19, 1978.

Petitioner's representatives are alleged to have orally furnished additional information to Internal Revenue Service representatives at conferences relating to petitioner's application for exempt status under sec. 501(c)(3), I.R.C. 1954. Such orally furnished information was not reduced to writing or included in any of the documents comprising the administrative record. Held, in an action for declaratory judgment under sec. 7428, I.R.C. 1954, petitioner's failure to submit the additional information in writing does not constitute “good cause,” within the meaning of Rule 217(a) of the Rules of Practice and Procedure of this Court, for permitting such information to be introduced in evidence by stipulation or oral testimony. Christopher D. Rhodes, for the petitioner.

Kevin M. Bagley, for the respondent.

OPINION

FEATHERSTON, Judge:

In this action under section 7428¹ for a declaratory judgment that petitioner is entitled to exemption from Federal income taxes under section 501(c)(3), petitioner has filed a Motion to Present Evidence Not Contained in the Administrative Record. Respondent objects on the ground that “good cause” within the meaning of Rule 217(a)² has not been shown for the presentation of such evidence. We agree with respondent that petitioner's motion must be denied

Section 7428(a)³ confers jurisdiction on this Court to “make a declaration” with respect to the “initial qualification” of an organization as an organization described in section 501(c)(3) which is exempt from tax under section 501(a). Petitioner invokes this jurisdiction and alleges that its application, dated June 3, 1976, for tax-exempt status under section 501(c)(3), was erroneously denied on February 28, 1977. Petitioner alleges that in denying such application, the Secretary erred in concluding:

A. That the lawyer referral activities of Petitioner result in “substantial” private benefit for the panel members to whom clients are referred, and,

B. That the free legal services provided cannot be considered as charitable because they are provided to persons who are not indigent within the meaning of Rev. Rul. 69-161, 1969-1 C.B. 149.

The facts alleged in the petition “as a basis” for petitioner's exemption are as follows:

A. The activities of the referral service itself are absolutely free to all applicants, irrespective of financial status, and the service is totally dependent upon the legal community for its operating funds.

B. The panel members are expected by the service to handle the problems sent to them irrespective of the referred party's potential ability to pay, and a substantial portion of the referred attorney's total time spent on referral service applicants is donated altogether or at fees far below the normal fees charged by the referral attorneys for regular clients.

C. All donated time is passed along as inkind services to the Houston Legal Foundation, which is a service exclusively for the indigent.

Respondent's answer denies that he erred in his ruling that petitioner is not entitled to tax-exempt status and denies most of the facts alleged as a basis for the exemption claim.

The parties have filed a Stipulation as to Administrative Record to which are attached 14 documents, marked as exhibits 1-A through 14-N. In the stipulation the parties agree that those exhibits “constitute the entire administrative record.” We interpret this stipulation to mean that the parties agree that the 14 enumerated exhibits are all the written documents properly includable in the administrative record and that the stipulation was not intended to foreclose petitioner's contention that the Court should consider the additional information referred to in the pending motion.

Petitioner's motion states that, in attempting to obtain an exemption under section 501(c)(3), one of its representatives met with respondent's representatives on several occasions. During these meetings petitioner's representatives orally furnished information which was not formally submitted in writing. Petitioner alleges that, in furnishing such information, its representatives were attempting to receive a favorable determination rather than “perfect a record” for this litigation. Since this information was “submitted” to the Internal Revenue Service, the motion states, it should be introduced in this proceeding by stipulation or testimony. In essence, petitioner's motion is based on the ground that its representatives merely neglected to confirm this orally furnished information by a letter or other appropriate writing.

Prior to the adoption of section 7428, added by section 1306, Tax Reform Act of 1976, 90 Stat. 1717, taxpayers, whose applications for exempt status under section 501(c)(3) were denied, had no judicial recourse for the review of an adverse Internal Revenue Service ruling except in the context of a deficiency proceeding in this Court or a tax refund suit in a district court or the Court of Claims. In two cases decided in 1974, Bob Jones University v. Simon, 416 U.S. 725 (1974), and Alexander v. “Americans United” Inc., 416 U.S. 752 (1974), the Supreme Court commented extensively on the hardship cast upon such organizations by the delay in obtaining a final judgment in these types of court actions. To provide a more appropriate remedy, section 7428 was enacted conferring jurisdiction on this Court along with the United States Court of Claims and the United States District Court for the District of Columbia to enter declaratory judgments as to the status of organizations claiming tax exemptions under section 501(c)(3).

Section 7428 was not intended to remove the responsibility for ruling on the exempt status of organizations from the Internal Revenue Service. Rather the focus of the section is on the review of the Service's administrative determination (or failure to make such determination). The action is called a declaratory judgment, but it has much narrower scope than exists in respect of declaratory judgment litigation in the United States District Courts generally. See prefatory note to amendments to this Court's Rules in respect of declaratory judgments under section 7476 and note to Rule 210, 64 T.C. 1177 (1975). In the final analysis, this Court's function under section 7428 is to resolve disputes as to the legal issues raised by the Internal Revenue Service's denial of an exemption ruling on the basis of uninvestigated statements of facts submitted by the taxpayer in its ruling request and related papers.

In recognition of the limited scope of these declaratory judgment procedures, H. Rept. 94-658, 94th Cong., 1st Sess., 1976-3 C.B. (Vol. 2) 977, accompanying the enactment of section 7428, explains:

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. * * *⁴

The report adds (at pages 979-980):

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. (Emphasis added.)

The requirement of the exhaustion of administrative remedies in section 7428(b)(2) is, of course, meaningless if the ruling applicant is permitted to withhold information from the Internal Revenue Service and later introduce it in evidence in the declaratory judgment proceeding. Accordingly, Rule 217(a) provides:

(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, as defined in Rule 210(b)(10). 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. * * *

Rule 210(b)(10) defines the term “Administrative record” to include all “documents,” “protests and related papers,” “written correspondence between the Internal Revenue Service and the applicant,” “all pertinent returns,” “the notice of determination by the Commissioner,” and, in the case of an organization claiming exemption, the organization's incorporation and related documents.⁵ Thus the definition is expansive and includes all written comments (and correspondence in respect thereto) submitted to the Internal Revenue Service in the Administrative proceedings in respect of the request for determination. However, the definition does not refer to oral representations made in conferences held during the applicant's pursuit of his administrative remedies.

The note accompanying and explaining Rule 217(a) is as follows:

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...