Retired Teachers Legal Def. Fund, Inc. v. Comm'r of Internal Revenue

• Decision Date: 24 February 1982
• Docket Number: Docket No. 19607-80X.
• Citation: 78 T.C. 280
• Parties: RETIRED TEACHERS LEGAL DEFENSE FUND, INC., PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

78 T.C. 280

RETIRED TEACHERS LEGAL DEFENSE FUND, INC., PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 19607-80X.

United States Tax Court

Filed February 24, 1982.

Petitioner is organized to protect the financial stability of the New York City Teachers' Retirement System and the contributions and pensions of retiree members of that system and is currently involved in litigation to serve these purposes. Held, denying tax-exempt status to petitioner does not violate petitioner's First Amendment rights. Held, further, various parts of sec. 1.501(c)(3)-1(d), Income Tax Regs., are constitutionally valid. Held, further, sec. 1.501(c)-1(c)(1), Income Tax Regs., is not unconstitutionally vague. Held, further, petitioner is organized and operated to serve the private interests of its members and is therefore not entitled to exemption under secs. 501(a) and 501(c)(3), I.R.C. 1954 as amended. Alfred Kirshner (an officer), for the petitioner.

Joseph T. Chalhoub, for the respondent.

OPINION

TIETJENS , Judge:

Respondent determined that petitioner does not qualify for exemption from Federal income tax under section 501(c)(3).¹ Petitioner, challenging respondent's adverse determination, has invoked the jurisdiction of this Court for a declaratory judgment² pursuant to section 7428

The issue for our decision is whether petitioner is organized and operated exclusively for one or more exempt purposes within the meaning of section 501(c)(3) or whether petitioner serves private rather than public interests.

The case was submitted for decision on a stipulated administrative record under Rules 122 and 217, Tax Court Rules of Practice and Procedure. The stipulated record, which is assumed to be true for the purpose of this proceeding, is incorporated herein by reference.

Petitioner, incorporated under the Not-for-Profit Corporation Law of the State of New York on September 24, 1979, has its principal place of business in New York, N.Y. According to petitioner's certificate of incorporation (certificate), the purposes for which petitioner was formed are:

(a) To protect the financial stability of the N.Y.C. Teachers' Retirement System by ensuring that only bonds with A, AA, or AAA ratings are purchased; that prices paid are no higher than market price; and that losses that have been incurred are restored.

(b) The corporation is formed exclusively for charitable, literary and educational purposes within the meaning of section 501(c)(3) of the Internal Revenue Code of 1954 as amended.

(c) The corporation shall not practice law under the terms of sec. 495(5) of the Judiciary Law.

(d) No legislative and no lobbying activities will be undertaken.

(e) To protect the contributions and pensions of retiree members of the N.Y.C. Teachers' Retirement System.

In addition, petitioner's certificate states:

(1) Notwithstanding any other provision of these articles, the corporation is organized exclusively for one or more of the following purposes: * * * charitable * * * as specified in section 501(c)(3) * * * and shall not carry on any activities not permitted * * * a corporation exempt from Federal Income Tax under 501(c)(3) * * *

(2) No part of the net earnings of the corporation shall inure to the benefit of any member, trustee, director * * * or any private individual * * *

* * *

(4) In the event of dissolution, all the remaining assets * * * shall * * * be distributed to another organization exempt under section 501(c)(3) * * *

Petitioner's bylaws reiterate the purposes listed (a) through (e) above.

Membership in petitioner is open to any retiree of the New York City Teachers' Retirement System (system) who is receiving a pension. Membership fees are $5 per year. Among an enrollment of approximately 105,000 teachers in the system are 25,000 retired teachers. Of these retirees, approximately 8,000 aged 75 to 100, receive less than $4,000 a year in retirement benefits and are afflicted with various physical and economic disabilities.

Petitioner distributes a newsletter to pensioners through which they are informed of the stability of pension fund assets. Moreover, in the past newsletters, petitioner has solicited funds from its members to finance litigation brought by petitioner's president, Alfred Kirshner. The action supported by petitioner is a derivative suit which seeks to secure restitution of an alleged $204 million loss of the system's assets. In Kirshner v. United States, 603 F.2d 234 (2d Cir 1978), the Circuit Court held that a beneficiary of a city pension fund had standing to sue, under section 10b of the Securities Exchange Act of 1934 and section 17(a) of the Securities Act of 1933, the pension fund trustees in order to challenge the purchase of New York City bonds. The court, however, held the District Court had correctly dismissed his constitutional and civil rights legislation claims. ³ Publicity about the outcome of this suit has appeared in the New York Times, the Wall Street Journal, and the New York Law Journal. Representatives from public retiree organizations believe the principles of the Kirshner case will apply to 12 million State and local public employee pension plan members.

After the Kirshner case is decided on the merits, petitioner contemplates no further activities except other legal challenges, as necessary, to remedy abuses by the trustees of the system's pension fund and the supervision of pension fund investments to ensure that there continues to be full disclosure under the Federal securities laws.

Petitioner argues herein that denying it exemption violates its members' First Amendment privileges, that the three operational test regulations used by respondent to deny it exemption are unconstitutionally vague, and, alternatively, that it meets the regulations' requirements and is organized and operated exclusively for charitable purposes.

Respondent contends that petitioner has failed to prove both that it is organized and operated exclusively for exempt purposes and that it is not operated to serve the private interests of its members.

We agree with respondent.

Petitioner raises various constitutional arguments which we will address first. Citing Associated Press v. United States, 326 U.S. 1, 20 (1945), it claims that the solicitation of funds through its newsletter is a protected First Amendment right. Here, unlike Associated Press, however, respondent is not attempting to prohibit petitioner's dissemination of its newsletter or its solicitation of funds. In denying tax-exempt status to petitioner, respondent is merely asserting that petitioner has not shown that it is entitled to a tax benefit. See Gen. Conf. of the Free Church v. Commissioner, 71 T.C. 920, 930-931 (1979). Similarly, in Cammarano v. United States, 358 U.S. 498 (1959), the Supreme Court held that a statute prohibiting tax deductions for lobbying activities did not infringe on First Amendment rights. The Court said:

Petitioners are not being denied a tax deduction because they engage in constitutionally protected activities, but are simply being required to pay for those activities entirely out of their own pockets, as everyone else engaging in similar activities is required to do under the provisions of the Internal Revenue Code. * * *

Petitioner's argument that, by denying it tax-exempt status, respondent is effectively denying petitioner special postage rates⁴ and thereby violating its members' rights, likewise confuses a privilege with a right.

Petitioner asserts that it has been accorded disparate treatment, violative of its First Amendment right of free speech, by respondent's denying it tax exemption. If respondent treated petitioner differently from other organizations seeking tax exemption, such a denial of benefits might indeed result in unconstitutional discrimination. Gen. Conf. of the Free Church v. Commissioner, supra. However, we have found no evidence in the administrative record to support petitioner's contention and, therefore, find this argument of petitioner's also meritless.

Petitioner cites the case Big Mama Rag, Inc. v. United States, 631 F.2d 1030 (D.C. Cir. 1980),⁵ to support its argument that the three operational test regulations used by respondent are excessively vague in contravention of petitioner's First and Fifth Amendment rights. In Big Mama Rag, Inc., the Circuit Court held that the definition of “educational” in section 1.501(c)(3)-1(d)(3), Income Tax Regs., is unconstitutionally vague in violation of the First Amendment. More specifically, the Circuit Court held that the “regulation defining educational * * * does not clearly indicate which organizations are advocacy groups and thereby subject to the ‘full and fair exposition’ standard” ( 631 F.2d at 1037), and that the regulation fails to specify the requirements of the “full and fair exposition” test.⁶

While it appears that petitioner is presenting the same argument as the taxpayer in Big Mama Rag, Inc., we do not see how the “full and fair exposition” test could apply to the facts herein. Respondent did not deny petitioner tax-exempt status because it failed the “full and fair exposition” test. To the extent, however, that petitioner may be arguing that it serves an educational purpose and that the term “educational” as used in section 1.501(c)(3)-1(d)(3)(i), Income Tax Regs., is unconstitutionally vague, we will examine that part of the regulation which defines “education” as:

( a) The instruction or training of the individual for the purpose of improving or developing his capabilities; or

( b) The instruction of the public on subjects useful to the individual and beneficial to the community.

Section 1.501(c)(3)-1(d)(3)(i), Income Tax Regs., proceeds to provide the following examples of educational organizations:

Example (1). An organization, such as a primary or secondary school, a college, or a professional or trade school, which has a regularly scheduled curriculum, a regular faculty, and a regularly...