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95 TNT 136-69 (JULY 13, 1995)
* * * * * * * * * * * * * * * * *
Other Court Documents (CTO)
* * * * * * * * * * * * * * * * *
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFF TAX
ANALYSTS' MOTION FOR SUMMARY JUDGMENT.
SHORT NAME: Tax Analysts v. IRS
JUDGE(s): Hogan, Thomas
TAX ANALYSTS,
Plaintiff,
v.
INTERNAL REVENUE SERVICE,
Defendant.
United States District Court for the District of Dist. of Columbia
94-CV-00220 (TFH)
SUMMARY:
Plaintiff filed its memorandum of points and authorities in
support of its motion for summary judgment in the case of Tax
Analysts v. IRS, a suit seeking release of all exempt organization
closing agreements entered into by the IRS after Dec. 31, 1992.
TEXT:
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF
PLAINTIFF TAX ANALYSTS' MOTION FOR SUMMARY JUDGMENT
William J. Lehrfeld
D.C. Bar No. 51292
Bruce L. Stern
D.C. Bar No. 436231
WILLIAM J. LEHRFELD, P.C.
1250 H Street, N.W., Suite 740
Washington, D.C. 20005
Telephone: (202) 659-4772
Facsimile: (202) 659-8876
William A. Dobrovir
D.C. Bar No. 030148
William A. Dobrovir, P.C.
65 Culpeper Street
Warrenton, Virginia 22186
Telephone: (703) 341-2183
Facsimile: (703) 341-4329
Attorneys for Plaintiff
TAX ANALYSTS
TABLE OF CONTENTS
Table of Contents
Table of Authorities
Memorandum of Points and Authorities
I. Introduction
II. Statement of Facts
A. Background Information Regarding
Plaintiff Tax Analysts
B. The Underlying FOIA Request
III. Issue Presented for Determination
IV. Background on Exempt Organizations,
IRS Disclosure Rules and IRS Use of
Closing Agreements
A. Tax Exemption Under the Internal
Revenue Code
B. The Application Process for
Initial Recognition of
Exemption Under IRC 501(c)(3);
Re-Qualification After
Revocation of Recognition of
Exemption
C. Disclosure Provisions Applicable
to Exempt Organizations
1. Under IRC 6104, "Return
Information" Relating to
Exempt Organizations is
Subject to Public Disclosure
2. IRC 6104 Provides an
Exception to IRC 6103's
Non-Disclosure Provisions
D. The IRS' Use of Closing
Agreements With Exempt
Organizations
1. The Church of Scientology
Closing Agreement
V. Standard for Summary Judgment
VI. Legal Argument
A. Disclosure Under FOIA
B. The IRS has Improperly Withheld
Agency Records From Plaintiff
1. The Requested Documents
are "Agency Records"
2. The Requested Documents
Were "Improperly" "Withheld"
From Plaintiff
C. The Requested Closing Agreements
are not Exempt From Disclosure
1. Closing Agreements are
Issued by the IRS
a. Closing Agreements are
Mailed to the Taxpayer
by the IRS
b. Closing Agreements are
Adopted by the IRS
c. The Requested Closing
Agreements are not
Exempt From Disclosure
Under IRC 6103
D. Allowing the IRS to Withhold the
Requested Closing Agreements Would
Frustrate the Interests of Public
Policy and Allow the IRS to
Subvert its own Disclosure Rules
E. The IRS' Failure to Produce the
Withheld Documents for Public
Inspection Contravenes the Policy
of the National Office's Exempt
Organizations Technical Division
VII. Conclusion
TABLE OF AUTHORITIES
CASES
Belisle v. Commissioner,
462 F. Supp. 460 (W.D. Okla. 1978)
Bob Jones University v. United States,
461 U.S. 574, 103 S. Ct. 2017, 76 L. Ed. 2d. 157 (1983)
Brian Ruud International v. United States,
733 F. Supp. 396 (D.D.C. 1989)
Breuhaus v. IRS,
609 F. 2d 80 (2d Cir. 1979)
California Thoroughbred Breeders Ass'n. v. Commissioner,
47 T.C. 335 (1966)
Celotex Cord v. Catrett,
477 U.S. 317, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986)
Center on Corporate Responsibility, Inc. v Schultz,
368 F. Supp. 863 (D.D.C. 1973)
Christian Echoes National Ministry v. United States,
404 F. 2d 1066 (10th Cir. 1969)
Church of Scientology v. Commissioner,
83 T.C. 381 (1984), aff'd, 823 F. 2d 1310, cert. den.,
486 U.S. 1015 (1988)
Church of Scientology v. Commissioner,
823 F. 2d 1310 (9th Cir. 1987), cert. den.,
486 U.S. 1015 (1988)
Church of Spiritual Technology v. United States,
26 C1. Ct. 713 (C1. Ct. 1992), aff'd, 991 F. 2d 812 (Fed.
Cir. 1993)
Coit v. Green,
404 U.S. 997, 92 S. Ct. 564, 30 L. Ed. 2d 550 (1971)
Department of Air Force v. Rose,
425 U.S. 352, 96 5. Ct. 1592, 48 L. Ed. 2d 11 (1976)
Founding Church of Scientology v. United States,
412 F. 2d 1197 (Ct. C1. 1969)
GTE Sylvania, Inc. v. Consumers Union,
445 U.S. 375, 100 S. Ct. 1194, 63 L. Ed. 2d 467 (1980)
Kissinger v. Reporters Committee for Freedom of Press,
445 U.S. 136, 100 5. Ct. 960, 63 L. Ed. 2d 267 (1980)
McGlotten v. Connally,
338 F. Supp. 448 (D.D.C. 1972)
NLRB v. Robbins Tire & Rubber Co.,
437 U.S. 214, 98 S. Ct. 2311, 57 L. Ed. 2d 159 (1978)
NLRB v. Sears. Roebuck & Co.,
421 U.S. 132, 95 S. Ct. 1504, 44 L. Ed. 2d 29 (1975)
Presbyterian and Reformed Publishing Co. v. Commissioner,
743 F. 2d 18 (3rd Cir. 1984)
Tax Analysts and Advocates v. IRS,
505 F. 2d 350 (D.C. 1974)
Taxation With Representation Fund v. IRS,
646 F. 2d 666 (D.C. 1981)
United Missionary Aviation, Inc. v. Commissioner,
T.C. Memo 1990-566, 60 T.C.M. 1152 (1990)
U.S. Department of Justice v. Tax Analysts,
492 U.S. 136, 109 S. Ct. 2841, 106 L. Ed. 2d 112 (1989)
STATUTES
5 U.S.C. section 552
5 U.S.C. section 552(b)
5 U.S.C. section 552(a)(4)(B)
26 U.S.C. section 6103(a)
26 U.S.C. section 6103(b)(1)
26 U.S.C. section 6103(b)(2)(A)
26 U.S.C. section 6104(a)(1)(A)
26 U.S.C. section 6104(b)
26 U.S.C. section 6104(e)(1)
26 U.S.C. section 7121(a)
26 U.S.C. section 7121(b)
INTERNAL REVENUE CODE REGULATIONS
Reg. section 1.501(a)-1(a)(2)
Reg. section 301.6104(a)-1(b)
Reg. section 301.6104(a)-1(c)
Reg. section 301.6110-2(h)
IRS REVENUE PROCEDURES
Rev. Proc. 68-16, 1968-1 C.B. 770
Rev. Proc. 80-28, 1980-1 C.B. 680
Rev. Proc. 90-27, 1990-1 C.B. 514
IRS REVENUE RULINGS
Rev. Rul. 69-247, 1969-1 C.B. 303
IRS INTERNAL REVENUE MANUAL (IRM)
IRM - Administration, Disclosure of Official Information
Return Handbook, Chapter 910(7)
IRM - Exempt Organizations Handbook, Chapter (49)23(2)
IRM - Exempt Organization Handbook, 7761.2(2)
IRM - Administration, Part VIII, EP/EO, 7764.3(3)
IRM - Audit (10)46(4)
IRM - Closing Agreement Handbook, Part VIII,
Appeals 613.4(3)
IRM - Part IV, Audit, (10)31
FEDERAL RULES OF CIVIL PROCEDURE
Federal Rule of Civil Procedure 56(c)
CONGRESSIONAL REPORTS
Report on Reforms to Improve the Tax Rules Governing Public
Charities, Subcommittee on Oversight of the Committee on
Ways and Means, U.S. House of Representatives, WMCP
103-26 (1994)
Federal Tax Laws Applicable to the Activities of Tax Exempt
Charitable Organizations, Hearing Before Subcommittee on Oversight of
the Committee on Ways and Means, H. Rep. 103rd Cong., 1st Sess.,
Serial 103-39 (1993)
IRS Oversight of Tax Exempt Foundations, Hearing before
a Subcommittee of the Committee on Government Operations,
98th Cong., 1st Sess., (1983)
Teamsters' Central States Pension Fund and General ERISA Enforcement,
Hearings Before Subcommittee on Oversight of the Committee on Ways
and Means, H. Rep., 95th Cong., First Sess. (2 vols.) , Serial 95-35
and 36 (1977)
Public Inspection of IRS Private Letter Rulings, Hearing Before the
Subcommittee on Administration of the Internal Revenue Code of the
Committee on Finance, U.S. Senate, 94th Cong., 1st Sess., (1975)
H. Rep. No. 94-658, 94th Cong., 1st. Sess., (1975)
Tax Reform Act of 1969, S. Rep. 91-552, 91st Cong.,
1st Sess., (1969), reprinted at, 1969-3 C.B. 423
Revenue Act of 1950, S. Rep. 2375, 81st Cong., 1st
Sess., (1950), reprinted at, 1950-2 C.B. 483
Tax Exempt Organizations, Preliminary Report to the Joint Committee
on Internal Revenue Taxation, Prepared by Technical Staffs of the
Joint Committee, the Treasury and the Bureau of Internal Revenue
pursuant to section 5011 of the Internal Revenue Code of 1939 (1945)
GENERAL ACCOUNTING OFFICE (GAO) REPORTS
U.S. General Accounting Office, "Public Information
Reporting by Tax Exempt Foundations Needs More Attention by IRS",
Report to the Chairman, Subcommittee on Commerce, Consumer, and
Monetary Affairs, Committee on Government Operations, House of
Representatives, GAO/GGD-83-58 (1983)
U.S. General Accounting Office, "Competition Between Taxable
Businesses and Tax-Exempt Organizations", Briefing Report to the
Joint Committee on Taxation, U.S. Congress, GAO/GGD-87-40BR
(1987)
U.S. General Accounting Office, "IRS Information on
Revoked Tax-Exempt Organizations Could Be Improved",
Briefing Report, GAO/GGD-85-36 (1985)
U.S. General Accounting Office, "Tax Administration - Information on
Lobbying and Political Activities of Tax-Exempt Organizations", Fact
Sheet for the Chairman, Subcommittee on Oversight, Committee on Ways
and Means, House of Representatives1 GAO/GGD-87-32FS (1987)
U.S. General Accounting Office, "Tax-Exempt
Organizations - Information on Selected Types of
Organizations", Briefing Report to Congressional
Requestors, GAO/GGD-95-84BR (1995)
ARTICLES
Caplin, "Taxpayer Rulings Policy of the Internal Revenue
Service: A Statement of Principles," 20 N.Y.U. Inst.
on Fed. Tax 1 (1962)
Rogovin, "The 4 R's: Regulations, Rulings, Reliance and
Retroactivity," 43 Taxes 756 (1965)
Tax Lawyer, Vol. 22, No. 4, Summer 1969
MISCELLANEOUS
Budget of the United States, FY 1996, Analytical Perspectives
FOIA Update, Summer/Fall 1993
IRS Commissioner's Annual Report (1975)
IRS Commissioner's Annual Report (1985)
1992 IRS Exempt Organization Continuing Professional Education
Technical Instruction Program, "Closing Agreements", p. 262
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF
PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
I.
Introduction
At issue in this case is whether certain agency records created
and maintained by defendant INTERNAL REVENUE SERVICE (hereinafter
sometimes referred to as the "IRS" or "Service") are subject to
public disclosure under the U.S. Freedom of Information Act (5 U.S.C.
section 552). The specific records at issue herein are "closing
agreements" the IRS entered into with organizations exempt from
Federal tax under Internal Revenue Code section ("IRC") 501(a). /1/
The Service has refused to produce these records on the basis that
the entirety of the agreements constitutes "return information" and,
pursuant to IRC 6103, the agreements are therefore exempt from
disclosure under FOIA.
As discussed below, the IRS has improperly withheld the
requested closing agreements. Notwithstanding the Service's
contentions to the contrary, these agreements do not constitute
"return information" and are subject to public inspection under FOIA.
The closing agreements sought by plaintiff relate directly to an
organization's application for initial and continuing recognition of
exemption as an entity described in IRC 501(a), and, as such, are
required to be disclosed to the public under IRC 6104. By refusing
to disclose the requested closing agreements, the IRS thwarts its own
disclosure rules and shields controversial agency action from public
scrutiny. Allowing the IRS to withhold the requested documents from
public inspection defeats the interests of public policy in
accountability for entities enjoying tax subsidies granted by the
various exemption and deduction provisions of the Internal Revenue
Code. /2/ Specifically, non-disclosure frustrates long standing
Congressional interest in the oversight of tax-exempt charities and
Congress' expressed intent that agency actions involving exempt
organizations be subject to public review. /3/ Public oversight of
exempt organizations is particularly important due to the dramatic
decline in the number of IRS audits of exempt organizations in recent
years. /4/
II.
Statement of Facts
A. Background Information Regarding Plaintiff TAX ANALYSTS
Plaintiff TAX ANALYSTS is a nonprofit, educational organization
exempt from federal taxes under IRC 501(a). (See, Plaintiff's
Statement of Material Facts in Support of Motion for Summary Judgment
(hereinafter "MF"), No. 1.) In furtherance of its exempt purposes,
plaintiff publishes a variety of tax publications, including Tax
Notes, Daily TaxFax, Tax Notes International, The Exempt Organization
Tax Review, The Insurance Tax Review and, State Tax Notes. (MF No.
2.) Plaintiff also makes available a wide variety of tax information
to the public, including full-text IRS, Treasury and Congressional
documents and hearing transcripts, the IRS Master File of Exempt
Organizations and directories of government tax officials and private
tax practitioners. (MF No. 2.)
To ensure public access to tax materials maintained by the IRS
and other federal agencies, plaintiff and its affiliates have
litigated a number of disclosure cases against the government,
including, U.S. Department of Justice v. Tax Analysts, 429 U.S. 136,
109 S. Ct. 2841, 106 L. Ed. 2d 112 (1989) (Court upheld District
Court decision that Justice Department has duty under FOIA to make
copies of Court decisions available to public); Taxation With
Representation Fund v. IRS, 646 F. 2d 666, 47 AFTR 2d (P-H) 81-1026
(D.C. 1981) (IRS General Counsel Memoranda, Technical Advice
Memorandum and certain Actions on Decision subject to public
disclosure under FOIA); and, Tax Analysts and Advocates v. IRS, 505
F. 2d 350, 34 AFTR 2d (P-H) 74-5731 (D.C. 1974) (IRS private letter
rulings subject to public disclosure under FOIA). Through its
administrative and litigation activities, TAX ANALYSTS promotes,
establishes and argues for, the public availability of documents and
materials relating to the administration of our federal tax laws by
all agencies of the United States. /5/
B. The Underlying FOIA Request
On November 10, 1993, plaintiff filed a Freedom of Information
Act ("FOIA") disclosure request with defendant IRS which is the
subject of this suit. By its FOIA request, TAX ANALYSTS sought, in
part, copies of all closing agreements the IRS entered into with
exempt organizations on or after December 31, 1992. (MF No. 4.)
Plaintiff's FOIA request complied with all applicable IRS
regulations. (MF No. 5.)
The IRS failed to timely respond to plaintiff's FOIA request
and, on January 10, 1994, TAX ANALYSTS filed an administrative appeal
of the Service's constructive denial of its November 10, 1993
disclosure request. (MF No. 6.) On February 7, 1994, the IRS denied
plaintiffs' administrative appeal and advised TAX ANALYSTS that it
would not produce any closing agreements sought by its FOIA request.
(MF No. 7.) The IRS' decision was based upon its determination that
closing agreements constitute privileged "return information" and, as
such, pursuant to IRC 6103 and 5 U.S.C. 552(b)(3), are not subject to
disclosure under FOIA. (MF No. 7.)
On October 14, 1994, plaintiff filed its complaint herein. By
its complaint, TAX ANALYSTS is seeking an order directing the IRS to
produce a sub-set of the closing agreements requested by its November
10, 1993 FOIA request. Specifically, plaintiff is seeking the
production of any closing agreement entered into between the IRS and
an exempt organization which relates to, or contains provisions
regarding, the organization's pending application for recognition of
exemption and/or the IRS' initial or continuing determination to
recognize the organization as exempt under IRC 501(a).
III.
ISSUE PRESENTED FOR DETERMINATION
Whether all or any part of a "closing agreement" entered into
between the IRS and a tax-exempt organization which arises out of,
relates to, or contains provisions regarding, a favorable
determination of exempt status issued with respect to an exemption
application, is subject to disclosure under the Freedom of
Information Act.
IV.
BACKGROUND ON EXEMPT ORGANIZATIONS, IRS DISCLOSURE RULES AND
IRS USE OF CLOSING AGREEMENTS
In order to get a clear understanding of this dispute, it is
essential to understand the statutory scheme regarding exempt
organizations; the process by which the IRS determines whether an
organization qualifies for its initial and continuing exemption
ruling; how an organization, after revocation of its exemption
ruling, re-qualifies for exemption within (or after) the process of
either settling or controverting prior years' liabilities; the
disclosure rules applicable to tax-exempt entities; and, the evolving
use of closing agreements by the IRS to resolve outstanding issues
with exempt organizations in the re-qualification process. Each of
these areas is addressed in turn.
A. Introduction
Since the adoption of the Income Tax Act of 1913, the Internal
Revenue laws have provided an exemption from income tax for certain
organizations, including those with religious, educational and
scientific purposes. Until 1944, no returns of any sort were
required to be filed with the IRS by tax-exempt organizations. /6/
These returns (but not exemption applications) were first used by the
Treasury Department, and Congressional staff, to ascertain whether
"provisions of Section 501| constitute a loophole for tax evasion
and avoidance." /7/ Shortly thereafter, in 1950, Congress concluded
that disclosure of financial information on exempt organization
returns served a public purpose by allowing the public to share in
accountability judgments. /8/
Until 1969, only IRS regulations prescribed the administrative
process by which an organization would be recognized as exempt. /9/
Upon enactment of IRC 508(a), new IRC 501(c)(3) organizations wishing
to claim all the federal tax benefits available to charities had to
file a timely exemption application; failing to do so denied them
exempt status until the filing was made. IRC 508(a) does not require
IRS to issue a letter ruling responding to the applications but it
generally does so, both favorable and unfavorable. A charity with an
unfavorable ruling has recourse to a declaratory judgment in one of
three forums pursuant to IRC 7428. Favorable letter rulings issued
after analysis and review of a fully documented exemption application
allow both the applicant and the public to rely on the discretion
exercised by the IRS. /10/
B. The Application Process for Initial Recognition of Exemption
Under IRC 501(c)(3); Re-Qualification After Revocation of Recognition
of Exemption
With limited exceptions, all new organizations (i.e., those
formed after October 9, 1969) claiming exemption under IRC 501(c)(3)
must file an application for recognition of exemption with the IRS by
timely filing IRS Form 1023. Form 1023 requires applicants to
provide the IRS with substantial information about their prior
operations and proposed activities. Prior corporate tax returns
(e.g., Form 1120) may be part of the information requested by IRS.
(See, IRS Form 1023, Part II, page 1.) Information also required by
Form 1023 includes a list of officers and directors and compensation
paid to them, copies of leases and relevant contracts, likely sources
of revenue, projected expenditures, proposed budgets and balance
sheets. (MF No. 8.) With this information, IRS determines whether
the applicant satisfies IRC 501(c)(3) and if so, a favorable ruling
ensues. A favorable ruling relates back to the date of the
applicant's creation and forward until revoked by the Internal
Revenue Service as a result of the audit process. (See, Rev. Proc.
90-27, Section 13, 1990-1 C.B. 514, 518.; see also, United Missionary
Aviation v. Commissioner, T.C. Memo 1990-566, 60 T.C.M. 1152, 1158
(revocation of exemption justified where corporate behavior changed
after application was submitted).)
Typically, an exemption application is filed with the IRS Key
District Office in which the applicant's principal place of business
is located. (MF No. 9.) The Key District Office will review the
application and, generally, will issue the applicant either a
favorable determination letter (if it is determined that the
applicant meets the criteria for exemption) or an initial adverse
determination letter (if it does not). (MF No. 10.)
Under certain circumstances, exemption applications will be
forwarded by a Key District Office to the IRS National Office for
consideration and issuance of a ruling letter. Applications will be
forwarded to the National Office for ruling if the application
presents an issue for which there is no published precedent or where
the District Office believes National Office review is warranted.
(MF No. 11.) If an application is forwarded to the National Office,
the National Office's Exempt Organizations Division will often
request additional information from the applicant and will generally
analyze prevailing published rulings, case law, and perhaps prior
internal rulings to determine whether the organization will be
recognized as exempt. It also determines the effective date for tax
exempt status.
The same process is followed for an organization whose favorable
ruling was properly or improperly revoked for conduct in prior years
when it seeks a new ruling for future years. Bifurcation of years
between "exempt years" and "non-exempt" years occurs whenever IRS
argues, (correctly or not), that a charity violated the exemption
law. /11/ If the charity whose ruling was revoked defeats the IRS in
court, the IRS has an abbreviated re-application and ruling procedure
to accelerate the recognition of future years exemption. /12/ But
practically speaking, controversy resolution (prior years) and the
re-application process (future years) can be negotiated
simultaneously if the challenged charity alters or promises to alter
its behavior to lead IRS to conclude that the charity will not again
violate IRC 501(c)(3). (See, e.g., Center on Corporate
Responsibility, Inc. v. Schultz, 368 F. Supp. 863 (D.D.C. 1973).)
Except in unusual cases, the negotiations are carried on without
public awareness, so there is no public accountability for either
party's ineptness, inertia, non-feasance or abuse of process. /13/
During its processing of an exemption application, the IRS
maintains what is known as an "administrative file". This file
contains all documents and papers relating to the exemption
application which are either received or generated by the Service
during its consideration and review of the application. (MF No. 13.)
If the exemption application of a new organization is approved by the
issuance of a private ruling letter, the IRS then purges the
administrative file and creates an "administrative record" which
consists solely of the documents from the administrative file which
it believes are subject to disclosure. (MF No. 14.) Under IRC
6104(a), the administrative record must include a complete copy of
the exemption application, any papers submitted in support of the
application and any letter or other document issued by the Service
with respect thereto. /14/
Organizations recognized as exempt from tax typically must file
an annual information return with the IRS (IRS Form 990) pursuant to
section 6033 of the Code. This return is comparable to a tax return.
(See, Rev. Rul. 69-247, 1969-1 C.B. 303; California Thoroughbred
Breeders Assn. v. Commissioner, 47 T.C. 335 (1969) (holding that
exempt organization's information return, if adequately descriptive,
is a tax return for purposes of limitations on assessments under IRC
6501(g)(2) when applying the unrelated business income tax.).) The
law requires exempt organizations to annually furnish the IRS with
substantial information regarding their activities, assets, income
and expenses. /15/ The information required to be disclosed allows
the Congress and the public to decide if the public subsidy of the
tax exemption and deductibility remain suitable, by specific
organization or by class. /16/
IRS has been criticized for poor record management in revocation
cases and poor disclosure policies. (See, GAO, "IRS Information on
Revoked Tax-Exempt Organizations Could Be Improved", Briefing Report,
GAO/GGD-85-36.) There is no doubt that but for the disclosure
provisions (described below), much financial reporting by exempt
organizations would likely be confidential as tax return information,
if and to the extent the entity was a taxpayer.
C. Disclosure Provisions Applicable to Exempt Organizations
Tax "returns" and "return information" are generally not
subject to public disclosure. IRC 6103(a) provides in pertinent
part:
"Returns and return information shall be kept confidential, and
except as authorized by this title . . . no officer or employee of
the United States . . . shall disclose any return or return
information obtained by him in any manner in connection with his
service . . ."
(26 U.S.C. 6103(a).)
The term "return" means any "tax or information return,
declaration of estimated tax, or claim for refund . . . which is
filed with the Secretary by, on behalf of, or with respect to any
person, and any amendment or supplement thereto, . . ." (IRC
6103(b)(1).)
The term "return information" means, in part,
"a taxpayer's identity, the nature, source or amount of his
income, payments, receipts, deductions, exemptions, credits, assets,
liabilities, net worth, tax liability, tax withheld, deficiencies,
overassessments, or tax payments, whether or not the taxpayer's
return was, is being, or will be examined or subject to other
investigation or processing, or any other data, received by, recorded
by, prepared by, furnished to, or collected by the Secretary with
respect to a return or with respect to the determination of the
existence, or possible existence, of liability (or amount thereof) of
any person under this title for any tax, penalty, interest, fine,
forfeiture, or other imposition, or offense . . ."
(26 U.S.C. 6103(b)(2)(A).)
The applicability of IRC 6103 to tax-exempt organizations is
severely limited by IRC 6104, which provides that a substantial
amount of information relating to exempt organizations is subject to
public disclosure. Unlike non-exempt taxpayers, "return information"
relating to exempt organizations is neither privileged nor exempt
from disclosure under section 6104 of the Internal Revenue Code and
the FOIA.
1. Under IRC 6104, "Return Information" Relating to Exempt
Organizations is Subject to Public Disclosure
Because their operations are subsidized by taxpayers, /17/
Congress mandates that a substantial amount of information relating
to exempt organizations be available for public inspection. /18/
Under IRC 6104, if an organization is recognized as exempt from tax
under IRC 501(c), its exemption application, and all documents filed
in support thereof and issued by the IRS with respect thereto, must
be made available for public review by the IRS and by the charity
itself, as must be the organization's annual information return (IRS
Form 990). IRC 6104(a)(1)(A) provides in pertinent part:
"If an organization described in section 501(c) or (d) is exempt
from taxation under section 501(a) for any taxable year, the
application filed by the organization with respect to which the
Secretary made his determination that such organization was entitled
to exemption under section 501(a), together with any papers submitted
in support of such application, and any letter or other document
issued by the Internal Revenue Service with respect to such
application shall be open to public inspection at the National Office
of the Internal Revenue Service."
IRC 6104(b) further provides in pertinent part:
" Annual information returns| shall be made available to the
public at such times and places as the Secretary shall prescribe."
(See also, IRC 6104(e)(1), requiring exempt organizations to allow
public inspection of their exemption applications (and related
papers) and annual information returns at their principal places of
business.)
The plain purpose of IRC 6104 is to facilitate public oversight
of exempt organizations and to aid the IRS in the monitoring of their
activities. /19/ As Congress reported last year, public oversight is
"critical to ensuring charities' overall compliance with the tax
laws, and to maintaining the continued high level of public trust in
the charitable community." Report on Reforms to Improve the Tax
Rules Governing Public Charities, Subcommittee on Oversight of the
Committee on Ways and Means, U.S. House of Representatives, WMCP 103-
26 (1994), p. 19. The Internal Revenue Manual ("IRM") further
provides:
"The intent of Congress in allowing for the public inspection of
the information governed by IRC 6104(a)(b) and (e) was to enable the
public to scrutinize the activities of tax-exempt organizations and
trusts. Congress intended that these organizations and trusts be
subject to a certain degree of public accountability in view of their
privileged tax status and because the public has a right to know for
what purposes their contributions are being or will be used."
(IRM - Administration, Disclosure of Official Information Return
Handbook, Chapter 910(7).)
Public review of the entirety of all documents passing between
IRS and a successful applicant also ensures integrity in the IRS'
system of granting exempt status and provides a safeguard that
organizations will not be accorded special treatment by the Service.
/20/ Greater public awareness of IRS exemption rules means that bad
rulings based on faulty policy can be challenged (Coit v. Green, 404
U.S. 997 (1971)) and thereafter, the IRS may be forced by public
opinion to change its policy. Bob Jones University v. United States,
supra, 461 U.S. at 585, fn. 9. The unsavory history of the
government's favorable IRC 501(c)(3) treatment of segregated private
schools, and then its complete reversal, indicates the benefits of
full disclosure of IRS exemption rulings.
2. IRC 6104 Provides an Exception to IRC 6103's
Non-Disclosure Provisions
IRC 6104 provides an exception to the non-disclosure provisions
of IRC 6103 and severely limits what constitutes "return information"
with respect to tax-exempt organizations. /21/ Because of IRC 6104,
the following "return information" (as defined by IRC 6103(b)(2)(A))
relating to an exempt organization is subject to public disclosure
and is NOT privileged:
1. The "identity" of the taxpayer (including its name, address
and employer identification number);
2. The "nature, source and amount of its| income" (with the
exception of unrelated business taxable income);
3. The taxpayer's "assets, liabilities, and net worth", and,
4. The taxpayer's expenditures (including compensation paid to
its highest paid officers, employees and independent contractors).
Generally, under IRC 6104, the only "return information"
relating to exempt organizations not subject to public disclosure is
information with respect to whether the organization is liable for
any tax, penalty, interest or fine or whether it is, or will be,
under examination by the Service. (See, Breuhaus v. IRS, 609 F. 2d
80 (2d Cir. 1979) (IRS correspondence relating to organization's
liability for IRC 507 termination tax not subject to public
disclosure); Belisle v. Commissioner, 462 F. Supp. 460 (W.D. Okla.
1978) (IRS' investigative files relating to organization's liability
for tax not subject to public disclosure).)
D. The IRS' Use of Closing Agreements With Exempt Organizations
IRC 7121(a) authorizes the IRS to enter into a written closing
agreement with any person "relating to the liability of such
person . . . in respect of any internal revenue tax for any taxable
period." Closing agreements are final and conclusive agreements
between the IRS and taxpayer and will not be set aside except upon a
showing of fraud, malfeasance or misrepresentation of a material
fact. (26 U.S.C. 7121(b).)
Closing agreements give the IRS flexibility to resolve
outstanding issues with taxpayers, including exempt organizations and
applicants for exemption. The IRS is increasing its use of closing
agreements with exempt organizations and is using the agreements to
resolve a wide variety of issues. (See, "Closing Agreements", 1992
Exempt Organizations Continuing Professional Education Technical
Instruction Program, Internal Revenue Service, p. 263.)
During discovery, the IRS disclosed that it has used closing
agreements to resolve outstanding issues with respect to one or more
organization's applications for recognition of exemption and that it
predicated its recognition of exempt status on at least one
applicant's agreement to be bound by the terms of a closing
agreement. (MF Nos. 15, 16.) These agreements, whose terms were not
disclosed by IRS, are the ones at issue herein. /22/
1. The Church of Scientology Closing Agreement
One closing agreement in which the IRS resolved issues regarding
a pending exemption application is the Service's agreement with the
Church of Scientology, International and its affiliates. This
agreement, executed in 1993, ended a 40 year dispute between the
Church and the IRS. /23/
Although the IRS has refused to release specific details about
the Scientology closing agreement, it has admitted that the agreement
was executed and that it resolved issues surrounding the exempt
status of the Church and its affiliates. (MF No. 21.) At the time
the closing agreement was executed, the Church and its affiliates had
filed numerous exemption applications, which were then pending before
the IRS National Office.
Due to the controversial nature of the Church, the Scientology
exemption applications (which plaintiff believes were originally
filed beginning in 1983 and continuing to 1991) were not processed
pursuant to the IRS' standard procedures. (MF No. 22.) In an
extraordinary move, a special "negotiations committee" was formed by
the IRS to negotiate a resolution to the outstanding issues involving
the Scientologists, including their pending exemption applications.
/24/ (MF Nos. 24, 25.) Plaintiff believes this special committee
was formed at the direction of then IRS Commissioner Fred Goldberg
following a meeting he had with representatives of the
Scientologists. /25/
This special committee ultimately negotiated the IRS' closing
agreement with the Scientologists and the committee made the
determination that the Church and its affiliates would be recognized
as exempt under IRC 501(c)(3). (MF No. 26.) The committee's
determination that the Scientologists qualified for exemption was
made notwithstanding the fact that the IRS' prior revocation of the
Church's exempt status had been upheld by the Ninth Circuit in Church
of Scientology v. Commissioner, 823 F. 2d 1310, 60 AFTR 2d 87-5386
(9th Cir. 1987).
After the closing agreement was executed, the Scientologists
apparently filed new exemption applications with the IRS National
Office, which superseded their prior applications. Once the new
applications were received by the National Office, the "negotiations
committee" issued "special instructions" to the IRS' Exempt
Organizations Division to issue favorable ruling letters to the
Scientologists. (MF Nos. 27, 28.) These letters were issued on
October 1, 1993. (MF No. 29.) /26/
The IRS' decision to recognize the Scientologists as exempt was
apparently conditioned on the parties' execution of a closing
agreement. During discovery, the IRS refused to confirm or deny
whether the execution of the closing agreement was a condition
precedent to the issuance of the favorable ruling letters or whether
the agreement provided the Scientologists would be recognized as
exempt, alleging that such information constitutes privileged "return
information" under IRC 6103. /27/
Although it is undisputed that the closing agreement contains
provisions directly relating to the IRS' determination to recognize
the Scientologists as exempt for future years (MF No. 21), the
Service has refused to make the agreement available for public
inspection as part of the Scientologists' administrative record. The
IRS contends that this closing agreement is not subject to disclosure
under IRC 6104 since the agreement was not "issued" by it. /28/
V.
STANDARD FOR SUMMARY JUDGMENT
Federal Rule of Civil Procedure ("FRCP") 56(c) provides that
summary judgment shall be entered in favor of a movant if "the
pleadings, . . ., together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving
party is entitled to judgment as a matter of law." See also, Celotex
Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct.
2548 (1986). As discussed below, and in the papers and affidavits
filed in support of this motion, there are no genuine issues of
material fact involved with respect to plaintiff's FOIA claim and it
is entitled to judgment thereon as a matter of law.
VI.
LEGAL ARGUMENT
A. Disclosure Under FOIA
Under the U.S. Freedom of Information Act (5 U.S.C. section
552), the public may request and obtain copies of records maintained
by Federal government agencies, including the IRS. In enacting FOIA,
Congress sought to "open agency action to the light of public
scrutiny." Department of Air Force v. Rose, 425 U.S. 352, 372, 96 S.
Ct. 1592, 48 L. Ed. 2d 11 (1976).
FOIA requires agencies to adhere to a "general policy of full
agency disclosure", Id, at 360 (citations omitted), which helps
"ensure an informed citizenry, vital to the functioning of a
democratic society." NLRB v. Robbins Tire & Rubber Co., 437 U.S.
214, 242, 98 S. Ct. 2311, 57 L. Ed. 2d 467 (1978). In adopting FOIA,
Congress intended to grant the public full access to agency records
and close the "loopholes in the Administrative Procedures Act| which
allow ed| agencies to deny legitimate information to the public."
GTE Sylvania, Inc. v. Consumers Union, 445 U.S. 375, 385, 100 S. Ct.
1194, 63 L. Ed. 2d 467 (1980).
Under FOIA, virtually all records possessed by a federal agency
are subject to public disclosure unless they fall within one of nine
enumerated exemptions. /29/ Records not subject to public disclosure
include documents that are: (1) authorized under Executive Order to
be kept secret in the interest of national defense or foreign policy;
(2) related solely to an agency's internal personnel rules and
practices; (3) specifically exempted from disclosure by statute; (4)
trade secrets or commercial or financial information obtained from a
person; (5) inter-agency or intra-agency memorandums or letters which
would not be available by law to a party other than an agency in
litigation with the agency; (6) personnel and medical files; (7)
records or information compiled for law enforcement purposes; (8)
related to examination, operating or condition reports prepared by an
agency responsible for the regulation or supervision of financial
institutions; and, (9) geological or geophysical information and data
concerning wells. (5 U.S.C. section 552(b).)
In October, 1993, to spur agency disclosure under FOIA,
President Clinton and Attorney General Reno adopted a new FOIA policy
and called upon all federal agencies to follow "the spirit" as well
as the letter of FOIA. The President re-articulated that the primary
objective of FOIA was to achieve "maximum responsible disclosure of
government information". In line with the President's new policy,
the Attorney General strongly encouraged all federal agencies to make
discretionary disclosures of exempt information "whenever possible".
/30/
FOIA vests jurisdiction to resolve disclosure disputes in the
District Courts. 5 U.S.C. section 552(a)(4)(B). /31/ Federal
jurisdiction is dependent upon a showing that an agency has (1)
"improperly", (2) "withheld", (3) "agency records". Kissinger v.
Reporters Committee for Freedom of Press, 445 U.S. 136, 150, 100 S.
Ct. 960, 63 L. Ed. 2d 267 (1980). Jurisdiction is also predicated
upon a party exhausting its administrative remedies under FOIA and
the corresponding regulations adopted by the individual agencies.
B. The IRS has Improperly Withheld Agency Records From Plaintiff
1. The Requested Documents Are "Agency Records"
Two requirements must be met in order for requested materials to
qualify as "agency records". First, an agency must "either obtain or
create" the requested materials. Second, the agency must be in
control of the requested materials at the time the FOIA request is
made. Department of Justice v. Tax Analysts, 492 U.S. 136, 109 S.
Ct. 2841, 106 L. Ed. 2d 112 (1989) (citations omitted).
In this action, it is undisputed that the requested closing
agreements are "agency records" for purposes of FOIA. The closing
agreements were either obtained and/or created by the IRS and were in
the control of the Service at the time plaintiff's FOIA request was
made. (MF No. 30.)
2. The Requested Documents Were "Improperly" "Withheld"
From Plaintiff
When an agency refuses to comply with a disclosure request,
documents are "withheld" for purposes of FOIA. Tax Analysts, supra,
492 U.S. at 149. Documents are "improperly" withheld, if the records
are not produced to a requesting party and they do not fall within
one of FOIA's nine enumerated exemptions. Id. at 151. As discussed
below, the IRS' decision to withhold the requested closing agreements
was improper since, contrary to its assertion, the documents are not
statutorily exempt from disclosure.
C. The Requested Closing Agreements are not Exempt From
Disclosure
As previously stated, IRC 6104(a)(1)(A) provides that any
document "issued" by the IRS with respect to an approved exemption
application is subject to public disclosure. Although the IRS does
not dispute the fact that the requested closing agreements relate to
approved exemption applications, it asserts that closing agreements
are not "issued" by it and, therefore, the agreements sought by
plaintiff are outside the scope of IRC 6104. The IRS further asserts
that since the agreements are not subject to disclosure under IRC
6104 (since they are not "issued" by it), their public release is
statutorily barred by IRC 6103. (See, Joint Report to the Court,
Part III(D).) /32/
As such, the critical issue for determination by the Court, and
which will determine whether the requested closing agreements are
subject to disclosure, is whether the agreements are "issued" by the
Service for purposes of IRC 6104. As discussed below, under the IRS'
own regulations and internal operating manual, it is clear that the
requested closing agreements are "issued" by it and, thus, subject to
public disclosure under IRC 6104.
1. Closing Agreements are Issued by the IRS
Reg. section 301.6104(a)(1)(b) provides that, for purposes of
IRC 6104, the term "issued" is to be interpreted in accordance with
the rules set forth in Reg. section 301.6110-2(h). (IRC 6110 relates
to the public disclosure of written determinations and technical
advice memoranda). Reg. section 301.6110-2(h) provides in pertinent
part:
"'Issuance' of a written determination occurs, . . . , upon the
mailing of the ruling or determination letter to the person whom it
pertains. Issuance of a technical advice memorandum occurs upon the
adoption of the technical advice memorandum by the district
director."
As such, it is clear that for purposes of IRC 6104, a document
is "issued" when it is either mailed to the taxpayer to which it
pertains or is adopted by the Service.
a. Closing Agreements are Mailed to the Taxpayer by the IRS
Under the IRS' internal procedures, an exempt organization which
enters into a closing agreement with the IRS will prepare the
agreement, sign it and send it to the IRS for execution by the
Assistant Commissioner (EP/EO). Once a closing agreement is signed
by the Assistant Commissioner (EP/EO) (in triplicate), a duplicate
original is mailed by the Service to the taxpayer which is party to
the agreement. The IRS' Exempt Organization Handbook provides in
pertinent part:
"After signing, the closing agreement is returned with the
Special File to the Division office. The letter transmitting the
duplicate closing agreement to the taxpayer . . . are signed, dated
and mailed." Internal Revenue Manual ("IRM") - Administration, Part
VIII, EP/EO, 7764.3(3).
(See also, Exhibit 7760-4, copy of transmittal letter to taxpayer.
(This letter is used to send a fully executed, original closing
agreement to the exempt organization which is party to the
agreement.)) /33/
The IRS' Closing Agreement Handbook further provides:
"A duplicate original of the closing agreement will be mailed to
the taxpayer (or to the representative) by appropriate transmittal
letter. (See, Exhibit 6 "Letter Sending Taxpayer Copy of Closing
Agreement - Letter 1595(P)"|.)" IRM, Closing Agreement Handbook,
Part VIII, Appeals 613.4(3).
(See also, IRM - Audit (10)46(4).)
Since closing agreements relating to an organization's exemption
application are mailed to the taxpayer, it is clear that pursuant to
the rules set forth in Reg. section 301.6110-2(h) they are "issued"
by the IRS and, thus, subject to public disclosure under IRC 6104.
b. Closing Agreements are "Adopted" by the IRS
IRS internal procedures provide that closing agreements with
exempt organizations may be executed by the Commissioner or Assistant
Commissioner (EP/EO). /34/ The agreement is first signed by the
taxpayer and then the IRS signatory. The Internal Revenue Manual
provides:
"The taxpayer's signature ordinarily constitutes an offer to
agree (or is a constituent part thereof) and the signature for the
Commissioner an acceptance and approval of the offer." IRM - Part
IV, Audit, (10)31.
Once executed by the Commissioner or Assistant Commissioner, a
closing agreement and its terms are "adopted" by the IRS in the same
manner a technical advice memorandum is. A closing agreement is
comparable in purpose and effect to a technical advice memorandum,
with the added consideration of finality. Like a closing agreement,
a technical advice memorandum is issued at the request of a taxpayer
and incorporates the Service's position with respect to a particular
set of facts. Except for finality, the only difference between the
two documents is in form.
Since closing agreements are "adopted" by the Service in the
same manner as a technical advice memorandum is, under the rules set
out in Reg. section 301.6110-2(h), they are "issued" by the IRS and,
thus, subject to public disclosure. /35/
c. The Requested Closing Agreements are not Exempt From
Disclosure Under IRC 6103
Since the requested closing agreements are "issued" by the IRS,
they fall within the scope of documents subject to disclosure under
IRC 6104 and are not exempt from public inspection under IRC 6103.
As such, the Service's contention that the documents are statutorily
exempt from disclosure and are privileged "return information" has no
merit and the Court should enter an order directing the IRS to
produce the requested closing agreements to plaintiff for its
inspection and review. /36/
D. Allowing the IRS to Withhold the Requested Closing Agreements
Would Frustrate the Interests of Public Policy and Allow the
IRS to Subvert its own Disclosure Rules
A ruling that the IRS is not required to produce the requested
closing agreements for public inspection would serve to frustrate the
intent of Congress as it expresses public policy. IRC 6104 is
designed to allow public inspection of all documents passing between
the applicant and the agency relating to the IRS' recognition of an
organization as exempt from tax. Public oversight of exempt
organizations is now plainly hampered by IRS inertia or ineptness.
/37/ It could be even more severely hampered if the Service were
allowed to withhold from public inspection closing agreements which
contain information and terms regarding an organization's exempt
status negotiated and executed as a partial or complete substitute
for the exemption application process. See generally, Reg. section
1.501(a)-1(a)(2) (need for organization claiming exemption to file
application).
If closing agreements relating to exemption applications were
held to be exempt from disclosure, the IRS would be able to shield
from public scrutiny agreements with controversial applicants and/or
unorthodox exemption terms. The terms of an organization's
exemption, which are normally subject to public disclosure under IRC
6104, would then be confidential and inaccessible to the public;
closing agreements would then become a private substitute for an
otherwise public document.
The fact that the IRS might use closing agreements to protect
otherwise public information from disclosure was a specific concern
of Congress when it adopted IRC 6110 in 1975. In a report urging the
adoption of IRC 6110, the House Ways and Means Committee stated that
although closing agreements were not generally to be subject to
public disclosure under that statute as "written determinations", the
Service was not to use such agreements to withhold otherwise public
information. The Committee report stated:
"Your committee intends, however, that the closing agreement
exception is not to be used as a means of avoiding public disclosure
of determinations which, under present practice, would be issued in a
form which would be open to public inspection under the bill."
(H. Rep. No. 94-658, 94th Cong., 1st. Sess. (1975), p. 316.)
Similarly, the Court should not allow the IRS to avoid the
disclosure of IRC 6104 information by using an allegedly confidential
closing agreement during the exemption application process. If the
entirety of the document flow in the application process (including
closing agreements) is not subject to public inspection, the Service,
through the use of closing agreements, will be able to mask
controversial decisions, and thereby frustrate the Congressional
expectation of accountability. Confidentiality of such documents
would also serve to protect the agency's actions from the light of
public scrutiny, which enhances the likelihood of abuse of process.
/38/
E. The IRS' Failure to Produce The Withheld Documents for Public
Inspection Contravenes the Bespoken Policy of the National Office's
Exempt Organizations Division
It is the policy of the IRS Exempt Organizations Technical
Division (EOTD) that any closing agreement the Service enters into
with an exempt organization regarding a pending exemption application
is subject to public disclosure under IRC 6104. During his
deposition, Marcus Owens, the Director of the IRS National Office
EOTD stated:
Q By Mr. Stern|: In those situations in which the IRS has
used a closing agreement in the exemption application process, isn't
the agreement placed in the organization's non-public|
administrative file?
A By Mr. Owens|: With regard to those cases with which I am
familiar that involved applications for exemption and closing
agreements, I believe that is the case, that they were made -- the
closing agreements were included in the non-public| administrative
file, AND INDEED, THE PUBLIC| ADMINISTRATIVE RECORD IN THE CASES.
Q: So, copies of the closing agreements were contained in the
administrative record subject to public disclosure|?
A: That is what I understand to be the case, and that is, as I
recall, a decision that I made in the cases that I asked it
to be done.
Q: Would that be Division policy?
A: THAT WOULD MAKE IT DIVISION POLICY, YES.
(Deposition of Marcus Owens, pp. 120 - 121, ll. 24 - 17.) (Emphasis
added.)
Despite Mr. Owens' statement that it is the EOTD's policy that
closing agreements entered into with exempt organizations regarding
pending exemption applications are subject to public disclosure, the
IRS has refused to produce copies of the requested closing agreements
to plaintiff. The Service's failure to produce the requested
agreements is in contravention of the EOTD's policy and apparently
reflects a policy dispute between the EOTD and the IRS' Office of
Disclosure Litigation.
In determining whether the requested closing agreements are
subject to public disclosure, the Court should give deference to the
policy of the EOTD which has primary responsibility for exempt
organization matters in the IRS and, as such, is better suited to
determine which exempt organization documents are subject to
disclosure under IRC 6104. /39/ Public disclosure of closing
agreements with exempt organizations serves to alert all exempt
organizations of transactions being scrutinized by the IRS and
specific activities the IRS considers to be in violation of IRC
501(c)(3).
Notwithstanding the public benefit which results from the
disclosure of exempt organization closing agreements, the IRS has not
adopted any standards as to when it will require an organization to
consent to disclosure of a closing agreement or the terms thereof.
(MF No. 20.) The result is an inconsistent disclosure policy that
defeats the Congressionally mandated rule that organizations enjoying
tax exemption should operate in a fish bowl and that the grounds for
granting tax exemption should be publicly disclosed.
VII.
CONCLUSION
Based upon the foregoing, plaintiff TAX ANALYSTS respectfully
requests that the Court enter an order directing defendant INTERNAL
REVENUE SERVICE to produce for plaintiff's inspection the requested
closing agreements. The IRS has improperly withheld these documents
from plaintiff since they are not exempt from disclosure under the
Internal Revenue Code or FOIA. Plaintiff further requests that the
Court enter an order awarding it its reasonable attorneys' fees and
costs incurred herein pursuant to 5 U.S.C. section 552(a)(4)(E).
Respectfully submitted,
June 30, 1995 William J. Lehrfeld
D.C. Bar No. 51292
Bruce L. Stern
D.C. Bar No. 436231
WILLIAM J. LEHRFELD, P.C.
1250 H Street, N.W., Suite 740
Washington, D.C. 20005
Telephone: (202) 659-4772
Facsimile: (202) 659-8876
William A. Dobrovir
D.C. Bar No. 030148
William A. Dobrovir, P.C.
65 Culpeper Street
Warrenton, Virginia 22186
Telephone: (703) 341-2183
Facsimile: (703) 341-4329
Attorneys for Plaintiff
TAX ANALYSTS
FOOTNOTES
/1/ A "closing agreement" is a final agreement between the IRS
and a taxpayer on a specific issue or liability. Closing agreements
are used by the Service to resolve a variety of issues involving
exempt organizations. For details, see, Rev. Proc. 68-16, C.B. 1968-
1, 770.
/2/ In Budget of the United States, FY 1996, Analytical
Perspectives, Table 5-6 (pp. 64-65), it is reported that income tax
exempt organizations, and income tax charitable deductions, total
$24.6 billion in tax expenditures (revenue losses).
/3/ Report on Reforms to Improve the Tax Rules Governing Public
Charities, Report of Subcommittee on Oversight of Committee on Ways
and Means, WMCP 103-26, (1994), p. 4.
/4/ In 1975, 695,000 organizations were recognized by the IRS as
exempt from tax. That year, the Service conducted audits of 22,168
exempt organizations or 3 percent of the total. (See, IRS
Commissioner's 1975 Annual Report, pp. 41, 140.) In 1985, 886,658
organizations were recognized as exempt from tax and the Service
conducted 19,609 audits of these entities. (See, IRS Commissioner's
1985 Annual Report, pp. 65, 70.) Although the number of exempt
organizations increased by nearly 200,000 organizations (or 25
percent) during this 10 year period, IRS audits declined by over 10
percent. In 1985, just over 2 percent of all exempt organizations
were audited.
In recent testimony before Congress, the IRS Commissioner,
Margaret M. Richardson, testified that in the last four years alone,
audits of exempt organizations have dropped 30 percent. The
Commissioner reported that in 1992 the IRS only audited 5,132 exempt
organizations out of the 1,085,206 entities recognized by the Service
as exempt, or less than one-half of one percent of all exempt
organizations. See, Federal Tax Laws Applicable to the Activities of
Tax-Exempt Charitable Organizations, Hearing before the Subcommittee
on Oversight of the Committee on Ways and Means, H.Rep., 103d Cong.,
1st Sess., Serial 103-39 (June 15, 1993) (Testimony of Margaret M.
Richardson, Commissioner of Internal Revenue).
/5/ See also, Public Inspection of IRS Private Letter Rulings,
Hearing Before the Subcommittee on Administration of the Internal
Revenue Code of the Committee on Finance, U.S. Senate, 94th Cong.,
1st Sess., pp. 70-96 (testimony of Thomas F. Field, Executive
Director, Tax Analysts and Advocates).
/6/ Tax Lawyer, Vol. 22, No. 4, Summer, 1969 at pp. 1023-1025
(publication of the Tax Section of American Bar Association).
/7/ Tax Exempt Organizations, Preliminary Report to the Joint
Committee on Internal Revenue Taxation, Prepared by Technical Staffs
of the Joint Committee, the Treasury and the Bureau of Internal
Revenue pursuant to section 5011 of the Internal Revenue Code (1939),
(1945), p. 3.
/8/ Revenue Act of 1950, S. Rep. 2375, 81st Cong., 1st Sess.,
(1950), reprinted at, 1950-2 C.B. 483, at 502 (discussing enactment
of IRC (1939) 153, now IRC (1986) 6104(b)).
/9/ "Under present law, an organization is exempt if it meets
the requirements of the Code, whether or not it has obtained an
'exemption certificate' from the Internal Revenue Service". Tax
Reform Act of 1969, S.Rep. 91-552, 91st Cong., 1st Sess., (1969) (on
present law before enactment of IRC 508(a)).
/10/ Rev. Proc. 90-27, 1990-1 C.B. 514; Rogovin, "The 4 R's:
Regulations, Rulings, Reliance and Retroactivity," 43 Taxes 756
(1965); Caplin, "Taxpayer Rulings Policy of the Internal Revenue
Service: A Statement of Principles," 20 N.Y.U. Inst. on Fed. Tax 1
(1962).
/11/ Ruling revocations unsustained by judicial review include:
Presbyterian and Reformed Publishing Co. v. Commissioner, 743 F. 2d
148 (3rd Cir. 1984); and, Brian Ruud International v. United States,
733 F. Supp. 396 (D.D.C. 1990).
/12/ Rev. Proc. 80-28, 1980-1 C.B. 680.
/13/ Because of a looming truck strike with potentially
disastrous consequences, mobster connections, abuse of IRS process
and other catchy reasons, the cause for revocation and the process of
re-qualification for tax exempt status of the Central States
Teamsters Pension Fund (after IRS revocation), became the subject of
detailed Congressional hearings. (See, Teamsters' Central States
Pension Fund and General ERISA Enforcement, Hearings Before
Subcommittee on Oversight of the Committee on Ways and Means, H.Rep.,
95 Cong., First Sess. (2 vols.), Serial 95-35 and 36, Appendix, at
pp. 782 forward.) Negotiated conditions which led to the reissuance
of a new exemption ruling for future years while old years in
controversy were resolved are detailed (pp. 856-860) and best
exemplify the process which is implicated in this lawsuit.
/14/ If an exemption application is not ruled upon favorably, no
documents are subject to public disclosure under IRC 6104. (See,
Reg. section 301.6104(a)-1(c).)
/15/ To illustrate the type and extent of information required
by IRS Form 990, plaintiff TAX ANALYSTS' 1994 IRS Form 990 is
attached as Exhibit "A" to the Declaration of Thomas F. Field filed
in support hereof.
/16/ See, e.g., U.S. General Accounting Office, "Tax Policy -
Competition Between Taxable Businesses and Tax-Exempt Organizations",
Briefing Report to the Joint Committee on Taxation, U.S. Congress,
(1987) GAO/GGD-87-40BR; U.S. General Accounting Office, "Tax
Administration - Information on Lobbying and Political Activities of
Tax-Exempt Organizations", Fact Sheet for the Chairman, Subcommittee
on Oversight, Committee on Ways and Means, House of Representatives,
(1987) GAO/GGD-87-32FS; U.S. General Accounting Office, "Tax-Exempt
Organizations - Information on Selected Types of Organizations",
Briefing Report to Congressional Requestors, (1995), GAO/GGD-95-84BR.
/17/ See, footnote 2, supra. In Bob Jones University v. United
States, 461 U.S. 574 (1983), the majority recognized that federal
charitable exemption and deduction incentives are an indirect form of
public subsidy. In McGlotten v. Connally, 338 F. Supp. 448 (D.D.C.
1972), the Court recognized that a donee's favored status under IRC
170(c) allowing deductibility (a "mirror" of 501(c)(3)), was a form
of "federal financial assistance."
/18/ When, in 1969, it mandated exemption applications for new
charities, and expanded public reporting by all exempt organizations,
Congress opined:
" . . . the House and the Finance Committee concluded that the
past two decades indicates that more information is needed, on a
more current basis for more organizations and that this
information should be more readily available to the public,
including state officials."
(See, Tax Reform Act of 1969, S. Rep. 91-552, 91st Cong., 1st Sess.,
(1969), p. 52 (on changes enlarging public reporting and disclosure
laws affecting exempt organizations).)
/19/ See, Revenue Act of 1950, S. Rpt. No. 2375, 81st Cong. 2d
Sess. (1950), reprinted in, 1950 U.S. Code & Cong. 3053, at 3087
(discussing adoption of former IRC 153 requiring filing and
disclosure of exempt organization annual information returns). See
also, Technical Amendments Act of 1958, S. Rpt. No. 1983, 85th Cong.
2d Sess. (1958), reprinted in, 1958 U.S. Code & Cong. 4791, at 4884
(discussing adoption of IRC 6104(a)(1)(A) requiring disclosure of
exemption applications and supporting materials) ("Your committee
agrees with the House that making these applications available to the
public will provide substantial additional aid to the Internal
Revenue Service in determining whether organizations are actually
operating in the manner in which they have stated in their
applications for exemption.").)
/20/ The failure of the IRS in the administration of exempt
organizations is detailed to Congress by the GAO in: IRS Oversight
of Tax Exempt Foundations, Hearing before a Subcommittee of the
Committee on Government Operations, 98th Cong., 1st Sess., (1983), pp
2-26.
/21/ See, IRM, Exempt Organizations Handbook, Chapter (49)23(2)
("IRC 6104 excerpts much Exempt Organization tax information from the
general confidentiality rule of IRC 6103.")
/22/ The use of closing agreements in the exemption application
process is extraordinary and involves relatively few of the
applications annually reviewed by the IRS.
/23/ In 1979 and 1980, 11 Scientologists were convicted of
conspiracy to obstruct justice. The Scientologists' convictions
resulted from their bugging and burglarizing IRS offices. These
criminal acts were done in an attempt to thwart the Service's
investigation into the then tax-exempt Church and its then tax-exempt
affiliates. (For a complete background on the Church of Scientology,
its criminal activities and the IRS' revocation of its exempt status,
see, Church of Scientology v. Commissioner, 83 T.C. 381 (1984).)
/24/ So far as plaintiff can determine, the IRS won every IRC
501(c)(3) controversy with the Church and its affiliates. See, e.g.,
Founding Church of Scientology v. United States, 412 F.2d 1197 (Ct.
Cl. 1969) through and including Church of Spiritual Technology v.
United States, 70 AFTR 2d 92-5233 (Cl. Ct. 1992), and related cases
cited therein.
/25/ During discovery, plaintiff deposed Howard Schoenfeld,
Special Assistant to the Assistant Commissioner (EP/EO). During this
deposition, plaintiff asked Mr. Schoenfeld (who was a member of the
"negotiations committee") whether the committee was established at
Commissioner Goldberg's direction. Pursuant to the instructions of
counsel, Mr. Schoenfeld refused to answer this question on the basis
that the response constituted privileged "return information" under
IRC 6103. (See, Schoenfeld Deposition, p. 66, ll. 6 - 15.)
/26/ The IRS has refused to disclose the date of the
Scientologists' closing agreement, so plaintiff is unable to describe
with certainty the sequence of events surrounding the Service's
determination and the dates and dispositions of prior applications.
/27/ During the deposition of James McGovern, the Assistant
Commissioner (EP/EO) and a member of the IRS' special "negotiations
committee", plaintiff attempted, without success, to determine
whether the closing agreement provided that the Scientologists would
be recognized as exempt:
Q: By Mr. Stern|: Did the agreement provide that the IRS would
recognize the Scientology applicants, or any of them, as
exempt under Section 501(c)(3)?
A: By Mr. Jackel|: Objection.| There's no waiver of sic|
from anyone on that particular topic. It's 6103 information.
Q: Was entry into the closing agreement a condition precedent to
the issuance of favorable ruling letters to any of the
Scientology applicants?
A: By Mr. Jackel|: Objection.| Uh, there's no waiver from
the taxpayer on that allowing us to disclose information that
would be responsive to that question. It's 6103.
(Deposition of James McGovern, p. 72, ll. 12 - 23.)
See also, Schoenfeld Deposition, pp. 104 - 105, ll. 19 - 9
(deponent instructed not to answer whether favorable ruling letters
issued to Scientologists were conditioned on agreement to enter into,
or be bound by the terms of, a closing agreement).
/28/ As discussed below, the Service's position with respect to
the closing agreements at issue herein is that although the
agreements may relate to or arise out of the exemption application
process, they are not "issued" by the IRS, and are therefore not
subject to disclosure under IRC 6104. (See, Joint Report to the
Court, part II, B, filed December 15, 1994.)
/29/ See, NLRB v. Sears, Roebuck & Co., 421 U.S. 132, 136
(1975).
/30/ See, President Clinton's FOIA Memorandum, reprinted in FOIA
Update, Summer/Fall 1993, at 3. See also, Attorney General's
Memorandum for Heads of Departments and Agencies regarding the
Freedom of Information Act (October 4, 1993), reprinted in FOIA
Update, Summer/Fall 1993, at 4-5.
/31/ This provision states: "On complaint, the district court
of the United States in which the complainant resides, or has his
principal place of business, or in which the agency records are
situated, or in the District of Columbia, has jurisdiction to enjoin
the agency from withholding agency records improperly withheld from
the complainant. In such a case the court shall determine de novo,
and may examine the contents of such agency records in camera to
determine whether such records or any part thereof shall be withheld
under any of the exemptions set forth in subsection (b) of this
section, and the burden is on the agency to sustain its action."
/32/ In the parties' Joint Report, the IRS described its
position as follows: "These agreements are not required to be
disclosed under 26 U.S.C. section 6104 because, unlike rulings on
exempt status and other pronouncements, they are not "issued" by the
Internal Revenue Service."
/33/ This form transmittal letter states: "Dear Taxpayer|:
The Assistant Commissioner (EP/EO) of the Internal Revenue Service
approved your closing agreement on the date shown above. I have
enclosed the signed duplicate of the agreement for your records.
Thank you for your cooperation. Very truly yours, IRS Signatory|."
/34/ See, IRS Delegation Order No. 97, as revised; IRS Exempt
Organization Handbook, 7761.2(2).
/35/ A judicial determination that the IRS "adopts" closing
agreements is essential to the IRS' continued compliance with IRC
6104. If the Court only rules that closing agreements are "issued"
under IRC 6104 when mailed, the IRS will have the opportunity to
avoid public disclosure of future closing agreements by amending its
internal procedures to provide that such agreements will no longer be
mailed to taxpayers, but will instead be delivered by another means.
/36/ Plaintiff agrees that absent the exemption application
process, closing agreements, including the IRS' agreement with the
Church of Scientology, may contain privileged "return information"
(i.e., provisions relating to matters other than the organizations'
exemption from tax, including the organizations' income tax
liability). The Court may conduct an in camera review of the
requested closing agreements subject to this suit and allow the IRS
to redact any privileged information contained therein which was not
submitted during the course of a revokee's application process. See,
Christian Echoes National Ministry v. United States, 404 F. 2d 1066,
23 AFTR 2d 19-498 (10th Cir. 1969).
/37/ See, e.g., U.S. Government Accounting Office, "Public
Inspection Reporting by Tax-Exempt Private Foundations Needs More
Attention By IRS", Report to the Chairman, Subcommittee on Commerce,
Consumer, and Monetary Affairs, Committee on Government Operations,
House of Representatives, GAO/GGD-83-58 (1983).
/38/ In Center on Corporate Responsibility v.Schultz, supra,
despite discovery against IRS which showed "White House pressure" the
IRS refused to accede to demands by a federal judge for further
disclosure of documents containing implications of political
influence. 368 F. Supp. at 872 - 873. Using FRCP 37(b)(2)(A), Judge
Richey nullified all IRS actions adverse to the exemption applicant.
He then held that despite all the "political intervention", the
applicant qualified for IRC 501(c)(3) status. (Id.)
/39/ IRS recently required several organizations whose exemption
it controverted to consent to the disclosure of privileged "return
information" contained in closing agreements. For example, in 1991,
the IRS required Jimmy Swaggart Ministries to disclose that it had
agreed to pay in excess of $171,000 in back taxes and interest as a
result of its failure to adhere to IRC 501(c)(3)'s proscription
against involvement in political activities. (MF No. 17.) In 1993,
the Old Time Gospel Hour was required to disclose that its exemption
under IRC 501(c)(3) had been revoked for 1986 and 1987 and, as a
condition of the reinstatement of its exempt status, it paid the IRS
$50,000 in taxes. (MF No. 18.) In 1994, Hermann Hospital, a tax-
exempt hospital in Houston, Texas, was required to distribute to the
national tax and local Houston media, a closing agreement under which
it agreed to pay the IRS $993,500 in taxes. (MF No. 19.)
END OF FOOTNOTES
