merely the instruments by which the charitable purposes are sought to be accomplished. Rev. Rul. 74-587, 1974-2 Cum. Bull. 12.
Private racial discrimination:
• A private school that does not have a racially nondiscriminating policy as to students does not qualify for exemption, because a charitable purpose, educational or otherwise, may not be contrary to public policy. Rev. Rul.
71-447, 1971-2 Cum. Bull. 230.
• Providing free recreational facilities to community residents does not qualify under 501(c)(3) where the use of the facilities is restricted to less than the entire community on the basis of race. Rev. Rul. 67-325, 1967-2 Cum. Bull. 113.
Promoting minority rights and viewpoints:
• See Rev. Rul. 72-228 above (women's rights organizations).
• Investigating discrimination against minority groups in housing and public accommodations, publishing the results and providing speakers and dis- cussion leaders on the subject matter of such investigations, and en- couraging proprietors of discriminatory establishments and trade associa- tions to comply with civil rights laws, without engaging in boycotts, re- prisals or picketing, qualifies under 501(c)(3). Rev. Rul. 68-438, 1968-2, Cum. Bull. 209.
• Providing funds for legal defense of members of a religious sect from prosecutions for state law violations, in cases involving substantial constitu- tional issues of religious freedom, where the tenets of the sect forbid its members from defending themselves in court, qualifies under 501(c)(3) as
"promoting social welfare by defending human and civil rights secured by law." Rev. Rul. 73-285, I.R.B. 1973-27, 11.
• Educating the public on the dangers of an extreme political doctrine does not qualify under 501(c)(3) where a substantial part of the activity is distributing or presenting materials that attack identified individuals and institutions without a sufficiently full and fair exposition of the pertinent facts to enable the public to form independent opinions or judgments. Rev.
Rul. 68-263, 1968-1 Cum. Bull. 256.
Low-income and integrated housing:
• Building and renovating homes for sale to low-income families, and pro- viding financial aid to such purchasers, qualifies under 501 (c)(3) as relieving the poor and distressed; building and selling low-cost housing units on an open occupancy basis to both low-and moderate-income members of minority groups qualifies under 501 (c)(3) as eliminating prejudice and discrimination and lessening neighborhood tensions; and rehabilitating an apartment house for rental to both low-and moderate-income families in an old and run-down residential area qualified under 501(c)(3) as combatting community deterioration. However, erecting housing for rental to moderate income families in an area suffering a shortage of such housing, because of the high cost of land, increased interest rates and growing population, does not qualify as a charitable purpose under 501(c)(3). Rev. Rul. 70-585,
1970-2 Cum. Bull. 115.
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• Promoting racial integration in housing by educational programs and by assisting white families to obtain homes in integrated neighborhoods, making mortgage loans to such families at prevailing bank rates or purchas- ing and reselling homes to such families at no profit, qualifies under 501(c)(3). Rev. Rul. 68-655, 1968-2 Cum. Bull. 213.
• Conducting a model demonstration housing program for low-income or displaced families, by rehabilitating and selling or leasing homes to such families on a nonprofit basis, utilizing funds received from sale of interest- bearing obligations as well as from grants and contributions, qualifies under 501(c)(3). Rev. Rul. 68-17, 1968-1 Cum. Bull. 247.
Free schools and day care:
• Acting as a clearinghouse and course coordinator by bringing together instructors and interested students, with no regular curriculum, open en- rollment and courses on subjects ranging from handicrafts to philosophy and economics, taught at various locations and without salary by anyone who considers himself qualifies to teach, qualified for 501(c)(3) exemption as advancing education. Rev. Rul. 71-413, 1971-2 Cum. Bull. 229.
• An educational day care center operated adjacent to the premises of an industrial company, for preschool children selected on the basis of need from among children of the company's employees, of parents employed in other nearby factories and of other parents recommended by antipoverty and welfare agencies, with medical assistance available from the company's staff, participation of parents during the working day and tour of the company for the children as parts of the program, qualifies under 501(c)(3) as advancing education; "any private benefits derived by the company or the parents of enrolled children is incidental to the public benefits resulting from the organization's operations." Rev. Rul. 70-533, 1970-2 Cum. Bull.
112.
Environment and pollution:
• Educating the public on environmental deterioration due to solid waste pollution and collecting materials for sale to commercial companies for recycling, with net income from such sales used to help finance the educa- tional program, qualifies under 501(c)(3); the income derived from sale of the waste materials to recycling companies is "merely incidental" to accomplishing the exempt purpose. Rev. Rul. 72-560, 1972, Cum. Bull.
248.
The Service's treatment of the racial discrimination question in private schools illustrates the interaction between concern for judicial precedent and for broader concepts of the public interest. It could be argued that segregated private schools did not benefit the community as a whole, but it seemed harder to argue that racial discrimination prevented them from being "educational," an apparently independent criterion under 501(c)(3). Many persons, including no doubt many in the Service, thought that Congress should resolve such a far-reaching and controversial policy issue. But Congress did not, and the Service continued until 1970 to accord exempt status to segregated private schools because there was no court decision holding that such schools were not "charitable."49 Litigation on the issue was commenced against the Service.50 The impasse was broken when the highest Service officials concluded that a charity cannot be created for a purpose whose accomplishment
"would tend to frustrate some well-settled public policy."S1 In formally articulating
2591 this conclusion, Revenue Ruling 71-447 relied in part on the comment of the Restatement (Second) of Trusts that, " A trust for a purpose the accomplishment of which is contrary to public policy, although not forbidden by law, is invalid," as did the federal court which reached the same conclusion in the Green case.52
The question how far the Service should go in requiring affirmative anti- discrimination steps by private charitable organizations has remained troublesome.
In 1972 the Service required affirmative steps only by private schools that "have not clearly established" their racially nondiscriminatory policy as to students.53 Not until February 1975 did the Service propose to require all private schools to show affirmative steps to establish a racially nondiscriminatory policy, effectively extend that policy to faculty and staff, and require maintenance of records showing the reasons for rejection of all applicants for admission, financial aid or employment5 4
Such requirements have not yet been applied by the Service to exempt organiza- tions other than schools, although the trend of court decisions may in due course produce that result.55 Nor has the Service yet adopted a similar policy with respect to sex discrimination, although there too the courrts may be leading the way.56
The sheer administrative task of undertaking to police some 230,000 exempt organizations in these respects, and concern for imposing burdensome record- keeping requirements on all such organizations to ease the Service's own adminis- trative task, are clearly among the factors that have cause the Service to move slowing in this area. There is also concern to observe the distinction between assisting in the formulation of broad public policy, which the Service does not regard as its proper role, and implementing public policies that have been firmly and indisputably established elsewhere.
The question of public interest law firms was controversial and difficult for the Service both because there were no guidelines as to the permissible objects of the litigation to be conducted by such firms and because the firms frequently purport to act on behalf of majority interests rather than disadvantaged minorities. In early 1970 the Service undertook to study the question, meanwhile holding up numerous pending applications.57 After several months the Service announced publicly its special study and cautioned that during the interim it was unable to provide assurance of the deductibility of contributions. A flurry of public and congressional protests ensued; among the suggestions and comments received by the Service were many from professional and public interest groups, including the Tax Section of the American Bar Association. Shortly thereafter the Service issued Revenue Procedure 71-39 (summarized at page 2588 above) setting forth guidelines under which public interest law firms would receive 501(c)(3) recognition.
Those quidelines, it can be observed, avoided any criteria that would require the Service to judge whether the applicant's proposed objectives were favored by the Congress or the public. In explaining the Service's conclusions, Commissioner Thrower stated, " . . . we should not have and we would not want the responsibility of making such a determination . . . [which] would exclude recognition of litigation on behalf of unpopular causes not having Congressional approval, even though thought by the proponents to be in the public interest.58 The Commissioner also observed that, " . . . we received a number of submissions that seemed prepared to concede to us the role of arbiter of the public good . . . I do not believe that Congress wishes Internal Revenue to make such wholly subjective, ad hoc decisions."59
Discussion. In resolving these questions and the others summarized at pages 2587-90 above, it does not appear that the Service frustrated the recognition of innovative or controversial new charitable concepts. In some cases the Service has set conditions or drawn distinctions that may be more restrictive than proponents of the activity believe appropriate, for example, on receipt of fees by public interest law firms,6
limitation of business enterprises associated with vocational training to a size reasonably necessary for the training program, qualification of housing programs for
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mode rate-income families only to promote racial integration or prevent community deterioration but not as an end in itself. Others regard such restrictions and distinc- tions as reasonable, and in virtually no case has the Service refused any foothold to a newly emerging charitable concept; indeed, in the great majority of cases re- viewed, new charitable programs have been permitted to develop into full operation on a generally unrestricted basis.
As long as the statutory standards remain broad enough to accommodate mean- ings that change and expand as the needs of society change and expand, as we believe they should and must, a balance of cautionary and innovative viewpoints seems preferable to any monolithic or doctrinaire approach to the question of what constitutes a "charitable" purpose. The interaction between caution and inspiration which has characterized the Service's approach to this question, although un- doubtedly delaying recognition of some new charitable concepts longer than their proponents believe desirable and resulting in tax-subsidized social innovation more than others believe to be appropriate, seems on the whole to have been healthy.
Initial Determinations District Level
Procedure. Applications for recognition of exempt status are initially filed in the Internal Revenue district in which the organization's principal office is located, but they are referred to the District Director of the nearest "key district." Within each of the 19 key district offices,61 the Audit Division staff includes an average of 20 to 30 revenue agents and tax auditors designated as "key district specialists" who handle only exempt organization matters. In most key districts, about two thirds of these specialists are assigned to an Examination Group and one third to a De- termination Letter Activity Group, each headed by a group manager.62 A Regional Exempt Organization Program Coordinator in each of the seven Internal Revenue regions coordinates audit programs and monitors the workload of all key district specialist groups within the region, reporting to the Assistant Regional Commis- sioner (Audit). These are the only field personnel who concentrates full time on exempt organization matters.
Each application is first reviewed by the manager of the key district Determina- tion Letter Activity Group for completeness and to ascertain whether the applica- tion should be referred to the National Office for further processing. The published Revenue Procedure requires referral to the National Office only of applications
"which present questions the answers to which are not specifically covered by statute, Treasury Decision or regulation, or by a ruling, opinion, or court decision published in the Internal Revenue Bulletin."6 3 However, the official Internal Revenue Manual for guidance of IRS employees further restricts field authority by providing that key district offices must also refer to the National Office all applica- tions for exemption which involve "matters of extensive public interest," that is,
"those in which the organization, its officers, or its activities are likely to generate Congressional, mass media, or other wide-spread public interest"6 4 In addition, whenever a key district finds that at any one time it has two or more applications from organizations of the following types, instead of referring the applications for a National Office ruling on an individual basis it is to request technical advice on the common issues without identifying the organizations by name: (a) urban economic development organizations; (b) homeowners' association; (c) low-and moderate- income housing organizations; (d) fund-raising events for charity; (e) organizations providing administrative services for charities (except IRC 501 (e) organizations); and (f) public interest law firms.65
About 20,00 determination letters are issued each year by key District Directors upon applications for all types of exemption under sections 501 and 521 (farmers'