2669 10. Code § 7803(a)
87. Ibid., at 608
88. Until a favorable exemption determination is issued, foundations considering grants cannot be certain that such grants will not be taxable expenditures under Code § 4945(d)(5); other prospective donors have no assurance that contributions will be deductible.
89. In Center on Corporate Responsibility, Inc. v. Schultz, 368 F. Supp. 863 (D.C.D.C. 1973), two years and eight months elapsed before a National Office ruling was issued; the ruling was issued two weeks after the applicant commenced suit. The case may fairly be regarded, however, as atypical. See note 197, infra.
90. The general criteria for referral are that, "Cases are referred to Interpretative Division in those instances in which the importance or complexity of the issue is such as to justify Chief Counsel consideration." IRM (11)1 72(1 )(a)(1)(3).
91. The other is the Legislation and Regulations Division, which represents the Service in connection with tax legislation and prepares regulations. There is also an Associate Chief Counsel (Litigation) and an Operations and Planning Division of the Chief Counsel's office, with a Regional Counsel attached to each of the seven field regions.
92. Code § 7801(b)(2).
93. In the Legislation and Regulations Division, one of five Branches handles all exempt organization matters concerning legislative changes and preparation of regulations.
94. Until his recent retirement there was a Special Assistant to the Chief Counsel, assigned to the Office of the Associate Chief Counsel (Technical), who specialized in reviewing difficult 501(c)(3) determinations cases; since his retirement this function has been assumed personally by the Chief Counsel and the Associate Chief Counsel (Technical).
95. On March 13, 1975, the number of exempt organization matters pending in the Chief Counsel's Interpretative Division had been reduced to 78, of which 43 were proposed Revenue Rulings and 35 concerned particular organizations. The latter included 16 exemption qualifications under § 501(c)(3). This workload reduction may be due at least partly to temporarily decrease case referrals while the Service's Exempt Organizations officials were occupied with the reorganization recently in process under the new Assistant Commissioner (see\
Chapter III below).
96. IRM 4(11)52 provides: "Examining officers may usually discuss possible revocation or change in exempt status with officials of an organization before submitting recommendations.
Generally, such discussions are essential for examining officers to obtain sufficient facts to make
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their recommendations. However, if an examining officer believes that an organization is subversive, he should not discuss this with the organization's representative, but should prepare a detailed report setting forth all pertinent information, including the reasons for his views, and forward it to the National Office under the technical advice procedures. . . " (emphasis added) The reference to "subversiveness" is apparently an obsolete reference to Code § 508(g) disqualifying organizations designated by final orders of the Subversive Activities Control Board, which is no longer in existence; see also page 2615 below.
97. Rev. Proc. 72-4, 1972-1 Cum. Bull. 706. An exception to this procedure may be invoked
"where delay would be prejudicial to the interests of the Internal Revenue Service (such as in cases involving fraud, jeopardy, the imminence of the expiration of the statute of limitations, or where immediate action is necessary to protect the interests of the Government)." Section 11.07, Rev. Proc. 72-4, 1972-1 Cum. Bull. 706. In such cases the District Director may issue a revocation notice prior to affording administrative appeal rights to the organization. In any other case warranting immediate action "to protect the interests of the Government," such as
"in flagrant abuse cases when the organization is performing substantial acts clearly inconsistent with the exemption provisions of the Code and the Government's interest would be prejudiced by the time lapse which would be involved if normal appeal procedures were followed," the District Director must first obtain National Office approval before issuing a revocation notice prior to affording the organization appeal rights. IRM 4(11)91. In addition to such cases, a district-level conference is not afforded in any case involving "failure or refusal to comply with the tax laws because of moral, religious, political, constitutional, conscientious, or similar grounds." IRM 4(11)82.2. As in the case of adverse initial determinations, the absolute right to National Office review of revocations is currently being modified, see pages 2623, 2626 below.
98. Since retroactive revocation can result in assessment of past due taxes for all years remaining open under the statute of limitations, the courts require that exercise of this discretionary authority to take retroactive action not be abused. Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 1 L.Ed. 2d 746, 77 S.Ct. 707 (1957); Lesavoy Foundation v.
Commissioner, 238 F2d 589 (3d Cir. 1956).
99. Sec. 11.01, Rev. Proc. 72-4, 1972-1 Cum. Bull. 706, 708. The reference to a "prohibited transaction" apparently is to Code Section 503, which provides for loss of exemption if certain prohibited self-dealing transactions are engaged in by otherwise exempt employee benefit plans;
prior to the Tax Reform Act of 1969, but not since then, Section 503 applied also to some 5O1(c)(3) organizations. See pages 2659-60 below.
100. IRM (11)671.2(10)(4),.2(11)0. IRS Form 990, filed annually by all exempt organizations, calls for "a detailed description" of "any activities which have not previously been reported t o "
the Service and for a copy of "any changes" in the organization's "governing instrument, articles of incorporation, or bylaws, or other instruments of similar import."
101. IRM (11)671.2(10)4.
102. Sec. 11.01, Rev. Proc. 72-4, 1972-1 Cum. Bull. 706.
103. IRM (11)671.2(11)2.
104. See Sec. 13.05, Rev. Proc. 72-3, 1972-1 Cum. Bull. 698.
105. See Sec. 6, Rev. Proc. 72-2, 1972-1, Cum. Bull. 695; Lehrfeld & Webster, op. cit., note 68, supra., at 604.
106. Rev. Proc. 72-39, 1972-2 Cum. Bull. 818. However, deducibility may be denied where the contributor was aware that revocation was imminent or was "in part responsible for, or was aware of, the activities or deficiencies on the part of the organization that gave rise to the loss
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of qualification," id. at sec. 3.01. The Service is apparently applying this criterion also for imposition of § 4945 penalty taxes upon private foundations for "taxable expenditures" in making grants to organizations with awareness that revocation of the grantee's exempt status was imminent.
107. Rev. Proc. 72-39, 1972-2 Cum. Bull. 818. See also IRM 4(11)92.
108. See Rev. Rul. 71-447, 1971-2 Cum. Bull. 230. The first instance of such advance suspension occurred before the Service developed any procedural rules on the subject, in connection with the 1966 revocation of the Sierra Club's 501(c)(3) status. See Grant, The Sierra Club: The Procedural Aspects of the Revocation of Its Tax Exemption, 15 UCLA L. Rev. 200 (1967).
109. The Tax Reform Act of 1969 made churches, previously exempt from these provisions, subject to the tax on unrelated business income effective in 1976.
110. Code § 513(a). At the same time, feeder organizations were denied exemption by section 502 only if the organization's "primary purpose" is carrying on a trade or business for profit.
111. S. Rep. No. 2375, 81st Cong., 2d Sess. at 29, 1950-2 Cum. Bull, 483, 504-505.
112. Now Treas. Reg. § 1.501(c)(3)-1(e)(1).
113. Treas. Reg. § 1.501(c)(3)-1(b)(1)(iii).
114. Treas. Reg. § 1.501 (c)(3)-l(c)(1). These regulations can be read as being internally inconsistent, in that Reg. § 1.501 (c)(3)-1(b)(1)(iii) applies the "organizational" tests and provides for no more than an "insubstantial" amount of unrelated business activity, while Reg.
§ 1.501(c)(3)-1(c) applies the "operational" test and embodies both a primary activity as well as an insubstantial activity test; Reg. § 501(c)(3)-1(e) retains the "primary purpose" test put into the Regulations after the Revenue Act of 1950.
115. IRM (11)671.741.1.
116. In the Service's view, the principal authority, now more than 40 years old, remains S/ee v.
Commissioner, 42 F.2d 184 (2d Cir. 1930), which held that lobbying for repeal of statutes dealing with prevention of conception was not "mediate to the primary purpose" or "ancillary to the end in chief" of the American Birth Control League.
117. See Rogovin, Tax Exemption: Current Thinking Within the Service, N.Y.U. 22d Ann. Inst.
on Fed. Tax. (1964) 945, 959-960.
118. While the report for FY 1973 gives the figure 22,028 at page 18, the table at page 138 of that report shows 23,640 exempt organization returns examined. The annual report figures for exempt organization returns examined do not coincide with those shown at page 2610 below for audits completed, apparently because the annual report figures are for returns (years) rather than cases (entities). As applied to the 8,518 exempt organizations whose audits were completed in FY 1969 and the 18,980 completed in FY 1973, the annual report data on revocations recommended would indicate such recommendations in 1.96% of the audit cases completed in the former year and 1.33% in the latter year.
119. See the analysis at page 2612 below, indicating that final revocation results from less than 1% of 501(c)(3) organization audits but from more than 6% of audits of other types of exempt organizations.
120. See Rev. Proc. 72-3, 1972-1 Cum. Bull. 698.
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121. Commissioner Alexander announced on July 31, 1974, that as soon as an appropriate procedure can be established the Service will release to the public all private ruling letters issued in the future (except those required by law) together with the supporting information supplied by the requesting taxpayers. Public comments on this proposed change of policy were solicited by News Release IR-1409, August 9, 1974. The Service has now formally proposed such a procedure for rulings and determination letters on most subjects, but not on exemption applications, by a Notice of Proposed Rulemaking, 39 Fed. Reg. 43087, December 10, 1974;
the extent to which these procedures should apply to exemption applications is still under consideration. These procedures would require requests for rulings or determination letters to include a blanket waiver of confidentiality (except as to trade secrets or national defense or foreign policy secrets) and permit public inspection in the reading room of the Service's National Office beginning 30 days after the ruling or determination letter is issued, but would not permit a taxpayer to "rely upon, use, or cite as precedent any ruling issued to another taxpayer."
122. Testimony of Commissioner Alexander, Hearings Before the Subcommittee on Foundations, U.S. Senate Committee on Finance, June 3, 1974, p. 117.
123. See Testimony of Lawrence B. Gibbs, Assistant Commissioner (Technical), in Hearings, ibid, at 167. As of December 31, 1974, about 65 such rulings requests had been pending for longer than six months (page 2597 above).
124. See Hearings, ibid, at 171-177; "Public Supervision of Philanthropy and Charity, Can It Be Improved?," Non-Profit Report, December .1973, pp. 20-21.
125. The Service has recently indicated its readiness to issue advance rulings on whether proposed investments would jeopardize a foundation's exempt purposes, on an investment by investment basis. Rev. Rul. 74-316, IRB 1974-26, p. 17.
126. The Service's FY 1974 budget for its exempt-organization program is $21,138,000, of which $15,198,000 is allocated to audit functions. Testimony of Commissioner Alexander, Hearing Before U.S. Senate Finance Committee, Subcommittee on Foundations, June 3, 1974, p. 113.
127. Data is on completed audits as supplied by the Service. For FY 1974, 63.9% of the Service's total exempt organization examination expenditures were budgeted for private foundation audits. Ibid, at 114.
128. These figures, from the Service's Exempt Organizations Master File as of FY 1973, do not include about 6,400 Non-exempt Charitable Trusts (NECTs) which are treated as private foundations (NECTs increased to 7,700 as of March 31, 1974), nor do they include among 501(c)(3) organizations the numerous subordinate units covered by group rulings issued to central organizations; the Service's 643,586 figure for all exempt organizations, however, does include subordinate units of parent organizations other than religious organizations. As of June 30, 1974, there were 10,852 organizations whose foundation status had not yet been determined. See Appendix.
129. See Giving USA, 1974 (American Association of Fund-Raising Counsel, Inc.), p. 6.
130. IRM 4(11)13. A list of exempt organizations on the NOCC list as of April 13, 1973, appears in Hearings Before the Subcommittee on Domestic Finance of the Committee on Banking and Currency, U.S. House of Representatives, on Tax Exempt Foundations and Charitable Trusts, April 5 and 6, 1973, pp. 227-245.
131. IRM 4(11)74.
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132. Ibid. Until recently, National Office pre-closing review was also required for most private foundation audits involving "correction" of chapter 42 violations. Issuance of final Treasury Regulations on the subject is now believed by the Service to provide sufficient guidance for the field to handle most issues. IRM 4(11)55 as updated August 29, 1974.
133. IRM 4(11)95.
134. Section 7605(c) also requires that an officer of at least Regional Commissioner level believes the church "may be engaged" in such unrelated trade or business, and specifies that the religious activities not be audited except to determine whether the organization is a church (or convention or association of churches); a church's books may be audited only to the extent necessary to determine any tax that may be due. This provision was enacted in 1969 when churches were first made subject (starting in 1976) to the tax on unrelated business income. See also page 2655 below.
135. IRM 4(11)57.
136. IRM 4(11)94. The Service advises that this instruction is not intended to be limited to misleading statements concerning deductibility and that very few such press releases have been issued.
137. IRM 4(11)42.
138. Complaints are a separate source for planning audit coverage. See IRM 4(11)43.
139. IRM 4(11)45, as revised August 29, 1974.
140. IRM 4(11)46; Exempt Organization Master File Handbook, IRM 4(11)20.622.
141. Tax Audit Guidelines - Exempt Organizations, IRM 4(12)40, December 10, 1965.
142. Audit Technique Guidelines, Religious, Charitable, Scientific, Literary and Educational Organizations — IRC 501(c)(3), Lesson 700-9, IRS Exempt Organization Training Program (Examinations) Document 3152-01 (January 1973).
143. Now section 501 (f), which refers for definition of such organizations to the no-longer-existing Subversive Activities Control Board.
144. The Tax Reform Act of 1969 has since made section 503 inapplicable to 501(c)(3) organizations.
145. Since repealed by the Tax Reform Act of 1969.
146. IRM 4(11)52.
147. See also pages 2609-10 below.
148. IRM 4(11)G-29, sec. 3.03, May 15, 1972, now IRM 4(11)55.1(3).
149. IRM 4(11)54.3.
150. IRM 4(11)73. The size of the sampling in "all other" cases ranges from 14 to 33%, depending on the key district.
151. IRM 4(11)82.4.
152. IRM 4(11)55.
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153. See Rev. Proc. 72-2, 1972-1 Cum. Bull. 695. If the examiner or reviewer rejects the taxpayer's request that technical advice be obtained, the taxpayer may appeal to the Chief of the district Audit Division and to the National Office Audit Division, whose decision on referral is final.
154. See IRM 4(11)76, 4(11)85.1. The Service advises that its unpublished Audit Manual, IRM 4422, provides only for cautioning that an increase of such activities may jeopardize exempt status, and that the failure of the manual's published provisions to delete instructions for cautionary advice on the mere continuance of existing activities is inadvertent. Nevertheless,
"No Change Advisory Letters" have been sent to exempt organizations stating, "Please be advised that continuation or enlargement of the above mentioned activities may . . . adversely affect your exempt status in future years" [emphasis added].
155. See page 2594 above.
156. It is also forbidden by the Civil Service Commission for solicitations of federal employees.
See pages 2633-34 below.
157. Report and Recommendations to the Commission on Private Philanthropy and Public Needs of the study on Private Philanthropic Foundations, prepared by the Council on Foundations.
158. Testimony of Commissioner Alexander, Hearings Before the Subcommittee on Foundations, U.S. Senate Finance Committee, June 3, 1974, p. 114.
159. IRM Manual Supplement 48G-222, September 18, 1974, Sec. 1. The field examination portion of the TCMP audit cycle is to be completed by December 31, 1976, for exempt organizations having assets or income of $1 million or more, and by February 1, 1976, for all others.
160. See the directive quoted at pages 2607-08 above.
161. News Release IR-1284, Remarks of Commissioner Johnnie M. Walters, prepared for delivery before Tax Exempt Organizations Institute, San Diego, California, January 12, 1973.
162. Brief for Amici Curiae in Commissioner v. Americans United, inc., 416 U.S. 752 (1974), p.26. See also Speiser v. Randall, 357 U.S. 513, 518 (1957): " I t cannot be gainsaid that a discriminatory denial of a tax exemption for engaging in speech is a limitation on free speech."
163. Even during this period, the integrity of the Service in general was high. The Advisory Group to the Joint Committee on Internal Revenue Taxation reported, "We believe that the standards of integrity maintained by the Bureau [as it was then denominated] . . . are of a very high order. This is truly remarkable in view of the size and decentralized character of this organization and the inherent nature of tax determination which continuously provides opportunities for lesser standards. Honesty is not the only course open to thousands of Bureau employees, yet few choose to follow any other . . . Considering the levels of compensations, the handicaps under which many employees work, and the all too long and obvious neglect of the role of the Bureau in the country's welfare, only an unusual devotion and belief in the revenue service by the persons in it has kept the organization intact and operating." See Bierman, Introduction to the Problems Facing Bureau of Internal Revenue Administration Today, 1 N.Y.U. Inst. Fed. Taxation 271, 281 (1949).
164. Steps taken under the Commissioner appointed in 1951 included background investigations, including tax audits for at least the previous three years, of every Internal Revenue employee throughout the country and summary dismissals with recommendations to the Justice Department for criminal prosecution. See Statement of Commissioner John B.
Dunlap, 92 J. of Accountancy 700 (December 1951).