Nationalist Movement v. Commissioner

United States Court of Appeals,

Fifth Circuit.

No. 94-40389

Summary Calendar.

The NATIONALIST MOVEMENT, A Mississippi Non-Profit Corporation,
Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Nov. 7, 1994.

Appeal from a Decision of the United States Tax Court.

Before DUHÉ, WIENER and STEWART, Circuit Judges.

PER CURIAM:

Appellant, The Nationalist Movement, a Mississippi non-profit

corporation, appeals from judgment entered by the United States Tax

Court denying tax exempt status under I.R.C. § 501(c)(3). We

affirm.

I. FACTS

Appellant is a non-profit organization which promotes a

"pro-majority" agenda, favoring democracy, majority-rule and

American nationality. Appellant claims to conduct various social

service programs for the poor and disadvantaged. These services

allegedly consist of "counseling" services and First Amendment

litigation. In addition, Appellant publishes pamphlets, brochures,

studies, polls and a newspaper. Appellant claims tax exemption as

a corporation organized primarily for charitable purposes and

secondarily for educational purposes.

Appellant applied to the Internal Revenue Service (IRS or

1
Commissioner) for 501(c)(3) exemption in December 1987. After some

discussion and correspondence between the parties, the IRS issued

a final adverse ruling stating,

Your activities demonstrate that you are not operated
exclusively for exempt charitable or educational purposes as
required by section 501(c)(3). Furthermore, you are operated
in furtherance of a substantial nonexempt private purpose.

In 1991 Appellant filed a declaratory judgment action in the United

States Tax Court, appealing the Commissioner's decision.1

Appellant sought relief on various grounds including, inter

alia, that the Commissioner had erred in his determination that

Appellant is not operated exclusively for exempt charitable and

educational purposes and that certain IRS regulations were

unconstitutional on their face or as applied.2 During the course

of the Tax Court proceedings, Appellant filed a Motion to Compel

Discovery and a Motion Under Tax Court Rule 217 to supplement the

administrative record. The Tax Court denied both motions because

1
See I.R.C. § 7428(a).
2
Specifically, Appellant challenges Rev.Proc. 86-43, 1986-2
C.B. 729 which sets out the "methodology test". The IRS uses the
methodology test to determine "when advocacy of a particular
viewpoint or position by an organization is considered
educational within the meaning of section 501(c)(3) of the
Internal Revenue Code, and within the meaning of section
1.501(c)(3)-1(d)(3) of the Income Tax Regulations." Rev.Proc.
86-43, 1986-2 C.B. 729 at § 1.

The D.C. Circuit, in Big Mama Rag, Inc. v. United
States, 631 F.2d 1030 (D.C.Cir.1980), found 26 C.F.R. §
1.501(c)(3)-1(d)(3) unconstitutionally vague. Rev.Proc. 86-
43 attempts to reduce the vagueness in the application of §
1.501(c)(3)-1(d)(3). The constitutionality of this test has
not been decided by any circuit. However, the D.C. Circuit
discussed the test with approval in National Alliance v.
United States, 710 F.2d 868 (D.C.Cir.1983).

2
its review was limited to the administrative record, and entered

declaratory judgment for the Appellee.

Appellant appeals the holding of the Tax Court on several

grounds. First, Appellant claims that the court erred in refusing

to allow additional discovery and by refusing to allow

supplementation of the administrative record. Second, Appellant

claims that the court erred in finding that its legal and

counseling services are not charitable. Finally, Appellant claims

that certain revenue procedures, on their face or as applied,

violate "due process and equal protection under the First, Fifth

and Fourteenth Amendments." Because we find that the Tax Court

correctly decided the first two issues, we need not address the

constitutionality of the revenue procedures.

II. DISCOVERY ISSUES

Tax Court Rule 217(a) provides that "[o]nly with the

permission of the Court, upon good cause shown, will any party be

permitted to introduce before the Court any evidence other than

that presented before the Internal Revenue Service and contained in

the administrative record as so defined." We review the decision

of the Tax Court to exclude additional evidence under an abuse of

discretion standard. See Tamko Asphalt Prod., Inc. v.

Commissioner, 658 F.2d 735, 738-39 (10th Cir.1981).

Appellant attempted to supplement the administrative record by

two methods. First, Appellant requested discovery from the IRS

which it claimed would show disparate application of the Tax Code.

Second, Appellant attempted to attach a "Brandeis Brief" in support

3
of its constitutional claims. Appellant's only arguments as to

"good cause" center around its claims that the information was

necessary to receive a "fair trial." The Tax Court denied both

motions because Appellant failed to show good cause why the

information could not have been submitted during the administrative

process.

We find no abuse of discretion in the Tax Court's holding.

The purpose of the declaratory judgment action under I.R.C. § 7428

is to review the Commissioner's decision. Section 7428 does not

provide for a trial de novo. "To allow the party seeking

[declaratory judgment] to freely bring new evidence before the Tax

Court would amount to a bypass of the Service's administrative

remedies since the Tax Court would be considering factual

contentions the IRS had no opportunity to consider." Tamko Asphalt

Prod., Inc. v. Commissioner, 658 F.2d at 739. The Appellant had

the burden of establishing its entitlement to exemption during the

administrative process. See Senior Citizens Stores, Inc. v. United

States, 602 F.2d 711, 713 (5th Cir.1979). Failure to carry this

burden may not be remedied by disregarding the statutory scheme

established by Congress.

III. EXEMPTION ANALYSIS

A. Standard of Review

Title 26, section 7482(a)(1) provides that "The United States

Courts of Appeals ... shall have exclusive jurisdiction to review

the decisions of the Tax Court ... in the same manner and to the

same extent as decisions of the district courts in civil actions

4
tried without a jury...." Thus, we review findings of fact for

clear error and legal conclusions de novo. Estate of Clayton v.

Commissioner, 976 F.2d 1486, 1490 (5th Cir.1992). Our review is

limited to the record before the Tax Court, and new evidence may

not be submitted on appeal. See Hintz v. Commissioner, 712 F.2d

281, 286 (7th Cir.1983). A finding that a corporation is not

operated exclusively for charitable purposes cannot be disturbed

unless clearly erroneous. Senior Citizens Stores v. United States,

602 F.2d at 713.

B. 501(c)(3) Exemption

Section 501(c)(3) of the Internal Revenue Code provides tax

exemption for:

Corporations ... organized and operated exclusively for
religious, charitable, scientific, testing for public safety,
literary, or educational activities ... no part of the net
earnings of which inures to the benefit of any private
shareholder or individual, no substantial part of the
activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation (except as otherwise
provided in subsection (h)), and which does not participate
in, or intervene in (including the publishing or distributing
of statements), any political campaign on behalf of (or in
opposition to) any candidate for public office.

To be declared exempt under this section, a corporation must be

organized and operated exclusively for one or more exempt purposes.

26 C.F.R. § 1.501(c)(3)-1. The treasury regulations set out two

tests to determine whether an organization meets this criteria.

Id. A corporation must first satisfy the "organizational test."

To satisfy the organizational test, the "articles of organization"3

3
"[T]he term "articles of organization' or "articles'
includes the trust instrument, the corporate charter, the
articles of association, or any other written instrument by which

5
must:

(a) Limit the purposes of such organization to one or more
exempt purposes; and

(b) Do not expressly empower the organization to engage,
otherwise than as an insubstantial part of its activities, in
activities which in themselves are not in furtherance of one
or more exempt purposes.

26 C.F.R. § 1.501(c)(3)-1(b). There is no dispute in this instance

that Appellant satisfies the organizational test.

Once the organizational test is satisfied, the organization

must also show that it satisfies the "operational test." The

operational test consists of four elements:

First, the organization must engage primarily in activities
which accomplish one or more of the exempt purposes specified
in § 501(c)(3). Second, the organization's net earnings may
not inure to the benefit of private shareholders or
individuals. Third, the organization must not expend a
substantial part of its resources attempting to influence
legislation or political campaigns. Courts have imposed a
fourth element. Organizations seeking exemption from taxes
must serve a valid purpose and confer a public benefit.

Church of Scientology v. Commissioner, 823 F.2d 1310, 1315 (9th

Cir.1987), cert. denied, 486 U.S. 1015, 108 S.Ct. 1752, 100 L.Ed.2d

214 (1988). Only the first element is in contention in this

appeal.

C. Exempt Purpose

An organization must be operated exclusively for an exempt

purpose to qualify for exemption under § 501(c)(3). "An

organization will not be so regarded if more than an insubstantial

part of its activities is not in furtherance of an exempt purpose."

26 C.F.R. § 1.501(c)(3)-1(c)(1). "[T]he presence of a single

an organization is created." 26 C.F.R. § 1.501(c)(3)-1(b)(v).

6
[non-exempt] purpose, if substantial in nature, will destroy the

exemption regardless of the number or importance of truly [exempt]

purposes." Better Business Bureau v. United States, 326 U.S. 279,

283, 66 S.Ct. 112, 114, 90 L.Ed. 67 (1945); Hutchinson Baseball

Enter., Inc. v. Commissioner, 696 F.2d 757, 762 (10th Cir.1982).

Appellant lists its activities, based on percentage of time

expended, as follows: "social service, 25%; legal (First

Amendment), 20%; TV, broadcasting, 20%; administration, 10%;

publishing, 10%; forums, speeches, 5%; classes, training, 5%;

and miscellaneous, 5%." The Tax Court found that neither

Appellant's social services nor the legal activities (together

amounting to 45% of Appellant's activities) qualified as charitable

purposes under the § 501(c)(3).4 The burden is on the Appellant to

prove that it is entitled to the exemption. See Senior Citizens

Stores, Inc. v. United States, 602 F.2d at 713. Therefore,

Appellant had the duty to present, during the administrative

process, evidence establishing its exempt status. See Church of

Scientology v. Commissioner, 823 F.2d at 1317.

4
"The term "charitable' is used in section 501(c)(3) in its
generally accepted legal sense and is, therefore, not to be
construed as limited by the separate enumeration in section
501(c)(3) of other tax exempt purposes which may fall within the
broad outlines of "charity' as developed by judicial decisions.
Such term includes: Relief of the poor and distressed or of the
underprivileged; advancement of religion; advancement of
education or science; erection or maintenance of public
buildings, monuments or works; lessening of the burdens of
Government; and promotion of social welfare by organization
designed to accomplish any of the above purposes, or (i) to
lessen neighborhood tensions; (ii) to eliminate prejudice and
discrimination; (iii) to defend human and civil rights secured
by law; or (iv) to combat community deterioration and juvenile
delinquency." 26 C.F.R. § 1.501(c)(3)-1(d)(2).

7
1. Social Services

Appellant's primary social service is an alleged telephone

counseling line. Appellant claims this line is primarily a

clearing house for services, which refers callers to "appropriate

government or social service agencies (such as Social Security

Administration, Veterans' Department, drug counseling and the

like)." The Tax Court found Appellant's explanation of its

counseling activities to be insufficient and inconsistent. For

example, Appellant submitted two separate documents regarding the

number of calls received per month. The first document states the

approximate number of calls to be 30, while the second states the

approximate number of calls to be in "excess of 100".

Appellant's evidence of its counseling activities consists of

a copy from a telephone book listing Appellant's name under the

heading of "Community Service Numbers," a one page document

entitled "TNM Counseling Guidelines," "recap" (purporting to break

down the calls received by type) and Appellant's contention that

the majority of calls are fielded by Richard Barrett, "a practicing

attorney, with college credits in psychology, education and related

fields." Appellant provides no other information as to the

training of its counselors, advertising of its services or scope of

its counseling. On the record presented, we find that the Tax

Court's determination that Appellant's counseling services were not

exclusively charitable in nature was not clearly erroneous.

2. Legal Services

Once again, Appellant provided very little information to the

8
IRS regarding its activities. Appellant itself was the interested

party in the majority of its litigation. While the precedential

value of First Amendment litigation has some collateral benefit

which inures to the general public, the primary purpose of the

litigation was to advance the interests of the Appellant. On the

record presented, we hold that the Tax Court's finding that

Appellant's legal activities were not primarily for charitable

purposes was not clearly erroneous.

IV. CONCLUSION

By its own admission, Appellant's social services and legal

services jointly comprise approximately 45% of its activities.

Having found that neither Appellant's social services nor legal

services were primarily for the benefit of the public, the Tax

Court properly found as a matter of law that Appellant's non-exempt

activities were more than insubstantial.5 Appellant is therefore

not entitled to an I.R.C. § 501(c)(3) exemption.

After a thorough review of the record, we conclude that the

Tax Court's holding was not clearly erroneous. The decision of the

United States Tax Court is AFFIRMED.

5
Because Appellant's non-exempt social and legal activities
are themselves sufficient to defeat exemption, we need not
consider Appellant's contention that the methodology test used to
evaluate its educational activities is unconstitutional.

9