Fund for the Study of Economic Growth & Tax Reform v. Internal Revenue Service

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 10, 1998 Decided December 8, 1998

No. 98-5105

The Fund for the Study of Economic Growth

and Tax Reform,

Appellant

v.

Internal Revenue Service,

Appellee

Appeal from the United States District Court

for the District of Columbia

(No. 97cv00747)

William J. Lehrfeld argued the cause for appellant. With
him on the briefs was Amber Wong Hsu.

Kenneth L. Greene, Attorney, United States Department of
Justice, argued the cause for appellee. With him on the brief
were Loretta C. Argrett, Assistant Attorney General, Wilma

A. Lewis, United States Attorney, and Thomas J. Clark,
Attorney, U.S. Department of Justice.

Before: Wald and Garland, Circuit Judges and Buckley,
Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge Wald.

Wald, Circuit Judge: The Fund for the Study of Economic
Growth and Tax Reform ("Fund") appeals the decision of the
district court upholding the determination of the Internal
Revenue Service ("IRS") that the Fund did not qualify for tax
exempt status under 26 U.S.C. s 501(c)(3) ("501(c)(3)"). In
order to qualify for tax exempt status under 501(c)(3), an
organization must be both organized and operated exclusively
for exempt purposes, charitable, educational, scientific, and so
forth. An organization is not operated exclusively for exempt
purposes if it is an "action" organization, defined in the
regulations as an organization which "advocates, or cam-
paigns for, the attainment" of legislation. Treas. Reg.
s 1.501(c)(3)-1(c)(3)(iv)(b). The IRS determined that the
Fund was an "action" organization because it advocated on
behalf of the repeal of the current tax code and the imple-
mentation of legislation embodying its proposals for a flat
tax.1 The district court agreed with the IRS that the Fund

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1 In its initial adverse determination letter, the IRS also indicated
that the Fund did not qualify for 501(c)(3) tax exemption because its
activities conferred a substantial private benefit on the Republican
party and its candidates. See Treas. Reg. s 1.501(c)(3)-1(d)(ii) ("An
organization is not organized or operated exclusively [for one of the
purposes listed in 501(c)(3)] ... unless it serves a public rather than
a private interest. Thus, to meet the requirement of this subdivi-
sion, it is necessary for an organization to establish that it is not
organized or operated for the benefit of private interests....").
The Fund argues that the IRS dropped this private benefit argu-
ment in its final determination and, hence, that the private benefit
argument should not have been considered by the district court.
The IRS argues that it did not drop the private benefit argument
and that, even if it did, it was permitted to reintroduce it before the
district court. Given the fact that the IRS and the district court
agreed on a separate ground for denial, namely, that the Fund was

was an "action" organization and, hence, was not qualified
under 501(c)(3). After careful review of the record, we find
that the district court did not err in so doing and we
accordingly affirm its decision upholding the IRS's denial of
tax exempt status under 501(c)(3).

I. Background

On April 3, 1995, the Republican leadership in Congress,
then-Senate Majority Leader, Robert Dole, and then-Speaker
of the House of Representatives, Newt Gingrich, announced
the formation of the National Commission on Economic
Growth and Tax Reform ("Commission") which was charged
with the task of designing a "flatter, fairer, and simpler"
system of taxation. Joint Appendix ("J.A.") at 91. Dole and
Gingrich appointed Jack Kemp as chair of the Commission,
who in turn established the Fund, a charitable trust which
was intended to be the legal entity providing the financial
support (through solicited donations) for the activities of the
Commission.

On June 12, 1995, the Fund submitted to the IRS an
application for recognition of exemption under 501(c)(3).2 In
its application to the IRS, the Fund stated that it had been
established to "fund the study, research and analysis of ideas
and proposals to reform the Nation's tax system" and that it
would "provide grants to nonpartisan individuals and entities
(including educational and scientific institutes) to research

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an "action organization," we find it unnecessary to resolve the
parties' dispute with respect to the private benefit aspect. Accord-
ingly, we do not address the issue of whether the private benefit
argument was properly before the district court nor do we address
the merits of the argument. Instead, we limit ourselves solely to
the issue of whether the Fund was an "action organization" and
failed on that basis to qualify for 501(c)(3) tax exemption.

2 Tax exempt status under 501(c)(3) is desirable because exempt
organizations are not subject to federal income tax under 26 U.S.C.
s 501(a) and because contributions to exempt organizations are tax
deductible under 26 U.S.C. s 170(c).

and analyze data on whether and to what extent the present
tax system burdens economic growth." Id. at 42.

From June to September of 1996, the Commission held a
series of public hearings around the country on the issue of
reforming the present tax system. The Commission also
requested responses of the American public through a survey
in "Sound Off" in Money Magazine which asked people how
they would reform the federal income tax system. Finally, on
January 17, 1996, the Commission published a report, "Un-
leashing America's Potential: A Pro-Growth, Pro-Family
Tax System for the 21st Century." The Commission issued a
press release to correspond with the release of its report,
stating that the Commission "today recommended to the U.S.
Congress and the President that the current Internal Reve-
nue Code be repealed in its entirety and replaced with a new,
simplified, single rate tax system with a generous personal
exemption." Id. at 202. The report itself also began by
stating that the Commission "recommend[ed] to the Congress
and to the President of the United States that the current
Internal Revenue Code be repealed in its entirety." Id. at
354. The report stated that the principles and recommenda-
tions contained therein comprised a "Tax Test" and asked
"that Congress not pass nor the President sign any tax
legislation that fails to pass this test." Id. The issuance of
the report was widely covered by the press. See id. at 420-
42.

By letter dated August 8, 1996, the IRS communicated its
initial adverse determination that the Fund did not qualify for
tax-exempt status. First, the IRS determined that because
the Fund's primary activity was to provide funding for the
Commission, the IRS would treat the Commission's activities
as those of the Fund.3 Next, the IRS found that the evidence

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3 The district court agreed with the IRS on this point, finding that
"due to the fact that the Fund exclusively supported the Commis-
sion, the activities of the Commission should be attributed to the
Fund." J.A. at 620. The Fund does not contest this finding on
appeal; accordingly, we also attribute the activities of the Commis-

indicated that the Commission was an "action" organization.
The regulations applicable to 501(c)(3) provide that an organi-
zation seeking 501(c)(3) status must be organized and operat-
ed exclusively for religious, charitable, scientific, testing for
public safety, literary, or educational purposes, or for the
prevention of cruelty to children or animals. Treas. Reg.
s 1.501(c)(3)-1(d)(1)(i). The regulations provide that an orga-
nization is not operated exclusively for exempt purposes if it
is an "action" organization. Treas. Reg. s 1.501(c)(3)-
1(c)(3)(i). An organization is an "action" organization if it has
the following two characteristics: "(a) Its main or primary
objective or objectives (as distinguished from its incidental or
secondary objectives) may be attained only by legislation or a
defeat of proposed legislation; and (b) it advocates, or cam-
paigns for, the attainment of such main or primary objective
or objectives as distinguished from engaging in nonpartisan
analysis, study, or research, and making the results thereof
available to the public." Treas. Reg. s 1.501(c)(3)-1(c)(3)(iv).

The IRS determined that the Commission met both prongs
of this "action" organization test because (a) it sought to
encourage the implementation of a flat tax, a goal that could
only be accomplished by legislation, and (b) it advocated for
this goal. J.A. at 540-43. In finding that the Commission
advocated, the IRS looked primarily to the final report issued
by the Commission, noting that "[b]ecause the final report is
virtually the only product of the Commission, the facts and
circumstances that lead us to conclude that its predominate
purpose is advocacy are centered in that document." Id. at
543. With respect to the report, the IRS concluded that it
"read[ ] like a brief or manifesto in support of a particular list
of tax law changes"; that it was drafted "to present the most
forceful arguments in favor of one point of view"; and that,
"as a whole," it was "a document rooted in advocacy...." Id.
at 542-43. The IRS's initial determination was therefore that
the Fund did not qualify for 501(c)(3) tax exemption because
it constituted an "action" organization.

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sion to the Fund for purposes of determining whether the Fund
qualifies for 501(c)(3) tax exemption.

The Fund responded to the IRS's initial adverse determi-
nation by letter dated October 15, 1996. A conference with
IRS officials to discuss the IRS's proposed denial was held on
November 8, 1996. On January 27, 1997, the IRS issued a
final adverse ruling denying the Fund's application for ex-
emption under 501(c)(3). The Fund responded by filing a
complaint in the district court below, seeking a declaratory
judgment under 26 U.S.C. s 7428, that it is a tax exempt
organization under 501(c)(3).4 The district court decided the
case on cross-motions for summary judgment.

Invoking de novo review, the district court sustained the
IRS's determination that the Fund did not qualify for tax
exemption because it operated as an "action" organization.5

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4 26 U.S.C. s 7428(a)(2) provides that the United States Tax
Court, the United States Claims Court, or the district court of the
United States for the District Columbia may make a declaration
with respect to the initial or continuing qualification of an organiza-
tion under 501(c)(3).

5 There appears to be confusion about the standard under which
lower courts review IRS determinations of tax exemptions under 26
U.S.C. s 7428 in terms of whether there ought be any deference
given to the IRS. There are cases holding that the standard of
review is de novo. See, e.g., Basic Unit Ministry of Alma Karl
Schurig v. United States, 511 F.Supp. 166, 168 (D.D.C. 1981), aff'd
per curiam, 670 F.2d 1210 (D.C. Cir. 1982). Other courts have said
that the review is not de novo, but in the context of discussing the
scope of review, rather than the standard of review. See, e.g.,
American Campaign Academy v. Commissioner, 92 T.C. 1053, 1063
(1989) ("In making our declaration, we do not, however, engage in a
de novo review of the administrative record.... Rather, we 'base
[our] determination upon the reasons provided by the Internal
Revenue Service in its notice to the party making the request for a
determination....' ") (quoting H.R. Rep. No. 94-658, at 288 (1976)).
In the instant case, the question of deference to the IRS proves not
to be significant because the district court agreed with the IRS
under de novo review that the Fund did not qualify for tax exempt
status under 501(c)(3). However, in a case where the district court
(or the Tax Court or the Claims Court, as the case may be)
disagreed with the IRS on the merits, it would be important for
that court to determine what if any deference is due to the IRS's

The Fund conceded that it met the first prong of the "action"
organization test, that is, that its policies could only be
achieved by way of legislation, and the court found that the
Fund met the second prong as well, that is, that it advocated
for the attainment of the legislation. The court made a
number of findings indicating that the Fund advocated. For
example, the court found that while the Fund organized
public hearings throughout the country, "the record show[ed]
that these were conducted to advance a particular political
message and to [provide] support for a cornerstone of the
Republican agenda in the 1996 elections." Id. at 622-A. The
court also noted that the speakers at these hearings "clearly
enunciated" the message of "mobilizing the majority in Con-
gress (a Republican Congress) to achieve a tax reform...."
Id. The court also took account of the press releases and
newspaper accounts covering the activities of the Commis-
sion, noting that the "record [wa]s replete with examples that
the Commission advocated a legislative agenda that favored
the repeal of the current tax code, and the installation of a
'flat tax,' " and that the "Commission admittedly relied on the
press for marketing and advertising of its objectives and
disseminating its proposed recommendation." Id. The court
also emphasized the timing of the entire endeavor, noting that
the Commission lasted no more than one year, a year in
which the "political environment [was] laden with tax reform
issues." Id. at 622-A-622-B. Finally, the court noted several
statements made by members of the Commission, and related
parties, including a statement by Senator Dole and Speaker
Gingrich, that the work of the final report " 'will surely serve
as a catalyst for congressional hearings and debate,' " id. at
623, and a statement by the Vice Chairman of the Commis-
sion that the final report " 'will guide the debate over tax
reform throughout this campaign year.' " Id. at 624.

Based on these findings, the district court concluded that
the IRS did not err in finding that the Fund was "actively

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determination. Because we need not decide the question of the
trial court's standard of review of IRS determinations in 501(c)(3)
cases for purposes of this appeal, we leave the issue open.

engaged in advocacy," holding that "the evidence on the
record supports a finding that the plaintiff is an 'action
organization' and is therefore barred from the privilege of tax
exemption." Id.

II. Discussion

A.Standard of Review

The IRS in its brief and the Fund at oral argument agreed
that the standard for our review of the district court's find-
ings is clearly erroneous. The case law on standard of review
in the 501(c)(3) context is quite clear: the determination of
whether an organization is organized and operated exclusively
for exempt purposes is a factual determination reviewed only
for clear error. See, e.g., Nationalist Movement v. Commis-
sioner, 37 F.3d 216, 219 (5th Cir. 1994) ("A finding that a
corporation is not operated exclusively for charitable pur-
poses cannot be disturbed unless clearly erroneous.");
Orange County Agric. Society, Inc. v. Commissioner, 893
F.2d 529, 532 (2d Cir. 1990) ("We review the Tax Court
decision for clear error. The conclusion that an organization
is operated for a substantial non-exempt purpose is a finding
of fact entitled to deferential review."); American Ass'n of
Christian Schools v. United States, 850 F.2d 1510, 1513 (11th
Cir. 1988) ("The district court's factual finding that the tax-
payer is not operated exclusively for religious purposes can-
not be disturbed on appeal unless clearly erroneous.");
Church By Mail, Inc. v. Commissioner, 765 F.2d 1387, 1390
(9th Cir. 1985) ("[The] factual finding [that an organization is
operated for a substantial non-exempt purpose] [is] reviewa-
ble under the clearly erroneous standard."); Granzow v.
Commissioner, 739 F.2d 265, 268 (7th Cir. 1984) (per curiam)
("The Tax Court's holding ... [that an organization was not
entitled to exemption] must be sustained on appeal unless
clearly erroneous.").6

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6 This standard of review with respect to the findings of the Tax
Court appears to have its origin in the jurisdictional statute provid-
ing review of Tax Court decisions. 26 U.S.C. s 7482 provides that
courts of appeals are to review Tax Court decisions "in the same

Moreover, even were we to characterize the district court's
determination that the Fund did not operate exclusively for
an exempt purpose as a mixed question of law and fact, the
Supreme Court has instructed us to review mixed questions
of law and fact in tax cases such as these under the clearly
erroneous standard. See Commissioner v. Duberstein, 363
U.S. 278, 289 n.11 (1960); see also Pullman-Standard v.
Swint, 456 U.S. 273, 289 n.19 (1982) (listing Duberstein as
example of where mixed question of law and fact is not
reviewed de novo).

Accordingly, whether the district court's findings in this
case are considered to be findings of fact or mixed findings of
fact and law, our review is on a clearly erroneous basis.
Here, however, the district court decided the case by way of a
grant of summary judgment, thereby presumably viewing its
finding that the Fund was an "action" organization as a
finding of law, not of fact. Because, as we have pointed out,
our review is on a clearly erroneous basis, however, we

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manner and to the same extent as decisions of district courts in civil
actions tried without a jury." This language mimics that of Rule
52(a)'s clearly erroneous standard and the Supreme Court has
interpreted 26 U.S.C. s 7482 as "in the most explicit terms at-
tach[ing] the identical weight [as Rule 52(a)] to the findings of the
Tax Court." Commissioner v. Duberstein, 363 U.S. 278, 291 (1960).

Of course, our review here is of the district court, not the Tax
Court. But the statute granting jurisdiction to the Tax Court, the
Court of Claims and the district court for the District of Columbia
with respect to 501(c)(3) claims, 26 U.S.C. s 7428, suggests that
these three courts are to be treated the same under appellate
review: "Any such declaration shall have the force and effect of a
decision of the Tax Court or a final judgment or decree of the
district court or the Claims Court, as the case may be, and shall be
reviewable as such." 26 U.S.C. s 7428(a)(2). Accordingly, our best
reading of 26 U.S.C. s 7482 and 26 U.S.C. s 7428 in combination is
that s 7482 instructs us to review the findings of the Tax Court
under the clearly erroneous standard and s 7428 instructs us to
treat the district court for the District of Columbia as if it were the
Tax Court, meaning that its findings must also be reviewed for clear
error.

believe that it would be more appropriate for future district
courts to decide 501(c)(3) issues at bench trials, rather than
on summary judgment. Nevertheless, although the court
below stated that it was deciding the case on summary
judgment, a reading of its decision and the record shows that
in fact the court decided the critical issue of whether the
Fund was an "action" organization on the merits.7 Thus, we
think that a remand is unnecessary, and we review the case
as if it had been properly structured and decided on the
merits.

B.Review of District Court's Findings

Given our deferential standard of review, and given the fact
that the burden is on the taxpayer seeking exemption to
demonstrate that it is in fact entitled to tax-exempt status, see
Granzow v. Commissioner, 739 F.2d 265, 268 (7th Cir. 1984)
(per curiam) ("Exemption from income taxation is a matter of
legislative grace. A taxpayer requesting an exemption must
demonstrate compliance with the specific requirements set
forth in the statute granting the exemption.... The party
claiming the exemption bears the burden of proof of entitle-
ment"), we have no difficulty in upholding the district court's
conclusion that the Fund advocated and hence does not
qualify for tax exempt status under 501(c)(3).

The regulations define an "action" organization as one that
"advocates, or campaigns for, the attainment of [legislation]
... as distinguished from engaging in nonpartisan analysis,
study, or research and making the results thereof available to
the public." Treas. Reg. s 1.501(c)(3)-1(c)(3)(iv)(b). While
there is no bright line distinguishing an organization which
advocates from an organization which engages in nonpartisan
analysis, study or research--and we do not attempt to draw
one here--we can in this case easily conclude that the district
court did not clearly err in finding that the Fund crossed over
the line into advocacy.8 The Commission existed for one

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7 There were no disputes as to the historical facts underlying the
district court's determination.

8 The Fund argues that it does not meet the "action" organization
test because it did not actively campaign for its proposed flat tax.

year--the year before the 1996 Presidential elections. It
studied one issue, an issue that was at the time a very central
and controversial political one. With great fanfare, the Com-
mission published a final report wherein it extolled the bene-
fits of the flat tax and "recommend[ed] to the Congress and
to the President of the United States that the current Inter-
nal Revenue Code be repealed in its entirety." J.A. at 354.
Moreover, the district court did not clearly err in concluding
that the Commission's activities were not mere "nonpartisan
analysis, study, or research and making the results thereof
available to the public." Treas. Reg. s 1.501(c)(3)-
1(c)(3)(iv)(b). Based on the record before us, the court could
reasonably conclude that the Commission had not set out to
study tax reform generally and only later concluded that a
flat tax was preferable to the present system of taxation.9
Rather, the indications are that the Commission assumed a
conclusion--the preferability of a flat tax--and then tried to
sell this conclusion both to Congress and the President, and
to the public more broadly. Of course, the Commission is
free to conclude that a flat tax is preferable to the present
system of taxation; and it is free to argue this position
vigorously to the Congress, to the President and to the
American public. However, as the Supreme Court has noted,
controversies such as these " 'must be conducted without
public subvention; the Treasury stands aside from them.' "
Cammarano v. United States, 358 U.S. 498, 512 (1959) (quot-

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However, the second prong of the test asks whether an organization
"advocates or campaigns" for legislation (emphasis added), indicat-
ing that a sustained, grass-roots campaign is not required and that
advocacy alone is sufficient.

9 We emphasize that our holding in this case is quite narrow. We
are not holding that any organization which studies an issue touch-
ing on legislation, reaches a conclusion with respect to that issue,
and then argues the merits of that conclusion must necessarily be
characterized as an "action" organization. We are simply holding
that an organization which assumes a conclusion with respect to a
highly public and controversial legislative issue and then goes into
the business of selling that conclusion may properly be designated
an "action" organization.

ing Slee v. Commissioner, 42 F.2d 184, 185 (2d Cir. 1930) (L.
Hand, J.)). The Fund has failed in this case to meet its
burden of demonstrating that it is entitled to tax exemption
under 501(c)(3) and the district court did not err in finding
that it was not so entitled. Accordingly, the decision of the
district court is affirmed.

So ordered.