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
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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
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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
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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).
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[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
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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