CHURCH OF SPIRITUAL TECHNOLOGY, Plaintiff,
v.
The UNITED STATES, Defendant.
No. 581-88T.
United States Claims Court.
July 13, 1990.
Church brought action seeking declaration that it was tax-exempt. Church
moved to declare final adverse ruling denying tax-exempt status null and void.
The Claims Court, Bruggink, J., held that administrative determination was not
null and void; therefore, church had burden to prove its qualification as tax-
exempt.
Motion denied.
INTERNAL REVENUE
Internal Revenue Service (IRS) administrative determination denying a church
tax-exempt status was not rendered null and void, even if IRS's decision was
based on bias and failure to follow procedure; therefore, church had burden in
declaratory judgment action to prove tax-exempt status. 26 U.S.C.A. ss
501(c)(3), 7428; Tax Court Rule 217(c)(2)(i), 26 U.S.C.A. foll. s
7453.
INTERNAL REVENUE
Internal Revenue Service (IRS) administrative determination denying a church
tax-exempt status was not rendered null and void, even if IRS's decision was
based on bias and failure to follow procedure; therefore, church had burden in
declaratory judgment action to prove tax-exempt status. 26 U.S.C.A. ss
501(c)(3), 7428; Tax Court Rule 217(c)(2)(i), 26 U.S.C.A. foll. s
7453.
*762 Monique E. Yingling, with whom were James A. Harris and Kenneth S.
Nankin, Washington, D.C., for plaintiff. Thomas C. Spring, of counsel.
David Gustafson, with whom were Asst. Atty. Gen. Shirley D. Peterson, Mildred
L. Seidman, and Gerald B. Leedom, Washington, D.C., for defendant.
OPINION
BRUGGINK, Judge.
This is an action brought pursuant to *763 Internal Revenue Code
Section 7428. [FN1] That section permits an organization to obtain a
declaratory judgment concerning its qualification, under Section 501(c)(3),
as an organization exempt from taxation. Pending is plaintiff's motion to
declare the final adverse ruling null and void. [FN2] The motion raises the
question of which party bears the burden of proof in determining plaintiff's
status. Plaintiff's position is that the final adverse ruling issued by the
Internal Revenue Service ("IRS") denying tax-exempt status is null and void,
and that therefore the burden of proof is allocated as if no final adverse
ruling had been issued. If plaintiff is correct, defendant would bear the
burden of establishing the reasons why plaintiff should not be recognized as
tax exempt. Because of the importance of this issue to the merits of the
complaint, the issue has been isolated for preliminary resolution. For the
reasons which follow, the court agrees with defendant that plaintiff bears the
burden of proof.
FN1. All references are to the Internal Revenue Code of 1988 (26 U.S.C.).
FN2. Defendant filed a motion to dismiss on November 22, 1989, based on
the argument that plaintiff had failed to exhaust its administrative
remedies, and that the court was thus without jurisdiction. Plaintiff
responded with a cross motion for summary judgment, seeking a declaration
that the IRS Final Adverse Ruling was null and void. As part of that cross
motion, plaintiff contends that the IRS bears the burden of proof to
sustain the grounds for the adverse ruling. By order of February 13, 1990,
the court severed the cross motion and deferred further action on it until
resolution of the motion to dismiss. The defendant's motion was denied on
May 3, 1990. The cross motion was simultaneously reactivated solely with
respect to the question of which party bears the burden of proof. That
issue has been fully briefed, and further argument is deemed unnecessary.
BACKGROUND
The parties have filed proposed findings of uncontroverted fact. [FN3]
Insofar as is relevant to disposing of the pending motion with respect to
burden of proof, the facts are not materially in dispute.
FN3. By order of February 13, 1990, the court directed that all
dispositive motions follow the procedures of RUSCC 56 with respect to use
of proposed findings of fact. By opinion dated October 2, 1989, the court
designated the Administrative Record from which the parties may draw
factual support. 18 Cl.Ct. 247 (1989).
In its complaint, plaintiff Church of Spiritual Technology ("CST") states that
it is a church of the Scientology religion. It recites that its purpose is to
preserve and protect the scriptures of the Scientology faith for all
generations. The scriptures of Scientology consist of the written and recorded
spoken words of L. Ron Hubbard, the founder of Scientology. CST makes
archival-quality copies of scriptures, preserves them, and stores them.
CST applied for recognition of exempt status on August 26, 1983. At the time
of CST's application, Church of Scientology International ("CSI") [FN4] and
Religious Technology Center ("RTC") [FN5] had exemption applications pending
before the IRS. On January 7, 1986, the IRS issued an initial adverse
determination letter concerning CST. On the same day, virtually identical
letters were issued to CSI and RTC. In CST's letter the IRS expressed its
conclusion that the organization is not operated exclusively for exempt
purposes. Specifically, it stated, inter alia, that CST is "operated in a
manner indistinguishable from that of an ordinary commercial enterprise." The
initial letter also recites that CST had not supplied "concrete and detailed"
information in response to IRS' questions.
FN4. CSI is the "Mother Church" of the Scientology religion.
FN5. RTC is a California nonprofit religious corporation formed for the
purpose of ensuring orthodox practice of the Scientology faith. RTC
supervises CSI and subordinate churches of Scientology.
On January 24, 1986 L. Ron Hubbard died, leaving the bulk of his estate to
CST, conditioned on its being recognized as an exempt organization. On July 3,
1986, CST, CSI and RTC filed identical protests of the initial adverse
determination letters. On July 8, 1988, the IRS issued final adverse rulings
with respect to CST. Similar rulings were made as to the other Scientology
entities.
*764 Four reasons were given for the ruling as to CST. Solely for the
purposes of ruling with regard to determination of which party bears the burden
of proof, defendant is willing to assume that the grounds given by the IRS for
rejecting exempt status cannot be supported in the record, that IRS employees
were biased against the Scientology religion, and that the procedures followed
in the course of the ruling deviated from those outlined in the Internal
Revenue Manual.
DISCUSSION
Tax Court Rule 217(c)(2)(i) directs that the petitioner in a
Section 7428 declaratory judgment proceeding has the burden of proof as to
grounds set out in the notice of determination. [FN6] The parties are agreed
that the Government bears the burden of proof with respect to grounds not
raised in a determination letter. [FN7] In this case there was a determination
letter. By its terms, Rule 217 would thus seem to dictate that CST bears
the burden of proof with respect to those reasons advanced in the IRS final
determination letter. It is plaintiff's position, however, that for purposes
of fixing which side bears the burden of proof, the determination letter should
be treated as null and void. Two reasons are advanced in support of
plaintiff's position. First, it contends that the IRS discriminates against
the Scientology religion. Second, it contends that the IRS failed to follow
its own procedures in issuing the final ruling. As defendant has conceded for
purposes of this motion that there was discrimination and a failure to follow
procedures, plaintiff concludes that the court should treat the final adverse
ruling as null and void.
FN6. There are no special rules governing tax matters in this court. The
court has held, however, that Congress expected the Claims Court and the
district courts to follow the practices of the Tax Court. Church of
Spiritual Technology v. United States, 18 Cl.Ct. 247, 250 (1989);
Church of the Visible Intelligence v. United States, 4 Cl.Ct. 55, 60
(1983).
FN7. Tax Court Rule 217(c)(2)(ii).
CST has not cited the court to any decisions directly supporting its
position. It instead places primary reliance on the decision of the district
court in Center on Corporate Responsibility v. Shultz, 368 F.Supp. 863
(D.D.C.1973). That action was one for a refund of withholding taxes. The
plaintiff alleged that it was tax exempt pursuant to Section 501(c)(3).
There were three elements of the holding in Center on Corporate
Responsibility. The first was that sanctions were appropriate because of
willful failure by defendants to comply with discovery orders. The sanction
imposed was that defendants could not challenge plaintiff's assertion that it
was "singled out for selective treatment for political, ideological and other
improper reasons." Id. at 871-73. In light of that fact, the "validity of
the Service's ruling" was "nullifie[d]" and no basis thus existed for denying
exempt status. Id. at 873. The second holding was that, after considering
the merits, plaintiff met the requirements necessary for exempt status. The
arguments advanced by the IRS were separately addressed and rejected. Id.
at 873-78. As the court points out, the second holding was theoretically
unnecessary in light of the first. Id. at 873. The final holding of the
case was that the court had the power to enjoin the IRS from denying tax-exempt
status to the plaintiff so long as its operations were maintained as explained
to the court. Id. at 880.
Center on Corporate Responsibility arose in a different procedural context
than the case at bar. It was not an action under Section 7428, which did
not come into existence until 1976. [FN8] Rather, it arose as a refund
proceeding. There was no occasion, therefore, for the court to discuss whether
political abuse would void a final adverse ruling and thereby shift the burden
of proof in an action commenced pursuant to Section 7428. Plaintiff argues,
nevertheless, that if political abuse "nullified" the IRS ruling in that
action, by analogy the court here should treat the final adverse ruling as if
it had never been issued. That *765 is far too great a leap to make,
however. It is clear from the context of the Center on Corporate
Responsibility decision that the term "nullified" was not used as a term of art
in a procedural sense. The plain import of that aspect of the holding is that
the Government's reasoning in support of an exemption denial was eliminated.
FN8. Section 7428 was added by Pub.L. 94-455, Title XIII, s 1306(a), 90
Stat. 1717 (1976).
The inapplicability of CST's argument is highlighted by its reliance on
other cases arising in circumstances totally unrelated to the present action.
United States v. Caceres, 440 U.S. 741, 99 S.Ct. 1465, 59 L.Ed.2d 733
(1979), for example, involved a criminal prosecution for bribing a revenue
officer. Plaintiff relies on that decision for the proposition that an agency
must obey its own regulations. Id. at 751 n. 14, 99 S.Ct. at 1471 n. 14.
Morton v. Ruiz, 415 U.S. 199, 94 S.Ct. 1055, 39 L.Ed.2d 270 (1974),
involving a claim for payment of benefits, and Oglala Sioux Tribe of Indians
v. Andrus, 603 F.2d 707 (8th Cir.1979), involving an action to prevent transfer
of an employee of the Bureau of Indian Affairs, are to the same effect. That
proposition, however, does not assist plaintiff here. The decisions relied
upon by CST [FN9] involve determinations on the merits of a claim. The courts
did not treat the relevant agency actions as if, from a procedural standpoint,
they did not exist. Rather, the courts' holdings that there had been a failure
to comply with regulations became a part of the rationale in support of
granting relief on the underlying claim.
FN9. This applies as well to Lennon v. INS, 527 F.2d 187 (2d
Cir.1975) (proceeding to determine whether John Lennon was an excludable
alien), and SEC v. Wheeling-Pittsburgh Steel Corp., 482 F.Supp. 555
(W.D.Pa.1979) (action to enforce an administrative subpoena). The
political harassment found in those decisions was cited as a reason for
granting or denying relief on the underlying merits issue.
In the present action, on the contrary, Tax Court Rule 217 addresses a very
specific matter of tax administration--which side bears the burden of proof.
If decisions relied upon by plaintiff were analogized to the present case, CST
would be free to argue, as did the plaintiffs in those decisions, that the
agency action (the adverse determination letter) is invalid insofar as its
rationale is undercut by bias or failure to follow agency procedures. There is
nothing within the decisions cited by plaintiff, however, which supports the
proposition that an administrative determination should be treated as if it had
never been issued.
It bears repetition, in view of the arguments raised in plaintiff's motion to
shift the burden of proof, to point out that this action raises a single
question: Is plaintiff an organization described in Section 501(c)(3) which
is exempt from tax under Section 501(a)? It is appropriate, therefore, to
test the relevance of plaintiff's arguments in light of the limited focus of
the court's inquiry under Section 7428. That determination is normally
based on the record plaintiff developed at the administrative level. To the
extent there was animus, ill-will or discrimination in the ruling itself, that
impropriety cannot provide analytical support for the Government's position.
The court's ruling will be drawn from the facts established in the record. If
the adverse ruling was affected in the way plaintiff argues, plaintiff's task
should be concomitantly easier.
The court recognizes that plaintiff also alleges that there were procedural
irregularities at the administrative level. Some of those allegations touch on
the plaintiff's ability to develop an administrative record. CST contends, for
example, that it was prevented at one point from adding certain information to
the record, and that the final determination was based on information not made
available to it. The court has had occasion already in this action to discuss
the contents of the administrative record, and noted that only under rare
circumstances can additional evidence be introduced during court proceedings.
Church of Spiritual Technology v. United States, 18 Cl.Ct. 247, 249 (1989),
citing Bethel Conservative Mennonite Church v. C.I.R., 746 F.2d 388, 392
(7th Cir.1984), and Church of Visible Intelligence v. United States, 4
Cl.Ct. 55, 60 (1983). Without reopening issues previously resolved, the
*766 court concludes that the best context for evaluating arguments that go
to the integrity and fairness of the record is upon consideration of the
merits. It would be more appropriate in that context to evaluate the
prejudicial effect, if any, of the alleged procedural violations, and whether
it would be appropriate to remedy a violation by adjusting the record.
CONCLUSION
The plaintiff's motion to declare the final adverse ruling null and void
is denied. Plaintiff will bear the burden of proof with respect to those
reasons for denial of recognition of exempt status set out in the final adverse
determination letter. The parties are directed to file a joint status report
on or before July 27, 1990 proposing further proceedings.