Archive Message - 1995
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Since some of the materials which describe the $cientology cult could be considered to be copywritten materials, I have censored myself and The Skeptic Tank by deleting any and all possible text files which describes the cult's hidden mythologies. I have elected to quote just a bit of the questionable text according to the "Fair Use" legal findings afforded to those who report. - Fredric L. Rice, The Skeptic Tank, 09/Sep/95 -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- From news.interserv.net!news.sprintlink.net!EU.net!sun4nl!xs4all!utopia.hacktic.nl!not-for-mail Mon Jul 17 09:49:22 1995 Path: news.interserv.net!news.sprintlink.net!EU.net!sun4nl!xs4all!utopia.hacktic.nl!not-for-mail From: nobody@REPLAY.COM (Anonymous) Newsgroups: alt.religion.scientology Subject: Big Suprise - 79K Date: 14 Jul 1995 05:00:24 +0200 Organization: RePLaY aND CoMPaNY UnLimited Lines: 1567 Sender: replay@utopia.hacktic.nl Message-ID: <3u4mk8$n09@utopia.hacktic.nl> NNTP-Posting-Host: utopia.hacktic.nl Content-Type: text Content-Length: 78225 XComm: Replay may or may not approve of the content of this posting XComm: Report misuse of this automated service to <postmaster@REPLAY.COM> 95 TNT 136-69 (JULY 13, 1995) * * * * * * * * * * * * * * * * * Other Court Documents (CTO) * * * * * * * * * * * * * * * * * MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFF TAX ANALYSTS' MOTION FOR SUMMARY JUDGMENT. SHORT NAME: Tax Analysts v. IRS JUDGE(s): Hogan, Thomas TAX ANALYSTS, Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant. United States District Court for the District of Dist. of Columbia 94-CV-00220 (TFH) SUMMARY: Plaintiff filed its memorandum of points and authorities in support of its motion for summary judgment in the case of Tax Analysts v. IRS, a suit seeking release of all exempt organization closing agreements entered into by the IRS after Dec. 31, 1992. TEXT: MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFF TAX ANALYSTS' MOTION FOR SUMMARY JUDGMENT William J. Lehrfeld D.C. Bar No. 51292 Bruce L. Stern D.C. Bar No. 436231 WILLIAM J. LEHRFELD, P.C. 1250 H Street, N.W., Suite 740 Washington, D.C. 20005 Telephone: (202) 659-4772 Facsimile: (202) 659-8876 William A. Dobrovir D.C. Bar No. 030148 William A. Dobrovir, P.C. 65 Culpeper Street Warrenton, Virginia 22186 Telephone: (703) 341-2183 Facsimile: (703) 341-4329 Attorneys for Plaintiff TAX ANALYSTS TABLE OF CONTENTS Table of Contents Table of Authorities Memorandum of Points and Authorities I. Introduction II. Statement of Facts A. Background Information Regarding Plaintiff Tax Analysts B. The Underlying FOIA Request III. Issue Presented for Determination IV. Background on Exempt Organizations, IRS Disclosure Rules and IRS Use of Closing Agreements A. Tax Exemption Under the Internal Revenue Code B. The Application Process for Initial Recognition of Exemption Under IRC 501(c)(3); Re-Qualification After Revocation of Recognition of Exemption C. Disclosure Provisions Applicable to Exempt Organizations 1. Under IRC 6104, "Return Information" Relating to Exempt Organizations is Subject to Public Disclosure 2. IRC 6104 Provides an Exception to IRC 6103's Non-Disclosure Provisions D. The IRS' Use of Closing Agreements With Exempt Organizations 1. The Church of Scientology Closing Agreement V. Standard for Summary Judgment VI. Legal Argument A. Disclosure Under FOIA B. The IRS has Improperly Withheld Agency Records From Plaintiff 1. The Requested Documents are "Agency Records" 2. The Requested Documents Were "Improperly" "Withheld" From Plaintiff C. The Requested Closing Agreements are not Exempt From Disclosure 1. Closing Agreements are Issued by the IRS a. Closing Agreements are Mailed to the Taxpayer by the IRS b. Closing Agreements are Adopted by the IRS c. The Requested Closing Agreements are not Exempt From Disclosure Under IRC 6103 D. Allowing the IRS to Withhold the Requested Closing Agreements Would Frustrate the Interests of Public Policy and Allow the IRS to Subvert its own Disclosure Rules E. The IRS' Failure to Produce the Withheld Documents for Public Inspection Contravenes the Policy of the National Office's Exempt Organizations Technical Division VII. Conclusion TABLE OF AUTHORITIES CASES Belisle v. Commissioner, 462 F. Supp. 460 (W.D. Okla. 1978) Bob Jones University v. United States, 461 U.S. 574, 103 S. Ct. 2017, 76 L. Ed. 2d. 157 (1983) Brian Ruud International v. United States, 733 F. Supp. 396 (D.D.C. 1989) Breuhaus v. IRS, 609 F. 2d 80 (2d Cir. 1979) California Thoroughbred Breeders Ass'n. v. Commissioner, 47 T.C. 335 (1966) Celotex Cord v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986) Center on Corporate Responsibility, Inc. v Schultz, 368 F. Supp. 863 (D.D.C. 1973) Christian Echoes National Ministry v. United States, 404 F. 2d 1066 (10th Cir. 1969) Church of Scientology v. Commissioner, 83 T.C. 381 (1984), aff'd, 823 F. 2d 1310, cert. den., 486 U.S. 1015 (1988) Church of Scientology v. Commissioner, 823 F. 2d 1310 (9th Cir. 1987), cert. den., 486 U.S. 1015 (1988) Church of Spiritual Technology v. United States, 26 C1. Ct. 713 (C1. Ct. 1992), aff'd, 991 F. 2d 812 (Fed. Cir. 1993) Coit v. Green, 404 U.S. 997, 92 S. Ct. 564, 30 L. Ed. 2d 550 (1971) Department of Air Force v. Rose, 425 U.S. 352, 96 5. Ct. 1592, 48 L. Ed. 2d 11 (1976) Founding Church of Scientology v. United States, 412 F. 2d 1197 (Ct. C1. 1969) GTE Sylvania, Inc. v. Consumers Union, 445 U.S. 375, 100 S. Ct. 1194, 63 L. Ed. 2d 467 (1980) Kissinger v. Reporters Committee for Freedom of Press, 445 U.S. 136, 100 5. Ct. 960, 63 L. Ed. 2d 267 (1980) McGlotten v. Connally, 338 F. Supp. 448 (D.D.C. 1972) NLRB v. Robbins Tire & Rubber Co., 437 U.S. 214, 98 S. Ct. 2311, 57 L. Ed. 2d 159 (1978) NLRB v. Sears. Roebuck & Co., 421 U.S. 132, 95 S. Ct. 1504, 44 L. Ed. 2d 29 (1975) Presbyterian and Reformed Publishing Co. v. Commissioner, 743 F. 2d 18 (3rd Cir. 1984) Tax Analysts and Advocates v. IRS, 505 F. 2d 350 (D.C. 1974) Taxation With Representation Fund v. IRS, 646 F. 2d 666 (D.C. 1981) United Missionary Aviation, Inc. v. Commissioner, T.C. Memo 1990-566, 60 T.C.M. 1152 (1990) U.S. Department of Justice v. Tax Analysts, 492 U.S. 136, 109 S. Ct. 2841, 106 L. Ed. 2d 112 (1989) STATUTES 5 U.S.C. section 552 5 U.S.C. section 552(b) 5 U.S.C. section 552(a)(4)(B) 26 U.S.C. section 6103(a) 26 U.S.C. section 6103(b)(1) 26 U.S.C. section 6103(b)(2)(A) 26 U.S.C. section 6104(a)(1)(A) 26 U.S.C. section 6104(b) 26 U.S.C. section 6104(e)(1) 26 U.S.C. section 7121(a) 26 U.S.C. section 7121(b) INTERNAL REVENUE CODE REGULATIONS Reg. section 1.501(a)-1(a)(2) Reg. section 301.6104(a)-1(b) Reg. section 301.6104(a)-1(c) Reg. section 301.6110-2(h) IRS REVENUE PROCEDURES Rev. Proc. 68-16, 1968-1 C.B. 770 Rev. Proc. 80-28, 1980-1 C.B. 680 Rev. Proc. 90-27, 1990-1 C.B. 514 IRS REVENUE RULINGS Rev. Rul. 69-247, 1969-1 C.B. 303 IRS INTERNAL REVENUE MANUAL (IRM) IRM - Administration, Disclosure of Official Information Return Handbook, Chapter 910(7) IRM - Exempt Organizations Handbook, Chapter (49)23(2) IRM - Exempt Organization Handbook, 7761.2(2) IRM - Administration, Part VIII, EP/EO, 7764.3(3) IRM - Audit (10)46(4) IRM - Closing Agreement Handbook, Part VIII, Appeals 613.4(3) IRM - Part IV, Audit, (10)31 FEDERAL RULES OF CIVIL PROCEDURE Federal Rule of Civil Procedure 56(c) CONGRESSIONAL REPORTS Report on Reforms to Improve the Tax Rules Governing Public Charities, Subcommittee on Oversight of the Committee on Ways and Means, U.S. House of Representatives, WMCP 103-26 (1994) Federal Tax Laws Applicable to the Activities of Tax Exempt Charitable Organizations, Hearing Before Subcommittee on Oversight of the Committee on Ways and Means, H. Rep. 103rd Cong., 1st Sess., Serial 103-39 (1993) IRS Oversight of Tax Exempt Foundations, Hearing before a Subcommittee of the Committee on Government Operations, 98th Cong., 1st Sess., (1983) Teamsters' Central States Pension Fund and General ERISA Enforcement, Hearings Before Subcommittee on Oversight of the Committee on Ways and Means, H. Rep., 95th Cong., First Sess. (2 vols.) , Serial 95-35 and 36 (1977) Public Inspection of IRS Private Letter Rulings, Hearing Before the Subcommittee on Administration of the Internal Revenue Code of the Committee on Finance, U.S. Senate, 94th Cong., 1st Sess., (1975) H. Rep. No. 94-658, 94th Cong., 1st. Sess., (1975) Tax Reform Act of 1969, S. Rep. 91-552, 91st Cong., 1st Sess., (1969), reprinted at, 1969-3 C.B. 423 Revenue Act of 1950, S. Rep. 2375, 81st Cong., 1st Sess., (1950), reprinted at, 1950-2 C.B. 483 Tax Exempt Organizations, Preliminary Report to the Joint Committee on Internal Revenue Taxation, Prepared by Technical Staffs of the Joint Committee, the Treasury and the Bureau of Internal Revenue pursuant to section 5011 of the Internal Revenue Code of 1939 (1945) GENERAL ACCOUNTING OFFICE (GAO) REPORTS U.S. General Accounting Office, "Public Information Reporting by Tax Exempt Foundations Needs More Attention by IRS", Report to the Chairman, Subcommittee on Commerce, Consumer, and Monetary Affairs, Committee on Government Operations, House of Representatives, GAO/GGD-83-58 (1983) U.S. General Accounting Office, "Competition Between Taxable Businesses and Tax-Exempt Organizations", Briefing Report to the Joint Committee on Taxation, U.S. Congress, GAO/GGD-87-40BR (1987) U.S. General Accounting Office, "IRS Information on Revoked Tax-Exempt Organizations Could Be Improved", Briefing Report, GAO/GGD-85-36 (1985) U.S. General Accounting Office, "Tax Administration - Information on Lobbying and Political Activities of Tax-Exempt Organizations", Fact Sheet for the Chairman, Subcommittee on Oversight, Committee on Ways and Means, House of Representatives1 GAO/GGD-87-32FS (1987) U.S. General Accounting Office, "Tax-Exempt Organizations - Information on Selected Types of Organizations", Briefing Report to Congressional Requestors, GAO/GGD-95-84BR (1995) ARTICLES Caplin, "Taxpayer Rulings Policy of the Internal Revenue Service: A Statement of Principles," 20 N.Y.U. Inst. on Fed. Tax 1 (1962) Rogovin, "The 4 R's: Regulations, Rulings, Reliance and Retroactivity," 43 Taxes 756 (1965) Tax Lawyer, Vol. 22, No. 4, Summer 1969 MISCELLANEOUS Budget of the United States, FY 1996, Analytical Perspectives FOIA Update, Summer/Fall 1993 IRS Commissioner's Annual Report (1975) IRS Commissioner's Annual Report (1985) 1992 IRS Exempt Organization Continuing Professional Education Technical Instruction Program, "Closing Agreements", p. 262 MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT I. Introduction At issue in this case is whether certain agency records created and maintained by defendant INTERNAL REVENUE SERVICE (hereinafter sometimes referred to as the "IRS" or "Service") are subject to public disclosure under the U.S. Freedom of Information Act (5 U.S.C. section 552). The specific records at issue herein are "closing agreements" the IRS entered into with organizations exempt from Federal tax under Internal Revenue Code section ("IRC") 501(a). /1/ The Service has refused to produce these records on the basis that the entirety of the agreements constitutes "return information" and, pursuant to IRC 6103, the agreements are therefore exempt from disclosure under FOIA. As discussed below, the IRS has improperly withheld the requested closing agreements. Notwithstanding the Service's contentions to the contrary, these agreements do not constitute "return information" and are subject to public inspection under FOIA. The closing agreements sought by plaintiff relate directly to an organization's application for initial and continuing recognition of exemption as an entity described in IRC 501(a), and, as such, are required to be disclosed to the public under IRC 6104. By refusing to disclose the requested closing agreements, the IRS thwarts its own disclosure rules and shields controversial agency action from public scrutiny. Allowing the IRS to withhold the requested documents from public inspection defeats the interests of public policy in accountability for entities enjoying tax subsidies granted by the various exemption and deduction provisions of the Internal Revenue Code. /2/ Specifically, non-disclosure frustrates long standing Congressional interest in the oversight of tax-exempt charities and Congress' expressed intent that agency actions involving exempt organizations be subject to public review. /3/ Public oversight of exempt organizations is particularly important due to the dramatic decline in the number of IRS audits of exempt organizations in recent years. /4/ II. Statement of Facts A. Background Information Regarding Plaintiff TAX ANALYSTS Plaintiff TAX ANALYSTS is a nonprofit, educational organization exempt from federal taxes under IRC 501(a). (See, Plaintiff's Statement of Material Facts in Support of Motion for Summary Judgment (hereinafter "MF"), No. 1.) In furtherance of its exempt purposes, plaintiff publishes a variety of tax publications, including Tax Notes, Daily TaxFax, Tax Notes International, The Exempt Organization Tax Review, The Insurance Tax Review and, State Tax Notes. (MF No. 2.) Plaintiff also makes available a wide variety of tax information to the public, including full-text IRS, Treasury and Congressional documents and hearing transcripts, the IRS Master File of Exempt Organizations and directories of government tax officials and private tax practitioners. (MF No. 2.) To ensure public access to tax materials maintained by the IRS and other federal agencies, plaintiff and its affiliates have litigated a number of disclosure cases against the government, including, U.S. Department of Justice v. Tax Analysts, 429 U.S. 136, 109 S. Ct. 2841, 106 L. Ed. 2d 112 (1989) (Court upheld District Court decision that Justice Department has duty under FOIA to make copies of Court decisions available to public); Taxation With Representation Fund v. IRS, 646 F. 2d 666, 47 AFTR 2d (P-H) 81-1026 (D.C. 1981) (IRS General Counsel Memoranda, Technical Advice Memorandum and certain Actions on Decision subject to public disclosure under FOIA); and, Tax Analysts and Advocates v. IRS, 505 F. 2d 350, 34 AFTR 2d (P-H) 74-5731 (D.C. 1974) (IRS private letter rulings subject to public disclosure under FOIA). Through its administrative and litigation activities, TAX ANALYSTS promotes, establishes and argues for, the public availability of documents and materials relating to the administration of our federal tax laws by all agencies of the United States. /5/ B. The Underlying FOIA Request On November 10, 1993, plaintiff filed a Freedom of Information Act ("FOIA") disclosure request with defendant IRS which is the subject of this suit. By its FOIA request, TAX ANALYSTS sought, in part, copies of all closing agreements the IRS entered into with exempt organizations on or after December 31, 1992. (MF No. 4.) Plaintiff's FOIA request complied with all applicable IRS regulations. (MF No. 5.) The IRS failed to timely respond to plaintiff's FOIA request and, on January 10, 1994, TAX ANALYSTS filed an administrative appeal of the Service's constructive denial of its November 10, 1993 disclosure request. (MF No. 6.) On February 7, 1994, the IRS denied plaintiffs' administrative appeal and advised TAX ANALYSTS that it would not produce any closing agreements sought by its FOIA request. (MF No. 7.) The IRS' decision was based upon its determination that closing agreements constitute privileged "return information" and, as such, pursuant to IRC 6103 and 5 U.S.C. 552(b)(3), are not subject to disclosure under FOIA. (MF No. 7.) On October 14, 1994, plaintiff filed its complaint herein. By its complaint, TAX ANALYSTS is seeking an order directing the IRS to produce a sub-set of the closing agreements requested by its November 10, 1993 FOIA request. Specifically, plaintiff is seeking the production of any closing agreement entered into between the IRS and an exempt organization which relates to, or contains provisions regarding, the organization's pending application for recognition of exemption and/or the IRS' initial or continuing determination to recognize the organization as exempt under IRC 501(a). III. ISSUE PRESENTED FOR DETERMINATION Whether all or any part of a "closing agreement" entered into between the IRS and a tax-exempt organization which arises out of, relates to, or contains provisions regarding, a favorable determination of exempt status issued with respect to an exemption application, is subject to disclosure under the Freedom of Information Act. IV. BACKGROUND ON EXEMPT ORGANIZATIONS, IRS DISCLOSURE RULES AND IRS USE OF CLOSING AGREEMENTS In order to get a clear understanding of this dispute, it is essential to understand the statutory scheme regarding exempt organizations; the process by which the IRS determines whether an organization qualifies for its initial and continuing exemption ruling; how an organization, after revocation of its exemption ruling, re-qualifies for exemption within (or after) the process of either settling or controverting prior years' liabilities; the disclosure rules applicable to tax-exempt entities; and, the evolving use of closing agreements by the IRS to resolve outstanding issues with exempt organizations in the re-qualification process. Each of these areas is addressed in turn. A. Introduction Since the adoption of the Income Tax Act of 1913, the Internal Revenue laws have provided an exemption from income tax for certain organizations, including those with religious, educational and scientific purposes. Until 1944, no returns of any sort were required to be filed with the IRS by tax-exempt organizations. /6/ These returns (but not exemption applications) were first used by the Treasury Department, and Congressional staff, to ascertain whether "provisions of Section 501| constitute a loophole for tax evasion and avoidance." /7/ Shortly thereafter, in 1950, Congress concluded that disclosure of financial information on exempt organization returns served a public purpose by allowing the public to share in accountability judgments. /8/ Until 1969, only IRS regulations prescribed the administrative process by which an organization would be recognized as exempt. /9/ Upon enactment of IRC 508(a), new IRC 501(c)(3) organizations wishing to claim all the federal tax benefits available to charities had to file a timely exemption application; failing to do so denied them exempt status until the filing was made. IRC 508(a) does not require IRS to issue a letter ruling responding to the applications but it generally does so, both favorable and unfavorable. A charity with an unfavorable ruling has recourse to a declaratory judgment in one of three forums pursuant to IRC 7428. Favorable letter rulings issued after analysis and review of a fully documented exemption application allow both the applicant and the public to rely on the discretion exercised by the IRS. /10/ B. The Application Process for Initial Recognition of Exemption Under IRC 501(c)(3); Re-Qualification After Revocation of Recognition of Exemption With limited exceptions, all new organizations (i.e., those formed after October 9, 1969) claiming exemption under IRC 501(c)(3) must file an application for recognition of exemption with the IRS by timely filing IRS Form 1023. Form 1023 requires applicants to provide the IRS with substantial information about their prior operations and proposed activities. Prior corporate tax returns (e.g., Form 1120) may be part of the information requested by IRS. (See, IRS Form 1023, Part II, page 1.) Information also required by Form 1023 includes a list of officers and directors and compensation paid to them, copies of leases and relevant contracts, likely sources of revenue, projected expenditures, proposed budgets and balance sheets. (MF No. 8.) With this information, IRS determines whether the applicant satisfies IRC 501(c)(3) and if so, a favorable ruling ensues. A favorable ruling relates back to the date of the applicant's creation and forward until revoked by the Internal Revenue Service as a result of the audit process. (See, Rev. Proc. 90-27, Section 13, 1990-1 C.B. 514, 518.; see also, United Missionary Aviation v. Commissioner, T.C. Memo 1990-566, 60 T.C.M. 1152, 1158 (revocation of exemption justified where corporate behavior changed after application was submitted).) Typically, an exemption application is filed with the IRS Key District Office in which the applicant's principal place of business is located. (MF No. 9.) The Key District Office will review the application and, generally, will issue the applicant either a favorable determination letter (if it is determined that the applicant meets the criteria for exemption) or an initial adverse determination letter (if it does not). (MF No. 10.) Under certain circumstances, exemption applications will be forwarded by a Key District Office to the IRS National Office for consideration and issuance of a ruling letter. Applications will be forwarded to the National Office for ruling if the application presents an issue for which there is no published precedent or where the District Office believes National Office review is warranted. (MF No. 11.) If an application is forwarded to the National Office, the National Office's Exempt Organizations Division will often request additional information from the applicant and will generally analyze prevailing published rulings, case law, and perhaps prior internal rulings to determine whether the organization will be recognized as exempt. It also determines the effective date for tax exempt status. The same process is followed for an organization whose favorable ruling was properly or improperly revoked for conduct in prior years when it seeks a new ruling for future years. Bifurcation of years between "exempt years" and "non-exempt" years occurs whenever IRS argues, (correctly or not), that a charity violated the exemption law. /11/ If the charity whose ruling was revoked defeats the IRS in court, the IRS has an abbreviated re-application and ruling procedure to accelerate the recognition of future years exemption. /12/ But practically speaking, controversy resolution (prior years) and the re-application process (future years) can be negotiated simultaneously if the challenged charity alters or promises to alter its behavior to lead IRS to conclude that the charity will not again violate IRC 501(c)(3). (See, e.g., Center on Corporate Responsibility, Inc. v. Schultz, 368 F. Supp. 863 (D.D.C. 1973).) Except in unusual cases, the negotiations are carried on without public awareness, so there is no public accountability for either party's ineptness, inertia, non-feasance or abuse of process. /13/ During its processing of an exemption application, the IRS maintains what is known as an "administrative file". This file contains all documents and papers relating to the exemption application which are either received or generated by the Service during its consideration and review of the application. (MF No. 13.) If the exemption application of a new organization is approved by the issuance of a private ruling letter, the IRS then purges the administrative file and creates an "administrative record" which consists solely of the documents from the administrative file which it believes are subject to disclosure. (MF No. 14.) Under IRC 6104(a), the administrative record must include a complete copy of the exemption application, any papers submitted in support of the application and any letter or other document issued by the Service with respect thereto. /14/ Organizations recognized as exempt from tax typically must file an annual information return with the IRS (IRS Form 990) pursuant to section 6033 of the Code. This return is comparable to a tax return. (See, Rev. Rul. 69-247, 1969-1 C.B. 303; California Thoroughbred Breeders Assn. v. Commissioner, 47 T.C. 335 (1969) (holding that exempt organization's information return, if adequately descriptive, is a tax return for purposes of limitations on assessments under IRC 6501(g)(2) when applying the unrelated business income tax.).) The law requires exempt organizations to annually furnish the IRS with substantial information regarding their activities, assets, income and expenses. /15/ The information required to be disclosed allows the Congress and the public to decide if the public subsidy of the tax exemption and deductibility remain suitable, by specific organization or by class. /16/ IRS has been criticized for poor record management in revocation cases and poor disclosure policies. (See, GAO, "IRS Information on Revoked Tax-Exempt Organizations Could Be Improved", Briefing Report, GAO/GGD-85-36.) There is no doubt that but for the disclosure provisions (described below), much financial reporting by exempt organizations would likely be confidential as tax return information, if and to the extent the entity was a taxpayer. C. Disclosure Provisions Applicable to Exempt Organizations Tax "returns" and "return information" are generally not subject to public disclosure. IRC 6103(a) provides in pertinent part: "Returns and return information shall be kept confidential, and except as authorized by this title . . . no officer or employee of the United States . . . shall disclose any return or return information obtained by him in any manner in connection with his service . . ." (26 U.S.C. 6103(a).) The term "return" means any "tax or information return, declaration of estimated tax, or claim for refund . . . which is filed with the Secretary by, on behalf of, or with respect to any person, and any amendment or supplement thereto, . . ." (IRC 6103(b)(1).) The term "return information" means, in part, "a taxpayer's identity, the nature, source or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether or not the taxpayer's return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition, or offense . . ." (26 U.S.C. 6103(b)(2)(A).) The applicability of IRC 6103 to tax-exempt organizations is severely limited by IRC 6104, which provides that a substantial amount of information relating to exempt organizations is subject to public disclosure. Unlike non-exempt taxpayers, "return information" relating to exempt organizations is neither privileged nor exempt from disclosure under section 6104 of the Internal Revenue Code and the FOIA. 1. Under IRC 6104, "Return Information" Relating to Exempt Organizations is Subject to Public Disclosure Because their operations are subsidized by taxpayers, /17/ Congress mandates that a substantial amount of information relating to exempt organizations be available for public inspection. /18/ Under IRC 6104, if an organization is recognized as exempt from tax under IRC 501(c), its exemption application, and all documents filed in support thereof and issued by the IRS with respect thereto, must be made available for public review by the IRS and by the charity itself, as must be the organization's annual information return (IRS Form 990). IRC 6104(a)(1)(A) provides in pertinent part: "If an organization described in section 501(c) or (d) is exempt from taxation under section 501(a) for any taxable year, the application filed by the organization with respect to which the Secretary made his determination that such organization was entitled to exemption under section 501(a), together with any papers submitted in support of such application, and any letter or other document issued by the Internal Revenue Service with respect to such application shall be open to public inspection at the National Office of the Internal Revenue Service." IRC 6104(b) further provides in pertinent part: " Annual information returns| shall be made available to the public at such times and places as the Secretary shall prescribe." (See also, IRC 6104(e)(1), requiring exempt organizations to allow public inspection of their exemption applications (and related papers) and annual information returns at their principal places of business.) The plain purpose of IRC 6104 is to facilitate public oversight of exempt organizations and to aid the IRS in the monitoring of their activities. /19/ As Congress reported last year, public oversight is "critical to ensuring charities' overall compliance with the tax laws, and to maintaining the continued high level of public trust in the charitable community." Report on Reforms to Improve the Tax Rules Governing Public Charities, Subcommittee on Oversight of the Committee on Ways and Means, U.S. House of Representatives, WMCP 103- 26 (1994), p. 19. The Internal Revenue Manual ("IRM") further provides: "The intent of Congress in allowing for the public inspection of the information governed by IRC 6104(a)(b) and (e) was to enable the public to scrutinize the activities of tax-exempt organizations and trusts. Congress intended that these organizations and trusts be subject to a certain degree of public accountability in view of their privileged tax status and because the public has a right to know for what purposes their contributions are being or will be used." (IRM - Administration, Disclosure of Official Information Return Handbook, Chapter 910(7).) Public review of the entirety of all documents passing between IRS and a successful applicant also ensures integrity in the IRS' system of granting exempt status and provides a safeguard that organizations will not be accorded special treatment by the Service. /20/ Greater public awareness of IRS exemption rules means that bad rulings based on faulty policy can be challenged (Coit v. Green, 404 U.S. 997 (1971)) and thereafter, the IRS may be forced by public opinion to change its policy. Bob Jones University v. United States, supra, 461 U.S. at 585, fn. 9. The unsavory history of the government's favorable IRC 501(c)(3) treatment of segregated private schools, and then its complete reversal, indicates the benefits of full disclosure of IRS exemption rulings. 2. IRC 6104 Provides an Exception to IRC 6103's Non-Disclosure Provisions IRC 6104 provides an exception to the non-disclosure provisions of IRC 6103 and severely limits what constitutes "return information" with respect to tax-exempt organizations. /21/ Because of IRC 6104, the following "return information" (as defined by IRC 6103(b)(2)(A)) relating to an exempt organization is subject to public disclosure and is NOT privileged: 1. The "identity" of the taxpayer (including its name, address and employer identification number); 2. The "nature, source and amount of its| income" (with the exception of unrelated business taxable income); 3. The taxpayer's "assets, liabilities, and net worth", and, 4. The taxpayer's expenditures (including compensation paid to its highest paid officers, employees and independent contractors). Generally, under IRC 6104, the only "return information" relating to exempt organizations not subject to public disclosure is information with respect to whether the organization is liable for any tax, penalty, interest or fine or whether it is, or will be, under examination by the Service. (See, Breuhaus v. IRS, 609 F. 2d 80 (2d Cir. 1979) (IRS correspondence relating to organization's liability for IRC 507 termination tax not subject to public disclosure); Belisle v. Commissioner, 462 F. Supp. 460 (W.D. Okla. 1978) (IRS' investigative files relating to organization's liability for tax not subject to public disclosure).) D. The IRS' Use of Closing Agreements With Exempt Organizations IRC 7121(a) authorizes the IRS to enter into a written closing agreement with any person "relating to the liability of such person . . . in respect of any internal revenue tax for any taxable period." Closing agreements are final and conclusive agreements between the IRS and taxpayer and will not be set aside except upon a showing of fraud, malfeasance or misrepresentation of a material fact. (26 U.S.C. 7121(b).) Closing agreements give the IRS flexibility to resolve outstanding issues with taxpayers, including exempt organizations and applicants for exemption. The IRS is increasing its use of closing agreements with exempt organizations and is using the agreements to resolve a wide variety of issues. (See, "Closing Agreements", 1992 Exempt Organizations Continuing Professional Education Technical Instruction Program, Internal Revenue Service, p. 263.) During discovery, the IRS disclosed that it has used closing agreements to resolve outstanding issues with respect to one or more organization's applications for recognition of exemption and that it predicated its recognition of exempt status on at least one applicant's agreement to be bound by the terms of a closing agreement. (MF Nos. 15, 16.) These agreements, whose terms were not disclosed by IRS, are the ones at issue herein. /22/ 1. The Church of Scientology Closing Agreement One closing agreement in which the IRS resolved issues regarding a pending exemption application is the Service's agreement with the Church of Scientology, International and its affiliates. This agreement, executed in 1993, ended a 40 year dispute between the Church and the IRS. /23/ Although the IRS has refused to release specific details about the Scientology closing agreement, it has admitted that the agreement was executed and that it resolved issues surrounding the exempt status of the Church and its affiliates. (MF No. 21.) At the time the closing agreement was executed, the Church and its affiliates had filed numerous exemption applications, which were then pending before the IRS National Office. Due to the controversial nature of the Church, the Scientology exemption applications (which plaintiff believes were originally filed beginning in 1983 and continuing to 1991) were not processed pursuant to the IRS' standard procedures. (MF No. 22.) In an extraordinary move, a special "negotiations committee" was formed by the IRS to negotiate a resolution to the outstanding issues involving the Scientologists, including their pending exemption applications. /24/ (MF Nos. 24, 25.) Plaintiff believes this special committee was formed at the direction of then IRS Commissioner Fred Goldberg following a meeting he had with representatives of the Scientologists. /25/ This special committee ultimately negotiated the IRS' closing agreement with the Scientologists and the committee made the determination that the Church and its affiliates would be recognized as exempt under IRC 501(c)(3). (MF No. 26.) The committee's determination that the Scientologists qualified for exemption was made notwithstanding the fact that the IRS' prior revocation of the Church's exempt status had been upheld by the Ninth Circuit in Church of Scientology v. Commissioner, 823 F. 2d 1310, 60 AFTR 2d 87-5386 (9th Cir. 1987). After the closing agreement was executed, the Scientologists apparently filed new exemption applications with the IRS National Office, which superseded their prior applications. Once the new applications were received by the National Office, the "negotiations committee" issued "special instructions" to the IRS' Exempt Organizations Division to issue favorable ruling letters to the Scientologists. (MF Nos. 27, 28.) These letters were issued on October 1, 1993. (MF No. 29.) /26/ The IRS' decision to recognize the Scientologists as exempt was apparently conditioned on the parties' execution of a closing agreement. During discovery, the IRS refused to confirm or deny whether the execution of the closing agreement was a condition precedent to the issuance of the favorable ruling letters or whether the agreement provided the Scientologists would be recognized as exempt, alleging that such information constitutes privileged "return information" under IRC 6103. /27/ Although it is undisputed that the closing agreement contains provisions directly relating to the IRS' determination to recognize the Scientologists as exempt for future years (MF No. 21), the Service has refused to make the agreement available for public inspection as part of the Scientologists' administrative record. The IRS contends that this closing agreement is not subject to disclosure under IRC 6104 since the agreement was not "issued" by it. /28/ V. STANDARD FOR SUMMARY JUDGMENT Federal Rule of Civil Procedure ("FRCP") 56(c) provides that summary judgment shall be entered in favor of a movant if "the pleadings, . . ., together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." See also, Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). As discussed below, and in the papers and affidavits filed in support of this motion, there are no genuine issues of material fact involved with respect to plaintiff's FOIA claim and it is entitled to judgment thereon as a matter of law. VI. LEGAL ARGUMENT A. Disclosure Under FOIA Under the U.S. Freedom of Information Act (5 U.S.C. section 552), the public may request and obtain copies of records maintained by Federal government agencies, including the IRS. In enacting FOIA, Congress sought to "open agency action to the light of public scrutiny." Department of Air Force v. Rose, 425 U.S. 352, 372, 96 S. Ct. 1592, 48 L. Ed. 2d 11 (1976). FOIA requires agencies to adhere to a "general policy of full agency disclosure", Id, at 360 (citations omitted), which helps "ensure an informed citizenry, vital to the functioning of a democratic society." NLRB v. Robbins Tire & Rubber Co., 437 U.S. 214, 242, 98 S. Ct. 2311, 57 L. Ed. 2d 467 (1978). In adopting FOIA, Congress intended to grant the public full access to agency records and close the "loopholes in the Administrative Procedures Act| which allow ed| agencies to deny legitimate information to the public." GTE Sylvania, Inc. v. Consumers Union, 445 U.S. 375, 385, 100 S. Ct. 1194, 63 L. Ed. 2d 467 (1980). Under FOIA, virtually all records possessed by a federal agency are subject to public disclosure unless they fall within one of nine enumerated exemptions. /29/ Records not subject to public disclosure include documents that are: (1) authorized under Executive Order to be kept secret in the interest of national defense or foreign policy; (2) related solely to an agency's internal personnel rules and practices; (3) specifically exempted from disclosure by statute; (4) trade secrets or commercial or financial information obtained from a person; (5) inter-agency or intra-agency memorandums or letters which would not be available by law to a party other than an agency in litigation with the agency; (6) personnel and medical files; (7) records or information compiled for law enforcement purposes; (8) related to examination, operating or condition reports prepared by an agency responsible for the regulation or supervision of financial institutions; and, (9) geological or geophysical information and data concerning wells. (5 U.S.C. section 552(b).) In October, 1993, to spur agency disclosure under FOIA, President Clinton and Attorney General Reno adopted a new FOIA policy and called upon all federal agencies to follow "the spirit" as well as the letter of FOIA. The President re-articulated that the primary objective of FOIA was to achieve "maximum responsible disclosure of government information". In line with the President's new policy, the Attorney General strongly encouraged all federal agencies to make discretionary disclosures of exempt information "whenever possible". /30/ FOIA vests jurisdiction to resolve disclosure disputes in the District Courts. 5 U.S.C. section 552(a)(4)(B). /31/ Federal jurisdiction is dependent upon a showing that an agency has (1) "improperly", (2) "withheld", (3) "agency records". Kissinger v. Reporters Committee for Freedom of Press, 445 U.S. 136, 150, 100 S. Ct. 960, 63 L. Ed. 2d 267 (1980). Jurisdiction is also predicated upon a party exhausting its administrative remedies under FOIA and the corresponding regulations adopted by the individual agencies. B. The IRS has Improperly Withheld Agency Records From Plaintiff 1. The Requested Documents Are "Agency Records" Two requirements must be met in order for requested materials to qualify as "agency records". First, an agency must "either obtain or create" the requested materials. Second, the agency must be in control of the requested materials at the time the FOIA request is made. Department of Justice v. Tax Analysts, 492 U.S. 136, 109 S. Ct. 2841, 106 L. Ed. 2d 112 (1989) (citations omitted). In this action, it is undisputed that the requested closing agreements are "agency records" for purposes of FOIA. The closing agreements were either obtained and/or created by the IRS and were in the control of the Service at the time plaintiff's FOIA request was made. (MF No. 30.) 2. The Requested Documents Were "Improperly" "Withheld" From Plaintiff When an agency refuses to comply with a disclosure request, documents are "withheld" for purposes of FOIA. Tax Analysts, supra, 492 U.S. at 149. Documents are "improperly" withheld, if the records are not produced to a requesting party and they do not fall within one of FOIA's nine enumerated exemptions. Id. at 151. As discussed below, the IRS' decision to withhold the requested closing agreements was improper since, contrary to its assertion, the documents are not statutorily exempt from disclosure. C. The Requested Closing Agreements are not Exempt From Disclosure As previously stated, IRC 6104(a)(1)(A) provides that any document "issued" by the IRS with respect to an approved exemption application is subject to public disclosure. Although the IRS does not dispute the fact that the requested closing agreements relate to approved exemption applications, it asserts that closing agreements are not "issued" by it and, therefore, the agreements sought by plaintiff are outside the scope of IRC 6104. The IRS further asserts that since the agreements are not subject to disclosure under IRC 6104 (since they are not "issued" by it), their public release is statutorily barred by IRC 6103. (See, Joint Report to the Court, Part III(D).) /32/ As such, the critical issue for determination by the Court, and which will determine whether the requested closing agreements are subject to disclosure, is whether the agreements are "issued" by the Service for purposes of IRC 6104. As discussed below, under the IRS' own regulations and internal operating manual, it is clear that the requested closing agreements are "issued" by it and, thus, subject to public disclosure under IRC 6104. 1. Closing Agreements are Issued by the IRS Reg. section 301.6104(a)(1)(b) provides that, for purposes of IRC 6104, the term "issued" is to be interpreted in accordance with the rules set forth in Reg. section 301.6110-2(h). (IRC 6110 relates to the public disclosure of written determinations and technical advice memoranda). Reg. section 301.6110-2(h) provides in pertinent part: "'Issuance' of a written determination occurs, . . . , upon the mailing of the ruling or determination letter to the person whom it pertains. Issuance of a technical advice memorandum occurs upon the adoption of the technical advice memorandum by the district director." As such, it is clear that for purposes of IRC 6104, a document is "issued" when it is either mailed to the taxpayer to which it pertains or is adopted by the Service. a. Closing Agreements are Mailed to the Taxpayer by the IRS Under the IRS' internal procedures, an exempt organization which enters into a closing agreement with the IRS will prepare the agreement, sign it and send it to the IRS for execution by the Assistant Commissioner (EP/EO). Once a closing agreement is signed by the Assistant Commissioner (EP/EO) (in triplicate), a duplicate original is mailed by the Service to the taxpayer which is party to the agreement. The IRS' Exempt Organization Handbook provides in pertinent part: "After signing, the closing agreement is returned with the Special File to the Division office. The letter transmitting the duplicate closing agreement to the taxpayer . . . are signed, dated and mailed." Internal Revenue Manual ("IRM") - Administration, Part VIII, EP/EO, 7764.3(3). (See also, Exhibit 7760-4, copy of transmittal letter to taxpayer. (This letter is used to send a fully executed, original closing agreement to the exempt organization which is party to the agreement.)) /33/ The IRS' Closing Agreement Handbook further provides: "A duplicate original of the closing agreement will be mailed to the taxpayer (or to the representative) by appropriate transmittal letter. (See, Exhibit 6 "Letter Sending Taxpayer Copy of Closing Agreement - Letter 1595(P)"|.)" IRM, Closing Agreement Handbook, Part VIII, Appeals 613.4(3). (See also, IRM - Audit (10)46(4).) Since closing agreements relating to an organization's exemption application are mailed to the taxpayer, it is clear that pursuant to the rules set forth in Reg. section 301.6110-2(h) they are "issued" by the IRS and, thus, subject to public disclosure under IRC 6104. b. Closing Agreements are "Adopted" by the IRS IRS internal procedures provide that closing agreements with exempt organizations may be executed by the Commissioner or Assistant Commissioner (EP/EO). /34/ The agreement is first signed by the taxpayer and then the IRS signatory. The Internal Revenue Manual provides: "The taxpayer's signature ordinarily constitutes an offer to agree (or is a constituent part thereof) and the signature for the Commissioner an acceptance and approval of the offer." IRM - Part IV, Audit, (10)31. Once executed by the Commissioner or Assistant Commissioner, a closing agreement and its terms are "adopted" by the IRS in the same manner a technical advice memorandum is. A closing agreement is comparable in purpose and effect to a technical advice memorandum, with the added consideration of finality. Like a closing agreement, a technical advice memorandum is issued at the request of a taxpayer and incorporates the Service's position with respect to a particular set of facts. Except for finality, the only difference between the two documents is in form. Since closing agreements are "adopted" by the Service in the same manner as a technical advice memorandum is, under the rules set out in Reg. section 301.6110-2(h), they are "issued" by the IRS and, thus, subject to public disclosure. /35/ c. The Requested Closing Agreements are not Exempt From Disclosure Under IRC 6103 Since the requested closing agreements are "issued" by the IRS, they fall within the scope of documents subject to disclosure under IRC 6104 and are not exempt from public inspection under IRC 6103. As such, the Service's contention that the documents are statutorily exempt from disclosure and are privileged "return information" has no merit and the Court should enter an order directing the IRS to produce the requested closing agreements to plaintiff for its inspection and review. /36/ D. Allowing the IRS to Withhold the Requested Closing Agreements Would Frustrate the Interests of Public Policy and Allow the IRS to Subvert its own Disclosure Rules A ruling that the IRS is not required to produce the requested closing agreements for public inspection would serve to frustrate the intent of Congress as it expresses public policy. IRC 6104 is designed to allow public inspection of all documents passing between the applicant and the agency relating to the IRS' recognition of an organization as exempt from tax. Public oversight of exempt organizations is now plainly hampered by IRS inertia or ineptness. /37/ It could be even more severely hampered if the Service were allowed to withhold from public inspection closing agreements which contain information and terms regarding an organization's exempt status negotiated and executed as a partial or complete substitute for the exemption application process. See generally, Reg. section 1.501(a)-1(a)(2) (need for organization claiming exemption to file application). If closing agreements relating to exemption applications were held to be exempt from disclosure, the IRS would be able to shield from public scrutiny agreements with controversial applicants and/or unorthodox exemption terms. The terms of an organization's exemption, which are normally subject to public disclosure under IRC 6104, would then be confidential and inaccessible to the public; closing agreements would then become a private substitute for an otherwise public document. The fact that the IRS might use closing agreements to protect otherwise public information from disclosure was a specific concern of Congress when it adopted IRC 6110 in 1975. In a report urging the adoption of IRC 6110, the House Ways and Means Committee stated that although closing agreements were not generally to be subject to public disclosure under that statute as "written determinations", the Service was not to use such agreements to withhold otherwise public information. The Committee report stated: "Your committee intends, however, that the closing agreement exception is not to be used as a means of avoiding public disclosure of determinations which, under present practice, would be issued in a form which would be open to public inspection under the bill." (H. Rep. No. 94-658, 94th Cong., 1st. Sess. (1975), p. 316.) Similarly, the Court should not allow the IRS to avoid the disclosure of IRC 6104 information by using an allegedly confidential closing agreement during the exemption application process. If the entirety of the document flow in the application process (including closing agreements) is not subject to public inspection, the Service, through the use of closing agreements, will be able to mask controversial decisions, and thereby frustrate the Congressional expectation of accountability. Confidentiality of such documents would also serve to protect the agency's actions from the light of public scrutiny, which enhances the likelihood of abuse of process. /38/ E. The IRS' Failure to Produce The Withheld Documents for Public Inspection Contravenes the Bespoken Policy of the National Office's Exempt Organizations Division It is the policy of the IRS Exempt Organizations Technical Division (EOTD) that any closing agreement the Service enters into with an exempt organization regarding a pending exemption application is subject to public disclosure under IRC 6104. During his deposition, Marcus Owens, the Director of the IRS National Office EOTD stated: Q By Mr. Stern|: In those situations in which the IRS has used a closing agreement in the exemption application process, isn't the agreement placed in the organization's non-public| administrative file? A By Mr. Owens|: With regard to those cases with which I am familiar that involved applications for exemption and closing agreements, I believe that is the case, that they were made -- the closing agreements were included in the non-public| administrative file, AND INDEED, THE PUBLIC| ADMINISTRATIVE RECORD IN THE CASES. Q: So, copies of the closing agreements were contained in the administrative record subject to public disclosure|? A: That is what I understand to be the case, and that is, as I recall, a decision that I made in the cases that I asked it to be done. Q: Would that be Division policy? A: THAT WOULD MAKE IT DIVISION POLICY, YES. (Deposition of Marcus Owens, pp. 120 - 121, ll. 24 - 17.) (Emphasis added.) Despite Mr. Owens' statement that it is the EOTD's policy that closing agreements entered into with exempt organizations regarding pending exemption applications are subject to public disclosure, the IRS has refused to produce copies of the requested closing agreements to plaintiff. The Service's failure to produce the requested agreements is in contravention of the EOTD's policy and apparently reflects a policy dispute between the EOTD and the IRS' Office of Disclosure Litigation. In determining whether the requested closing agreements are subject to public disclosure, the Court should give deference to the policy of the EOTD which has primary responsibility for exempt organization matters in the IRS and, as such, is better suited to determine which exempt organization documents are subject to disclosure under IRC 6104. /39/ Public disclosure of closing agreements with exempt organizations serves to alert all exempt organizations of transactions being scrutinized by the IRS and specific activities the IRS considers to be in violation of IRC 501(c)(3). Notwithstanding the public benefit which results from the disclosure of exempt organization closing agreements, the IRS has not adopted any standards as to when it will require an organization to consent to disclosure of a closing agreement or the terms thereof. (MF No. 20.) The result is an inconsistent disclosure policy that defeats the Congressionally mandated rule that organizations enjoying tax exemption should operate in a fish bowl and that the grounds for granting tax exemption should be publicly disclosed. VII. CONCLUSION Based upon the foregoing, plaintiff TAX ANALYSTS respectfully requests that the Court enter an order directing defendant INTERNAL REVENUE SERVICE to produce for plaintiff's inspection the requested closing agreements. The IRS has improperly withheld these documents from plaintiff since they are not exempt from disclosure under the Internal Revenue Code or FOIA. Plaintiff further requests that the Court enter an order awarding it its reasonable attorneys' fees and costs incurred herein pursuant to 5 U.S.C. section 552(a)(4)(E). Respectfully submitted, June 30, 1995 William J. Lehrfeld D.C. Bar No. 51292 Bruce L. Stern D.C. Bar No. 436231 WILLIAM J. LEHRFELD, P.C. 1250 H Street, N.W., Suite 740 Washington, D.C. 20005 Telephone: (202) 659-4772 Facsimile: (202) 659-8876 William A. Dobrovir D.C. Bar No. 030148 William A. Dobrovir, P.C. 65 Culpeper Street Warrenton, Virginia 22186 Telephone: (703) 341-2183 Facsimile: (703) 341-4329 Attorneys for Plaintiff TAX ANALYSTS FOOTNOTES /1/ A "closing agreement" is a final agreement between the IRS and a taxpayer on a specific issue or liability. Closing agreements are used by the Service to resolve a variety of issues involving exempt organizations. For details, see, Rev. Proc. 68-16, C.B. 1968- 1, 770. /2/ In Budget of the United States, FY 1996, Analytical Perspectives, Table 5-6 (pp. 64-65), it is reported that income tax exempt organizations, and income tax charitable deductions, total $24.6 billion in tax expenditures (revenue losses). /3/ Report on Reforms to Improve the Tax Rules Governing Public Charities, Report of Subcommittee on Oversight of Committee on Ways and Means, WMCP 103-26, (1994), p. 4. /4/ In 1975, 695,000 organizations were recognized by the IRS as exempt from tax. That year, the Service conducted audits of 22,168 exempt organizations or 3 percent of the total. (See, IRS Commissioner's 1975 Annual Report, pp. 41, 140.) In 1985, 886,658 organizations were recognized as exempt from tax and the Service conducted 19,609 audits of these entities. (See, IRS Commissioner's 1985 Annual Report, pp. 65, 70.) Although the number of exempt organizations increased by nearly 200,000 organizations (or 25 percent) during this 10 year period, IRS audits declined by over 10 percent. In 1985, just over 2 percent of all exempt organizations were audited. In recent testimony before Congress, the IRS Commissioner, Margaret M. Richardson, testified that in the last four years alone, audits of exempt organizations have dropped 30 percent. The Commissioner reported that in 1992 the IRS only audited 5,132 exempt organizations out of the 1,085,206 entities recognized by the Service as exempt, or less than one-half of one percent of all exempt organizations. See, Federal Tax Laws Applicable to the Activities of Tax-Exempt Charitable Organizations, Hearing before the Subcommittee on Oversight of the Committee on Ways and Means, H.Rep., 103d Cong., 1st Sess., Serial 103-39 (June 15, 1993) (Testimony of Margaret M. Richardson, Commissioner of Internal Revenue). /5/ See also, Public Inspection of IRS Private Letter Rulings, Hearing Before the Subcommittee on Administration of the Internal Revenue Code of the Committee on Finance, U.S. Senate, 94th Cong., 1st Sess., pp. 70-96 (testimony of Thomas F. Field, Executive Director, Tax Analysts and Advocates). /6/ Tax Lawyer, Vol. 22, No. 4, Summer, 1969 at pp. 1023-1025 (publication of the Tax Section of American Bar Association). /7/ Tax Exempt Organizations, Preliminary Report to the Joint Committee on Internal Revenue Taxation, Prepared by Technical Staffs of the Joint Committee, the Treasury and the Bureau of Internal Revenue pursuant to section 5011 of the Internal Revenue Code (1939), (1945), p. 3. /8/ Revenue Act of 1950, S. Rep. 2375, 81st Cong., 1st Sess., (1950), reprinted at, 1950-2 C.B. 483, at 502 (discussing enactment of IRC (1939) 153, now IRC (1986) 6104(b)). /9/ "Under present law, an organization is exempt if it meets the requirements of the Code, whether or not it has obtained an 'exemption certificate' from the Internal Revenue Service". Tax Reform Act of 1969, S.Rep. 91-552, 91st Cong., 1st Sess., (1969) (on present law before enactment of IRC 508(a)). /10/ Rev. Proc. 90-27, 1990-1 C.B. 514; Rogovin, "The 4 R's: Regulations, Rulings, Reliance and Retroactivity," 43 Taxes 756 (1965); Caplin, "Taxpayer Rulings Policy of the Internal Revenue Service: A Statement of Principles," 20 N.Y.U. Inst. on Fed. Tax 1 (1962). /11/ Ruling revocations unsustained by judicial review include: Presbyterian and Reformed Publishing Co. v. Commissioner, 743 F. 2d 148 (3rd Cir. 1984); and, Brian Ruud International v. United States, 733 F. Supp. 396 (D.D.C. 1990). /12/ Rev. Proc. 80-28, 1980-1 C.B. 680. /13/ Because of a looming truck strike with potentially disastrous consequences, mobster connections, abuse of IRS process and other catchy reasons, the cause for revocation and the process of re-qualification for tax exempt status of the Central States Teamsters Pension Fund (after IRS revocation), became the subject of detailed Congressional hearings. (See, Teamsters' Central States Pension Fund and General ERISA Enforcement, Hearings Before Subcommittee on Oversight of the Committee on Ways and Means, H.Rep., 95 Cong., First Sess. (2 vols.), Serial 95-35 and 36, Appendix, at pp. 782 forward.) Negotiated conditions which led to the reissuance of a new exemption ruling for future years while old years in controversy were resolved are detailed (pp. 856-860) and best exemplify the process which is implicated in this lawsuit. /14/ If an exemption application is not ruled upon favorably, no documents are subject to public disclosure under IRC 6104. (See, Reg. section 301.6104(a)-1(c).) /15/ To illustrate the type and extent of information required by IRS Form 990, plaintiff TAX ANALYSTS' 1994 IRS Form 990 is attached as Exhibit "A" to the Declaration of Thomas F. Field filed in support hereof. /16/ See, e.g., U.S. General Accounting Office, "Tax Policy - Competition Between Taxable Businesses and Tax-Exempt Organizations", Briefing Report to the Joint Committee on Taxation, U.S. Congress, (1987) GAO/GGD-87-40BR; U.S. General Accounting Office, "Tax Administration - Information on Lobbying and Political Activities of Tax-Exempt Organizations", Fact Sheet for the Chairman, Subcommittee on Oversight, Committee on Ways and Means, House of Representatives, (1987) GAO/GGD-87-32FS; U.S. General Accounting Office, "Tax-Exempt Organizations - Information on Selected Types of Organizations", Briefing Report to Congressional Requestors, (1995), GAO/GGD-95-84BR. /17/ See, footnote 2, supra. In Bob Jones University v. United States, 461 U.S. 574 (1983), the majority recognized that federal charitable exemption and deduction incentives are an indirect form of public subsidy. In McGlotten v. Connally, 338 F. Supp. 448 (D.D.C. 1972), the Court recognized that a donee's favored status under IRC 170(c) allowing deductibility (a "mirror" of 501(c)(3)), was a form of "federal financial assistance." /18/ When, in 1969, it mandated exemption applications for new charities, and expanded public reporting by all exempt organizations, Congress opined: " . . . the House and the Finance Committee concluded that the past two decades indicates that more information is needed, on a more current basis for more organizations and that this information should be more readily available to the public, including state officials." (See, Tax Reform Act of 1969, S. Rep. 91-552, 91st Cong., 1st Sess., (1969), p. 52 (on changes enlarging public reporting and disclosure laws affecting exempt organizations).) /19/ See, Revenue Act of 1950, S. Rpt. No. 2375, 81st Cong. 2d Sess. (1950), reprinted in, 1950 U.S. Code & Cong. 3053, at 3087 (discussing adoption of former IRC 153 requiring filing and disclosure of exempt organization annual information returns). See also, Technical Amendments Act of 1958, S. Rpt. No. 1983, 85th Cong. 2d Sess. (1958), reprinted in, 1958 U.S. Code & Cong. 4791, at 4884 (discussing adoption of IRC 6104(a)(1)(A) requiring disclosure of exemption applications and supporting materials) ("Your committee agrees with the House that making these applications available to the public will provide substantial additional aid to the Internal Revenue Service in determining whether organizations are actually operating in the manner in which they have stated in their applications for exemption.").) /20/ The failure of the IRS in the administration of exempt organizations is detailed to Congress by the GAO in: IRS Oversight of Tax Exempt Foundations, Hearing before a Subcommittee of the Committee on Government Operations, 98th Cong., 1st Sess., (1983), pp 2-26. /21/ See, IRM, Exempt Organizations Handbook, Chapter (49)23(2) ("IRC 6104 excerpts much Exempt Organization tax information from the general confidentiality rule of IRC 6103.") /22/ The use of closing agreements in the exemption application process is extraordinary and involves relatively few of the applications annually reviewed by the IRS. /23/ In 1979 and 1980, 11 Scientologists were convicted of conspiracy to obstruct justice. The Scientologists' convictions resulted from their bugging and burglarizing IRS offices. These criminal acts were done in an attempt to thwart the Service's investigation into the then tax-exempt Church and its then tax-exempt affiliates. (For a complete background on the Church of Scientology, its criminal activities and the IRS' revocation of its exempt status, see, Church of Scientology v. Commissioner, 83 T.C. 381 (1984).) /24/ So far as plaintiff can determine, the IRS won every IRC 501(c)(3) controversy with the Church and its affiliates. See, e.g., Founding Church of Scientology v. United States, 412 F.2d 1197 (Ct. Cl. 1969) through and including Church of Spiritual Technology v. United States, 70 AFTR 2d 92-5233 (Cl. Ct. 1992), and related cases cited therein. /25/ During discovery, plaintiff deposed Howard Schoenfeld, Special Assistant to the Assistant Commissioner (EP/EO). During this deposition, plaintiff asked Mr. Schoenfeld (who was a member of the "negotiations committee") whether the committee was established at Commissioner Goldberg's direction. Pursuant to the instructions of counsel, Mr. Schoenfeld refused to answer this question on the basis that the response constituted privileged "return information" under IRC 6103. (See, Schoenfeld Deposition, p. 66, ll. 6 - 15.) /26/ The IRS has refused to disclose the date of the Scientologists' closing agreement, so plaintiff is unable to describe with certainty the sequence of events surrounding the Service's determination and the dates and dispositions of prior applications. /27/ During the deposition of James McGovern, the Assistant Commissioner (EP/EO) and a member of the IRS' special "negotiations committee", plaintiff attempted, without success, to determine whether the closing agreement provided that the Scientologists would be recognized as exempt: Q: By Mr. Stern|: Did the agreement provide that the IRS would recognize the Scientology applicants, or any of them, as exempt under Section 501(c)(3)? A: By Mr. Jackel|: Objection.| There's no waiver of sic| from anyone on that particular topic. It's 6103 information. Q: Was entry into the closing agreement a condition precedent to the issuance of favorable ruling letters to any of the Scientology applicants? A: By Mr. Jackel|: Objection.| Uh, there's no waiver from the taxpayer on that allowing us to disclose information that would be responsive to that question. It's 6103. (Deposition of James McGovern, p. 72, ll. 12 - 23.) See also, Schoenfeld Deposition, pp. 104 - 105, ll. 19 - 9 (deponent instructed not to answer whether favorable ruling letters issued to Scientologists were conditioned on agreement to enter into, or be bound by the terms of, a closing agreement). /28/ As discussed below, the Service's position with respect to the closing agreements at issue herein is that although the agreements may relate to or arise out of the exemption application process, they are not "issued" by the IRS, and are therefore not subject to disclosure under IRC 6104. (See, Joint Report to the Court, part II, B, filed December 15, 1994.) /29/ See, NLRB v. Sears, Roebuck & Co., 421 U.S. 132, 136 (1975). /30/ See, President Clinton's FOIA Memorandum, reprinted in FOIA Update, Summer/Fall 1993, at 3. See also, Attorney General's Memorandum for Heads of Departments and Agencies regarding the Freedom of Information Act (October 4, 1993), reprinted in FOIA Update, Summer/Fall 1993, at 4-5. /31/ This provision states: "On complaint, the district court of the United States in which the complainant resides, or has his principal place of business, or in which the agency records are situated, or in the District of Columbia, has jurisdiction to enjoin the agency from withholding agency records improperly withheld from the complainant. In such a case the court shall determine de novo, and may examine the contents of such agency records in camera to determine whether such records or any part thereof shall be withheld under any of the exemptions set forth in subsection (b) of this section, and the burden is on the agency to sustain its action." /32/ In the parties' Joint Report, the IRS described its position as follows: "These agreements are not required to be disclosed under 26 U.S.C. section 6104 because, unlike rulings on exempt status and other pronouncements, they are not "issued" by the Internal Revenue Service." /33/ This form transmittal letter states: "Dear Taxpayer|: The Assistant Commissioner (EP/EO) of the Internal Revenue Service approved your closing agreement on the date shown above. I have enclosed the signed duplicate of the agreement for your records. Thank you for your cooperation. Very truly yours, IRS Signatory|." /34/ See, IRS Delegation Order No. 97, as revised; IRS Exempt Organization Handbook, 7761.2(2). /35/ A judicial determination that the IRS "adopts" closing agreements is essential to the IRS' continued compliance with IRC 6104. If the Court only rules that closing agreements are "issued" under IRC 6104 when mailed, the IRS will have the opportunity to avoid public disclosure of future closing agreements by amending its internal procedures to provide that such agreements will no longer be mailed to taxpayers, but will instead be delivered by another means. /36/ Plaintiff agrees that absent the exemption application process, closing agreements, including the IRS' agreement with the Church of Scientology, may contain privileged "return information" (i.e., provisions relating to matters other than the organizations' exemption from tax, including the organizations' income tax liability). The Court may conduct an in camera review of the requested closing agreements subject to this suit and allow the IRS to redact any privileged information contained therein which was not submitted during the course of a revokee's application process. See, Christian Echoes National Ministry v. United States, 404 F. 2d 1066, 23 AFTR 2d 19-498 (10th Cir. 1969). /37/ See, e.g., U.S. Government Accounting Office, "Public Inspection Reporting by Tax-Exempt Private Foundations Needs More Attention By IRS", Report to the Chairman, Subcommittee on Commerce, Consumer, and Monetary Affairs, Committee on Government Operations, House of Representatives, GAO/GGD-83-58 (1983). /38/ In Center on Corporate Responsibility v.Schultz, supra, despite discovery against IRS which showed "White House pressure" the IRS refused to accede to demands by a federal judge for further disclosure of documents containing implications of political influence. 368 F. Supp. at 872 - 873. Using FRCP 37(b)(2)(A), Judge Richey nullified all IRS actions adverse to the exemption applicant. He then held that despite all the "political intervention", the applicant qualified for IRC 501(c)(3) status. (Id.) /39/ IRS recently required several organizations whose exemption it controverted to consent to the disclosure of privileged "return information" contained in closing agreements. For example, in 1991, the IRS required Jimmy Swaggart Ministries to disclose that it had agreed to pay in excess of $171,000 in back taxes and interest as a result of its failure to adhere to IRC 501(c)(3)'s proscription against involvement in political activities. (MF No. 17.) In 1993, the Old Time Gospel Hour was required to disclose that its exemption under IRC 501(c)(3) had been revoked for 1986 and 1987 and, as a condition of the reinstatement of its exempt status, it paid the IRS $50,000 in taxes. (MF No. 18.) In 1994, Hermann Hospital, a tax- exempt hospital in Houston, Texas, was required to distribute to the national tax and local Houston media, a closing agreement under which it agreed to pay the IRS $993,500 in taxes. (MF No. 19.) END OF FOOTNOTES

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