Schmalbeck on IRC 7428 Declaratory Judgements

Schmalbeck is out with an excellent report about tax exemption in Tax Notes this week.  He explores the boundaries of tax exemption by use of a comprehensive catalog of all IRC 7428 decisions to date.  Appendix A, nearly 20 pages, collects the cases from 1977 (the year 7428 became effective) to the present, including Memorial Hermann about which we blogged just a few days ago. There are 195 cases and Schmalbeck offers interesting demographics along the way.  For example, only about 20% of the cases overturned an adverse IRS ruling, but litigants enjoyed a higher success rate (45%) in the Court of Claims than in the Tax Court or the federal district court.  Appendix B is 35 pages long, arranges the cases by alphabetical order, and summarizes the controversy and the court's holding in each controversy. 

Private inurement, private benefit and church status compose most of the issues.  The Report doesn't just curate, it offers observations  to indicate trends of one sort or another.  For example, Schmalbeck tells us why Americans United for Separation of Church and State, about which we blogged today coincidentally, was the real "poster child" proving the necessity of IRC 7428.  It wasn't Bob Jones, which was able to get judicial review through an employment tax refund claim.  IRS denied (c)(3) status to Americans United but granted (c)(4) status.  That Americans United would never owe taxes complicated its ability to obtain judicial review.  Here is part of the Introduction:

The boundary of greatest interest in the field of federal nonprofit law is the one that defines a charitable organization for purposes of section 501(c)(3). It has several dimensions: Is the organization’s purpose within the statutory definition of charitable? Are its operations consistent with public policy? Are the operations of the organization free (enough) of private inurement or benefit, lobbying, campaign participation, and commerciality?

Unfortunately, as anyone who has taught or practiced the law in this area knows, charity is not a crisp legal concept. Each of its dimensions is more like a doughnut than a bicycle tire, offering robust opportunities for dispute. Indeed, were it not the case that the majority of fledgling, would-be charitable organizations have only limited resources to see their disputes through to their conclusions, one imagines that the courts would be flooded with cases that seek to elaborate on the precise location of the boundaries along each dimension of “charitable.” Even so, there are many litigated disputes. This report is constructed primarily around the disputes about exempt status that have been decided under section 7428, which offers organizations an opportunity to seek a declaratory judgment to the effect that, despite IRS views to the contrary, they merit section 501(c)(3) status. Because cases brought under section 7428 are easily searchable, a reasonably comprehensive collection of these cases is available for systematic study. Other cases, as well as rulings, examples in the Treasury regulations, and other materials are also available and are referred to below when useful.

Following a brief summary of the history and operation of section 7428, this report looks at what the cases decided under that section reveal about the locations of the several boundaries surrounding the concepts that collectively define the nature of charity for federal tax purposes. It also offers some observations about the administrative process implications of cases that do not produce litigated disputes.

Nice work.  I would especially recommend downloading the appendices.  

darryll k. jones