Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-09-05401/USCOURTS-caDC-09-05401-0/pdf.json

Parties Involved:
Internal Revenue Service
Appellee
Polm Family Foundation, Inc.
Appellant
United States of America
Appellee

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 18, 2011 Decided May 6, 2011

No. 09-5401

POLM FAMILY FOUNDATION, INC.,

APPELLANT

v.

UNITED STATES OF AMERICA AND INTERNAL 

REVENUE SERVICE,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 1:08-cv-00514)

Emanuel J. Kallina II argued the cause for appellant. With

him on the briefs was Elisabeth A. Koenig.

John Schumann, Attorney, U.S. Department of Justice,

argued the cause for appellees. With him on the brief were

Ronald C. Machen Jr., U.S. Attorney, and Jonathan S. Cohen,

Attorney.

Before: GINSBURG and GRIFFITH, Circuit Judges, and

RANDOLPH, Senior Circuit Judge.

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Opinion for the Court filed by Senior Circuit Judge

RANDOLPH.

RANDOLPH, Senior Circuit Judge: This is an appeal from

the judgment of the district court declaring that the Polm Family

Foundation did not qualify as a public charity under § 509(a)(3)

of the Internal Revenue Code.

The Foundation is a Maryland non-stock corporation. 

According to its current articles of incorporation, the Foundation

exists to “conduct[] and support[] activities for the benefit of, to

perform the functions of, and/or to carry out the purposes of”

other organizations “which support, promote and/or perform

public health and/or Christian objectives, including but not

limited to Christian evangelism, edification and stewardship.” 

To carry out this mission, the Foundation’s articles of incorporation authorize it to accept gifts of property and “to exercise . . .

all powers conferred upon non-stock corporations by the

Maryland General Corporation Law.”

In 2007, the Foundation applied for tax-exempt status under

26 U.S.C. § 501(c)(3), and for recognition as a public charity

under 26 U.S.C. § 509(a)(3). A year of correspondence with the

Internal Revenue Service resulted in the Foundation amending

its articles of incorporation and bylaws and altering the composition of its board of directors. Still, the IRS did not reach a

final determination on the Foundation’s application. 

Invoking jurisdiction under 26 U.S.C. § 7428, the Foundation sued in the United States District Court for the District of

Columbia for a declaratory judgment that it was exempt from

federal income taxes under § 501(c)(3) and that it qualified as a

public charity under § 509(a)(3). The IRS did not—and does

not—dispute the Foundation’s status under § 501(c)(3). But it

moved for summary judgment on the Foundation’s claim for

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recognition as a public charity. The district court granted the

government’s motion. 

Section 501(c)(3) of the Internal Revenue Code provides

that a corporation organized and operated exclusively for

religious, charitable, scientific, testing for public safety, literary

or educational purposes is exempt from federal income taxes so

long as no part of its net earnings inure to the benefit of a private

individual and no substantial part of its activities involves

lobbying or political activities. 26 U.S.C. § 501(a), (c)(3). 

Contributions to § 501(c)(3) organizations are deductible from

the donor’s income taxes, id. § 170(c), estate taxes, id.

§§ 2055(a)(2), 2106(a), and gift taxes, id. § 2522(a). 

Section 501(c)(3) organizations are either public charities

or private foundations. All § 501(c)(3) organizations are

considered private foundations unless they qualify for an

exception under § 509(a). Because of congressional concern

about privately financed organizations abusing their tax-exempt

status, private foundations are subject to more restrictions than

are public charities. The theory is that public charities are less

likely to manipulate exemption from taxation because they are

exposed “to public scrutiny and the[y] depend[] on public

support.” Quarrie v. Comm’r of Internal Revenue, 603 F.2d

1274, 1277 (7th Cir. 1979). We have nothing to do with the

validity of the theory.

Public charities include churches, schools and hospitals, 26

U.S.C. § 509(a)(1); other publicly supported organizations, id.

§ 509(a)(2); and organizations supporting any of the above, id.

§ 509(a)(3). Supporting organizations are themselves of three

types, defined by the intimacy of their relationship with their

publicly supported organizations. Type I supporting organizations are the most closely connected to their publicly supported

organizations; Type III, the least.

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The Polm Family Foundation claimed that it was a Type II

supporting organization under § 509(a)(3) and the implementing

regulations, Treas. Reg. § 1.509(a)-4. To support this claim, the

Foundation had to satisfy each of three separate tests: the

organizational test, 26 U.S.C. § 509(a)(3)(A); the relationship

test, id. § 509(a)(3)(B)(ii); and the control test, id.

§ 509(a)(3)(C).1

 The IRS contends that the Foundation can meet

none of these tests. The district court granted summary judgment on the ground that the Foundation satisfied neither the

relationship test nor the control test. 

We prefer to rest our decision on the Foundation’s failure

to satisfy the organizational test. Of the three tests, this is the

1

 26 U.S.C. § 509(a)(3) states that a § 501(c)(3) organization is not

a “private foundation” if the organization:

(A) is organized, and at all times thereafter is

operated, exclusively for the benefit of, to perform

the functions of, or to carry out the purposes of one

or more specified organizations described in

paragraph (1) or (2),

(B) is-

(i) operated, supervised, or controlled by one or

more organizations described in paragraph (1) or

(2),

(ii) supervised or controlled in connection with

one or more such organizations, or

(iii) operated in connection with one or more

such organizations, and 

(C) is not controlled directly or indirectly by one or

more disqualified persons (as defined in section

4946) other than foundation managers and other than

one or more organizations described in paragraph (1)

or (2) . . ..

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most straightforward. That the district court did not rely on this

ground is of no moment. A prevailing party may “defend its

judgment on any ground properly raised below whether or not

that ground was relied upon, rejected, or even considered by the

District Court . . ..” Granfinanciera, S.A. v. Nordberg, 492 U.S.

33, 38-39 (1989); see also Wash.-Balt. Newspaper Guild, Local

35 v. Wash. Post, 959 F.2d 288, 292 n.3 (D.C. Cir. 1992);

Adams v. Agnew, 860 F.2d 1093, 1097 (D.C. Cir. 1988). 

To satisfy the organizational test, the Foundation had to

demonstrate that it is “organized, and at all times thereafter is

operated, exclusively for the benefit of, to perform the functions

of, or to carry out the purposes of one or more specified [publicly supported] organizations . . ..” 26 U.S.C § 509(a)(3)(A). 

Regulations implementing this provision require the articles of

incorporation of a supporting organization to “designate each of

the specified organizations by name . . ..” Treas. Reg.

§ 1.509(a)-4(d)(2)(i).

There is an exception to this requirement: a Type II

supporting organization need not specify by name each publicly

supported organization if its articles of incorporation “require

that it be operated to support or benefit one or more beneficiary

organizations which are designated by class or purpose . . ..” 

Treas. Reg. § 1.509(a)-4(d)(2)(i)(b). The IRS tells us that the

exception applies only if the class of beneficiary organizations

is “readily identifiable.” In support, it points to the examples in

the regulations and a related revenue ruling. See Treas. Reg.

§ 1.509(a)-4(d)(2)(iii); Rev. Rul. 81-43, 1981-1 C.B. 350. In

each example, the description of the class allows easy identification of the beneficiary organizations—e.g., “institutions of

higher learning in the State of Y,” Treas. Reg. § 1.509(a)-

4(d)(2)(iii); “[tax-exempt public charities] located in the [city

of] Z area,” Rev. Rul. 81-43. 

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An agency’s interpretation of its regulation is controlling

unless the interpretation is “plainly erroneous or inconsistent

with the regulation.” Auer v. Robbins, 519 U.S. 452, 461

(1997). This is so even if the interpretation appears for the first

time in a legal brief. Chase Bank USA, N.A. v. McCoy, 131 S.

Ct. 871, 880-81 (2011); Bigelow v. Dep’t of Def., 217 F.3d 875,

878 (D.C. Cir. 2000). “Because the interpretation the [IRS]

presents in its brief is consistent with the regulatory text,” Chase

Bank, 131 S. Ct at 880, we have no basis for rejecting it in favor

of some other version. In the statute’s terms, the organizations

the Foundation supports must be “specified.” This strongly

suggests that either the Foundation must identify those organizations by name or the organizations must be identifiable from the

Foundation’s articles of incorporation. That essentially is what

the Treasury regulation provides. The IRS so interprets it in its

submissions to this court and to the district court. The Foundation has offered nothing to counter the IRS’s interpretation. All

the Foundation has to say is that the government is forbidden

from making the argument. This is frivolous for the reasons we

have already given—a winning party may support the judgment

on appeal on any grounds argued below, even if the district court

never reached them. 

All that is left is the question whether the Foundation

satisfied the organizational test, as the IRS interprets it. The

Foundation has no defense. Its amended articles of incorporation designate as supported organizations “the class of organizations . . . which support, promote and/or perform public health

and/or Christian objectives, including but not limited to Christian evangelism, edification and stewardship.” Unlike the

examples contained in the regulation and the revenue ruling, this

designation does not make its beneficiary organizations readily

identifiable. There is no geographic limit. There is no limit by

type of publicly supported organization (such as churches or

seminaries). In light of the broad purposes mentioned in

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Foundation’s articles of incorporation, we agree with the

government that it would be difficult, if not impossible, to

determine whether the Foundation will receive oversight from

a readily identifiable class of publicly supported organizations. 

Affirmed.

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