Court Opinion

ID: 4484513
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:48.053594+00
Date Added: 2024-06-11T15:03:41.656837
License: Public Domain

Chabot, J., dissenting: Up to now, declaratory judgment jurisdiction under section 7428 has been thought to lie (1) where an organization has sought a status (qualification or classification) previously unacknowledged by the Internal Revenue Service and (2) where the Internal Revenue Service has revoked an organization’s favorable status ruling. The majority now add the situation where the organization has sought no change in status and the Internal Revenue Service has not revoked its favorable ruling. From this expansion I respectfully dissent. I. Failure To Make a Determination The majority apparently view the foundation of declaratory judgment jurisdiction in the instant case as the failure by the Secretary to make a determination with respect to an issue referred to in paragraph (1) of section 7428(a); the issue referred to evidently is the one in subparagraph (B) of this paragraph (1), i.e., "with respect to the initial classification or continuing classification of an organization as a private foundation (as defined in section 509(a)).”1  However, at the time the petition was filed in the instant case, there was outstanding a determination that petitioner was a public charity. Indeed, the determination even dealt with the particular category of public charity. Petitioner wanted to be classified as a medical research organization described in section 170(b)(l)(A)(iii), and the only outstanding determination put petitioner precisely into that category. Cf. Friends of Soc. of Servants of God v. Commissioner, 75 T.C. 209 (1980). At that time, there had been no "failure to make a determination” with respect to petitioner’s private foundation classification; it had a determination classifying it favorably. The majority’s conclusion that there can be a "failure to make a determination” within the meaning of section 7428(a)(2) at a point when there is outstanding a completely favorable determination as to petitioner does not appear to be consistent with the intended meaning of that phrase in the statute. II. Revocation Case versus Nonrevocation Case The majority assert (majority opinion, at p. 234 supra) that in this case, involving a proposed revocation of petitioner’s nonprivate foundation status, to require the filing of a new Form 1023, Application for Recognition of Exemption, in order to exhaust administrative remedies would be "wasteful.” I believe that it would not only be "wasteful” here, but totally inappropriate for petitioner (which was not requesting a change in its existing classification at the time the petition in this case was filed) to file a new Form 1023, or for that matter, any form of request for determination. This serves to highlight the majority’s failure to recognize the inherent difference between (1) a revocation case and (2) a situation where an organization asks respondent to recognize a status (qualification or classification) previously unacknowledged by respondent. This failure causes the majority to blur the distinction drawn by our Rules between revocation case protests and nonrevocation case requests for determination. Our Rules are premised on an understanding that normally a revocation results from an audit where the Internal Revenue Service is making its own investigation, not upon the request by an organization for a determination; in the latter case the Internal Revenue Service accepts the facts as stated in the request without investigating them. See the Notes accompanying Rules 213(a)(2) and 217(a), 68 T.C. 1042, 1048. Consequently, Rule 217(a) provides that in an action for declaratory judgment which does not involve a revocation, the Court will ordinarily2 look only to the administrative record; but, disposition in a revocation case may be made solely on the basis of the administrative record only where the parties agree that that record contains all the relevant facts and that these facts are not in dispute. Similarly, for purposes of framing an answer, Rule 213(a)(2) recognizes that in revocation cases the Internal Revenue Service will rely upon facts outside the administrative record. See Rule 212 and the accompanying Note. 68 T.C. 1041. On page 233 of their opinion, the majority cite several cases3 involving declaratory judgment actions, in which we reached the merits where a final adverse determination letter was issued in the context of the Internal Revenue Service’s revocation of the organization’s exempt status. In none of these cases did the Court recognize or mention any jurisdictional issue before reaching the merits. From this, the majority conclude that in these cases, as well as the instant case, there is "no other interpretation” but that the organization’s written protest "is a request for determination.” Each of the cases cited by the majority on this point was a revocation case. We have not required a request for determination as a basis for declaratory judgment jurisdiction where the dispute before us was whether respondent was correct in revoking a favorable determination. Indeed, the Court, in its 1977 revision of its Rules as to declaratory judgments (which went into effect more than 2 years before the earliest of the cited cases), had already observed that "Where the situation is one of revocation by the Service, it is not likely that there will have been a request for a determination.” Note accompanying Rule 211, 68 T.C. 1040. The reason the opinions in the three cases cited by the majority are silent on this point is simply that there is no such requirement where there has been a revocation.4 The majority attempt to create the requirement now, point to the three revocation cases as evidence that the requirement of a request for determination can be met by a protest, and then use the protest as the measuring point for an exhaustion of remedies analysis in a case where there was no revocation. The Byzantine nature of the majority’s analysis should not be allowed to obscure the conflict between that analysis and the understanding reflected in our Rules and prior practice.5 The Rules recognize the distinction between protests and requests for determination. See Rules 210(b)(10)6 and 211(e)(2).7 The majority effectively obliterate the distinction. Section 7428(b)(2) provides, in pertinent part, that— An organization requesting the determination of an issue referred to in subsection (a)(1) shall be deemed to have exhausted its administrative remedies with respect to a failure by the Secretary to make a determination with respect to such issue at the expiration of 270 days after the date on which the request for such determination was made if * * * Section 7476(b)(3), relating to retirement plans, is similar. The legislative histories of both sections also define a failure to make a determination as a "failure to act” by the Internal Revenue Service with respect to a request for a determination.8  Inasmuch as a request for determination is inappropriate where an organization does not request a change in its existing status, there can be no failure to make a determination as defined in the legislative history. Consequently, subsection (a)(2) does not give us declaratory judgment jurisdiction over the instant case. In the instant case there is a further difficulty with the majority’s conclusion that there has been a failure to make a determination with respect to petitioner’s protest, which the majority are pleased to treat as a request for a determination. The protest in question states as follows: The J. David Gladstone Foundation (hereinafter referred to as "taxpayer”), whose address is 9777 Wilshire Boulevard, Suite 610, Beverly Hills, California, disagrees with the determination that taxpayer is a private foundation within the meaning of sec. 509(a) of the Internal Revenue Code (hereinafter called the "Code”) for its taxable years ended December 31,1974 and 1975, proposed by the District Director in the above described determination letter and accompanying report of examination, and hereby appeals therefrom. In respondent’s final adverse determination, dated May 28, 1980, he conceded his proposal to reclassify petitioner as to 1974 and 1975, the only years put in dispute by the protest. Thus, at that point not only was there no failure to make a determination as to the matter put in issue by the protest, but petitioner received a favorable ruling on that limited point. Of course, a dispute remains. However, that dispute is framed by the revocation letter of May 28, 1980 — not by the protest. The instant case should properly be treated as a revocation case based on that letter; it should not be treated as a failure to make a determination case, based on petitioner’s protest. On page 235 of their opinion, the majority cite two cases9 involving declaratory judgment actions where we found that we had jurisdiction even though no final determination letter was issued on or before the date the petitions were filed, where more than 270 days had elapsed after the respective requests for determination. However, these cases are initial qualification or determination cases where the petitioners sought a determination of a status previously unacknowledged by the Internal Revenue Service. These cases have no application to the situation we face in the instant case; their citation is another example of the majority’s failure to distinguish between revocation and nonrevocation cases. III. Notice of Deficiency The administrative record in the instant case includes a copy of a notice of deficiency to petitioner, dated May 29,1980, which determines a deficiency in section 4940(a) excise tax (investment income of private foundations) for 1976 in the amount of $43,161. Thus, petitioner has had its "ticket to the Tax Court”10 for a year. No petition has been filed in this Court with respect to this notice of deficiency. The record in the instant case does not disclose whether a refund suit has been filed in a District Court or in the Court of Claims with respect to this tax. The legislative history underlying section 7428, enacted by section 1306(a) of the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1717, states that "This provision is intended to facilitate relatively prompt judicial review of the specified types of exempt organization issues; it is not intended to supplant the normal avenues of judicial review (redetermination of a deficiency or suit for refund of taxes) where those normal procedures could be expected to provide opportunities for prompt determinations.” (Emphasis added.) Furthermore, the legislative history indicates plainly that we are to look to certain events occurring after we properly obtain jurisdiction in the first instance over such a case, such as the filing of a petition regarding a redetermination of a related deficiency. H. Rept. 94-658, p. 286 (1975), 1976-3 C.B. (Vol. 2) 695, 978;11 S. Rept. 94-938, pp. 588-589 (1976), 1976-3 C.B. (Vol. 3) 49, 626-627; Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1976, p. 404,1976-3 C.B. (Vol. 2) 1, 416. The authorities and analysis presented by the majority (at pp. 223-224 of their opinion) are designed to show that this Court does not necessarily lose jurisdiction merely because respondent issued a final adverse determination after a valid petition was filed with us. However, the majority ignore the notice of deficiency. This notice puts in petitioner’s hands the right and opportunity to travel "the normal avenues of judicial review (redetermination of a deficiency or suit for refund of taxes)” arid does so at a time "where those normal procedures could be expected to provide opportunities for prompt determinations.” Indeed, one may wonder whether there is any purpose to further proceedings in the instant case other than petitioner’s evident desire to gain the possible tactical advantage adverted to in Judge Simpson’s concurring opinion. I find it disturbing that petitioner appears to be using this important relief measure, in direct contravention of the Congress’ stated purpose of enactment, merely to enable petitioner to avoid the burden of proof, or to gain a possible tactical advantage by cutting short an audit (see note 5 supra) or restricting respondent’s right to introduce evidence outside the administrative record (see note 2 supra). I find it more disturbing that the majority are putting this Court’s imprimatur on such misuse of the statute. IV. Conclusion The instant case should not be here. It does not fit into the statutory scheme as we have understood it in our Rules. It is contrary to the basic purpose for which the Congress enacted the declaratory judgment procedure. I would grant respondent’s motion to dismiss. Parker, J., agrees with this dissenting opinion.  The Note accompanying Rule 217(a) states (68 T.C. 1025,1048) as follows: "Although the Rule states that an action not involving a revocation will "ordinarily” be disposed of on the basis of the administrative record, there do not appear to be at this time any circumstances under which a trial will be held except as to disputed jurisdictional facts or to resolve disagreement between the parties as to the contents of the administrative record. * * * ”    Western Catholic Church v. Commissioner, 73 T.C. 196 (1979), affd. without published opinion 631 F.2d 736 (7th Cir. 1980) (organization, formed for religious purposes, was granted exemption upon representations in its application for exemption; subsequently, after examination by Internal Revenue Service of its activities, its exemption ruling was retroactively revoked by a final determination letter); Hutchinson Baseball Enterprises v. Commissioner, 73 T.C. 144 (1979), on appeal (10th Cir., Jan. 24, 1980) (organization, formed to promote, advance, and sponsor baseball, including Little League and amateur baseball, filed an application for exempt status on Oct. 5,1973; the Internal Revenue Service by letter dated Oct. 24,1973, determined that the organization was exempt as of Oct. 5,1973, but only through July 31, 1975, by which time it must have raised the public support necessary for avoidance of private foundation status; after reviewing operational information furnished by the organization, respondent issued a final adverse determination revoking exemption on Aug. 28,1978); Industrial Aid for the Blind v. Commissioner, 73 T.C. 96 (1979) (organization, formed to act as sales agent for products manufactured by blind persons, was granted exemption on Dec. 30, 1941, by the Internal Revenue Service; subsequently, the Internal Revenue Service determined that it was no longer exempt).   The legislative history, in discussing exhaustion of administrative remedies, does state that the organization must demonstrate that it has made a request to the Internal Revenue Service for a determination. H. Rept. 94-658, p. 287 (1975), 1976-3 C.B. (Vol. 2) 695, 979; S. Rept. 94-938, p. 590 (1976), 1976-3 C.B. (Vol. 3) 49, 628; Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1976, p. 405,1976-3 C.B. (Vol. 2) 1, 417. However, this is plainly not directed to a revocation case where the organization has already filed its request for determination and received a determination, which the Internal Revenue Service is proposing subsequently to revoke.   Contrast the majority’s analysis with the analysis in Tax Management Portfolio, Exempt Organizations — Declaratory Judgments, No. 421, at A-15, as follows: "Although the Tax Court [in New Community Sr. Citizen Housing v. Commissioner, 72 T.C. 372 (1979)] held that the Service’s ruling was not a 'determination’, it did not consider whether the organization’s initial ruling request constituted a 'request for determination’ starting the 270-day period running, or whether an organization can ever make a 'request for determination’ prior to revocation of exempt status. In New Community Senior Citizen Housing Corp. the organization could have argued that the Service’s failure to actually revoke the organization’s exempt status within 270-days after its initial request for determination was a failure to make a determination conferring declaratory judgment jurisdiction. [[Image here]] "The same type of argument could also arise in the context of an audit. The IRS could be in the process of auditing the returns of a sec. 501(c)(3) organization with a view toward revocation of exempt status. To cut short the Service’s review, the organization could make a formal request for determination and, then, if the Service does not complete its audit within 270 days, file a declaratory judgment action arguing that administrative remedies have been exhausted. "The organization in New Community Senior Citizen Housing Corp., supra, and the organization undergoing an audit should not be able to file a declaratory judgment action using the 270-day rule in this manner. An organization’s source of funds are not 'dried up’ until exempt status is actually revoked. Consequently, an organization that has already obtained recognition of exemption should not be able to request a determination and start the 270-day period running until the IRS actually revokes its favorable ruling. * * * ”   RULE 210. GENERAL (b) Definitions: As used in the Rules in this Title— [[Image here]] (11) "Administrative record” included the request for determination, all documents submitted to the Internal Revenue Service by the applicant in respect of the request for determination, all protests and related papers submitted to the Internal Revenue Service, all written correspondence between the Internal Revenue Service and the applicant in respect of the request for determination or such protests, * * * [Emphasis supplied.]   RULE 211. COMMENCEMENT OF ACTION FOR DECLARATORY JUDGMENT (f) Petition in Exempt Organization Action: The petition in an exempt organization action shall contain: [[Image here]] (2) The date upon which the request for determination, if any, was mailed to the Internal Revenue Service, and the office to which it was mailed; [Emphasis supplied.]   As to sec. 7428, see note 4 supra. As to sec. 7476, enacted by sec. 1041(a) of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 949, see S. Rept. 93-383, p. 114,1974-3 C.B. (Supp.) 80,193; H. Rept. 93-807,109 (1974), 1974-3 C.B. (Supp.) 236, 344.   B.H.W. Anesthesia Foundation v. Commissioner, 72 T.C. 681 (1979) (in which the organization was requesting initial qualification under sec. 501(c)(3), where it filed its petition more than 270 days after filing its application for recognition of exemption; the Internal Revenue Service conceded this jurisdictional point, 72 T.C. at 682 n. 2); BBS Associates, Inc. v. Commissioner, 74 T.C. 1118 (1980), on appeal (3d Cir., Nov. 24, 1980) (in which the taxpayer requested a determination that its profit sharing plan met the requirements of sec. 401(a), where almost 2 years had passed after its request and no final determination letter had been issued).   Commissioner v. Shapiro, 424 U.S. 614, 630 n. 12 (1976); Corbett v. Frank, 293 F.2d 501, 502 (9th Cir. 1961); Midland Mortgage Co. v. Commissioner, 73 T.C. 902,907 (1980).   The cited Ways & Means Committee report states as follows: "Also, it is expected that in general a court which has accepted pleadings in a declaratory judgment proceeding will yield to a court which has accepted pleadings in a redetermination of deficiency or a tax refund suit, unless the proceedings in the declaratory judgment suit are so far along that it would facilitate interests of prompt justice for the latter court to yield to the former. Your committee’s decisions are not to be permitted to create conflicting determinations on the parts of different trial courts with regard to any of the questions that may be determined in a declaratory judgment suit; nor are your committee’s decisions to operate so as to require duplication of effort on the part of parties, witnesses, or courts.” To the same effect are the cited Senate Finance Committee report and the cited Joint Taxation Committee staff explanation.