CHURCH OF SCIENTOLOGY OF HAWAII, Plaintiff-Appellee,
The UNITED STATES of America, Defendant-Appellant.
United States Court of Appeals,
Sept. 6, 1973.
Appeal by Government from an order of the United States District Court for the
District of Hawaii, Martin Pence, Chief Judge, denying Government's motion to
dismiss tax refund suit by nonprofit religious corporation. The Court of
Appeals, Trask, Circuit Judge, held that corporation waived contentions that it
refused the tender by Government of 1965 and 1966 tax payments made by
corporation because amount of tender was insufficient but that Government's
tender did not moot action.
Koelsch, J., filed a dissenting opinion.
 CONSTITUTIONAL LAW
There must be a viable justiciable controversy before the federal court in
order for it to act, since the court does not render advisory opinions or
decide abstract propositions. U.S.C.A.Const. art. 3, s 1 et seq.
Mere voluntary cessation of allegedly illegal conduct does not moot a case.
 DECLARATORY JUDGMENT
Proscription of Declaratory Judgments Act as to tax matters had no application
to action which did not ask for declaratory relief but which sought a refund of
taxes, allegedly unlawfully assessed and paid, on the basis that the taxpayer
was a church formed exclusively for religious and educational purposes with no
part of its net earnings inuring to the benefit of any individual and exempt
from taxation. 26 U.S.C.A. (I.R.C.1954) ss 501(c)(3), 7422; 28
U.S.C.A. s 2201.
 INTERNAL REVENUE
Taxpayer's refusal for specified reasons to accept a tender by the Government
of the taxes taxpayer has paid waives all other reasons, for purpose of
determining whether tender moots refund suit.
 INTERNAL REVENUE
Church which refused to accept Government's tender of income taxes paid by
church for two years only on the basis that refund would not lay to rest
charges of collateral harassment and settle all questions but which made no
objection to the amount of the tender waived contention that it refused tender
because amount of tender was insufficient in that the interest included was
inadequate and no costs of the action were included.
 CRIMINAL LAW
In criminal cases, payment of penalty does not moot the case for final appeal
and determination if judgment of conviction may entail collateral consequences.
 INTERNAL REVENUE
Where underlying issue of status of nonprofit religious corporation as an
organization exempt from federal income taxation was a continuing one and
recurring each year, determination of corporation's status involved collateral
consequences such as the corporation's right to be exempt from contributing
under Federal Insurance Contributions Act and its right to certain postal
rates, and Government's tender of a refund of corporation's 1965 and 1966
income tax payments was not intended to be a final resolution of tax-exempt
status issue and tender was not accepted, tender of tax payments did not moot
corporation's action for refund of taxes. 26 U.S.C.A. (I.R.C.1954) ss
501(c)(3), 3121(b)(8)(B), 3401(a)(9), 7422.
*314 Meyer T. Rothwacks (argued), Scott P. Crampton, Asst. Atty. Gen., Fred
B. Ugast, Acting Asst. Atty. Gen., Dept. of Justice, Washington, D. C., Robert
K. Fukuda, U. S. Atty., Honolulu, Hawaii, Harold S. Larsen, Grant W. Wiprud,
Donald H. Olson, Tax Div., Dept. of Justice, Washington, D.C., for defendant-
Tobias C. Tolzmann (argued), Joe Thrasher, Honolulu, Hawaii, for plaintiff-
Before KOELSCH, WRIGHT and TRASK, Circuit Judges.
TRASK, Circuit Judge:
The district court denied the government's motion to dismiss in this tax
refund case. Being of the opinion that the denial involved a controlling
question of law and that an immediate appeal might materially advance the
ultimate disposition of the case, the trial court so stated and we allowed the
interlocutory appeal under 28 U.S.C. s 1292(b). [FN1]
FN1. The question certified was as follows:
"Should the defendant's motion to dismiss, on the ground that this civil
Tax refund action be rendered moot by reason of an absolute and
unconditional tender to plaintiff of the amounts sued for plus interest as
provided by law, be granted." Appellant's Brief at 3.
The Church of Scientology of Hawaii (Church) was granted a charter as a
nonprofit religious corporation on December 8, 1964. It filed information
income tax returns for the years 1965 and 1966 claiming exemption under
section 501(c)(3) of the Internal Revenue Code as a church formed
exclusively for religious and educational purposes, no part of the net earnings
of which inured to the benefit of any private shareholder or individual. The
Internal Revenue Service denied the claim of exemption and assessed tax
deficiencies for the two years. The Church paid the deficiencies, filed claims
for refunds which were disallowed and then filed suit for a refund of the sums
paid. The issue in all of the proceedings was the claimed exempt status under
section 501(c)(3). Following discovery proceedings and a motion for summary
judgment filed by the Church, the government proposed a settlement whereby a
refund would be made of the amount "plaintiff would have received (other than
costs) had it prevailed in this litigation." The action would then be dismissed
with prejudice. This offer was rejected but the Church suggested that an offer
of judgment pursuant to Rule 68 Fed.R.Civ.P. would receive favorable
consideration. No such offer was made but the government caused checks
aggregating $806.08 to be tendered. The tender was not accepted and the motion
to dismiss was filed asserting that the action had become moot and that a
justiciable controversy no longer existed by virtue of the continuing tender.
The motion to dismiss was denied and this interlocutory appeal allowed.
 At the outset we recognize that there must be a viable justiciable
controversy before the court in order for it to act, since the court does not
render advisory opinions or decide abstract propositions. California v. San
Pablo & Tulare R.R. Co., 149 U.S. 308, 314, 13 S.Ct. 876, 37 L.Ed. 747 (1893).
[FN2] It is also entirely clear that jurisdiction to decide questions
concerning federal taxes has been expressly withheld under the Declaratory
Judgments Act, 28 U.S.C. s 2201. Apart from these settled rules there is
left for consideration whether under the general rules of mootness there
remains anything for the court to decide after an unconditional and continuing
offer by the government to refund the amount the taxpayer has paid, plus
interest. Appellee calls our attention to several matters about the offer that
it urges as significant. (1) The offer does not include any costs in the
action; *315 (2) there is a dispute as to the computation of interest; (3)
the offer states that "the terms of settlement should not be included in the
stipulation" (emphasis in original); and (4) there remain a number of
unresolved questions and continuing consequences whose determination will be
foreclosed by a dismissal. All of these work together, it is argued, to
preserve jurisdiction against an unaccepted tender of the refund.
FN2. "[I]t is well settled that federal courts may act only in the context
of a justiciable case or controversy." Benton v. Maryland, 395 U.S. 784,
788, 89 S.Ct. 2056, 2059, 23 L.Ed.2d 707 (1969); Liner v. Jafco, Inc.,
375 U.S. 301, 306 n. 3, 84 S.Ct. 391, 11 L.Ed.2d 347 (1964).
Appellant relies heavily upon our decision in Mitchell v. Riddell, 402 F.2d
842 (9th Cir.1968), cert. denied, 394 U.S. 456, 89 S.Ct. 1223, 22 L.Ed.2d
415 (1969), as being dispositive of this case. In Mitchell the settlor of an
inter vivos trust established exclusively for charitable purposes had attempted
unsuccessfully to have the Internal Revenue Service (IRS) declare it a tax
exempt organization. The service had declined to do so and persisted in its
demand that the trust report its income as a taxable organization, although
apparently no assessment had been made by IRS nor other legal action taken. In
order to obtain a determination Mitchell, the settlor, filed a trust return,
remitted the sum of ten dollars to IRS in behalf of the trust and "'included
the statement that no tax was due, . . . and calling for a refund with reasons
stated."' 402 F.2d at 844. He thereupon filed suit in the district court to
recover the ten dollars. In a second cause of action he asked that the trust
operations be found to be tax exempt under the Code. The government later
repaid the ten dollars to settlor and settlor accepted the money. The trial
court dismissed and we affirmed. We held that the repayment mooted the first
cause of action and the proscription in 28 U.S.C. s 2201 of the Declaratory
Judgments Act stripped the court of jurisdiction to pass upon the second.
Some readily apparent distinctions make Mitchell v. Riddell, supra, a
questionable precedent. The payment of the refund was not only tendered, but
accepted. Again, the entire litigation was contrived by settlor. No assessment
for unpaid federal income taxes against the trust or its alter ego had been
made. Significantly, we said:
"Appellants are not without a remedy. The Congress has provided ample
machinery for the settlement of income tax controversies. In the event a tax is
assessed against the Foundation, judicial review of such assessment may be
sought under the provisions of 26 U.S.C. s 7422 by paying the tax and
seeking a refund in the district court, or by petitioning the Tax Court of the
United States, prior to paying the tax, and in the event of an adverse decision
by the Tax Court by petitioning this Court to review the decision of the Tax
Court." 402 F.2d at 847.
Here there had been an assessment for claimed tax deficiencies, payment with
claim for refund and detailed statement of reasons and after denial of claim, a
suit to recover payments. This is the "ample machinery for the settlement of
income tax controversies" to which we pointed in Mitchell, supra.
The government also cites four cases as authority for the proposition that in
no other case has a taxpayer been able "to withstand a motion to dismiss
following a tender of the amount in dispute." We consider them. In Drs.
Hill & Thomas Co. v. United States, 392 F.2d 204 (6th Cir.1968), the taxpayer,
a professional corporation, challenged a Treasury Regulation which would
eliminate taxation of income to the corporation and cause it to flow through to
the individuals on a partnership basis. The Commission tendered a refund of the
entire amount in dispute and the case was dismissed, the court pointing out
that the identical problem was being litigated in two other circuits where no
mootness defense was available. The taxpayer was thus assured of a judicial
determination. In Lamb v. Commissioner of Internal Revenue, 390 F.2d 157
(2nd Cir. 1968), the taxpayer sought a determination of the deductibility of
his law school expenses. During the pendency of *316 the litigation a
similar problem was ruled against the Commissioner, prompting him to tender the
refund sought by this suit. The court dismissed the action as moot pointing out
the foregoing and that further proceedings against the taxpayer for the next
year were barred. Thus, there appears to have been a final determination. A.
A. Allen Revivals, Inc. v. Campbell, 353 F.2d 89 (5th Cir. 1965), was a case
where taxpayer sought exemption as a religious and educational organization.
Its suit was to recover funds paid as Federal Insurance Contributions Act
taxes. It tendered the money to the taxpayer but during the litigation the Tax
Court held that the taxpayer was in fact organized and operated exclusively for
charitable and educational purposes and no income taxes were due. IRS also
ruled that the taxpayer was exempt from employment taxes. Thus, again there had
been a judicial determination of status. Regina v. United States, 208
F.Supp. 137 (W.D. Pa.1962), involved an income tax based upon a valuation of
corporate stock used in an exchange. A tender of the refund sought was made and
the litigation held moot and dismissed. Although the merits were not judically
determined it was a non-recurring transaction and tax with no indicated
collateral involvements upon which other difficulties to the taxpayer could
 In none of them, therefore, was there an even arguable reason to
continue with litigation after the tender or payment was made. Thus we do not
find any of the cases cited by the government as dispositive of the issues
here. Looking first at the direct controversy between the parties, we note that
there is nothing in the proposed refund payment to the taxpayer of sums
involuntarily paid for 1965-1966 which would have assured it that the same
demands would not be made for 1967 and 1968. Indeed, the contrary is strongly
suggested. [FN3] It has long been the rule that "[m]ere voluntary cessation of
allegedly illegal conduct does not moot a case." United States v.
Concentrated Phosphate Export Ass'n, 393 U.S. 199, 203, 89 S.Ct. 361, 364, 21
L.Ed.2d 344 (1968). Prior to the Phosphate Export case, the Court had warned
against the danger of dismissal for mootness when actions of governmental
agencies are likely to be repeated, pointing out that broader considerations
should not be defeated by short-term orders "capable of repetition, yet evading
review. . . ." See also Moore v. Ogilvie, 394 U.S. 814, 816, 89 S.Ct. 1493,
23 L.Ed.2d 1 (1969); Southern Pacific Terminal Co. v. Interstate Commerce
Commission, 219 U.S. 498, 31 S.Ct. 279, 55 L.Ed. 310 (1911).
FN3. Attached to appellee's brief was a reproduction of a letter from the
IRS dated September 24, 1971, sending back to appellee information returns
it had filed based upon its claimed exempt status and notifying it that it
was not eligible to file such a return, but must file federal income tax
 The proscription of the Declaratory Judgments Act as to tax matters,
28 U.S.C. s 2201, has no application here. Appellee had sought relief under
the statute which provided a cause of action for refunds of taxes unlawfully
assessed and paid. 26 U.S.C. s 7422. It did not pretend to ask for
declaratory relief. The assessment had been made by the IRS, the taxes paid and
claims for refunds made and disallowed and the suit for refund then properly
filed. The underlying issue at all stages was taxpayer's claim of exemption
under section 501(c) (3).
 Turning, then, to the appellee's arguments in opposition to mootness,
we conclude that the contention that the amount of the tender is insufficient
and therefore the action may not be mooted by that tender is not well taken.
Insufficient interest was claimed of $1.30; costs were not included in the
tender. But no objection to the tender was made for these reasons. The
rejection was based upon a letter to Mr. Wilkenfield of the Department of
Justice dated May 11, 1971. It relied upon charges of collateral harassment
which a *317 cash refund would not lay to rest and a counter offer of
settlement of all questions. A refusal to accept a tender for one reason waives
all others. Moore v. Investment Properties Corp., 71 F.2d 711, 717-718 (9th
Cir.), cert. denied, 293 U.S. 611, 55 S.Ct. 142, 79 L.Ed. 701 (1934). The
same reason defeats appellee's argument based upon failure of the government to
The principal reasons advanced by appellee in support of the trial court's
retention of jurisdiction are that the underlying issue of the status of
appellee as an exempt corporation is a continuing one. It recurs each year. In
addition, the failure to resolve the legal issue results in adverse collateral
consequences which would be resolved by a determination of the underlying
The ongoing nature of the controversy is evidenced not only by a rejection of
information returns for a later year which were filed on the basis that
appellee is tax exempt and a demand by IRS for regular tax returns, [FN4] but
is evidenced even more clearly by an IRS "Manual Supplement," a copy of which
dated September 21, 1970, appears in the record. The stated purpose of the
manual is to identify "Church of Scientology type religious organizations" and
to provide guidelines for examining returns and for processing applications for
exemption. The detailed instructions which purport to describe in part the
religious philosophy of the Church appear to make such organizations a suspect
group. It is couched in terms of directions for future guidance.
FN4. See footnote 3 supra.
That the tender by IRS in this case of a refund of 1965 and 1966 income tax
payments was not intended to be a final resolution of the tax exempt status
issue is also evidenced by the fact that on March 24, 1971, officials of the
Church were subpoenaed to appear at the IRS office and bring with them:
(1) Payroll records from January 1, 1967, through December 31, 1970,
(2) W-2's for 1967 through 1970 inclusive.
The ongoing nature of the problem was also disclosed by a levy by IRS on the
bank account of the Church in the First Hawaii Bank for unpaid "941 tax" on or
about March 2, 1971. [FN5]
FN5. The number "941" apparently refers to Form 941 which is the form on
which F.I.C.A. and income withholding taxes are reported. Treas. Reg. s
39.1-4(2) (F.I.C.A.); s 31.6011(a)-4 (income tax).
Collateral consequences are also involved. An organization exempt from income
taxation pursuant s 501(c) (3) is additionally exempt from contributing
under the Federal Insurance Contributions Act, 26 U.S.C. s 3121(b)(8)(B),
under certain circumstances. There are also advantages to a church found to be
exempt under other provisions of the 1954 Internal Revenue Code. [FN6]
FN6. See 26 U.S.C. s 3401(a)(9); Treas.Reg. s 31.3401(a) (9)-
An exemption is provided for certain withholding tax payments by religious
organizations with such organizations being defined as having "the same
meaning and application as is given to the term for income tax purposes."
Other collateral consequences of its indeterminate status include the right to
certain postal rates and the right to solicit financial support on the basis
that gifts will be tax deductible as religious or charitable contributions.
In United States v. W. T. Grant Co., 345 U.S. 629, 73 S.Ct. 894, 97 L.Ed.
1303 (1953), the resignation of a common director did not render moot an attack
upon an interlocking directorate.
"[V]oluntary cessation of allegedly illegal conduct does not deprive the
tribunal of power to hear and determine the case, i.e., does not make the case
moot. . . . The case may nevertheless be moot if the defendant can demonstrate
that 'there is no reasonable expectation that the wrong will be repeated.' The
burden is a heavy one." 345 U.S. at 632-633, 73 *318 S.Ct. at 897,
quoting United States v. Aluminum Co. of America, 148 F.2d 416, 448 (2nd
See also United States v. Concentrated Phosphate Export Ass'n, supra.
 In criminal cases it appears clear that the payment of the penalty will
not moot the case for final appeal and determination if the judgment of
conviction may entail collateral consequences. Sibron v. New York, 392 U.S.
40, 53-55, 88 S.Ct. 1912, 20 L.Ed.2d 917 (1968); Ginsberg v. New York, 390
U. S. 629, 633 n. 2, 88 S.Ct. 1274, 20 L.Ed. 2d 195 (1968). The rule has
developed to the point where the Court stated in Sibron, supra, that "a
criminal case is moot only if it is shown that there is no possibility that any
collateral legal consequences will be imposed on the basis of the challenged
conviction." 392 U.S. at 57, 88 S.Ct. at 1900.
Granted that a criminal case is different from a civil case in many respects,
it is difficult to find a reason for distinction when considering whether a
case or controversy exists under Article III of the Constitution. Certainly
we find no distinction under the circumstances of this case.
Our conclusion in this respect if fortified by the judgment of the United
States District Court for the Western District of Missouri in First Federal
Savings & Loan Ass'n v. United States, 288 F.Supp. 477 (W.D.Mo.1968). In a fact
situation quite similar to the case here, that court held that a tender (as
distinguished from payment) was not effectual to moot the case and that the
possibility of a continuing recurrence of the problem was sufficient to entitle
the taxpayer to have the underlying legal issue determined.
 We must conclude with the admonition that what we say and hold here on
the issue of mootness is not intended to indicate any view upon the merits.
Whether the Church is eligible and can qualify for an exemption from payment of
income taxes under section 501(c)(3) of the Internal Revenue Code for its
taxable years 1965 and 1966 must be determined upon the evidence presented at
the trial upon that issue. We only answer the question certified by the
interlocutory appeal which is that the defendant's motion to dismiss on the
ground stated should be denied.
KOELSCH, Circuit Judge (dissenting.)
If a judgment on the merits would be worth the judicial time, the outlay of
money, and the attorney's efforts, I would hasten to join in the court's
opinion. No good purpose would be served, now that the judicial process has
been initiated, to dismiss this suit only to have a similar one commenced and
prosecuted at some future time. However, I am convinced that the trial, which
the Commissioner seeks to avoid, will settle nothing more than the church's
income tax status for the particular years under consideration-1965 and 1966.
Why, then, should we permit litigation which bids fair to be involved and time
consuming to continue?
The collateral estoppel effect of a judgment in an income tax matter is
generally limited, because each year's taxes are based upon facts peculiar to
that particular year, and give rise to separate claims by the Collector.
Although the doctrine does operate in the field of tax law, the factual
peculiarities of the subject have limited its application.
Thus in Tait v. Western Md. Ry. Co., 289 U.S. 620, 53 S.Ct. 706, 77 L.Ed.
1405 (1933) the Court, concluding that the concept of res judicata was
applicable in the field of tax law despite the scheme of annual tax periods,
held that a prior adverse determination regarding the deductibility of an
amortized proportion of the discount on sales of bonds by the taxpayer's
predecessors estopped the Collector from relitigating that issue in a suit
involving a later period. However, it should be noted that the allowable
discount constituted a "static fact"-one which did not derive its legal impact
from events of the later period.
*319 On the other hand, Commissioner of Internal Revenue v. Sunnen, 333
U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898 (1948) established two areas in which
collateral estoppel does not operate: The first, where the legal climate
changes in the interim between the suits; there, although the material fact is
"static," the prior determination is not controlling. The second, where
different-in the sense of new-facts have arisen, such as a series of contracts
or directors' resolutions, although such facts may be similar or identical to
facts that were peculiar to a prior year, the prior determination on the "old"
facts does not control the decision regarding the legal impact of the "new."
This "separable facts" doctrine in tax cases has been criticized as being too
mechanical in its operation and exalting form over substance [United States
v. Russell Mfg. Co., 349 F.2d 13 (2d Cir. 1965)] and has been confused by lower
courts; but it is still good law. See Branscomb, Collateral Estoppel in Tax
Cases: Static and Separable Facts, 37 Texas L.Rev. 584, 588-97 (1959). The
doctrine has been defended as an application of the general rule that an issue
must in fact be litigated before it can have an estoppel effect on a subsequent
litigation [Heckman, Collateral Estoppel as the Answer to Multiple Litigation
Problems in Federal Tax Law: Another View of Sunnen and The Evergreens,
19 Case W.Res.L.Rev. 230, 240 (1968)] and on the basis that the relitigation
of genuinely identical sets of facts with the same legal implications which the
doctrine necessitates in tax cases may well require less judicial time than the
appeals and remands involved in an erroneous determination by a trial court
that collateral estoppel applies. Branscomb, supra, 37 Tex.L.Rev. at p.
591; 85 Harv.L.Rev. 1478 (1972).
The record in the instant case makes clear that a trial would simply establish
the "separable facts" of Sunnen, not the "static facts" of Tait.
Under s 501(c)(3) church is eligible for exemption if it is a corporation
"organized and operated exclusively for religious-purposes-[and] no part of the
net earning of which inures to the benefit of any private shareholder or
individual-" The Tax Regulations relating to this section of the statute
[Treas. Reg. s 1.501(c)(3)-1 (1959)] set up two essential requirements
for an exemption; one organizational and the other operational. Both must be
met. A determination of the first requires an analysis of the corporation's
charter to determine whether it was organized exclusively for religious
purposes; of the second, a consideration of the actual day to day operation of
the corporation. Here the Commissioner has forthrightly admitted that the
church meets the organizational requirement of s 501(c)(3) and, accordingly,
has made clear that his objection to church's claim of exemption is predicated
solely upon operational grounds.
There are, of course, a variety of bases upon which the Commissioner can
challenge a claim of exempt status, all of which involve a consideration and
determination of the financial operation of the church during a given tax year.
For instance, as in Founding Church of Scientology v. United States, 412
F.2d 1197, 188 Ct.Cl. 490 (1969), he may take the position that exemption
should be denied because church income inured to the private benefit of its
founder. Or he may assert that exemption is lost because church paid
unreasonable salaries. However, under the "separable facts" doctrine, a
determination that church has or has not violated the "inurement of benefits"
clause during 1965 and 1966 would have no estoppel effect in litigation
concerning the same issues with respect to subsequent years. [FN1] This result
follows both under Sunnen and under *320 the general principle of
collateral estoppel that an issue must be actually litigated in order to have
an impact in subsequent litigation of a different claim. Developments in the
Law-Res Judicata, 65 Harv.L.Rev. 818, 840 (1952).
FN1. A fortiori with respect to salaries; the dollar amounts may be
precisely the same but the reasonableness will vary with changes in living
standards and community mores from year to year.
The judgment should be reversed.