FOUNDING CHURCH OF SCIENTOLOGY OF WASHINGTON, D.C., INC., Plaintiff,
UNITED STATES, Defendant.
United States Claims Court.
May 27, 1992.
Church sought declaratory judgment that it was organization entitled to be
included in Internal Revenue Service's list of organizations recognized as
qualified charitable donees. United States moved to dismiss. The Claims
Court, Margolis, J., held that no actual controversy existed so as to
permit church to seek declaratory judgment that it was qualified
charitable donee under Internal Revenue Service rules.
There was no actual controversy in case brought by church seeking declaratory
judgment that it was organization entitled to be included in Internal Revenue
Service's (IRS) list of organizations recognized as qualified charitable
donees, where IRS had never actually proposed to revoke prior ruling and had
not done so, and church had not filed any papers with IRS in course of church
examination which could be construed as request for determination. 26
U.S.C.A. ss 170(c), 6033(a)(2), 7428, 7611(c)(1)(A).
*245 Monique E. Yingling, Washington, D.C., for plaintiff. Thomas C.
Spring, of counsel.
W.C. Rapp, Washington, D.C., with whom was Asst. Atty. Gen. Shirley D.
Peterson, for defendant.
This tax case comes before the court on defendant's motion to dismiss
and on plaintiff's motion for summary judgment. Defendant, through the
Internal Revenue Service (IRS), began a church tax examination of plaintiff in
1989, but failed to complete it within the statutory time period. Before this
court, plaintiff seeks a declaratory judgment that it is an organization
described in s 170(c) of the Internal Revenue Code of 1986 (I.R.C.) entitled
to be included in IRS publication 78, a list of organizations recognized by the
IRS as qualified charitable donees. Defendant moves to dismiss, contending
this court lacks jurisdiction, and plaintiff moves for summary judgment. After
careful review of the record, and after hearing oral argument, this court
grants defendant's motion to dismiss and denies the plaintiff's motion for
In the 1950s, the IRS revoked plaintiff's tax-exempt status, a decision that
the Court of Claims upheld in Founding Church of Scientology of Washington,
D.C. v. United States, 412 F.2d 1197, 188 Ct.Cl. 490 (1969), cert. denied,
397 U.S. 1009, 90 S.Ct. 1237, 25 L.Ed.2d 422 (1970). Consequently,
plaintiff began to file corporate tax returns as a taxable entity.
Believing that circumstances had changed and that it was now operated
exclusively for tax-exempt purposes, plaintiff began in 1973 to file
information returns on Form 990, the information return used by exempt
organizations. Plaintiff discontinued filing returns in 1980, consistent with
its alleged church status and as permitted for churches by I.R.C. s
Pursuant to I.R.C. s 7611, the IRS sent plaintiff a "Notice of Church
Inquiry" on December 2, 1988, and a "Notice of Church Examination" on March 1,
1989, questioning plaintiff's qualification for tax-exempt status. On February
27, 1991, the IRS notified plaintiff that it was unable to complete its
examination within the two-year period provided by I.R.C. s 7611(c)(1)(A)
and that, as a result, there would be no change in plaintiff's tax status.
Plaintiff filed suit in this court on May 28, 1991, seeking a declaratory
judgment under I.R.C. s 7428 that it is an entity described in I.R.C. s
170(c) entitled to be included in IRS publication 78, the cumulative list of
organizations the IRS recognizes as qualified charitable donees. Defendant now
moves to dismiss for lack of jurisdiction, and plaintiff moves for summary
Plaintiff maintains that this court has jurisdiction to render a declaratory
judgment in this matter under I.R.C. s 7428, which provides in subsection a
in pertinent part as follows:
In a case of actual controversy involving--
(1) a determination by the Secretary--
*246 (A) with respect to the initial qualification or continuing
qualification of an organization as an organization described in section
501(c)(3) which is exempt from tax under section 501(a) or as an
organization described in section 170(c)(2).... or
(2) a failure by the Secretary to make a determination with respect to an
issue referred to in paragraph (1),
upon the filing of an appropriate pleading ... the United States Claims
Court ... may make a declaration with respect to such initial qualification or
Plaintiff also maintains that the February 27, 1991 letter in which the IRS
stated that plaintiff's tax status had not been changed (no-change letter) is
a "final report" within the meaning of I.R.C. s 7611(g). That section
[a]ny final report of an agent of the Internal Revenue Service shall be
treated as a determination of the Secretary under paragraph (1) of section
7428(a), and any church receiving such a report shall be treated for purposes
of sections 7428 and 7430 as having exhausted the administrative remedies
available to it.
Defendant seeks dismissal on jurisdictional grounds for two reasons. First,
defendant argues that plaintiff's complaint fails to set forth "a case of
actual controversy" as I.R.C. s 7428(a) demands. Second, defendant asserts
that the no-change letter should not be construed as a section 7611(g) final
report, which allows plaintiff to sue for declaratory relief under I.R.C. s
Beginning with the question of whether this is a case of actual controversy,
plaintiff contends that the IRS has " 'directly put in issue [its]
classification or qualification under the sections listed in
s 7428(a)(1)(A)-(C),' " which has " 'cause[d] [it] sufficient adverse
consequences ... to create an actual controversy.' " Baptist Hospitals,
Inc. v. United States, 851 F.2d 1397, 1400 (Fed.Cir.1988) (quoting Urantia
Foundation v. Commissioner, 684 F.2d 521, 525 (7th Cir.1982)). Plaintiff
argues that by not including it in IRS publication 78, the IRS has not provided
its potential contributors with advance assurance of deductibility and thus
created a case of actual controversy. As support for its contention, plaintiff
cites several cases in which, according to plaintiff, the court entertained
jurisdiction after the IRS failed to make a determination of tax-exempt
status. See National Foundation, Inc. v. United States, 13 Cl.Ct. 486
(1987); Foundation of Human Understanding v. Commissioner, 88 T.C. 1341
(1987); World Family Corp. v. Commissioner, 81 T.C. 958 (1983);
Gladstone Foundation v. Commissioner, 77 T.C. 221 (1981); Friends of the
Society of Servants of God v. Commissioner, 75 T.C. 209 (1980); BBS
Associates, Inc. v. Commissioner, 74 T.C. 1118 (1980); B.H.W. Anesthesia
Foundation, Inc. v. Commissioner, 72 T.C. 681 (1979).
Defendant counters that an actual controversy cannot exist in this case
because the IRS has not taken a position which is adverse to that asserted by
plaintiff. Defendant notes that the no-change letter does not alter the status
quo, namely, that plaintiff may maintain the same tax-exempt status it did
prior to and during the examination. Defendant also asserts that plaintiff is
free, following the examination, to hold itself out as an entity described in
I.R.C. ss 501(c)(3) and 170(a), as it could before the examination.
This court finds merit in defendant's position. Although plaintiff may
not be pleased that the examination ended without the conclusion to which
plaintiff believes it is entitled, the IRS's failure to complete the church tax
examination did not create an actual controversy. Had the IRS altered
plaintiff's "continuing qualification" in a fashion that would be adverse to
plaintiff, this court could have jurisdiction under I.R.C. s 7428(a)(1)(A)
to issue a declaratory judgment. [FN1] As the facts stand, the IRS in no way
changed plaintiff's tax status because *247 plaintiff is in the same tax
status position it was in before the examination began.
FN1. Jurisdiction would exist if the no-change letter is in fact a report
within the meaning of I.R.C. s 7611(g). However, this court need not
reach that issue. See note 2, infra.
The cases plaintiff cited are all distinguishable from the case at hand. In
three of the cases, the courts recognized that jurisdiction can exist under
s 7428(a) if the IRS determines that an entity should receive tax status
that is less favorable than that plaintiff requested in an application to the
IRS. See CREATE, Inc. v. Commissioner, 634 F.2d 803, 813 (5th Cir.1981);
Foundation of Human Understanding, 88 T.C. at 1355; Friends of the
Society, 75 T.C. at 216. Here, of course, plaintiff has not made a request for
certain treatment, which the IRS has rejected, and consequently plaintiff could
not have received an adverse ruling in the sense those cases contemplated.
Further, plaintiff could have applied (and still may do so) for the treatment
it seeks by filing Form 1023 with the IRS.
Four of the cases plaintiff cited involve jurisdiction following an exhaustion
of administrative remedies under I.R.C. s 7428(b)(2), which provides in
[a]n 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 the organization has taken, in a timely
manner, all reasonable steps to secure such determination.
In the cases plaintiff raises, the petitioners/plaintiffs sought a declaratory
judgment after the IRS had failed to issue notices of determination on their
requests for such within the statutory period. See National Foundation,
Inc., 13 Cl.Ct. at 490; World Family Corp., 81 T.C. at 959; BBS
Associates, Inc., 74 T.C. at 1119-20; B.H.W. Anesthesia Foundation, Inc.,
72 T.C. at 682 n. 2. An actual controversy may exist when the IRS fails to
make a determination, see I.R.C. s 7428(a)(2), so long as the
petitioner/plaintiff waits 270 days after the date on which the request for
such determination was made. See I.R.C. s 7428(b)(2). Subsection b of
s 7428 is inapposite in the present circumstances because the instant case
does not involve the IRS's failure to make a determination following a request
by plaintiff to do so. Therefore, this case is not an actual controversy
under s 7428(a)(2).
In the final case plaintiff cites, Gladstone Foundation, 77 T.C. 221, the
IRS proposed revoking petitioner's nonprivate foundation status, and petitioner
filed a written protest with the IRS. The IRS failed to make a final
determination within 270 days of petitioner's written protest, and petitioner
subsequently sought a declaratory judgment in the Tax Court. Ruling that the
written protest was the equivalent of a request for determination, the Tax
Court found that petitioner had exhausted its remedies under I.R.C. s
7428(b)(2) and therefore could bring a declaratory judgment action under
s 7428(a)(2). Id. at 233, 236.
The facts in the instant case are quite different from those in
Gladstone Foundation. Here, unlike in Gladstone Foundation, the IRS
actually never proposed to revoke a prior ruling and has not done so. Also,
plaintiff did not file any papers with the IRS in the course of the church
examination that can be construed as a request for a determination; and, in
any event, this court is not prepared to rule that something short of filing a
Form 1023 would satisfy I.R.C. s 7428(b)(2) in the circumstances of this
case. Gladstone Foundation does not lead this court to conclude that an
actual controversy exists in the instant case.
Because the facts do not "show that there is a substantial controversy,
between parties having adverse legal interests, of sufficient immediacy and
reality" to find an actual controversy, this court is without jurisdiction, and
the complaint must be dismissed. *248 [FN2] Maryland Casualty Co. v.
Pacific Coal & Oil Co., 312 U.S. 270, 273, 61 S.Ct. 510, 512, 85 L.Ed. 826
(1941). The defendant's motion to dismiss is granted. Further, plaintiff's
motion for summary judgment is denied. The clerk will dismiss the complaint
without prejudice. No costs.
FN2. Because the complaint has been dismissed on the actual controversy
ground, this court need not reach defendant's argument that the no-change
letter is not a final report.