Part of a public library containing court papers related to lawsuits involving Scientology in some way. Collected to help lawyers and critics of Scientology in future lawsuits from or against this cult. Please report back if this has been of help, or send new contributions to the collection. Thanks. Andreas Heldal-Lund (heldal@online.no)

              CHURCH OF SCIENTOLOGY OF HAWAII, Plaintiff-Appellee,
               The UNITED STATES of America, Defendant-Appellant.
                                  No. 71-2761.
                         United States Court of Appeals,
                                 Ninth Circuit.
                                 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.

 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.

 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.

 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.

 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.

 In criminal cases, payment of penalty does not moot the case for final appeal
 and determination if judgment of conviction may entail collateral consequences.

 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.
  [1] 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
  [2] 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

  [3] 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).
  [4][5] 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
 tender costs.
  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)-
     1(b) (2).
     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
 Cir. 1945).
  See also United States v. Concentrated Phosphate Export Ass'n, supra.
  [6] 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.
  [7] 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.

End of file...