330 F.Supp. 1150

28 A.F.T.R.2d 71-5164, 71-2 USTC P 9529

(Cite as: 330 F.Supp. 1150)

United States District Court,

District of Columbia.

William H. GREEN et al., Plaintiffs,

v.

John B. CONNALLY et al., Defendants,

v.

Dan COIT et al., Intervenors.

Civ. A. No. 1355-69.

June 30, 1971.

Class action by Negro parents of school children attending public schools in Mississippi, to enjoin United States Treasury officials from according tax- exempt status and deductibility of contributions to private schools in Mississippi discriminating against Negro students. Parents and children who supported or attended such private schools intervened as a class. A three- judge Court, Leventhal, Circuit Judge, held that under the Internal Revenue Code, racially discriminatory private schools are not entitled to federal tax exemption provided for charitable, educational institutions, and persons making gifts to such schools are not entitled to deductions for same as gifts to charitable, educational institutions.

Relief granted; order in accordance with opinion.

West Headnotes

[1] Internal Revenue 3513

220k3512 Most Cited Cases

(Formerly 220k742)

[1] Internal Revenue 4053

220k4053 Most Cited Cases

(Formerly 220k837, 150k39(1))

Under Internal Revenue Code, racially discriminatory private schools are not entitled to federal tax exemption provided for charitable, educational institutions, and persons making gifts to such schools are not entitled to deductions for same as gifts to charitable, educational institutions. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501.

[2] Internal Revenue 4045

220k4045 Most Cited Cases

(Formerly 220k837)

Term "charitable" in exemption provisions of Internal Revenue Code is used in its generally accepted legal sense and not in street or popular sense such as, e. g., benevolence to poor and suffering, and strong analogy can be derived from general common law of charitable trusts, at least for close interpretative questions. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501.

[3] Charities 10

75k10 Most Cited Cases

Charitable trust cannot validly be established to accomplish purpose contrary to public policy. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501.

[4] Charities 10

75k10 Most Cited Cases

[4] Charities 12

75k12 Most Cited Cases

Generally, trusts for education are considered to be for benefit of community, but this general rule is subject to qualification by rule that charitable trust cannot validly be established to accomplish purpose contrary to public policy. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501.

[5] Internal Revenue 3027

220k3027 Most Cited Cases

(Formerly 220k121)

[5] Internal Revenue 3055

220k3055 Most Cited Cases

(Formerly 220k183)

Federal tax exemptions and deductions are generally unavailable for activities contrary to declared federal public policy. 26 U.S.C.A. (I.R.C.1954) §§ 152(b) (5), 162, 165(c), 170, 501.

[6] Internal Revenue 3513

220k3513 Most Cited Cases

(Formerly 220k837)

[6] Internal Revenue 4053

220k4053 Most Cited Cases

(Formerly 220k837)

Federal policy is against government support for racial segregation of public or private schools. U.S.C.A.Const. Amend. 14; Civil Rights Act of 1964, §§ 401-605, 401(c), 601, 42 U.S.C.A. §§ 2000c to 2000d-4, 2000c(c), 2000d.

[7] Internal Revenue 3017

220k3027 Most Cited Cases

(Formerly 220k121)

Internal Revenue Code must be construed and applied in consonance with federal public policy against support for racial segregation of schools, public or private. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501; Civil Rights Act of 1964, §§ 401-605, 401(c), 601, 42 U.S.C.A. §§ 2000c to 2000d-4, 2000c(c), 2000d; U.S.C.A.Const. Amends. 13, 14.

[8] Constitutional Law 42.1(4)

92k42.1(4) Most Cited Cases

(Formerly 92k42)

Any amount of state support to help found segregated schools or to help maintain such schools is sufficient to give Negro school children standing to file complaint in federal court attacking constitutionality of such action. U.S.C.A.Const. Amend. 14; Civil Rights Act of 1964, §§ 401-605, 401(c), 601, 42 U.S.C.A. §§ 2000c to 2000d-4, 2000c(c), 2000d.

[9] Internal Revenue 3513

220k3513 Most Cited Cases

(Formerly 220k837)

[9] Internal Revenue 4053

220k4053 Most Cited Cases

(Formerly 220k837)

Internal Revenue Service's construction that it cannot allow tax-exempt status to private schools which practice racial discrimination nor treat gifts to such schools as charitable deductions for income tax purposes is not limited in application to schools formed for purpose of avoiding unitary school system. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501; Civil Rights Act of 1964, §§ 401- 605, 401(c), 601, 42 U.S.C.A. §§ 2000c to 2000d-4, 2000c(c), 2000d; U.S.C.A.Const. Amend. 14.

[10]Constitutional Law 48(4.1)

92k48(4.1) Most Cited Cases

(Formerly 92k48(4), 92k48)

Court's construction of sections of Internal Revenue Code was underscored by fact that it obviated need to determine serious constitutional claims. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501; U.S.C.A.Const. Amend. 14.

[11] Constitutional Law 91

92k91 Most Cited Cases

First Amendment grants broad freedom of association, including liberty of parent to educate his child in school of his choice, but such right does not extend to government support for policies and practices of racial discrimination among students. Civil Rights Act of 1964, §§ 401-605, 401(c), 601, 42 U.S.C.A. §§ 2000c to 2000d-4, 2000c(c), 2000d; U.S.C.A.Const. Amend. 1

[12] Constitutional Law 91

92k91 Most Cited Cases

. [ General right of association is protected no matter how unpopular group's purposes or characteristics may be, and one has constitutionally protected right to belong to political groups embracing both legal and illegal aims so long as one does not intend to engage in acts in furtherance of their unlawful purposes. U.S.C.A.Const. Amend. 1.

[13] Constitutional Law 208(1)

92k208(1) Most Cited Cases

Even statutory classifications which affect "fundamental right" are valid when shown to be necessary to promote compelling governmental interest. Civil Rights Act of 1964, §§ 401-605, 401(c), 601, 42 U.S.C.A. §§ 2000c to 2000d-4, 2000c(c), 2000d; 26 U.S.C.A. (I.R.C.1954) §§ 170, 501; U.S.C.A.Const. Amends. 5, 14.

[14] Constitutional Law 215

92k215 Most Cited Cases

Compelling as well as reasonable government interest in interdiction of racial discrimination stands on highest constitutional ground and is dominant over other constitutional interests to extent that there is complete and unavoidable conflict. U.S.C.A.Const. Amends. 1, 5, 14; Civil Rights Act of 1964, §§ 401-605, 401(c), 601, 42 U.S.C.A. §§ 2000c to 2000d-4, 2000c(c), 2000d.

[15] Constitutional Law 82(3)

92k82(3) Most Cited Cases

(Formerly 92k82)

Where there is compelling government interest, even First Amendment freedoms may be limited by appropriately confined lesser measures though such freedoms could not be prohibited directly. U.S.C.A.Const. Amend. 1.

[16] Constitutional Law 42.2(2)

92k42.2(2) Most Cited Cases

(Formerly 92k42)

Private individual has no constitutional right to demand government support of racially discriminatory policies. Civil Rights Act of 1964, §§ 401-605, 401(c), 601, 42 U.S.C.A. §§ 2000c to 2000d-4, 2000c(c), 2000d; 26 U.S.C.A. (I.R.C.1954) §§ 170, 501; U.S.C.A.Const. Amends. 1, 14.

Governmental and constitutional interest of avoiding racial discrimination in educational institutions embraces interest of avoiding even indirect economic benefit of tax exemption. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501; Civil Rights Act of 1964, §§ 401-605, 401(c), 601, 42 U.S.C.A. §§ 2000c to 2000d-4, 2000c(c), 2000d; U.S.C.A.Const. Amend. 14.

[18] Constitutional Law 82(2)

92k82(2) Most Cited Cases

(Formerly 92k82)

Freedoms of bill of rights must be read not in opposition to safeguards of amendments adopted after Civil War but in harmony with them, toward objective of continued national union. U.S.C.A.Const. Amends. 1, 14.

[19]Action 6

13k6 Most Cited Cases

Defendant does not necessarily moot case which is live in its inception by promising to conform to plaintiffs' wishes.

[20] Federal Courts 1013

170Bk1013 Most Cited Cases

(Formerly 106k263)

Three-judge court, convened because of plaintiffs' constitutional claims, had pendent jurisdiction to hear and determine plaintiffs' statutory claims. Civil Rights Act of 1964, §§ 401-605, 401(c), 601, 42 U.S.C.A. §§ 2000c to 2000d-4, 2000c(c), 2000d; 26 U.S.C.A. (I.R.C.1954) §§ 170, 501; U.S.C.A.Const. Amends. 1, 14; 28 U.S.C.A. §§ 2282, 2284.

[21] Declaratory Judgment 385

118Ak385 Most Cited Cases

Where declaration of policy by Internal Revenue Service was possibly discretionary and apparently based on shifting state common-law doctrine, declaration of plaintiffs' federal statutory rights under Internal Revenue Code was needed to provide more enduring, permanent relief in their action for injunctive and declaratory relief. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501.

[21] Declaratory Judgment 387

118Ak387 Most Cited Cases

Plaintiffs in action for declaratory and injunctive relief were entitled to protection, including effective procedures, insuring that Internal Revenue Code would not be applied in fact to provide tax benefits to private Mississippi schools practicing racial discrimination as to students, and where prior history and court findings left private Mississippi schools with badge of doubt on such issue, injunctive relief was granted against Internal Revenue Service, including requirements as to notification, to community, of change in policy of Service. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501.

[23] Federal Courts 232

170Bk232 Most Cited Cases

(Formerly 106k262.3(6), 106k262.3(9))

Federal courts have power to correct improper or inadequate action of federal officials not only, as in case of state officials, for failure to observe constitutional limits, but also for failure to act in consonance with pertinent federal legislation, and where necessary courts have power even to command affirmative action. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501; 5 U.S.C.A. §§ 551 et seq., 701 et seq., 3105.

[24] Adminstrative Law and Procedure 741

15Ak741 Most Cited Cases

Public interest requires court to assure adequate consideration of initial applications to government when that is crucial step not readily correctible at later stage on consideration of permanent application. 5 U.S.C.A. §§ 551 et seq., 701 et seq., 3105.

[25] Declaratory Judgment 384

118Ak384 Most Cited Cases

Where improvident ruling of Internal Revenue Service recognized tax-exempt status and advance assurance of deductibility would guarantee deductibility of contributions later made even if subsequent audit resulted in revocation (prospectively) of exemption ruling, court's decree could extend to matters of administration, such as information requirements, though court had accepted service's current interpretation of statute. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501.

[26] Equity 39(1)

150k39(1) Most Cited Cases

In granting relief ensuring that Internal Revenue Code would not be applied in fact to provide tax benefits to private Mississippi schools practicing racial discrimination as to students, court was required, as court of equity, to do complete justice. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501.

[27] Equity 39(1)

150k39(1) Most Cited Cases

Duty of court as court of equity to do complete justice is as applicable to protection of statutory rights as to protection of constitutional rights, and principle is applicable with full vigor when statute relates to fundamental civil rights. 26 U.S.C.A. (I.R.C.1954) §§ 170, 501; U.S.C.A.Const. Amends. 1, 14; Voting Rights Act of 1965, § 2 et seq., 42 U.S.C.A. § 1973 et seq.

*1155 Frank R. Parker, Jackson, Miss., and James Robertson, Washington, D. C., for plaintiffs

. Johnnie M. Walters, Asst. Atty. Gen., Tax Div., Richard M. Roberts, Deputy Asst. Atty. Gen., Tax Div., Stanley F. Krysa, Trial Atty., Tax Div. and Jack B. Teplitz, Dept. of Justice, for defendants

. George S. Leonard, of Leonard, Clammer & Flues, Washington, D. C., for intervenors.

Before LEVENTHAL, Circuit Judge, and WADDY and PRATT, District Judges.

OPINION, FINDINGS OF FACT AND CONCLUSIONS OF LAW IN SUPPORT OF ORDER FOR

DECLARATORY RELIEF AND PERMANENT INJUNCTION

LEVENTHAL, Circuit Judge:

Plaintiffs, Negro Federal taxpayers and their minor children attending public schools in Mississippi, brought this class action on May 21, 1969, seeking to enjoin the Secretary of the Treasury and Commissioner of Internal Revenue from according tax exempt status to private schools in Mississippi which exclude Negro students on the basis of race or color. They sought a declaration (1) that granting tax exempt status to such schools is violative of the provisions of the Internal Revenue Code of 1954 governing charities and charitable contributions; or (2) that if granting such status is authorized by the Code, then to that extent Sections 170 and 501 of the Code are unconstitutional.

I. PRIOR DEVELOPMENTS

In our Opinion issued January 12, 1970, in support of our Order for Preliminary Injunction, we concluded that these tax benefits and deductions "mean a substantial and significant support by the Government to the segregated private school pattern," and that accordingly plaintiffs had "a reasonable probability of success" on the merits of their constitutional claims. [FN1]

FN1.

Green v. Kennedy, 309 F.Supp. 1127, 1134, 1132 (D.D.C.1970).

On January 21, 1970, we granted the Motion to Intervene filed by Intervenors, Dan Coit, et al., as representatives of the class of parents and children who support or attend private, nonprofit, hitherto tax exempt schools in Mississippi having an enrollment consisting only of members of the white race and established as an alternative for white students seeking to avoid desegregated public schools. [FN2]

On the same day we granted Plaintiffs' motion to compel discovery, and Defendants have responded to requests for admissions and Plaintiffs have taken depositions. On June 26, 1970, we entered a supplemental order requiring defendants to suspend advance assurances of deductibility of contributions, previously given to segregated private schools in Mississippi, unless and until the Internal Revenue Service (IRS) determined that these schools were not part of a system of private schools operated on a racially segregated basis as an alternative to white students seeking to avoid desegregated public schools. Intervenors' motion to set this order aside was considered afresh, after oral argument *1156 on August 27, 1970, and denied on September 14, 1970. Intervenors appealed to the Supreme Court from the orders of this court of January 13, June 26 and September 14, 1970. The appeal was dismissed for want of jurisdiction on January 11, 1971. Coit v. Green, 400 U.S. 986, 91 S.Ct. 460, 27 L.Ed.2d 435 (1971).

In the midst of this litigation, the Internal Revenue Service changed its course with respect to segregated private schools. On July 10 and 19, 1970, the Service issued two Releases, discussed hereafter, announcing that "it can no longer legally justify allowing tax-exempt status to private schools which practice racial discrimination nor can it treat gifts to such schools as charitable deductions for income tax purposes." In testimony before the Senate Select Committee on Equal Educational Opportunity, [FN3] the Commissioner of Internal Revenue explained, "An organization seeking exemption as being organized and operated exclusively for educational purposes, within the meaning of section 501(c) (3) and section 170, must meet the tests of being 'charitable' in the common-law sense." As the IRS now construes the Code private schools which practice racial discrimination do not meet such requirements.

II. THE INTERNAL REVENUE CODE PROHIBITS EXEMPTION AND DEDUCTIONS FOR

RACIALLY DISCRIMINATORY PRIVATE SCHOOLS

[1]Upon reflection, we have concluded that the plaintiffs were entitled at the filing of the complaint and are now entitled to a declaration that the Code requires the denial and elimination of Federal tax exemptions for racially discriminatory private schools and of Federal income tax deductions for contributions to such schools. [FN4]

A. Code Provisions

The relevant provisions of the Internal Revenue Code are as follows:

* * *

* * *

[2]The key words are not defined with particularity in the Code or Treasury Regulations. But clearly, the term "charitable" is used "in its generally accepted legal sense," Treas.Reg. § 1.501 (c) (3)-1(d) (2), and not in a street or popular sense (such as, e. g., benevolence to the poor and suffering). See H. Reiling, "What is a Charitable Organization?" 44 A.B.A.J. 525, 527 (1958). Thus "strong analogy" can be derived from the general common law of charitable trusts, at least for close interpretative questions. Girard Trust Co. v. Commissioner of Internal Revenue, 122 F.2d 108, 110 (3d Cir. 1941); Pennsylvania Co. for Insurance of Lives and Granting Annuities v. Helvering, 62 App.D.C. 254, 66 F.2d 284 (1933).

B. Denial of Exemptions and Deductions May Be Required by Underlying Law of

Charitable Trusts

There is at least a grave doubt whether an educational organization that practices racial discrimination can qualify as a charitable trust under general trust law. We need not decide that question, but brief discussion provides helpful perspective.

1. General Law of Charitable Trusts.

Apart from tax advantages, the law bestows on charitable trusts many privileges not accorded their non-charitable cousins. As Bogert's text notes, these include: permission for the trust to be perpetual in duration; to inure to the benefit of beneficiaries who are not definitely ascertainable at creation of the trust or within the period of the rule against perpetuities; and to escape some of the rules regarding accumulations, as well as those against remoteness in vesting and suspension of the power of alienation. Special rules of construction are applied in an effort to support a charitable trust. And under the cy pres doctrine the courts modify charitable trusts to meet changing conditions in a way not permitted with regard to private trusts. "All these exceptions and exemptions imply more or less disadvantage to the community. The law must find in the trust which is to receive the name 'charitable' some advantages to the public which more than offset the detriments which arise out of the special privileges accorded to that trust. [FN5] "

FN5. 4 G. Bogert, The Law of Trusts and Trustees §§ 361, 362 (2d ed. 1964).

It is because society is "the real beneficiary of every charitable trust" that it is enforceable even though there are no ascertainable beneficiaries to bring an issue or controversy to the chancellor. It is the "public benefits arising from the charitable trust" that result in its enforcement by a public official, traditionally the Attorney General whose duties include protection of the people of the state in general. [FN6] And if the purpose of a trust does not merit classification as beneficial to the community and hence a charitable trust, then however honorable its purpose-say, a trust for the erection of monuments, the care *1158 of graves, the support of animals, and in various states for the saying of masses,-there is only an "honorary trust" which the transferee may decline to fulfill and remit to the settlor or estate. There is no community benefit which permits the time and effort of a public official to be devoted to its enforcement. [FN7]

FN6. 4 Bogert, supra note 5 § 411, p. 318; see § 362, p. 5 for the first sentence of this paragraph of opinion.

FN7. Restatement (Second) of Trusts § 124 (1959).

Underlying the law of charitable trusts is the conception, both in definition and requirement, that a "charitable" trust is one formed to serve the general welfare and be "beneficial to the community." Often cited is Ould v. Washington Hospital for Foundlings, 95 U.S. 303, 311, 24 L.Ed. 450 (1877), "A charitable use, where neither law nor public policy forbids, may be applied to almost any thing that tends to promote the well-doing and well-being of social man." The American Law Institute restates the doctrine thus: "A purpose is charitable if its accomplishment is of such social interest to the community as to justify permitting the property to be devoted to the purpose in perpetuity. [FN8] "

FN8. Id. § 368, Comment b.

Calculations of community benefit are often difficult, and as time passes, conceptions of worthy purposes may change. "Because of this constant flux," notes one commentator, [FN9] "attempts to formalize the community benefit into abstract rules inevitably degenerate into a listing of ad hoc responses to particular situations." The list in the preamble to the Statute of Charitable Uses, 43 Eliz. I, c. 4(1601), contained a fair collation of the then common charities. Other classical definitions, employing categories derived from the Statute, are set forth in the footnote. [FN10] But underlying any traditional listing of charitable purposes was the element that "accomplishment of the objects listed foreseeably redounded to community betterment." Annot. 12 A.L.R.2d 849, 855 (1950).

Trusts coming within Lord Macnaghten's first three categories (supra, note 10)-relief of poverty; advancement of education; advancement of religion-are recognized as beneficial to the community as a whole even though the class of persons benefiting directly is relatively small. When trusts come under the general, residual category ("other purposes beneficial to the community") it must be shown that the class of beneficiaries is large enough to establish the interest of the community in enforcement of the trust. Restatement (Second) of Trusts § 375, Comment a. And so, even several years before the July, 1970, change in tax policy as to educational charities, the IRS took the position that contributions to community recreation facilities would be deductible only if the facilities were open on a racially non-discriminatory basis. [FN11]

FN11. Rev.Rul. 67-325, 1967-2 Cum.Bull. 113.

*1159 Analysis of the contribution of a trust purpose to the benefit of the community must take into account broad principles of the general welfare, as expounded, inter alia, in constitutions, statutes, and court decisions. There may well be changes over time in the application of these principles to particular uses. For example, there was no mention of alleviating the suffering of animals in the Statute of Charitable Uses. Today it is recognized that the community has an interest in the prevention of cruelty to animals and societies formed for the prevention of cruelty to animals have been widely held charitable. [FN12] Changes in the courts' conceptions of what is charitable are wrought by changes in moral and ethical precepts generally held, or by changes in relative values assigned to different and sometimes competing and even conflicting interests of society. [FN13]

FN12. 4 A. Scott, The Law of Trusts § 374.2 at 2905-06 (1967).

FN14. 4 G. Bogert, supra note 5, § 369 at 63.

The courts should be left free to apply the standards of the time. What is charitable in one generation may be non-charitable in a later age, and vice versa. Ideas regarding social benefit and public good change from century to century, and vary in different communities.

While as a matter of form Professor Scott organized his treatise according to a set of traditional charitable categories, he cautions:

FN15. 4 A. Scott, supra, note 12, § 368 at 2855-56.

Another writer notes that the ultimate test of an attempted charitable trust is not whether it fits into a traditional category but whether the court finds it "beneficial to the community." See Annot. 12 A.L.R.2d 849, 859 (1950).

. The courts are, of course, vigilant to inquire whether a charitable trust has become unenforceable as written because of lack of benefit to the community even assuming it was valid when executed. The testator or settlor is not given the authority to impose his judgment, however enlightened and reasonable when exercised, on future generations and in perpetuity, with assurance of enforcement by state officials, without authority in the courts to reassess the reasonableness of his purposes in the light of future conditions and public policies.

2. The Common Law Rulings Avoiding Enforcement of Purpose of Racially

Discriminatory Private Education.

[3][4]All charitable trusts, educational or otherwise, are subject to the requirement that the purpose of the trust may not be illegal or contrary to public policy. This elementary principle, referred to by the Supreme Court in Ould supra, was restated as follows in the Restatement (Second) of Trusts § 377, Comment c (1959): "A trust for a purpose *1160 the accomplishment of which is contrary to public policy, although not forbidden by law, is invalid." This public policy doctrine operates as a necessary exception to or qualifier of the precept that in general trusts for education are considered to be for the benefit of the community. Otherwise, for example, Fagin's school for pickpockets would qualify for a charitable trust.

While in the past the traditional law of charities embraced educational trusts for the benefit of a racially defined class, there is grave doubt whether this rule has continuing vitality in view of current values which govern the application of charitable trust law. The cases indicate a trend that racially discriminatory institutions may not validly be established or maintained even under the common law pertaining to educational charities. [FN16] Professor Bogert's treatise has already reflected this shift. [FN17] While Professor Scott's treatise has not yet been revised so as to modify the earlier statement that a trust to educate persons of a particular race would nonetheless be charitable, [FN18] Professor Scott plainly recognizes the underlying rules that "[q]uestions of public policy are not fixed and unchanging, but vary from time to time and from place to place," [FN19] and that "[a] trust fails for illegality if the accomplishment of the purposes of the trust is regarded as against public policy in the community." [FN20]

Several cases have freed trustees and administrators of educational institutions from the necessity of following discriminatory provisions in gifts to their schools. Such discriminatory clauses were ignored as nullities, and the trusts were salvaged under the cy pres doctrine, avoiding reversion to residuary legatees, when Amherst and Stanford announced they would refuse to accept the gifts if the restrictive clauses were binding. [FN21] In 1964, Rice University brought an action in a Texas court against the Attorney General of Texas, seeking authority to ignore restrictions in its charter, and in the trust establishing the University, prohibiting the admission of Negroes. A jury made special findings of fact that the chief purpose of the University's benefactor was to create a first class educational institution and that the racial restrictions rendered this purpose impracticable. The court held the University trustees free to ignore the racial restriction in the trust and to admit all applicants without regard to race. [FN22]

3. Construction of Congressional Intent in Federal Tax Law Provisions by

Reference to Federal Public Policy.

There is merit in the general approach of interpreting these Code provisions by reference to common-law background, using that term in its broadest sense to include both the domain of equity courts and the on-going evolution of doctrine by the courts. If we were to follow the common law approach there would be a strong case for sustaining the interpretation of the Code announced in July 1970 by the IRS as reasonable in the light of the authorities we have cited. [FN23]

See Clark, supra note 9.

Taking into account the sensitive and crucial nature of the issue of racially discriminatory schools and the existence, as we shall relate, of a federal policy derived from Congressional enactment as well as the Constitution itself, it is our conclusion that the ultimate criterion for determination whether such schools are eligible under the "charitable" organization provisions of the Code rests not on a common law referent but on that Federal policy. In construing the Federal law that confers tax advantages upon educational charities, we are guided by two salient principles.

a. Public Policy

[5]Before considering the more particular subject of charities, we refer to the general and well-established principle that the Congressional intent in providing tax deductions and exemptions is not construed to be applicable to activities that are either illegal or contrary to public policy. For example, the dependency deduction was construed in Leon Turnipseed, 27 T.C. 758 (1957), to disallow such a deduction if the relationship between the taxpayer and the "dependent" was in violation of local law. This was later codified in Section 152(b) (5) of the Code. See also Fuller v. Commissioner of Internal Revenue, 213 F.2d 102 (10th Cir. 1954) limiting the deduction for individual business losses (now § 165(c)).

A number of cases establishing public policy as a limitation on tax benefits have been concerned with the ordinary and necessary business expense deduction under § 162 of the Code. *1162 Commissioner of Internal Revenue v. Tellier, 383 U.S. 687, 694, 86 S.Ct. 1118, 16 L.Ed.2d 185 (1966); Tank Truck Rentals, Inc. v. Commissioner of Internal Revenue, 356 U.S. 30, 33-34, 78 S.Ct. 507, 2 L.Ed.2d 562 (1958); Commissioner of Internal Revenue v. Sullivan, 356 U.S. 27, 78 S.Ct. 512, 2 L.Ed.2d 559 (1958); Lilly v. Commissioner of Internal Revenue, 343 U.S. 90, 96-97, 72 S.Ct. 497, 96 L.Ed. 769 (1952). At issue in Tank Truck Rentals was the deductibility of fines paid for violations of state maximum weight laws. Disallowing the deduction, the Court held, "A finding of 'necessity' cannot be made, however, if allowance of the deduction would frustrate sharply defined national or state policies proscribing particular types of conduct, evidenced by some governmental declaration thereof." (356 U.S. at 33-34, 78 S.Ct. at 509). The state policies of protecting their highways from damage and insuring the safety of persons using them were "evidenced" by the state penal statutes. Id. at 34, 78 S.Ct. 507. Cautioning that "each case must turn on its own facts," the Court articulated that "the test of nondeductibility always is the severity and immediacy of the frustration resulting from allowance of the deduction. The flexibility of such a standard is necessary if we are to accommodate both the congressional intent to tax only net income, and the presumption against congressional intent to encourage violation of declared public policy." Id. at 35, 78 S.Ct. at 510. [FN24]

This public policy limitation on tax benefits applies a fortiori to the case before us, involving the charitable deduction whose very purpose is rooted in helping institutions because they serve the public good. The Internal Revenue Code does not contemplate the granting of special Federal tax benefits to trusts or organizations, whether or not entitled to the special state rules relating to charitable trusts, whose organization or operation contravene Federal public policy. This principle cannot be applied without taking into account that as to private philanthropy, the promotion of a healthy pluralism is often viewed as a prime social benefit of general significance. In other words, society can be seen as benefiting not only from the application of private wealth to specific purposes in the public interest but also from the variety of choices made by individual philanthropists as to which activities to subsidize. [FN25] This decentralized choice-making is arguably more efficient and responsive to public needs than the cumbersome and less flexible allocation process of government administration. [FN26]

In a recent article, Judge Friendly has stressed the value of this pluralism, noting the incongruity "if the extension of the helping hand of the government, even when the help is monetary, were to turn our lively pluralistic society into a deadly uniformity ruled by constitutional absolutes." Philanthropy is a delicate plant whose fruits are often better than its roots; desire to benefit one's own kind may not be the noblest of motives but it is not ignoble. It is the very possibility of doing something different than government can do, of creating an *1163 institution free to make choices government cannot-even seemingly arbitrary ones-without having to provide a justification that will be examined in a court of law, which stimulates much private giving and interest. [FN27]

The indulgence of individual whim or preference has values but like all principles it cannot be pushed beyond sound limits to extremes that cannot be approved. The individual philanthropist cannot be indulged in his own vagaries as to what is charitable; he must conform to some kind of norm, else he cannot obtain subsidy or tax exemption. Similarly, the general principle of a "desire to benefit one's own kind" is an acceptable incentive to philanthropy as applied to a wide range of causes. But it takes on a different and unacceptable hue when it is manifested as racial discrimination. We are persuaded that there is a declared Federal public policy against support for racial discrimination in education which overrides any assertion of value in practicing private racial discrimination, whether ascribed to philosophical pluralism or divine inspiration for racial segregation.

b. Federal Policy Against Support for Racially Segregated Education

[6][7]The Code must be construed and applied in consonance with the Federal public policy against support for racial segregation of schools, public or private.

The sources and evidences of that Federal public policy are various. Perhaps the ultimate source is the strife-sprung national policy against slavery, culminating in its abolition in the Thirteenth Amendment. The Enabling Clause of that Amendment is a constitutional source for Congressional legislation "for abolishing all badges and incidents of slavery." Civil Rights Cases, 109 U.S. 3, 20, 3 S.Ct. 18, 28, 27 L.Ed. 835 (1883).

The constitutional strength of the government's interest in preventing even private racial discrimination is underscored by the recent decision in Jones v. Alfred H. Mayer Co., 392 U.S. 409, 88 S.Ct. 2186, 20 L.Ed.2d 1189 (1968), interpreting the Civil Rights Act of 1866, 42 U.S.C. § 1982, wherein that interest was held to prevail over the ordinary liberty of a citizen to buy and sell land and other property. Cf. Griffin v. Breckenridge, 403 U.S. 88, 91 S.Ct. 1790, 29 L.Ed.2d 338 (1971).

The policy against racial segregation in education was broadly proclaimed as to public education by the states in the historic decision in Brown v. Board of Education, 347 U.S. 483, 74 U.S. 686, 98 L.Ed. 873 (1954). That was a seminal case and it has had numerous progeny, the latest to issue being Swann v. Charlotte-Mecklenburg Board of Education, 402 U.S. 1, 91 S.Ct. 1267, 28 L.Ed.2d 554 (1971). In Bolling v. Sharpe, 347 U.S. 497, 500, 74 S.Ct. 693, 694, 98 L.Ed. 884 (1954), the companion case of Brown applying the prohibition against state school segregation to the Federal Government through the Fifth Amendment, the Supreme Court declared, "Segregation in public education is not reasonably related to any proper governmental objective ***."

The national policy against support for segregated education emerged in provisions adopted by the Congress in the Civil Rights Act of 1964, 42 U.S.C. §§ 2000c to 2000d-4 (1964). Section 601 of the Act, 42 U.S.C. § 2000d provides that:

*1165[8]We need not determine whether § 601 applies in terms to tax deductions and benefits. Certainly it is an expression of Federal policy against Federal support for private schools that practice racial discrimination. Another provision of the 1964 Act, calling on Federal officials to take action in order to terminate segregation in "public" schools and colleges, is expressly applicable to private schools "operated *** predominantly from or through the use of governmental funds or property, or funds or property derived from a governmental source." See § 401(c), 42 U.S.C. § 2000c (1964). This is a "rule of thumb," delineating an a fortiori case of unconstitutional state action, which does not derogate from the standing of Negro school children to launch a challenge in case of "any amount of state support to help found segregated schools or to help maintain such schools". Poindexter v. Louisiana Financial Assistance Commission, 258 F.Supp. 158, 164 (3-judge court) (E.D.La.1966) (denying motion to dismiss), repeated and incorporated in Poindexter v. Louisiana Financial Assistance Comm'n, 275 F.Supp. 833, 845 (E.D.La.1967) (permanent injunction) aff'd mem. 389 U.S. 571, 88 S.Ct. 693, 19 L.Ed.2d 780 (1968). (Emphasis supplied.)

The Internal Revenue Code provisions on charitable exemptions and deductions must be construed to avoid frustrations of Federal policy. Under the conditions of today they can no longer be construed so as to provide to private schools operating on a racially discriminatory premise the support of the exemptions and deductions which Federal tax law affords to charitable organizations and their sponsors.

[9]The construction upheld today applies to all private schools practicing racial discrimination. This goes beyond the class of schools considered in our prior opinion, 309 F.Supp. at 1132, where we discussed the constitutional problems inhering in providing tax benefits for private schools forming "a system of segregated private schools as an alternative available to white students seeking to avoid desegregated public schools." [FN29] The construction announced in 1970 by the IRS applies to all private schools, without reference to any finding or determination that such schools were formed for the purpose of avoiding a unitary school system. This construction comports with the Federal policy discussed above, and in our view reflects the proper construction of the Code in the light of that policy.

C. Avoidance of Constitutional Questions

[10]We are fortified in our view of the correctness of the IRS construction by the consideration that a contrary interpretation of the tax laws would raise serious constitutional questions, such as those we ventilated in our January, 1970, opinion. Clearly the Federal Government could not under the Constitution give direct financial aid to schools practicing racial discrimination. But tax exemptions and deductions certainly constitute a Federal Government benefit and support. While that support is indirect, and is in the nature *1165 of a matching grant rather than an unconditional grant, it would be difficult indeed to establish that such support can be provided consistently with the Constitution. The propriety of the interpretation approved by this court is underscored by the fact that it obviates the need to determine such serious constitutional claims. [FN30]

D. There Is No Merit In Contentions of Intervening White Parents that This

Construction Is Unconstitutional

We must also consider the claim made by the intervenors that defendants' interpretation violates their "right under the First Amendment to the Constitution to associate in private schools of their choice without regard to the educational philosophy thereof," [FN31] and that, under Speiser v. Randall, 357 U.S. 513, 78 S.Ct. 1332, 2 L.Ed.2d 1460 (1958), "what may not be done directly cannot be done indirectly under the guise of a discriminatory interpretation of the tax laws." [FN32]

1. Freedom of Association

[11]We recognize with intervenors that the Bill of Rights grants to the citizens of our free society a broad freedom of association. The liberty of a free people includes the right to educate one's child in a school of the parent's choice in public, private, or parochial. Griswold v. Connecticut, 381 U.S. 479, 482, 495, 85 S.Ct. 1678, 14 L.Ed.2d 510 (1965). These rights cannot be abridged by legislation which "unreasonably interferes with the liberty of parents and guardians to direct the upbringing and education of children under their control" or "which has no reasonable relation to some purpose within the competency of the State as is the case with legislation that requires attendance at public schools. Pierce v. Society of the Sisters, and Pierce v. Hill Military Academy, 268 U.S. 510, 534-535, 45 S.Ct. 571, 69 L.Ed. 1070 (1925).

We do not minimize the importance of the constitutional precepts established by the Pierce cases in 1925, and their doctrinal predecessor, Meyer v. Nebraska, 262 U.S. 390, 43 S.Ct. 625, 67 L.Ed. 1042 (1923). These decisions put a salutary end to an "effort to regiment the mental life of Americans." [FN33] The vitality and continuing significance of this doctrine is indisputable. Griswold v. Connecticut, supra. As Mr. Justice Brennan said concurring in School District of Abington Tp., Pa. v. Schempp, 374, U.S. 203, 242, 83 S.Ct. 1560, 1583, 10 L.Ed.2d 844 (1963):