CLAIMS COURT REFUSES TO ACCEDE TO DISCOVERY DEMANDS OF GROUP CLAIMING EXEMPT STATUS

Filed: December 3, 1986

Judge Thomas J. Lydon

For the plaintiff: Robert H. Kapp, Washington, D.C., attorney of record, Hogan & Hartson, of counsel.

For the defendant: Neil V. Birkhoff, Tax Division, Department of Justice, Washington, D.C. 20530.

Taxpayer's motion to compel responses to discovery requests concerning the IRS adverse determination as to taxpayer's tax-exempt status denied. In an initial qualification declaratory judgment action under section 7428, the scope of review is limited to the administrative record. Only on rare occasions upon a showing of good cause is discovery permissible. Taxpayer failed to show good cause for going beyond the administrative record. Moreover, taxpayer failed to show good cause why the United States should further explain or expand upon, via responses to discovery, the IRS adverse determination.

ORDER

Plaintiff, in this tax case, has filed a Motion To Compel Discovery. Specifically, plaintiff seeks an order compelling defendant to answer certain interrogatories which it served on defendant, and to produce certain documents set forth in plaintiff's request therefor which was also served on defendant. Plaintiff's motion had attached thereto as "Exhibit C" and "Exhibit D" defendant's response to the interrogatory request and the production request. Plaintiff advises that, despite good faith efforts, the parties have been unable to resolve this discovery matter. Defendant has filed a response in opposition to said motion.

At issue in this case is a determination by the Commissioner of the Internal Revenue Service (IRS) that plaintiff was not an organization qualified under section 501(c)(3) of the Internal Revenue Code for exemption from federal income tax under section 501(a) of said Code. In short, the litigation centers on plaintiff's tax exempt status. Plaintiff's complaint seeks a declaratory judgment under section 7248 of the Internal Revenue Code relative to its status as an organization exempt from federal income taxes pursuant to section 501(c)(3) of the Code. It is of some importance to note that this is an initial qualification declaratory judgment action. Plaintiff contends that the IRS determination that it does not qualify as a charitable organization under section 501(c)(3) of the Code is erroneous. Further, plaintiff alleges, on information and belief, that the IRS has qualified other similarly situated agencies for tax exempt status under section 501(c)(3) and thus there is no rational basis for treating plaintiff differently.

I.

In plaintiff's request for interrogatories (Nos. 1 and 2), it seeks to discover the reasons and grounds, if any, for the IRS determination denying it a tax exempt status. Interrogatory No. 1 requests defendant to "identify the 'ordinary commercial adoption agencies'" referred to in the IRS decisional letter. Interrogatory No. 2 requests defendant to "identify the 'private individuals' to which the United States of America contends the earnings of Easter House inures" and further requests defendant to "specify the manner in which the earnings of Easter House allegedly inures to the benefits of such private individuals * * *."

Generally, the scope of review in this type of case is limited to the administrative record. Church of the Visible Intelligence, etc. v. United States, 4 Cl. Ct. 55, 60 (1983). A court will allow a party to introduce evidence which was not part of the administrative proceedings only on rare occasions upon a showing of good cause. Id. 4 Cl. Ct. at 60. Ordinarily, a trial will be allowed only with respect to a factual dispute in the administrative record or to resolve disagreement between the parties as to whether a particular item is a part of such record. See for example, First Libertarian Church v. Commissioner, 74 T.C. 396 (1980). No such extraordinary circumstances exist, or are suggested to exist, in this case. This same reasoning renders the case of Virginia Professional Standards Foundation v. Blumenthal, 466 F. Supp. 1164 (D.D.C. 1976) inapposite.

In the case of an initial determination by IRS that an organization is not tax exempt, which is the situation in the case at bar, the usual question before the court is only whether or not the IRS determination is correct on the administrative record before it and no additional evidence is received by the court. Thus, the legal viability of an IRS determination on tax exempt status generally rests on the decision rendered and the administrative record supporting said decision. Plaintiff challenges the conclusionary nature of certain parts of the IRS determination. It seeks to have that determination analyzed and justified by the defendant at the discovery stage. In this type of case, and under existing circumstances, this asks too much. If, on analysis, after briefing by the parties, the determination is deemed not supported by the administrative record, the factual conclusions may be held insufficient to support the determination reached. However, the above statement must be tempered by recognition of who has the burden of proceeding and persuasion at the IRS level. Plaintiff must prove it is a non-profit organization before the IRS. The IRS is not required to disprove it.

As matters now stand, the operative facts should be available in the administrative record in one form or another. In this regard, in this type case the parties generally stipulate the administrative record. See id 4 Cl. Ct. at 60. If material facts, giving due regard to which party has the burden relative thereto, are not available in said record, that fact MAY help plaintiff in carrying its heavy burden of proving entitlement to the tax exemption claimed. Plaintiff does have a substantial burden in this regard. See Senior Citizens Stores, Inc. v. United States, 602 F.2d 711, 713 (5th Cir. 1979). See also Incorporated Trustees of Gospel Workers Society v. United States, 510 F. Supp. 374, 377 n. 6 (D.D.C. 1981), aff'd 672 F.2d 894 (D.C. Cir. 1981). It is plaintiff's burden to present all facts supportive of its tax exemption claim at the administrative proceedings. This includes, inter alia, facts as to whether plaintiff operates as a non-profit adoption agency. The IRS does not have to prove that fact, which, in essence, plaintiff is seeking to require by its discovery request. If plaintiff fails to carry the above burden, the IRS can conclude, because of the absence of evidence to the contrary, that plaintiff is an ordinary for profit commercial adoption agency. It is well settled that plaintiff must satisfy all the requirements for a tax exempt organization. See Western Catholic Church v. Commissioner, 73 T.C. 196, 207 (1979), aff'd 631 F.2d 736 (7th Cir. 1980).

Plaintiff's request for interrogatories Nos. 3 and 4 rests on "information and belief" that other non-profit adoption agencies operating in the same manner as plaintiff have been granted tax exempt status. However, there is no "showing" that any other agency was given treatment other than that accorded plaintiff. More than "information and belief" is necessary to make such a "showing." See Shakespeare Company v. United States, 182 Ct. Cl. 119, 128-29, 389 F.2d 772, 777-78 (1968).

II.

Plaintiff's production request, which is tied into its request for interrogatories, is likewise denied for reasons discussed above.

III.

Plaintiff has failed to show good cause supportive of the discovery requests it presents. Accordingly, its motion to compel discovery is denied. ¹ The attention of the parties is directed to the court's order of September 19, 1986 regarding the schedule for further proceedings in this case, which schedule was agreed to by counsel and accepted by the court.

                                   Thomas J. Lydon