Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc. v. Commissioner of Internal Revenue , 111 F. Supp. 3d 34 ( 2015 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
)
EDUCATIONAL ASSISTANCE )
FOUNDATION FOR THE )
DESCENDANTS OF HUNGARIAN )
IMMIGRANTS IN THE PERFORMING )
ARTS, INC., )
)
Plaintiff, )
)
v. ) Civil Action No. 11-1573 (RBW)
)
UNITED STATES OF AMERICA, )
)
Defendant. )
)
MEMORANDUM OPINION
The plaintiff, Educational Assistance Foundation for the Descendants of Hungarian
Immigrants in the Performing Arts, Inc. (“Foundation”), challenges the Internal Revenue
Service’s (“IRS”) decision to revoke its status as a tax-exempt organization under 26 U.S.C. §
501(c)(3). Amended Complaint for Declaratory Judgment (“Am. Compl.”) ¶¶ 1, 12, 27–31. The
IRS has moved for summary judgment, asserting that “there is no genuine issue as to any
material fact,” and that “[t]he administrative record . . . amply supports the actions taken by the
[IRS] to revoke [the] [Foundation]’s tax-exempt status.” United States’ Motion for Summary
Judgment (“Def.’s Mot.”), at 1. Upon careful consideration of the parties’ submissions 1 and the
1
The Foundation asks the Court to seal its opposition to the IRS’s motion for summary judgment. Plaintiff’s
Motion to Seal [] at 1. While “the decision as to access [to judicial records] is one best left to the sound discretion of
the trial court,” United States v. Hubbard, 650 F.2d 293, 316–17 (D.C. Cir. 1980) (citation omitted), there
nevertheless is a “strong presumption in favor of public access to judicial proceedings,” EEOC v. Nat’l Children’s
Ctr. Inc., 98 F.3d 1406, 1409 (D.C. Cir. 1996). In this Circuit, “[s]ix factors are generally considered when
determining whether a movant has shown sufficiently compelling circumstances to overcome the presumption in
favor of public access,” Kline v. Williams, No. 05-01102, 2012 WL 1431377, at *1 (D.D.C. Apr. 25, 2012) (citing
Hubbard, 650 F.2d at 317–20), but the Foundation has failed to address any of these factors in its motion to seal.
Indeed, the only stated basis for the Foundation’s motion to seal is the defunct suggestion that some of the
(continued . . . )
1
Administrative Record (“A.R.”), the Court concludes for the reasons that follow that it must
grant the IRS’s motion. 2
I. BACKGROUND
Julius Schaller died in December 2003, Def.’s Facts ¶ 1; Pl.’s Facts ¶ 1, leaving a Last
Will & Testament that appointed Barrett Weinberger and Frances Odza as joint executors of his
estate, A.R. at 165. Following Schaller’s death, Weinberger incorporated plaintiff Educational
Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts,
Inc., for the purpose of “provid[ing] financial assistance to college students” who descend from
“an immigrant from the Hungarian area of Eastern Europe” and are “involved in the performing
arts.” A.R. at 32. Weinberger listed himself, Odza, and Solomon Zieger as the Foundation’s
three corporate directors. A.R. at 48, 57. All three are descendants of Julius Schaller. A.R. at
123–24 (estate tax filing noting the familial relationship of each beneficiary to the decedent).
In June 2004, the Foundation “applied to the [IRS] for tax-exempt status,” Def.’s Facts ¶
3; Pl.’s Facts ¶ 3, and following its review, the IRS determined that the Foundation qualified as
an exempt organization under section 501(c)(3) of the Internal Revenue Code, A.R. at 98. After
( . . . continued)
information contained in the opposition is covered by the attorney-client privilege—a suggestion that this Court
previously rejected outright in its March 27, 2014 Memorandum Opinion and Order. See Educ. Assistance Found.
for the Descendants of Hungarian Immigrants in the Performing Arts, Inc. v. United States, 32 F. Supp. 3d 35, 48
(D.D.C. 2014) (“any attorney-client privilege that would otherwise protect the Weinberger-Bolden Letter has been
waived through the document’s inadvertent disclosure and the failure of the alleged privilege holders to take
appropriate steps to promptly assert the privilege and aggressively seek to recover the letter”). Therefore, the
Foundation offers no active basis for the Court to conclude that it would be appropriate for the opposition to be
included as part of the record, but under seal.
2
In addition to the documents already referenced, the Court considered the following submissions: (1) the United
States’ Statement of Undisputed Facts in Support of Motion for Summary Judgment (“Def.’s Facts”); (2) the United
States’ Memorandum in Support of Summary Judgment (“Def.’s Mem.”); (3) the Plaintiff’s Response to the United
States’ Statement of Undisputed Facts in Support of Motion for Summary Judgment (“Pl.’s Facts”); (4) the
Plaintiff’s Memorandum in Opposition to the Government’s Motion for Summary Judgment (“Pl.’s Mem.”); (5) the
United States’ Reply Memorandum in Support of Summary Judgment (“Def.’s Reply”); (6) the Plaintiff’s Motion
for Stay Pending Appeal (“Pl.’s Mot. to Stay”); (7) the United States’ Opposition to Plaintiff’s Motion for Stay
Pending Appeal (“Def.’s Opp’n to Stay”); and (8) the Plaintiff’s Reply Brief in Further Support of Its Motion for
Stay Pending Appeal (“Pl.’s Reply to Stay”).
2
the IRS granted the Foundation tax-exempt status, the Schaller estate transferred $2,595,847 to
the Foundation, and claimed a corresponding federal tax deduction that reduced Schaller’s “[n]et
estate tax[es]” and “[g]eneration-skipping transfer taxes” to zero. A.R. at 121, 171. Weinberger
executed the “Gift Agreement” on behalf of both the Schaller Estate as its Executor and the
Foundation as its President. A.R. at 188–91. This sole transfer from the Schaller estate
constituted the Foundation’s only donation and source of funding. Def.’s Facts ¶ 9; Pl.’s Facts ¶
9.
In December 2004, the Foundation awarded financial scholarships to Michael Chase
Weinberger and Adam Zieger for the 2005 calendar year, A.R. at 186, in amounts totaling
approximately $146,325, A.R. at 609. 3 The following year, the Foundation again awarded
scholarships to Michael Chase Weinberger and Adam Zieger, as well as Avraham Cashman
Wachs, A.R. at 194, in amounts totaling $84,162, A.R. at 610. Each of the scholarship recipients
is a direct descendant of Julius Schaller. Def.’s Facts ¶ 16; Pl.’s Facts ¶ 16.
The IRS conducted an audit of the Foundation’s activities, and based upon its findings,
concluded that the Foundation “does not qualify for exemption . . . because it is organized and
operated exclusively for the benefit of Julius Schaller’s Will.” A.R. at 617. Furthermore, the
IRS determined that its revocation would apply retroactive to the date of the Foundation’s
inception “because it omitted and misstated material facts in its application for exemption.” Id.
The Foundation now brings this declaratory judgment action pursuant to 26 U.S.C. §7428,
challenging the IRS’s determinations regarding its tax-exempt status. Am. Compl. ¶ 1.
3
The actual amount of scholarship grants issued during 2005 remains unclear because “[f]unds from the [Schaller]
Will and funds from the Foundation were co-mingled” in one account. A.R. at 608. The Court recognizes this
discrepancy, but notes that it is not material to the resolution of the pending motion for summary judgment.
3
II. STANDARD OF REVIEW
“An action for declaratory judgment under 26 U.S.C. § 7428 confers concurrent
jurisdiction to the Court for Federal Claims, the United States Tax Court and the District Court to
review a final determination by the Secretary of Treasury regarding the tax exempt status of an
organization under § 501(c)(3).” Fund for the Study of Econ. Growth and Tax Reform v. IRS,
997 F. Supp. 15, 18 (D.D.C. 1998), aff’d, 161 F.3d 755 (D.C. Cir. 1998). “The standard of
review in such cases is de novo and the scope of review is limited to the administrative record in
the absence of a showing of good cause.” Airlie Found. v. IRS, 283 F. Supp. 2d 58, 61 (D.D.C.
2003) (citation omitted). “The Court, however, may make findings of fact which differ from the
administrative record.” Id. at 62 (citation omitted). And “while the court must review the IRS’
determination de novo, the organization still carries the burden of demonstrating that it has met
the requirement of the statute under which it claims tax exemption.” Id. (citing Church of the
Visible Intelligence that Governs the Universe v. United States, 4 Cl. Ct. 55, 60 (1983)); see also
New Dynamics Found. v. United States, 70 Fed. Cl. 782, 799 (2006) (“The burden is on the
applicant to establish that it meets [the] statutory requirements” for tax-exempt status). Thus, the
taxpayer “must show both that it is entitled to the tax-exempt status and that the IRS’
determination was incorrect.” Airlie, 283 F. Supp. 2d at 62 (citing Airlie Found., Inc. v. United
States, 826 F. Supp. 537, 547 (D.D.C. 1993)). And in actions based upon 26 U.S.C. § 7428, “the
[C]ourt shall grant summary judgment only if one of the moving parties,” id., shows that “there
is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law,” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
4
III. ANALYSIS
A. The Foundation’s Tax-Exempt Status
“Exemptions from income tax are matters of legislative grace which the courts have
consistently construed strictly.” New Dynamics, 70 Fed. Cl. at 799 (2006) (citing Trs. of the
Graceland Cemetery Improvement Fund v. United States, 515 F.2d 763, 770 (Ct. Cl. 1975)).
Pursuant to Sections 501(a) and (c)(3) of the Internal Revenue Code, an organization is exempt
from federal income taxation if it meets three requirements: “(1) it is organized and operated
exclusively for an exempt purpose; (2) its net earnings do not inure to the benefit of any private
shareholder or individual; and (3) its activities do not . . . attempt[] to influence legislation.”
Family Trust of Mass., Inc. v. United States, 892 F. Supp. 2d 149, 155 (D.D.C. 2012) (quoting
Visible Intelligence, 4 Cl. Ct. at 61), aff’d 722 F.3d 355 (D.C. Cir. 2013). “Because the
requirements are stated in the conjunctive they all must be met.” Easter House v. United States,
12 Cl. Ct. 476, 483 (1987), aff’d, 846 F.2d 78 (Fed. Cir. 1988). 4
The IRS revoked the Foundation’s tax-exempt status because it “d[id] not operate
exclusively for an exempt purpose,” and instead “served ‘private interests to a more than
insubstantial degree’” because scholarships “were made only to descendants of the nieces and
nephews of Julius Schaller.” Def.’s Mem. at 16 (quoting A.R. 1023). “To be operated
exclusively for exempt purposes, an organization must engage primarily in activities which
accomplish at least one exempt purpose,” Visible Intelligence, 4 Cl. Ct. at 61 (citing 26 C.F.R. §
1.501(c)(3)-1(b)(1)(i)), with potential purposes including the following: religious, charitable,
scientific, testing for public safety, literary, educational, or prevention of cruelty to children or
4
While not applicable in this case, the Court also notes that “[a]n organization that otherwise meets the statutory
requirements will nevertheless fail to qualify for tax-exempt status if its exemption-related activities violate public
policy.” Airlie, 283 F. Supp. 2d at 62 n.3 (citing Bob Jones Univ. v. United States, 461 U.S. 574 (1982)).
5
animals, 26 C.F.R. § 1.501(c)(3)-1(d)(1)(i). While “an ‘incidental non-exempt purpose will not
disqualify an organization, . . . a single substantial non-exempt purpose or activity will destroy
the exemption, regardless of the number or quality of exempt purposes.’” Fund for Study, 997 F.
Supp. 15, 19 (D.D.C. 1998) (quoting Airlie, 826 F. Supp. at 548); see also New Dynamics, 70
Fed. Cl. at 799 (“‘Exclusively’ in this statutory context is a term of art and does not mean
‘solely,’” but if “the organization’s activities involve substantially non-exempt purposes, no tax
exemption applies.” (citations omitted)).
Treasury Regulations further specify that “[a]n organization is not organized or operated
exclusively for one or more [exempt] purposes . . . unless it serves a public rather than a private
interest.” 26 C.F.R. § 1.501(c)(3)-1(d)(1)(ii). In other words, “it is necessary for an organization
to establish that it is not organized or operated for the benefit of private interests such as
designated individuals, the creator or his family, shareholders of the organization, or persons
controlled, directly or indirectly, by such private interests.” Id.; see also Airlie, 826 F. Supp. at
549 (“[N]o part of an organization’s net earnings may inure to the benefit of any private
shareholder or individual.” (citation omitted)). “The plaintiff bears the burden of proof to
demonstrate that insiders do not benefit from the tax-exempt organization, ‘especially where the
facts indicate transactions arguably not on arm’s length terms.’” Id. at 550 (citation omitted).
The Treasury Regulations offer several hypothetical examples to illustrate this concept,
one which is particularly apt to the factual circumstances here:
(i) O is an educational organization the purpose of which is to study history and
immigration. O’s educational activities include sponsoring lectures and publishing
a journal. The focus of O’s historical studies is the genealogy of one family, tracing
the descent of its present members. O actively solicits for membership only
individuals who are members of that one family. O’s research is directed toward
publishing a history of that family that will document the pedigrees of family
members. A major objective of O’s research is to identify and locate living
6
descendants of that family to enable those descendants to become acquainted with
each other.
(ii) O’s educational activities primarily serve the private interests of members of a
single family rather than a public interest. Therefore, O is operated for the benefit
of private interests in violation of the restriction on private benefit . . . . Based on
these facts and circumstances, O is not operated exclusively for exempt purposes
and, therefore, is not described in section 501(c)(3).
26 C.F.R. § 1.501(c)(3)-1(d)(1)(iii). Applying this rationale, the United States Tax Court held in
Parshall Christian Order v. Commissioner that an organization with the sole purpose of providing
“housing, food, transportation, clothing, education & other proper needs as may from time to
time arise” to members of the organization failed meet the requirements of tax-exempt status
because “the only members of petitioner were the [petitioner’s principal officer, his wife,] and
their children.” 45 T.C.M. 488 (1983). The Tax Court concluded that the organization
“was thus serving the private interests of its creator and his family.” Id.
The record here similarly demonstrates that the Foundation was operated in a manner that
inured to the benefit of a single family. As the Foundation concedes, every educational
scholarship it issued during its existence was to a descendant of Julius Schaller, Pl.’s Facts ¶ 11.
Thus, the private benefit that inured to this one family precludes the Foundation from qualifying
for tax-exempt status. 26 C.F.R. § 1.501(c)(3)-1(d)(1)(ii); see also, e.g., Parshall Christian
Order, 45 T.C.M. 488 (1983). This conclusion is supported by the fact that all charitable
contributions to the Foundation originated from one source—the Schaller estate, A.R. 599, and
the executors of the Schaller Estate—all relatives of Julius Schaller —maintained control over
the Foundation’s operations as the members of its Board of Directors, id. at 601. While a
“family’s control over [an organization] is not in itself fatal to [the organization’s] cause” when
challenging a revocation or denial of tax-exempt status, Wendy L. Parker Rehab. Found., Inc. v.
C.I.R., 52 T.C.M. 51 (1986), “[p]rohibited inurement is strongly suggested where an
7
individual or small group is the principal contributor to an organization and the principal
recipient of the distributions of the organization, and that individual or small group has exclusive
control over the management of the organization’s funds,” Johnston v. C.I.R., 56 T.C.M.
520 (1988).
The Court’s conclusion is consistent with the Eastern District of South Carolina’s
findings under analogous circumstances in Charleston Chair Co. v. United States, 203 F. Supp.
126 (E.D.S.C. 1962). In Charleston Chair, a private company founded and funded an
organization that would provide educational scholarships exclusively to the company’s
employees and their children. Id. at 127. That Court concluded that “the narrow class of persons
who might benefit, the more restricted group that did benefit[,] and the preference given to the
son of the director, stockholder and trustee disclose that the Foundation was not operated
exclusively for charitable purposes.” Id. at 128.
In opposing the IRS’s motion for summary judgment, the Foundation contends that it
“was expressly organized to potentially benefit all Hungarian immigrant descendants,” Pl.’s
Opp’n at 20, and that “[t]here is simply no basis to apply the private benefit doctrine here”
because “the four scholarship recipients met the criteria to receive scholarship awards from the
Foundation,” id. at 23. This logic is patently flawed. “[A]n organization must be both
‘organized and operated exclusively’ for one or more exempt purposes,” and “[i]f an
organization fails to meet either prong, it cannot be exempt under section 503(c)(1).” New
Dynamics, 70 Fed. Cl. at 799. Even if the Court concludes that the Foundation’s “stated purpose
— to provide financial aid to those who are descendants of Hungarian immigrants in the
performing arts . . . — is a charitable purpose,” Pl.’s Opp’n at 11, the Foundation must also
operate in a manner that does not inure to the benefit of only one individual or family. As the
8
United States Tax Court explained in Wendy L. Parker, prohibited inurement may still occur
even if a charitable beneficiary is a member of a larger class that would otherwise qualify the
organization for tax-exempt status. 52 T.C.M. 51 (T.C. 1986). In that case, the
organization was formed for several purposes, including “aid[ing] the victims of coma[s] . . .
with funds[,] therapeutic equipment[,] and devices used in conjunction with accepted coma
recovery programs.” Id. During the 501(c)(3) application process, it was revealed that Wendy
Parker, “one of an unspecified number of recovering coma patients,” would receive thirty
percent of the organization’s proceeds. Id. Ms. Parker was the daughter of the organization’s
President and Secretary-Treasurer, and the sister of the organization’s Vice President. Id. Even
though she was a coma patient as contemplated by the organization’s proposed tax-exempt
purpose, the organization’s “selection of Wendy Parker as a substantial beneficiary of its
disbursements” demonstrated private inurement. Id. The Court therefore not only agreed with
the government that the organization’s proposed disbursements would improperly benefit Ms.
Parker, but would also improperly benefit “the Parker family in providing her care” because it
“relieves the Parker family of the economic burden of providing such care.” Id.
Finally, the Foundation suggests that it “should have been allotted five years to operate
and develop before being subjected” to an audit by the IRS. Pl.’s Opp’n at 18. In an attempt to
cast blame on the IRS, the Foundation contends that an audit after only two years of tax-exempt
status was premature and did not afford it “an appropriate amount of time to begin operations.”
Id. In support of this proposition, the Foundation relies upon Treasury Regulation § 1.170A-
9(f)(4), which reads:
An organization “normally” receives the requisite amount of public support and
meets the 33 ⅓ percent support test for a taxable year and the taxable year
immediately succeeding that year, if, for the taxable year being tested and the four
9
taxable years immediately preceding that taxable year, the organization meets the
33 ⅓ percent support test on an aggregate basis.
26 C.F.R. § 1.170A-9(f)(4). But this regulation has no bearing on the matter at hand, as it
pertains to the classification of tax-exempt organizations as a public charity, as opposed to a
private foundation. See id. “An organization recognized as exempt under § 501(c)(3) is deemed
to be a private foundation unless it qualifies as a public charity through certain exceptions set
forth in I.R.C. § 509(a).” Fund for Anonymous Gifts v. I.R.S., No. CIV.95-1629, 2001 WL
1203331, at *2 (D.D.C. Sept. 25, 2001); see also 26 U.S.C. § 509 (2012). While both types of
organizations qualify for tax-exempt status, “private foundations are more closely regulated in
order to prevent misuse of donor funds and to ‘compensate for their lack of public
accountability.’” Fund for Anonymous Gifts, 2001 WL 1203331, at *3 (quoting St. John’s
Orphanage v. United States, 16 Cl. Ct. 299, 302 (1989)). The Foundation has failed to offer any
authority, whatsoever, suggesting that the five-year period used when determining whether a §
501(c)(3) organization qualifies as a public charity has any bearing on the timing of a revocation
audit by the IRS. To the contrary, the United States Tax Court has opined that, as least with
respect to initial reviews of an organization’s tax-exempt status, the government is “not required
to adopt a ‘wait and see’ approach,” and determinations “may be based on projected as well as
actual operations.” Wendy L. Parker, 52 T.C.M. 51 (1986). To reject the Tax Court’s
position would permit organizations to operate in contravention of the requirements for tax-
exempt status for up to five years with impunity from government intervention, regardless of the
egregiousness of an organization’s violation.
In sum, the Foundation’s arguments that it was organized for tax-exempt purposes does
not redress its failure to operate exclusively for tax-exempt purposes. The Foundation’s decision
to award its scholarships exclusively to members of one family is an improper inurement that
10
precludes the Foundation from having tax-exempt status, see Parshall Christian Order, 45 T.C.M.
(CCH) 488 (1983), and the Court concludes that the IRS properly revoked the Foundation’s tax-
exempt status.
B. Retroactive Revocation
The IRS also contends in its summary judgment motion that it properly revoked the
Foundation’s tax-exempt status retroactive to the date of the Foundation’s creation. Def.’s Mem.
at 22. A “revocation or modification may be retroactive if the organization omitted or misstated
a material fact, operated in a manner materially different from that originally represented, or
engaged in a prohibited transaction” with “the purpose of diverting corpus or income from its
exempt purpose.” 26 C.F.R. § 601.201(n)(6)(i), (vii). “The Supreme Court has held that the IRS
Commissioner has broad discretion . . . to decide whether to revoke a ruling retroactively and
that such a determination is reviewable by the courts only for abuse of that discretion.”
Democratic Leadership Council, Inc. v. United States, 542 F. Supp. 2d 63, 70 (D.D.C. 2008)
(citing Auto. Club of Mich. v. Comm’r, 353 U.S. 180, 184 (1957)); see also Partners In Charity,
Inc. v. C.I.R., 141 T.C. 151, 163 (2013) (“A retroactive revocation of a tax-exemption ruling will
not be disturbed in the absence of an abuse of discretion, and we therefore review that retroactive
determination for abuse of discretion.” (citation omitted)). For the following two reasons, the
Court concludes that the IRS did not abuse its discretion by revoking the Foundation’s tax-
exempt status retroactively.
First, it is apparent that the Foundation was operated in a manner materially different
from that originally represented. As another former member of this Court explained, where an
organization’s “earnings were inuring to private individuals, including its leaders,” it is the case
that “[c]learly, these facts as subsequently developed differ materially from the facts on which
11
the original ruling was based.” Freedom Church of Revelation v. United States, 588 F. Supp.
693, 699 –700 (D.D.C. 1984). Because the Court has determined that the Foundation was
operated in a manner such that the benefits of its scholarships inured to members of only one
family, and this differed materially from its representations set forth in its tax-exempt
application, “the Court must sustain the retroactive application of the revocation of
[Foundation]’s tax-exempt status.” Id. at 700.
Second, the Administrative Record demonstrates a number of material misstatements that
provide independent bases for sustaining the IRS’s decision to revoke the Foundation’s tax-
exempt status retroactively. For example, the Foundation represented in its initial application
that:
In the spring season of each year, the [Foundation] shall announce the availability
of financial assistance to eligible recipients. This announcement shall minimally
be made in at least two newspapers of general circulation. The [Foundation] may
advertise the assistance through any other mass media vehicle it determines to be
appropriate, including but not limited to the world wide Internet.
A.R. 41-42. During the application process, the Foundation similarly represented that it would
“advertise the scholarship program in two newspapers of regular circulation such as USA Today
and The Forward (a long standing national newspaper whose readership includes many
Hungarian immigrants) [and would] list the scholarship program with such Internet scholarship
search engines as FastWeb and other financial aid resources.” A.R. at 73. Actually, however,
the Foundation failed to conduct any advertising campaign consistent with these representations.
It did not advertise in any national news publication, see Pl.’s Facts ¶ 18, and while it contacted
internet search engines Scholarships.com and Fastweb.com to publicize its scholarship
opportunities, it only did so on June 6, 2007—one day after the IRS commenced its audit of the
Foundation’s activities and nearly three years after qualifying for tax-exempt status, A.R. at 403
12
(audit response from Scholarships.com); id. at 1230 (audit response from Fastweb.com). The
Foundation now belatedly contends that it “sent letters to a number of universities” and
“employed its board members to publicize the scholarship opportunities by word of mouth,” Pl.’s
Facts ¶ 18, but these efforts fall far short of the representations the Foundation set forth in its
application. And while the Foundation contends that this is not a material misstatement, 5 the
Court finds otherwise, in light of the fact that the IRS specifically inquired into the Foundation’s
advertising plans during its initial assessment process. See A.R. at 68 (“Where will the
organization advertise the awards? Two newspapers of regular circulation were mentioned.
What newspapers will be used and how were these selected?”). And where, as here, “[t]he facts
upon which the revocation is based are materially different from the representations made in [the
Foundation]’s original application for exemption upon which an exemption was granted,”
retroactive revocation is appropriate. Freedom Church of Revelation, 588 F. Supp. at 699.
Moreover, the Foundation also misrepresented the manner by which it would select
scholarship recipients. During the application process, the Foundation represented that “[a]n
independent scholarship committee comprised of at least three individuals active in, or retired
from, institutions of higher learning, shall review all applications, financial need data, academic
achievement, and any other matters applicants which [sic] to present in support of their need and
deserving of the subject scholarships.” A.R. at 82. The Foundation further represented that this
committee would consist of “Dr. Saul Wachs, former Dean of the College of Education, Gratz
5
The Foundation cites Democratic Leadership Council, 542 F. Supp. 2d 63, for the proposition that “[a]n alleged
failure to later advertise in two print newspapers is not a material misstatement.” Pl.’s Opp’n at 26. The
Foundation’s reliance on this case is entirely misplaced, however, because the Court in that case concluded that the
organization’s activities were largely consistent with the representations set forth in its application for tax-exempt
status, and noted that the IRS agent responsible for auditing the plaintiff acknowledged that this was the case. See
Democratic Leadership, 542 F. Supp. 2d. at 74–76 (“As the Government’s agent acknowledged, and the undisputed
facts reveal, the [plaintiff] has not omitted or misstated a material fact or operated in a manner materially different
from that originally represented.”). Here, the Foundation’s activities differ substantially from its prior
representations submitted in support of its application for tax-exempt status.
13
College, Philadelphia, Pennsylvania, Dr. Neal Raisman, the former president of University of
Cincinnati-Raymond Walters Campus, Blue Ash, Ohio, and Dr. Cyndi Schulman, member,
South Florida Admissions Committee, Brandeis University.” A.R. at 96. Yet according to
Board Meeting minutes, dated December 27, 2004, and December 27, 2005, the selection
process in actuality consisted of input from Frances Odza and Barrett Weinberger, the only two
in attendance at the meetings, making motions on behalf of the Foundation to “look favorably
upon the grant requests” for each of the Schaller scholarship recipients. A.R. at 186, 194. The
minutes show that a scholarship committee had not yet been formed prior to these selections, and
that the applications were reviewed only by Cynthia Schulman “for integrity to eligibility and
expenses.” Id. (“Pending the completion of a scholarship committee, and given the familial
relationship involved, Cynthia Schulman reviewed the applications . . . .” (emphasis added)).
And Cynthia Schulman is a beneficiary of the Schaller Estate and is also named as successor
executor and trustee of the Estate. A.R. 158, 165. Yet again, the Foundation contends that these
misrepresentations are “immaterial,” but the Court finds otherwise, noting that the IRS
specifically inquired about the composition of the scholarship committee during the application
process. See A.R. 94–95.
In sum, the Court concludes that there is ample evidence in the Administrative Record
that supports the IRS’s conclusion that the Foundation operated in a manner materially different
from what it originally represented, and submitted an application for tax-exempt status that
contained material misrepresentations of fact. Thus, the IRS’s decision comports with the
requirements for retroactive revocation set forth in 26 C.F.R. § 601.201(n)(6)(i), and therefore,
the Court must conclude that the IRS did not abuse its discretion when it retroactively revoked
the Foundation’s tax-exempt status. See, e.g., Prince Edward Sch. Found. v. Comm’r, 478
14
F. Supp. 107, 113 (D.D.C. 1979) (finding retroactive revocation of tax-exempt status appropriate
because such revocation was “consistent with” Treasury Regulation 601.201(n)(6)(i)).
C. Stay of Proceedings
Finally, to avoid the inevitable, the Foundation has moved to stay the resolution of the
IRS’s motion for summary judgment “because an appeal is pending” before this Circuit “that
could impact this Court’s decision.” Pl.’s Mot. for Stay at 1. The genesis of the appeal traces
back to a letter from the co-executor of the Schaller estate to an attorney, which has been the
subject of much controversy in this case that need not be repeated in its entirety again here. See
generally Educ. Assistance Found. for the Descendants of Hungarian Immigrants in the
Performing Arts, Inc. v. United States, 32 F. Supp. 3d 35 (D.D.C. 2014) (concluding that any
attorney-client privilege attached to the letter had been waived); Nov. 21, 2014 Order, ECF No.
73 (denying the Foundation’s motion for certification for interlocutory appeal of the Court’s
privilege ruling). In concluding that any attorney-client privilege with respect to the letter had
been waived, the Court also denied as moot a motion to intervene by the co-executors and
beneficiaries of the Schaller estate who wished to argue in favor of the privilege as to the letter
being preserved. Educ. Assistance, 32 F. Supp. 3d at 42. The Court reasoned that, “regardless of
who holds the privilege, the actions taken by any of the parties involved here were insufficient to
preserve it.” Id. The Foundation represents that these individuals have now appealed the
Court’s decision to deny intervention. Pl.’s Mot. to Stay at 3.
“On a motion for stay, it is the movant’s obligation to justify the court’s exercise of such
an extraordinary remedy.” Cuomo v. U.S. Nuclear Regulatory Comm’n, 772 F.2d 972, 978
(D.C. Cir. 1985). To prevail, the movant must “show: (1) a likelihood of prevailing on the merits
of its appeal; (2) that it will suffer irreparable injury absent the stay; (3) that the non-moving
15
party will not be harmed by the issuance of a stay; and (4) that the public interest will be served
by a stay.” Al Maqaleh v. Gates, 620 F. Supp. 2d 51, 56 (D.D.C. 2009) (citation omitted).
“These factors interrelate on a sliding scale and must be balanced against each other.” Serono
Labs., Inc. v. Shalala, 158 F.3d 1313, 1318 (D.C. Cir. 1998).
Upon review of the parties’ filings and the administrative record, the Court concludes that
sufficient facts are available to find for the IRS regardless of whether the letter is considered, and
in reaching its decision the Court need not rely—and has not relied—on the letter in any manner.
Thus, even if the appellants are successful in intervening, and even if they subsequently
convinced the Court to reconsider its prior ruling regarding the admissibility of the letter, the
resolution of the IRS’s summary judgment motion would be the same. 6 Accordingly, the
Foundation has failed to demonstrate how it would suffer any prejudice—let alone irreparable
injury—absent the stay. The remaining three factors do not overcome this deficiency because:
(1) the Foundation merely disagrees with the Court’s analysis in a conclusory fashion and does
not offer a legal basis for the Court to conclude that its decision denying intervention was error;
(2) the IRS raises legitimate reasons to conclude that it will be harmed by the stay—namely, that
it will delay resolution of its tax claim against the Schaller Estate which “increases the risk that
the United States’ claim will not be fully paid,” Def.’s Opp’n to Stay at 15; and (3) the public
interest would be served by the prompt resolution of these matters. For these reasons, the Court
must conclude that the Foundation has failed to satisfy its “obligation to justify the court’s
exercise of such an extraordinary remedy,” Cuomo, 772 F.2d at 978, and therefore must deny the
Foundation’s motion to stay resolution of the IRS’s summary judgment motion.
6
The Foundation’s activities contravened the law in such a blatant and egregious manner that the Court could not
come to any other conclusion.
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IV. CONCLUSION
The Foundation operated in a manner that inured to the benefit of one family, precluding
it from having tax-exempt status. Therefore, the IRS’s decision to revoke the Foundation’s tax-
exempt status retroactively is supported by the Administrative Record and was not an abuse of
its discretion. Accordingly, the Court must grant the defendant’s motion for summary judgment.
SO ORDERED this 1st day of July, 2015. 7
REGGIE B. WALTON
United States District Judge
7
An Order consistent with this Memorandum Opinion will be issued contemporaneously.
17