tional or a violation of the laws of the United States." Under this standard, a private school with an overt policy of racial discrimination could, nevertheless, obtain or retain federal tax-exempt status so long as the state was not unduly involved in the school's operation.

Under the 1967 IRS standard, the findings of the court decisions described above, which found specific "segregation academies" to be racially discriminatory, would not, even if fully accepted by IRS, necessarily have required the denial of federal tax-exemption to those private schools. For the courts, in contrast to the 1967 Service ruling, were not concerned with whether the state was so involved in the operation of the "private schools that the operation itself amounted to state action subject to the limitations of the Fourteenth Amendment. The question in the above cases was only whether the state was providing assistance to what was conceded to be private discrimination at the "segregation academies." Norwood, supra, 413 U.S. at 464.* The above decisions would, therefore, not necessarily contain findings on the "state involvement" essential to a denial of tax-exempt status under the 1967 ruling of IRS. Consequently, as we have noted, many private schools which, in other contexts, had been adjudicated to be racially discriminatory retained their tax-exempt status. A considerable amount of scholarly debate followed concerning whether the above 1967 standard was adequate under the Code or the Constitution." And a suit was initiated in 1969 by black citizens of Mississippi challenging the adequacy of the standard. Green v. Kennedy, 309 F. Supp. 1127 (D. D.C., 1970) (3-judge court). Prior to a final decision in the suit, however, the Internal Revenue Service resolved the issue by announcing on July 10, 1970, that "it [could] * * * 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." The announcement was made a formal ruling and explained in more detail in Rev. Rul. 71-447, issued October 7, 1971. The 3judge court in the above case initiated by Mississippi residents agreed with the Service's interpretation of the Code. Green v. Connally, 330 F. Suppl. 1150, 1156 (D. D.C. 1971) aff'd sub nom. Coit v. Green, 404 U.S. 997 (1971).

The procedures for implementing the general rule, however, at first required little more than a declaration by the private school that it did not discriminate in student admissions and a publication of that policy, at least once, in some local newspaper. The courts, in several subsequent cases where the United States was a party, found that the school's compliance with that procedure was inadequate to overcome the prima facie case of discrimination established against the school. Norwood, supra, 382 F. Supp. at 929; Brumfield, supra, 425 F. Supp. at 534-535; United States v. State of Mississippi, 499 F. 2d at 434-435, fn. 17.

In an effort to tighten enforcement of revised ruling 71-447, the Internal Revenue Service published on February 18, 1975, for public comment a proposed revenue procedure setting forth guidelines and recordkeeping requirements for determining whether private schools, seeking or holding Federal tax-exempt status, have racially discriminatory policies as to students. 40 Fed. Reg. 6991 (Feb. 18, 1975). The proposed procedure was not specifically addressed to the problem of "segregation academies", but the Civil Rights Division of the Department of Justice commented on the proposed procedure describing ways in which the language of the proposed procedure could be interpreted or applied consistently with the standards used by the Federal courts in determining whether a private school was racially discriminatory. (Letter dated March 21, 1975 from Assistant Attorney General of the Civil Rights Division to Commissioner of Internal Revenue Service, additional materials, attachment A. The final version of

In rejecting the defendants' claim that textbooks and transportation aid was too insubstantial to invoke a constitutional proscription, the Court said: "The leeway for indirect aid to sectarian schools has no place in defining the permissible scope of state aid to private raciaily discriminatory schools. "State support of segregated schools through any arrangement, management, funds, or property cannot be squared with the [Fourteenth] Amendment's command that no State shall deny to any person within its jurisdiction the equal protection of the laws." Cooper v. Aaron, 358 U.S. 1, 19 (1958). Thus Mr. Justice White, the author of the Court's opinion in Allen, supra, and a dissenter in Lemon v. Kurtzman, supra, noted there that in his view, legislation providing assistance to any sectarian school which restricted entry on racial or religious grounds would, to that extent, be unconstitutional. Lemon, supra, at 671 n. 2." 413 U.S. at 464.

5 See, e.g., Note, Federal Tax Benefits to Segregated Private Schools, 68 Colum. L. Rev. 922 (1968); Allen, The Tax-Exempt Status of Segregated Schools, 24 Tax L. Rev. 409 (1969); and Weil, Tax Exemptions for Racial Discrimination in Education, 23 Tax L. Rev. 399 (1968).

I have provided to the subcommittee copies of each of the comments made by the Department of Justice through the Civil Rights Division on the proposed revenue procedures on this subject which have been published for public comment and request those additional materials be inserted in the record.

the above guidelines, which was published as revenue procedure 75-50, contained changes in language, however, which made several of the more important applications suggested by us difficult or impossible to justify. For example, we suggested that section 2.02 of the proposed procedure would have required a school to have operated "continuously" on а nondiscriminatory basis (letter, supra, p. 4). In the final version of the procedure, published on November 6, 1975, Rev. Proc. 75-50, 1975-2 C.B. 230, section 2.02 was changed to require only that * * * since the adoption of that policy [of nondiscrimination] it [the school in question] has operated in a bona fide manner in accordance therewith."

As a consequence of these and other differences in the court standards and IRS standards, some schools declared racially discriminatory by the Federal court in Brumfield, supra. which was tried in part in 1975 and 1976, were nevertheless enjoying Federal tax-exempt status.

When he assumed office, therefore, Commissioner Kurtz was faced with the anomaly that one Federal agency-the Department of Justice-was seeking and obtaining court injunctions prohibiting any State aid to certain, specific private schools, because those schools were racially discriminatory, while the Service was continuing to provide the substantial benefit of Federal tax-exempt status to those same schools under the standards then being employed by the Service. There can be no doubt that the anomaly should be corrected. Nor can there be any doubt that the appropriate way to correct the anomaly would be to conform the standards applied by IRS to the standards applied by the Federal courts.

II. THE PROPOSED REVENUE PROCEDURE

The first effort by IRS to accomplish that transformation of its standards to specifically address the problem of "segregation academies" was published for public comment on August 22, 1978 (43 Fed. Reg. 37296). Our written comments of October 23, 1978 (additional materials, attachment B) and our presentation at the public hearing of December 5, 1978 (additional materials, attachments C and D) on that proposed procedure are contained in the additional materials submitted with this statement. Since a revised procedure was published on February 9, 1979, for further public comment, we will limit the direct comments here to the revised procedure."

A substantial amount of criticism has been leveled at the proposed procedure. Some have claimed that a procedure addressed to this special problem is unnecessary. Others have claimed that the evidentiary standards used in the procedure are contrary to our legal tradition. Still others have said that the procedure is overreaching, while some claim the contrary-that the procedure is too flexible

and underinclusive.

We have considered each of the above criticisms and believe that each is either wrong or substantially overstated. Those who criticize the evidentiary presumptions and standards of the proposed procedure are misreading the applicable case law. Those who criticize the flexibility provided for application of the procedure are, in our view making unrealistic demands for precision. Those who claim that there is no need for a special procedure are either unaware of or wish to ignore the historical background described above.

A. IRS needs a special procedure for the two categories of schools described By its terms, the proposed procedure would apply to two categories of private elementary and secondary schools: (1) those schools that have been found to be racially discriminatory by the final decision of a court or Government agency (i.e., “adjudicated schools"), and (2) those schools without a significant minority student enrollment whose formation or substantial expansion is related to public school desegregation in the community served by the schools (i.e., "reviewable schools"). (sections 3.02 and 3.03). In other words the procedure deals directly with schools which fit the factual patterns of the "segregation academies" described above. The propriety of singling out these two categories of schools for special scrutiny raises questions of fairness to the schools singled out and efficiency in using limited resources for law enforcement, on which questions, as the agency responsible for enforcing the Internal Revenue Code, IRS's determination is entitled to great deference. In any event, we believe the historical circumstances described above demonstrate the clear need for the proposed procedure. We assume that there is no serious dispute about use of the "adjudicated" school category. If a school has been adjudged racially discriminatory by a court

Both the earlier proposed procedure and the current revision addressed the same two categories of schools. Therefore, our comments on that aspect of the earlier procedure would be equally applicable to the revision under consideration.

or an agency, there can be no question that it would promote efficiency of law enforcement for IRS to focus its enforcement on such schools. Also, having had a full opportunity to present its case, the adjudicated school cannot legitimately claim any unfairness that special attention is focused on it as a consequence of the adjudication.

But the schools formally adjudicated to be discriminatory constitute only a small portion of the "segregation academies" that have been established. As we demonstrate infra, pp. 19-23, the standards used by IRS in the proposed procedure to classify a school as "reviewable" are consistent with the standards used by the federal courts in determining whether a prima facie case of discrimination has been established against a particular private academy. Consequently, once a school has been properly classified as "reviewable" by IRS under the proposed procedure, the only difference between it and an "adjudicated" school is the happenstance of the school's involvement in a court or administrative proceeding. Therefore, it would be both unfair and inefficient law enforcement to focus solely on "adjudicated" schools and exclude "reviewable" schools from the procedure.

In addition, the court in Green v. Connally, 330 F. Supp. 1150, 1173 (D. D.C.) aff'd per curiam sub nom., Coit v. Green, 404 U.S. 997 (1971), ruled that private schools in Mississippi which were founded "at times reasonably proximate to public school desegregation ***" carried a "badge of doubt" concerning their eligibility for tax-exempt status. Accordingly, with respect to Mississippi private schools, the court stated that it was the duty of IRS to "seek out supplementary information, whether or not required for schools [located] elsewhere," before granting a final determination on their tax status. 330 F. Supp. at 1173. Under the current revenue procedures, the standards established by the court in Green v. Connally, supra, are applied only to Mississippi schools, Rev. Proc. 75-50, section 8. The proposed procedure would apply the same or similar standards to similarly situated private schools in other states and would be consistent with the court's decision in Green, which stated:

"To obviate any possible confusion the court is not to be misunderstood as laying down a special rule for schools located in Mississippi. The underlying principle is broader, and is applicable to schools outside Mississippi with the same or similar badge of doubt. Our decree is limited to schools in Mississippi because this is an action in behalf of black children and parents in Mississippi, and confinement of this aspect of our relief to schools in Mississippi applying for tax benefits defines a remedy proportionate to the injury threatened to plaintiffs and their class." 330 F. Supp. at 1174.

Thus, in addition to closely examining the operation of private schools which have been adjudicated to be racially discriminatory the Service is amply justified in adopting a specific procedure for examining those schools which, pursuant to standards developed by the Federal courts, are under "a badge of doubt". See Norwood v. Harrison, 382 F. Supp. 921 (1974), discussed infra. Moreover, unlike the more general provisions of Rev. Proc. 75-50, the proposed procedure would make it clear to the affected schools and to the public-at-large the factual circumstances that will trigger strict scrutiny of a school's policies and practices with respect to students.

B. The standards of the proposed procedure are consistent with the standards applied by the Federal courts

1. Placement of Burden.—A major criticism of the proposed procedure that was published for public comment on August 22, 1978, was that it impermissibly placed on the affected schools the burden of proving that they were not racially discriminatory. Opponents of the procedure argued that such a requirement contravenes the traditional standards of due process; that is, that an accused is "innocent until proven guilty". We have previously stated our disagreement with such a claim. We presume that the same criticism will be lodged against the revised procedure; it too provides that in order for an affected school to establish its eligibility for tax-exempt status, the school must come forward with objective evidence to demonstrate that, notwithstanding its status, the school in fact has a racially nondiscriminatory policy as to students. (Secs. 4.01(b) and 4.02). However, we have closely examined the provisions concerning the allocation of burden and have concluded that the approach outlined in the proposed procedure is consistent with the burden-shifting principles applied by the federal courts.

The schools that are subject to the requirements of the proposed procedure

will already have had a prima facie case of discrimination established against them, either by a prior adjudication (Sec. 3.02) or by the objective facts of their formation and operation (Sec. 3.03). Secs. 4.01 and 4.02 provide that once a prima facie case of discrimination has been established against a school, the burden then shifts to the school to produce rebuttal evidence. That this is the proper evidentiary approach is clear. On remand from the Supreme Court, in Norwood, supra, the district court ruled that "[o]nce plaintiffs have established a prima facie case of racially discriminatory admission policies as to a particular academy, the burden shifts to the school's representative to rebut an inference of racial disparity." 382 F. Supp. at 925. Accord, Brumfield v. Dodd, supra, 452 F. Supp. at 531, 532. Cf., Hodgen v. First Federal Savings and Loan Ass'n, 455 F. 2d 818, 822 (5th Cir., 1972), (“[i]n discrimination cases the law with respect to the burden of proof is well-settled. The plaintiff is required only to make out a prima facie case of unlawful discrimination at which point the burden shifts to the defendants to justify any disparities."); McDonnel-Douglas Corp. v. Green, 411 U.S. 792, 802 (1972) ("[t]he complainant in a Title VII trial must carry the burden *** of establishing a prima facie showing of racial discrimination ***. The burden then must shift to the [defendant] to articulate some legitimate, nondiscriminatory reason for the [presumed discrimination]").

In the Supreme Court's landmark decision in Keyes v. School District No. 1, Denver, Colo., 413 U.S. 189, 209 (1972), the Court noted that this burden-shifting principle is "not new or novel". Rather, the issue of how to properly allocate the burden of proof" is merely a question of policy and fairness based on experience in the different situations.' 9 J. Wigmore, Evidence § 2486, at 275 (3d ed. 1940)." 413 U.S. at 209. More importantly, the Court observed that "[i]n the context of racial segregation in public education, the courts, including this Court, have recognized a variety of situations in which 'fairness' and 'policy' require [school] authorities to bear the burden of explaining actions or conditions which appear to be racially motivated." Id. Given the existing case law, we believe that on the basis of fairness and sound administrative policy, the Service is amply justified in requiring schools which are subject to the proposed procedure to come forward and explain "conditions which appear to be racially motivated." 2. Establishing and Rebutting Proof of Discrimination.-The proposed procedure outlines standards that will be used to identify and deny tax-exempt status to those schools with a racially discriminatory policy as to students. (Secs. 3.03. 4.01 and 4.02). We have analyzed the standards, both for establishing a prima facie case of discrimination and for rebutting such a case, and have concluded that they are, in all essential respects, the same as legal principles which courts have applied in similar circumstances. Under those principles, the discriminatory nature vel non of a private school must, like that of a statutory program, be determined in light of “* * * its 'immediate objective,' its 'ultimate effect' and its 'historical context and the conditions existing prior to its formation.' ." Reitman v. Mulkey, 387 U.S. 369, 373 (1967).

Sec. 3.03 provides that a school will be treated as a "reviewable school," and thus subject to the requirements of the proposed procedure, if three characteristics are satisfied: (i) the school was formed or substantially expanded at the time of public school desegregation in the community served by the school, (ii) the school does not have a significant minority student enrollment, and (iii) if the school's formation or requisite expansion is related in fact to the desegregation of the public schools. (emphasis added). The procedure states that whether a school's minority enrollment is classified as "significant" depends "on all the relevant facts and circumstances" (Sec. 3.03 (b)). Although the formation or substantial expansion of a private school at the time of public school desegregation will "ordinarily" be considered to be related in fact to public school desegregation, the proposed procedure provides that a final determination by the Service as to whether that criteria is met "must be based on objective evidence, taking into account all the facts and circumstances ***" of each school. (Sec. 3.03 (c)). The standards set out in Sec. 3.03 are similar to the standards that the Norwood court, on remand, ruled were necessary to establish a prima facie case of discrimination. While cautioning that the quantum of proof required to establish a prima facie case of racial discrimination "is to be considered within the context of each case," 382 F. Supp. at 924, the court held that:

"[For those private academies serving elementary and secondary grades, or both, which were established during the wake of massive desegregation orders of federal courts, we believe that a prima facie case of racial discrimination

8 See discussion, infra, pp. 19-23.

arises from proof (a) that the school's existence began close upon the heels of massive desegregation of public schools within its locale, and (b) that no blocks are or have been in attendance as students and none is or has ever been employed as teacher or administrator at the private school." Id. at 924-925." The court noted that the critical time of a private school's formation or unusual enlargement, though not necessarily decisive, "must be a significant factor" in determining whether it is racially discriminatory, 382 F. Supp. at 925, and stated that newly formed schools designed to serve students withdrawing from the desegregated public schools "may be legitimately considered as a factor in presuming that such schools [have] a racially restrictive admission policy." Id. See e.g., Graham v. Evangeline Parish School Board, 484 F. 2d 649, reh. en banc den., 485 F. 2d 687 (5th Cir., 1973); McNeal v. Tate County Board of Education, 460 F. 2d 568 (5th Cir., 1971).

We would note that Sec. 3.03 (b) states that a school will be considered to have a "significant" minority student enrollment, and thus not subject to being classified as a reviewable school, if its percentage of minority students is "20 percent or more of the percentage of the minority school age population in the community served by the school." Some opponents of the proposed procedure have argued that the provision imposes a "racial quota" which private schools are expected to meet. That assertion is simply not true. The 20 percent guideline (Sec. 3.03(b)) is only a factor that, if met, will, ordinarily, require no further inquiry, as to whether a private school should be classified as "reviewable". Such a use of racial statistics as an indicator of racial discrimination has long been endorsed by the Supreme Court. See, Yick Wo v. Hopkins, 118 U.S. 356, 374 (1886); Castaneda v. Patrida, 430 U.S. 482 (1977). Moreover, the use of the 20 percent guideline as contemplated in Section 4.01 (a) is only an evidentiary standard which, if met, will relieve the private school of the burden of producing evidence under the alternative standard for demonstrating eligibility for continued tax-exempt status. The failure of either an "adjudicated school" or a "reviewable school" to meet the percentage standard does not create an irrebuttable presumption that the private school remains racially discriminatory; that determination will be made based on all the facts and circumstances. The school could still produce evidence as outlined in Section 4.03 to rebut the prima facie case or to show that it has taken appropriate measures to eliminate any continuing effects of its past discrimination.

The third criteria necessary for a school to be classified as a "reviewable school" is that its formation or expansion must be "related in fact" to public school desegregation. (Sec. 3.03). Sec. 3.03 (c) lists seven, non-exclusive factors that the Service will consider persuasive in determining whether this final criteria is met. We have analyzed the factors and have concluded that they are consistent with evidence which the federal courts have said is indicative of racial discrimination: (1) the opening or substantial expansion of one or more grades that are subject to public school desegregation, see Coffey v. State Educational Finance Commission, supra, 296 F. Supp. at 1391-1393; Norwood v. Harrison, supra, 382 F. Supp. at 928-929; (2) the enrollment of students who are drawn primarily from public schools, see Brumfield, supra, 425 F. Supp. at 535; Graham v. Evangeline Parish, supra, 484 F. 2d at 650; McNeal v. Tate County, supra, 460 F. 2d at 571; (3) the use of facilities formerly utilized by the public schools, see Brumfield, supra, 425 F. Supp. at 533; (4) membership in an organization that practices or advocates racial discrimination, see Brumfield, 425 F. Supp. at 533; (5) involvement by certain persons associated with the private school in efforts to oppose desegregation of the public schools, see Plaquemines Parish School Board v. United States, 415 F. 2d 817 (5th Cir., 1969); (6) discriminatory restrictive attendance areas, see Brumfield, supra, 425 F. Supp. at 533; and (7) the employment of faculty members who are drawn primarily from public schools subject to desegregation, see Griffin v. Board of Supervisors of Prince Edward County, 339 F. 2d 486, 491 (4th Cir., 1964); Plaquemines Parish v. United States, supra, 415 F. 2d at 828; Brumfield, supra, 425 F. Supp. at 434-435; Norwood v. Harrison, 382 F. Supp. at 927.

Section 4.03 outlines examples of "actions and programs" which a school that is covered by the proposed revenue procedure may show to demonstrate that, notwithstanding its status, "the school, in fact, is operating on a nondiscriminatory basis and minorities are welcome at the school." Included in the section is the caveat that the level of evidence required to rebut a finding of discrimination "may vary from school to school and depends on the circumstances of

Accord, Brum field v. Dodd, supra, 425 F. Supp. at 531.