It should be noted that civil rights groups have long urged IRS to develop procedures that would bring its approach in line with Federal court decisions declaring discriminatory private schools ineligible for tax exemptions and stating that schools formed or substantially expanded at the time of public school desegregation, and having little or no minority enrollment, bear the burden of proving that they do not discriminate on the basis of race.

The IRS has had a policy regarding discriminatory admissions policies and tax exemptions for private schools on the books since 1971, but the simple fact is that the policy has not been strong enough to prevent tax benefits from flowing to discriminatory institutions. Let's look at the history:

In 1970, as part of the Green v. Connally decision, the IRS was enjoined from recognizing the tax-exempt status of racially discriminatory schools in Mississippi. As a result, in 1971, IRS published the rule stating that a private school must operate in a racially nondiscriminatory manner in order to receive the privilege of tax-exempt status. And in 1975, IRS published Revenue Ruling 75-50, which laid out certain policy, public notification and recordkeeping requirements for private schools.

In that same year, IRS also published a ruling holding that private schools operated by churches are subject to the same standards applicable to secular private schools-a ruling that has been upheld in Federal courts.

In addition, separate court rulings have held that States cannot aid racially discriminatory schools. Yet, despite the findings in these cases, several of the schools already found to be discriminatory have retained their tax exemptions because they are in compliance with IRS minimal procedural requirements.

The IRS's chief counsel stated on October 26, 1978:

The substantive effect of IRS procedures was that schools which complied with our procedural requirements, by having a non-discriminatory policy in their bylaws and by publicizing it once a year, could retain tax exemptions even though held to be racially discriminatory in a separate court action. As the courts have pointed out, some schools appear to claim a nondiscriminatory policy merely to retain the benefits of tax exemptions.

The history of Federal court actions clearly gives the IRS a mandate to develop improved procedures. This judicial history, and the inadequacy of past procedures for purposes of enforcing the law led the IRS to promulgate a new proposed procedure published on August 22, 1978. We believe that the revenue procedure did reasonably reflect public policy on tax exemptions for private schools, and therefore we are incensed by the IRS' recent retreat as expressed in the new proposed regulations published on February 9.

The League strongly supported the August 22 proposed regulations in testimony presented at IRS' public hearing held on December 5, 1978, a copy of which is attached to my testimony to be included in the record. At that public hearing, Karen Gaddy, president of the League of Women Voters of Charlotte-Mecklenburg, N.C., speaking on behalf of the LWVUS, closed by stating:

We realize you are under heavy pressure to withdraw or dilute the procedure, but we urge you to remain firm in exercising your constitutional authority to enforce the nondiscrimination requirements for private schools seeking tax exemptions.

The August 22 regulations were a long overdue step in giving teeth to the IRS' well-established authority in enforcing the laws as they relate to granting tax exemptions to private schools. For both adjudicated schools-schools already found by a court or agency to be discriminatory, and reviewable schools-schools that have the burden of proof to show that they do not discriminate, the regulations spelled out two reasonable alternatives for demonstrating to IRS that they operate in a nondiscriminatory manner. The first method involved the socalled safe harbor guideline-a percentage of minority enrollment equal to 20 percent of the percentage of the minority school age population in the community.

In other words, any adjudiciate school or reviewable school able to meet this enrollment standard would be presumed to be nondiscriminatory. Even if a school could not meet the "safe harbor" test, it could still meet IRS' standards by engaging in four out of five activities specified in the regulations.

These activities included financial assistance for minority students, minority recruitment programs, increased minority enrollment, employment of minority teachers, and other evidence of good faith, such as making school facilities available to outside integrated groups and participation in extracurricular activities with integrated schools.

If anything, the regulations were too loseely drawn in this area. Indeed, a school could have met its burden of proof requirement under the August 22 regulations without even enrolling minority students, although the regulations did indicate that the IRS would grant such exemptions only in rare and unusual circumstances.

Over 5 months after the publication of the August 22 regulations, the IRS has reneged on the cornerstone of the procedure and shifted the burden of proof off discriminatory or suspect schools and back onto the IRS. In support of the August 22 approach, the IRS heard not only from civil rights groups, but also from the Department of Health, Education and Welfare, the Civil Rights division of the Department of Justice and the U.S. Commission on Civil Rights.

On the side of maintaining the status quo, IRS heard from Members of Congress questioning IRS' constitutional authority to issue the procedure, scores of private and parochial schools, and participants in a major letter-writing campaign generated by newspaper ads claiming that the IRS ruling was "clearly a blueprint for the destruction or our private and Christian schools."

We must not stand by and allow this kind of congressional pressure and now familiar scare tactics to dismantle an agency's enforcement powers to uphold Federal nondiscrimination laws. The August regulations are not a "blueprint for the destruction of private and parochial schools," they are a public notice canceling the free ride segregation academies have enjoyed at taxpayer's expense.

The League is outraged by the retreat embodied in the February 9 regulations because we do not believe that the new proposed regulations give IRS a strong enough procedure for cutting off tax exemptions to discriminatory private schools wherever they may exist.

For example, under the new proposed regulations, a school is considered reviewable only if its establishment or substantial expansion was related in fact to school desegregation, and it does not have signi

ficant minority enrollment. The addition of the phrase, "in fact" to the old definition means that IRS must prove that the creation or expansion of that school was related to school desegregation. It squarely places the burden back on IRS.

Further. IRS has also watered down its earlier definitions of "substantial expansion" and "significant minority enrollment".

The regulation does include a discussion of some of the facts that are relevant in determining whether a school's creation or expansion is in fact related to school desegregation, but the discussion raises serious questions. For example, the regulations state that if students are not drawn "to any significant extent" from public school grades subject to desegregation, then no factual relationship is presumed.

But how will "to any significant extent" be defined in this context? And what about desegregation plans that phase in grade levels over a period of years? How would private schools that are set up or expanded for grade levels planned for future inclusion in a public school desegregation plan be dealt with?

Although the list of factors that the IRS includes as possible indicators of a relationship is useful as far as it goes, it does not compensate for either the unanswered questions or the equivocal nature of the entire discussion. As the IRS states at the outset, "The facts tending to show a relationship or the absence of one are relevant in making the determination, but these facts are not inclusive."

We believe that IRS has left open far too big a loophole with regard to the establishment of a relationship between private school formation or expansion and public school desegregation.

When we move from the definitions onto a consideration of how the guidelines would apply, it becomes even clearer how much the regulations have been watered down. An adjudicated school, for example, would be considered nondiscriminatory if it either currently has significant minority enrollment or undertakes actions or programs reasonably designed to attract minority students on a continuing basis.

Yet, under the definition in the new proposed regulations, unlike the one in the August 22 regulations, whether minority student enrollment will be considered significant depends on "all the relevant facts and circumstances."

We recognize that there are some schools with legitimate reasons for not being able to meet a minority enrollment requirement; but the IRS has, in the new regulations, overreacted to these exceptions.

The loophole is even larger for the alternative ways of demonstrating nondiscrimination. While the August proposed regulations required that adjudicated schools demonstrate good faith by undertaking four out of five specified activities, the February regulations merely require the implementation of actions or programs listed as examples of ways to attract minority students.

Since no minimum number of activities is required, presumably a school could undertake just one of the suggestions and be considered nondiscriminatory under the regulations. Although the suggested activities closely resemble those described in the August regulations, there is a vast difference between suggesting and requiring something for purposes of enforcing a demonstration of good faith.

The standards are equally diluted for reviewable schools, which like adjudicated schools, must merely undertake actions or programs to attract minority students. And as we pointed out earlier, the standard defining a reviewable school has so many caveats that the burden has been shifted off the school and back onto IRS.

The LWVUS will be submitting to the IRS our formal comments on the new procedure. We urge this committe to ask the IRS to return to its initial approach embodied in the August 22 regs and expeditiously publish final regs. The action initially taken by the IRS demonstrated its commitment to enforcing the law and granting the privilege of tax-exempt status only to those institutions which uphold the law. We urge the IRS to stand by its August procedure.

Thank you very much, gentlemen. If you have any questions, I will be glad to attempt to answer them.

Mr. GIBBONS. Thank you, Ms. O'Leary.

Let me ask you, apparently, the watering down of the regs that you complain of, that was done primarily to allow the Catholic schools and the Jewish schools to escape the impact of this inspection by the IRS. Is that the way you interpret that?

Ms. O'LEARY. I put my crystal ball away a long time ago, Mr. Gibbons. I think that may have been the intent for some people, but I certainly can't say that that was the only intent as I know it.

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Mr. GIBBONS. Well, what other school system, other than the Catholics, or whatever church-related schools other than the Catholics erate a system of schools in which they will be considered in aggregate?

Ms. O'LEARY. Well, I think you have to remember that there are non-Catholic school systems. The Lutheran schools are a strong force. Mr. GIBBONS. That is only in the State of Missouri. They said they may qualify in Missouri, but that is the only place they knew of they could qualify.

Ms. O'LEARY. They have Lutheran schools in the city of Cleveland that I know personally about. I don't know that importance has to fall on the nonpublic school systems as much as on individual cases, which is what we are seeing around the country.

Mr. GIBBONS. The IRS Commissioner could not tell us and the HEW could not tell us. How many white flight schools have been created, where and how many students are involved?

Ms. O'LEARY. In December, Karen Gaddy's testimony on behalf of the League of Women Voters of the United States identified some real statistics with the Charlotte-Mecklenburg area of North Carolina. We have leagues all over the country that have, in one way or another, documented this and I believe that we could provide some hard data for the committee.

Mr. GIBBONS. That would be very helpful because while they collect everything else, they have not collected that. We would appreciate having something more than supposition. I am not saying that what you are saying is supposition because the Charlotte-Mecklenburg area is the first concrete example that we have. We know about the one in Mississippi that was the subject of the Green decision. I don't doubt that there are a great many schools, but I am just surprised that our Government has not collected a little more information on it.

Ms. O'LEARY. I hope that the league network will be able to come up with this for you.

Mr. GIBBONS. I know how vigorous you are in my community and how effective you are in my community, and I hope you will go out and get that information for us and we will include it in our record if you can get it for us.

Ms. O'LEARY. Thank you very much. We will.

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