Chapter 14 - § 14.4 • CONTESTING ADVERSE IRS DETERMINATIONS THROUGH DECLARATORY JUDGMENT ACTIONS

• Jurisdiction: Colorado

§ 14.4 • CONTESTING ADVERSE IRS DETERMINATIONS THROUGH DECLARATORY JUDGMENT ACTIONS

§ 14.4.1—Declaratory Judgment Actions — Background

In 1974, the U.S. Supreme Court ruled in two cases that a § 501(c)(3) organization could not obtain an injunction to prevent the IRS from revoking I.R.C. § 501(c)(3) status and de-listing the organization from Publication 78 (the list of 501(c)(3) organizations formerly maintained by the IRS). Bob Jones Univ. v. Simon, 416 U.S. 725 (1974); Alexander v. "Americans United" Inc., 416 U.S. 752 (1974). The cases effectively left the IRS with the power to ignore an application for exemption or to strip an existing exempt organization of its status under I.R.C. § 501(c)(3) in its absolute discretion.

Recognizing that exempt organizations should have a means to compel judicial review of IRS exemption decisions, Congress enacted I.R.C. § 7428 in 1976 to provide a judicial remedy for organizations denied initial or continuing recognition of status as a charity under I.R.C. § 501(c)(3), as a qualified charitable donee under I.R.C. § 170(c)(2), as a non-private foundation under I.R.C. § 509(a), or as a private operating foundation under I.R.C. § 4942(j)(3). The PATH Act of 2015 expanded the availability of declaratory judgment relief to all exempt organizations under §§ 501(c) and (d), effective for actions filed after December 18, 2015. Pub. L. No. 114-113, Div. Q, § 406, adding I.R.C. § 7428(a)(1)(E). As a result, social welfare organizations under I.R.C. § 501(c)(4) and trade associations under I.R.C. § 501(c)(6), among others, are no longer limited to tax assessment and deficiency action procedures in order to effect judicial review of an adverse IRS determination regarding their exempt status.

§ 14.4.2—Effect of Declaratory Judgment

If an organization obtains a declaratory judgment under I.R.C. § 7428, and if the underlying facts and applicable laws have not changed after the period reviewed by the court, the IRS will issue a ruling or determination letter recognizing the judgment. Rev. Proc. 80-28, 1980-1 C.B. 680. The only action necessary to put a declaratory judgment into effect, in theory, is that an organization submit a statement to the IRS that its activities remain the same as those reviewed by the court. Id. A ruling letter or determination stemming from a declaratory judgment has the same force and effect, and is subject to the same limitations, as a ruling or determination letter issued in the normal application administrative process. Id.

§ 14.4.3—Jurisdictional Requirements for Declaratory Judgment Actions

Actual Controversy

The "actual controversy" requirement for general federal court jurisdiction will be fulfilled if a final adverse determination (i.e., 90-day letter) has been issued to an organization. I.R.C. § 7428 specifies that the actual controversy relates to a determination made by the IRS (or to a failure by the IRS to make a determination) as to the initial or continuing qualification or classification of the organization in question. I.R.C. §§ 7428(a)(1) and (2). The determination must be final, and the IRS must have issued to the organization a formal notice of determination (i.e., 90-day letter) or failed to issue a determination in accordance with the 270-day rule. Treas. Reg. § 601.201(a)(3); see, e.g., High Adventure Ministries, Inc. v. Comm'r, 80 T.C. 292 (1983) (the Tax Court found no actual controversy existed...