## Facts

- Prior to 1976, organizations disputing an IRS denial or revocation of tax-exempt recognition generally could not obtain direct judicial review without engaging in taxable conduct, triggering an assessment, and litigating a deficiency or refund dispute.
- Congress viewed this structure as practically forcing organizations to disobey IRS determinations to reach court, even when the organization wished to comply with tax administration.
- The Senate Committee on Finance addressed these concerns during consideration of the Tax Reform Act of 1976.
- The committee report segment explains the purpose and operation of new I.R.C. § 7428, which authorizes declaratory-judgment actions regarding certain exemption-related determinations.
- The remedy is directed primarily to organizations seeking or maintaining recognition under § 501(c)(3) and certain entities whose status affects charitable-contribution deductibility under § 170(c)(2), including related classification questions specified in the statute.

## Issues

1. What judicial remedy should be provided to allow certain organizations to obtain timely review of IRS determinations about exempt or related status without first incurring tax liability or intentionally violating an IRS position?
2. Which organizations, determinations, courts, and procedural prerequisites should define and limit that remedy?
3. How should Congress balance meaningful judicial review against administrative finality, litigation volume, and forum consistency?

## Decision

- The committee endorsed a statutory declaratory-judgment procedure, enacted as I.R.C. § 7428, to permit specified organizations to seek court review of certain IRS determinations (or failures to make determinations) concerning exempt or related status.
- The procedure authorizes suit in limited federal fora: the U.S. Tax Court, the Court of Claims (now the Court of Federal Claims), and the U.S. District Court for the District of Columbia.
- Jurisdiction is conditioned on an adverse IRS determination or IRS inaction after submission of a completed request within the statute’s prescribed time, creating a constructive denial for filing purposes.
- The contemplated review addresses whether the organization qualifies for the status claimed and is designed to resolve the status question without requiring a prior tax assessment.
- Congress adopted the recommended approach by enacting § 7428 as part of the Tax Reform Act of 1976.

## Legal Principles

- A targeted declaratory-judgment remedy may be created to provide pre-enforcement judicial review of specified IRS determinations affecting tax-exempt qualification and related classifications.
- Access to this remedy is limited to specified organizations and specified determination types, and is conditioned on administrative finality or constructive finality after IRS delay.
- Congress may confine jurisdiction to selected federal courts to centralize expertise and reduce inconsistent outcomes across regions.
- The remedial design aims to avoid forcing regulated entities to violate an agency position merely to obtain judicial review, especially where third parties (such as donors) are materially affected.
- The remedy is intended to be narrow and status-focused, not a general substitute for traditional deficiency, refund, or other tax litigation routes outside the determinations enumerated by the statute.

## Conclusion

The committee report explains Congress’s decision to create I.R.C. § 7428 as a limited declaratory-judgment mechanism for certain organizations to secure timely judicial determinations of exempt or related status, replacing a regime that effectively required organizations to incur tax liability and litigate indirectly to obtain review.


S. Rep. No. 94-938, at 585–591 (1976)