American Society of Travel Agents, Inc. v. Michael Blumenthal, Secretary of Treasury

566 F.2d 145, 184 U.S. App. D.C. 253

• Court: Court of Appeals for the D.C. Circuit
• Decided: November 1, 1977
• Docket: 75-1782
• Status: Published

Opinions

McGOWAN, Circuit Judge:

This is an appeal from the District Court’s dismissal of a complaint challenging the administration of the federal tax laws, not in relation to the tax liabilities of plaintiffs-appellants, but as to third parties not before the court. It thus presents a threshold issue of standing to sue reminiscent of Justice Stewart’s observation, concurring in Simon v. Eastern Kentucky Welfare Rights Organization, et al., 426 U.S. 26, 46, 96 S.Ct. 1917, 1928, 48 L.Ed.2d 450 (1975), that he could not “imagine a case, at least outside the First Amendment area, where a person whose own tax liability was not affected ever could have standing to litigate the federal tax liability of someone else.” Because Eastern Kentucky — an obviously relevant case — was pending before the Supreme Court at the time this appeal was first scheduled for oral argument, we deferred our consideration to await the Supreme Court’s outcome. We now hold, by reference to the Supreme Court’s disposition of Eastern Kentucky, that there was a fatal want of standing here; and we affirm the District Court’s judgment for that reason.

I

Appellants, the American Society of Travel Agents (ASTA) and several individual travel agencies, complain of the failure of the federal tax authorities to assess taxes upon certain income received by the American Jewish Congress (AJC) and other organizations enjoying tax exemptions under § 501(c)(3) of the Internal Revenue Code.¹ In particular, they object to the tax-exempt treatment accorded to income derived from the operation of travel programs by § 501(c)(3) organizations. Appellants assert that such income should be taxed as so-called unrelated business income, i. e., income obtained from a business the conduct of which is “not substantially related ... to the exercise of performance ... [of the] purpose or function constituting the basis” for an organization’s § 501 exemption. See I.R.C. § 513(a). Alternatively, appellants contend that the AJC and other exempt organizations have become so heavily involved in the travel business that their § 501(c)(3) exemptions should be eliminated altogether.

By memorandum order, the District Court decided that neither count of appellants’ complaint stated a claim upon which relief could be granted. 36 A.F.T.R.2d 75-5142 (D.D.C. May 23, 1975). It observed that allegations like those raised by plaintiffs would necessitate “careful consideration of the particular facts and circumstances of each case.” Unwilling to embark upon such an enterprise, the court declared that its jurisdiction could “not be invoked to undertake continuing supervision of IRS’s administration of the Internal Revenue Code.”

The District Court’s reluctance to become embroiled, at the instance of taxpayers not directly involved, in the intricacies of tax law enforcement is both understandable and far from irrational in terms of jurisdictional principles. However, we believe that, looking to the Supreme Court’s opinion in Eastern Kentucky, dismissal of appellants’ action should be accomplished by resolution of the preliminary question of standing. We conclude that appellants have failed to demonstrate any actual injury resulting from appellees’ administration, with respect to third parties, of the statutory provisions governing tax-exempt organizations. We find that appellants here, like the complainants in Eastern Kentucky, “have failed to carry [the] burden” of establishing “that, in fact, the asserted injury was the consequence of the defendants’ actions, or that prospective relief will remove the harm.” 426 U.S. at 45, 96 S.Ct. at 1927, quoting Warth v. Seldin, 422 U.S. 490, 505, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975).

II

Appellants’ basic grievance may be simply stated. Private travel agents earn their livelihood, primarily on a commission basis, through the sale of transportation and travel-related services in both domestic and foreign markets. One especially common function performed by travel agents is the arrangement of so-called tour packages, consisting of transportation, accommodations, meals, and a variety of other features. Such packages are sold together at one price, a portion of which the agent retains as a commission.

Appellants allege that, in recent years, a number of tax-exempt organizations, including the AJC, have become increasingly involved in preparing tour packages and offering such packages to their members. Appellants further allege that the tax-exempt status of these organizations has enabled them to sell tour packages at prices lower than those which private travel agents must charge in order to earn a reasonable profit. Thus, so it is said, the AJC and other unspecified organizations have improperly used their tax exemptions to obtain an unfair competitive advantage in the sale of tour packages.

Operation of an extensive travel program is, in appellants’ view, substantially unrelated to the religious, charitable, scientific, or educational purposes which justify many § 501(c)(3) exemptions, including that enjoyed by the AJC. Consequently, appellants urge that income from such a travel program should be subjected to the same tax treatment accorded to income earned by ordinary ASTA members. Somewhat less vigorously, appellants maintain that if the § 501(c)(3) organizations at issue conduct travel businesses of significant size, then those organizations are no longer operated “exclusively” for religious, charitable, scientific, or educational purposes, and thereby forfeit their § 501(c)(3) exemptions.

We do not reach the merits, because we believe appellants have not alleged any judicially cognizable “injury in fact,” and thus have failed to establish their standing to bring this suit. “Injury in fact” has long been regarded as the foremost standing prerequisite, and the only one of constitutional dimension. See, e. g., United States v. SCRAP, 412 U.S. 669, 686-89 & n. 14, 93 S.Ct. 2405, 37 L.Ed.2d 254 (1973); Sierra Club v. Morton, 405 U.S. 727, 733, 92 S.Ct. 1361, 31 L.Ed.2d 636 (1972), and Flast v. Cohen, 392 U.S. 83, 99-101, 88 S.Ct. 1942, 20 L.Ed.2d 947 (1968). Under Article III of the Constitution, federal courts are limited to the adjudication of cases and controversies. In order to guarantee the adversarial litigation posture demanded by this constitutional language, plaintiffs seeking to invoke federal court jurisdiction have been required to demonstrate that they have suffered some actual injury attributable to defendants.

Here, appellants claim to have been injured by appellees’ improper administration of the Internal Revenue Code, and seek injunctive relief. However, appellants have not indicated with sufficient specificity either the manner in which their alleged injury occurred or the nature of that injury. Appellants point to no prospective customers who spurned the services of ASTA members because of appellees’ allegedly inequitable tax treatment of § 501(c)(3) organizations. Nor do appellants identify tour package purchasers who in fact patronized the AJC or some other tax-exempt organization, but who might legitimately be expected to do business with a private travel agent in the event appellees enforced the relevant tax code provisions according to appellants’ recommendations. Instead, appellants complain in more abstract terms, alleging injury arising from appellees’ creation of an unfair competitive atmosphere, and seeking relief in the form of the more congenial competitive environment which would supposedly result from proper tax enforcement policy. We regard this sort of injury claim as too speculative to support standing under the ¡circumstances presented here.

We conceive that this disposition is not only sustained, but also largely mandated, by Eastern Kentucky. In that case, several indigents and organizations composed of indigents attacked a 1969 Revenue Ruling which revised the criteria under which nonprofit hospitals might qualify for tax-exempt status as charitable institutions. In particular, the challenged ruling eliminated the requirement contained in a 1956 ruling to the effect that a non-profit hospital desirous of charitable classification “must be operated to the extent of its financial ability for those not able to pay for the services rendered.” Deletion of this language, argued the Eastern Kentucky plaintiffs, was directly responsible for several refusals by tax-exempt hospitals to provide needed services to individuals unable to pay a deposit or advance fee. Plaintiffs further alleged that similar refusals could be expected in the future if the offending Revenue Ruling was not changed.

As indicated above, the Supreme Court held that “Speculative inferences are necessary to connect [plaintiffs’] injury to the challenged actions . . . ,” and “[m]oreover, the complaint suggests no substantial likelihood that victory in this suit would result” in receipt of the hospital treatment desired. 426 U.S. at 45-46, 96 S.Ct. at 1927-1928. The Court explained its conclusion by commenting upon what it perceived as the tenuous connection between the injury suffered and the relief sought by plaintiffs:

[I]t does not follow . . . that the denial of access to hospital services in fact results from petitioners’ new Ruling, or that a court-ordered return by petitioners to their previous policy would result in these respondents’ receiving the hospital services they desire. It is purely speculative whether the denials of service specified in the complaint fairly can be traced to petitioners’ “encouragement” or instead result from decisions made by the hospitals without regard to the tax implications.

It is equally speculative whether the desired exercise of the court’s remedial powers in this suit would result in the availability to respondents of such services. So far as the complaint sheds light, it is just as plausible that the hospitals to which respondents may apply for service would elect to forego favorable tax treatment to avoid the undetermined financial drain of an increase in the level of uncompensated services.²

Id. at 42-43, 96 S.Ct. at 1926.

ASTA’s complaint in the appeal before us reveals inadequacies closely compa-rabie to those which afflicted the pleadings filed by the indigents and indigent organizations in Eastern Kentucky. Appellants here must rely solely on speculation in their attempt to assert that their business or profits would improve in the event that appellees began to tax the travel-related income of § 501(c)(3) organizations. Appellants have not demonstrated that they would reap any tangible benefit if the court were to order the relief sought.

As appellees argue in their supplemental memorandum, the lower cost of the tour packages offered by the AJC and other tax-exempt organizations may well be attributable at least in significant part to the use of volunteer labor or the willingness to accept lower profits than would commercial travel agents. Moreover, even if appellants were to prevail in this suit, members of § 501(c)(3) organizations might for a variety of reasons continue to prefer the travel programs operated by their own organizations. Alternately, such organizations might shift to tour packages whose religious or educational orientation would be more readily apparent. A third possibility is that travel by members of § 501(c)(3) organizations would simply decline.

If any of these consequences, or some combination of them, ensued from a decision favorable to appellants, private travel agents would enjoy no gain whatever from their successful litigation. This is precisely the sort of situation in which the Supreme Court failed to find standing in Eastern Kentucky.³

By emphasizing their asserted competitor status, appellants seek to distinguish Eastern Kentucky. Appellants contend that, as competitors of the AJC and certain other § 501(c)(3) organizations, they are entitled to protest tax treatment of such organizations in federal court.⁴ For support of their position, appellants rely heavily on Association of Data Processing Organizations, Inc. v. Camp, 397 U.S. 150, 90 S.Ct. , 25 L.Ed.2d 184 (1970). In that case, the Court held that private competitors had standing to challenge a ruling by the Comptroller of the Currency which allowed national banks to provide data processing services to other banks and bank customers. Appellants emphasize that the Supreme Court has, in its Eastern Kentucky opinion, recently reaffirmed the vitality of the Data Processing decision. See 426 U.S. at 45 n. 25, 96 S.Ct. 1917.

Our response is threefold. First, the rather cryptic phrasing of Data Processing does not clearly define the contours of competitor standing as conceived by the Supreme Court. The opinion by Justice Douglas for the Court provides little guidance as to the precise nature of the requirements which must be satisfied before competitor standing can be sustained.⁵

Secondly, and more significantly, Data Processing was not a tax case. Whatever may be the impact of competitor standing when ordinary administrative action is at issue, we do not believe that Data Processing should be read to endorse standing for any private business, individual or corporate, which wishes to contest the tax treatment of a competitor.

Finally, § 501(c)(3) organizations occupy a different posture with respect to the sale of tour packages than did the national banks with respect to the provision of data processing services. Here, the AJC and other such groups will clearly remain free to pursue their travel businesses, however the tax status is finally resolved. By contrast, in Data Processing, if the Comptroller of the Currency’s ruling had been overturned on judicial review, the offering of data processing services by national banks would have been illegal, and petitioners undoubtedly would have faced no further competition from that source, absent statutory revision.

For all these reasons, we do not believe that the Data Processing decision controls the standing issue in the present litigation.⁶ Since we are convinced that the Eastern Kentucky analysis of standing is the one we are bound to apply in this case, and that under it appellants lacked standing to maintain this suit, the judgment of dismissal is affirmed.⁷

It is so ordered.

1 . I.R.C. § 501(c)(3) (as amended, 1976) contains the following list of exempt organizations:

Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.

2 . Justice Powell’s opinion for the Court made clear that the finding of a standing deficiency in Eastern Kentucky rested upon a constitutional foundation.

[W]hen a plaintiff’s standing is brought into issue the relevant inquiry is whether . . . the plaintiff has shown an injury to himself that is likely to be redressed by a favorable decision. Absent such a showing, exercise of its power by a federal court would be gratuitous and thus inconsistent with the Art. Ill limitation.

* * * * * *

The necessity that the plaintiff who seeks to invoke judicial power stand to profit in some personal interest remains an Art. Ill requirement.

The standing question in this suit therefore turns upon whether any individual respondent has established an actual injury, or whether the respondent organizations have established actual injury to any of their indigent members.

5}! ifc SfC # * *

[Tjhe “case or controversy” limitation of Art. Ill still requires that a federal court act only to redress injury that fairly can be traced to the challenged action of the defendant . . .

Id. at 38-41, 96 S.Ct. at 1924-1926 (footnotes omitted).

In a recent case decided by another panel of this court, inquiries relating to causation and redressability of an alleged injury are characterized as “prudential limitations.” Tax Analysts and Advocates v. Blumenthal, No. 75-1304, 184 U.S.App.D.C. at---, 566 F.2d at 137-138 (1977); and see also Harrington v. Bush, 180 U.S.App.D.C. 45, 553 F.2d 190, 206 n. 68 (1977), where such inquiries are portrayed as being separate and apart from the “constitutional threshold of injury-in-fact”. The implication of these statements is that, although considerations of causation or re-dressability may conceivably operate to deprive particular plaintiffs of standing, such factors can in no event rise to the level of constitutional significance. Justice Powell’s words in Eastern Kentucky, especially the passages quoted above, are at odds with this approach. Causation and redressability, far from being prudential matters to be evaluated seriatim only after constitutional standing has been established, are part and parcel of the “injury in fact” requirement arising from the “case or controversy” language in Article III. Causation and redressability thus represent not additional independent standing hurdles which prospective litigants must clear, but rather identifiable aspects of the “injury in fact” test which has long been recognized as the primary standing criterion in the federal courts.

3 . Although Justice Stewart’s concurring statement in Eastern Kentucky dramatically denotes the special problems attendant upon the establishment of standing in the tax cases, under the circumstances of this case we find, as did the Eastern Kentucky majority, no need to reach “the question of whether a third party ever may challenge IRS treatment of another.” 426 U.S. at 37, 96 S.Ct. at 1923. The conventional “injury in fact” prerequisite was simply not met by appellants in the record before us.

4 . Appellants also rely on their competitor status to establish that they are within the “zone of interests to be protected or regulated by” the relevant Internal Revenue Code provisions. The so-called “zone of interests” test stems from the Supreme Court’s companion opinions in Association of Data Processing Organizations, Inc. v. Camp, 397 U.S. 150, 153, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970) and Barlow v. Collins, 397 U.S. 159, 164-65, 90 S.Ct. 832, 25 L.Ed.2d 192 (1970). As the Court observed in Eastern Kentucky, the “zone of interests” test presents “a second, nonconstitutional standing requirement.” 426 U.S. at 39 n. 19, 96 S.Ct. 1917. In an effort to demonstrate that the “unrelated business” concept was incorporated into the Code in order to protect competitors of tax-exempt organizations, appellants point to both the legislative history of I.R.C. § 513 and the regulations promulgated regarding that section. See, e. g., H.R.Rep. No. 2319, 81st Cong., 2d Sess. 36 (1950); S.Rep.No. 2375, 81st Cong., 2d Sess. 27-31 (1950), U.S. Code Cong. Serv. 1950, p. 3053; and 26 C.F.R. § 1.513-l(b) (1976). Given our disposition of this case under the “injury in fact” rubric, we need not address appellants’ “zone of interests” argument.

5 . Two examples may be cited. The first involves the identity of the parties who must be sued by a litigant alleging competitor standing. In Data Processing, one of the respondents was American National Bank & Trust Company, a national bank which was offering data processing services pursuant to the controverted ruling by the Comptroller of the Currency. Justice Douglas’s opinion does not disclose whether a successful claim of competitor standing necessitates naming one or more specific competitors as party opponents. Here, only the Secretary of the Treasury and the Commissioner of Internal Revenue were named as defendants. No organizations holding § 501(c)(3) tax exemptions were made parties. We note that in Eastern Kentucky, Justice Powell stressed the fact that no tax-exempt hospital was a defendant. See 426 U.S. at 41, 96 S.Ct. 1917. Also omitted from the Data Processing opinion was all discussion of the chain of causation connecting the challenged administrative action to the injury allegedly suffered by competitors of regulated enterprises. That chain was patently much shorter and more direct in Data Processing than it is in this case.

6 . In Tax Analysts, supra note 2, a panel of this court recently found economic injury in fact, adequate to meet the Article III test of standing. Appellant in that case was the owner of a small domestic oil well. Rightly or wrongly, he characterized himself as a competitor of the major oil companies producing and importing oil from abroad. He claimed to have suffered economic harm because the IRS had acquiesced in the tax credit treatment of certain sums paid by large oil companies to foreign governments. Appellant in Tax Analysts asserted that these sums represented foreign excise taxes or royalties, not foreign income taxes, and that therefore, they should be treated as deductible business expenses, not tax credits. Having found such allegations sufficient to establish injury in fact, the Tax Analysts panel then addressed the prudential “zone of interests” test, and found that the courthouse door was barred on that score. By reason of this latter finding, the panel did not think it necessary to pursue what it termed the “two additional prudential limitations relating to causation and redressability of the grievance . . .” 184 U.S.App.D.C. at-,-, 566 F.2d at 138 (footnote omitted); and see note 2 supra.

7 . The dissent observes of the foregoing opinion that “it constructs a constitutional standard of injury in fact that would effectively preclude taxpayer suits claiming competitive injury.” The word “constructs” is hardly an apt characterization of the majority’s effort, in purpose and effect, to follow as faithfully as possible the Supreme Court’s disposition of Eastern Kentucky — the case which, prior to that disposition, all members of the panel appeared to regard as almost certainly controlling.

It would thus seem that the dissent’s quarrel is essentially with the approach taken by the Supreme Court majority in Eastern Kentucky, and not with anything the panel majority has itself contrived. The dissent asserts that that approach is an impolitic and unwarrantable return to the rigors of common law pleading, and one that is incompatible with a rational determination of accessibility to the federal courts. Although in this instance the dissent purports to see distinctions which enable it to assert that Eastern Kentucky was rightly decided by the Supreme Court, it is manifest that this is not an undertaking it finds either necessary or congenial. As is usually the case in such circumstances, the differentiations here made in terms of economic probabilities are less than conclusive.

It is no disrespect to the Supreme Court to say that the concept of standing appears to be undergoing development. Warth v. Seldin, supra, and Eastern Kentucky, with their new emphasis upon causation and redressability, indicate that at least a majority of the Court is no longer content with a constitutional concept of injury in fact limited to an assurance that the interest asserted will guarantee an effective adversarial presentation. Causation and redress-ability have now explicitly been comprehended within that concept. Whether this is only a tightening up of pleading requirements, or whether it is a way station on the road to a holding of nonjusticiability in certain classes of litigation, neither we nor the dissent can say. In such circumstances it is surely the function of an intermediate appellate court to be guided by standing requirements as they are currently articulated by the Supreme Court in closely comparable contexts.