DOES THE Internal Revenue Service have the right to deny tax-exempt status to an organization that, in its opinion, openly spreads "racial propaganda"? It does not, according to U.S. District Judge Oliver Gasch. He ruled last month that the IRS had erred in rejecting such status for a small Virginia group called the National Alliance, whose application for tax exemption described membership as "available to all persons of European race."

This white-only outfit, according to the IRS, did not qualify for an exemption because it failed to meet the tax code's requirements for "charitable" or "educational" groups since -- again according to IRS -- it "induces, condones, and advocates violence and crime" against blacks and Jews. According to Judge Gasch, however, a 1980 U.S. Court of Appeals decision -- involving the denial of tax-exempt status to Big Mama Rag, a feminist paper -- applied also to the National Alliance lawsuit. The Court of Appeals had overturned the IRS's denial of tax exemption for Big Mama Rag on grounds that the Treasury regulations' definition of "educational" was unconstitutionally vague and, therefore, a violation of First Amendment rights.

In the National Alliance case, IRS officials essentially had turned the group down after reviewing the contents of its publications. These, IRS concluded, were "distorted, inflammatory and unfounded hate material" that violated the educational criteria established by the tax code provision that the Court of Appeals later struck down (the National Alliance had filed suit against IRS before the appellate court decided Big Mama Rag ). The now-defunct provision required that, for "educational" status, a group present a "sufficiently full and fair explosition of the pertinent facts" even while arguing for a particular viewpoint. The flip side of that admirable but abstract stipulation makes the Court of Appeals' decision seem more sensible still: "an organization is not educational if its principal function is the mere presentation of unsupported opinion." Even those who believe but stolidly in supported opinion can be forgiven a raised eyebrow at that feckless standard.

All the end, Judge Gasch remanded the National Alliance's application to the IRS for reconsideration "in light of Big Mama Rag " and of his own order. The underlying question of whether First Amendment protections preclude the IRS from reviewing the basic purposes -- and, therefore, the written statements -- of groups that apply for "educational" tax exemptions remains unsettled. The U.S. Court of Appeals itself had qualified the Big Mama Rag ruling by insisting that it did not mean to argue that every group "claiming an educational mantle" must be allowed one. Instead, after rapping the IRS's knuckles for its previously "imprecise" standards of evaluating such organizations, the court urged with comparable inprecision that the agency apply "criteria capable of neutral application" when dealing with requests for tax exemption.

What these criteria might be is anyone's guess especially if we refuse to allow "individual IRS officials to pass judgment on the content and quality of an applicant's views and goals," something the appellate court forbade explicitly as unconstitutional. For the moment, therefore, those bombarded by hate groups' goofy and scurrilous (but possibly tax-exempt) tracts will have to apply a more immediate if strictly constitutional remedy: the right to chuck the printed ravings of pathetic extremists in the nearest wastebasket.