United States v. Grayson County State Bank and Lloyd Butts, First Pentecostal Church, Etc., Intervenor-Appellee, 656 F.2d 1070, 1st Cir. (1981)
United States v. Grayson County State Bank and Lloyd Butts, First Pentecostal Church, Etc., Intervenor-Appellee, 656 F.2d 1070, 1st Cir. (1981)
2d 1070
81-2 USTC P 9680
The United States appeals from an order denying judicial enforcement, see 26
U.S.C. 7604(b), of an Internal Revenue Service (IRS) administrative
summons previously issued, see 26 U.S.C. 7602, to the Grayson County State
Bank, which had failed to respond. By the summons, in connection with the
investigation of the tax liability of an individual taxpayer (the minister of the
Section 7602 of the Internal Revenue Code of 1954, 26 U.S.C. 7602, grants
the Internal Revenue Service the power to summon books and records, and to
take the testimony of any individual for the purposes, inter alia, of ascertaining
the correctness of a tax return and determining a taxpayer's correct tax liability.
Section 7604 of the Code, 26 U.S.C. 7604 grants authority to the federal
district courts to issue orders compelling, through their powers of contempt,
compliance with the IRS summonses.
On refusal of the bank to provide said records the IRS applied to the federal
district court for enforcement of the administrative summons under Section
7604. A motion to intervene as defendant was granted to the First Pentecostal
Church which filed a motion to quash the summons as constituting excessive
governmental interference or entanglement with church affairs and because its
enforcement would allegedly have a "chilling effect" on the free exercise of
The district court, as earlier noted, denied judicial enforcement of the IRS
summons and quashed the summons on the grounds that (1) it violated the First
Amendment free exercise of religion rights of the intervening church and (2)
that the summons was not an authorized examination of church records because
it was not conducted pursuant to 26 U.S.C. 7605(c),2 a provision restricting
examination of such records.
I. The First Amendment Issue
In denying the IRS's application for enforcement and quashing the summons,
the district court found that the summons in this case sought documents which
would "lay open to government examination the entire financial history
including the manner in which the Church raises, invests, and spends funds
from all accounts that the Church's minister has signature privileges or trustee
assignment" and that such disclosure would be a "burden upon the free exercise
of the religious belief of (the church's) members." The district court found this
clearly raised a substantial question that judicial enforcement of the summons
would be an abusive use of the court's process that thus required the IRS to
show some reason to justify its request. The court further found that, since civil
tax liability for the years had prescribed, the government must come forward
and show some interest by way of tax fraud, which it had not done; in this
respect, the court pointed out that the government had produced no showing of
probable cause to suspect that the minister had committed tax fraud.
Initially, the issuance of an IRS summons must meet a test of good faith as
formulated in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d
112 (1964). The IRS must show that: (1) the investigation will be conducted
pursuant to a legitimate purpose, (2) the inquiry may be relevant to the purpose,
(3) the information sought is not already within the IRS's possession, and (4)
the proper administrative steps have been followed. Powell, supra, 379 U.S. at
57-58, 85 S.Ct. at 255; United States v. Holmes, supra, 614 F.2d at 987-88.
Appellee's argument that the IRS did not meet the Powell test is easily rejected:
A valid purpose was established, namely, to investigate the correct tax liability
of the minister; the records sought were limited only to those "on which (the
taxpayer had) signature privileges and/or trustee assignment" for the applicable
years, indicating relevance of the inquiry; the church has not claimed that the
IRS is in possession of this information; and notice of the summons was
provided to the taxpayer and the church as required by 26 U.S.C. 7609
(1976).4
10
Once a prima facie case for enforcement is shown, the burden shifts to the
taxpayer to show enforcement would be an abuse of the court's process. Powell,
supra, 379 U.S. at 58, 85 S.Ct. at 255; Holmes, supra, 614 F.2d at 988.
11
12
13
The church, citing United States v. Citizens State Bank, 612 F.2d 1091 (8th Cir.
1980), contends that the enforcement of the summons would result in a
"chilling effect" upon the free exercise of the religious beliefs of its members.
In Citizens State Bank the government issued a summons to the bank
requesting all bank records relating to the accounts of the taxpayer in question
and of the organization of which he was president. The Eighth Circuit found
that the appellants met their initial burden by making a prima facie showing of
an arguable First Amendment infringement. Id. at 1094. In the instant case, the
church's reliance on Citizens State Bank is misplaced. The organization there in
question was "a voluntary association of citizens who were opposed to the
current operation of the IRS and who made efforts to bring about changes in
the United States taxation system." Id. at 1093. The conclusion that an IRS
summons of this organization's records would produce a "chilling effect" on
membership is readily apparent.5 However, allowing the IRS access to
information to determine the correct tax liability of the taxpayer, the church's
minister, does not restrict the church's freedom to espouse religious doctrine nor
to solicit members or support. United States v. Holmes, 614 F.2d at 989.
Furthermore, the church has presented no evidence that enforcement of this
summons would restrict the religious activities of its members.6
14
Further, even if the enforcement would place an indirect burden on some First
Amendment rights, we recognized in United States v. Holmes :
15
The Supreme Court has employed a two part balancing test in determining
when such conduct is protected by the free exercise clause. First, plaintiff must
show a burden on the exercise of his religion by the law under review. Second,
the burden will be upheld only if the government interest outweighs the degree
of impairment of free exercise rights. See Wisconsin v. Yoder, 406 U.S. 205,
214, 92 S.Ct. 1526, 1532, 32 L.Ed.2d 15 (1972); Sherbert v. Verner, 374 U.S.
398, 403, 83 S.Ct. 1790, 1793, 10 L.Ed.2d 965 (1963).
16
17
18
We therefore disagree with the district court's conclusion that First Amendment
rights of the church or its members were implicated by the issuance of the
present summons. The summons was issued to secure access to records in the
possession of a bank, in connection with a taxpayer investigation, to examine
those records of the bank pertaining to the church that were relevantly
connected with the taxpayer's financial activity for the tax years of the
investigation. Under the relevant facts, no substantial showing is made of
abusive use of the summons, for its issuance does not constitute any significant
burden upon the free exercise of religious activity by the church or its
members.
19
The appellee church nevertheless contends that the district court's conclusions
to such effect are factual findings and subject to displacement on appellate
review only if clearly erroneous, Fed.R.Civ.P. 52(a). However, it is well settled
that the clearly-erroneous limitation does not apply to the review of a district
court's legal conclusions and inferences drawn from the facts, and that the
appellate court is free to make an independent determination from the same
facts of the determinative legal conclusions and inferences. United States v.
Mississippi Valley Generating Company, 364 U.S. 520, 526, 81 S.Ct. 294, 297,
5 L.Ed.2d 268 (1961); Spray-Bilt, Inc. v. Ingersoll-Rand World Trade, Ltd.,
350 F.2d 99, 103 (5th Cir. 1965); 9 Wright & Miller, Federal Practice and
Procedure, 2588 at 750, 2589 at 753 (1971). (Here, the principal facts
relevant to our determination are undisputed the issuance, scope, and purpose of
the summons.)
II. The Section 7605(c) Issue
20
The second issue presented on appeal is whether the court below erred in
holding that the IRS, in its attempt to obtain and examine bank records
pertaining to the church, is limited to an examination under Section 7605(c) of
the Internal Revenue Code, 26 U.S.C. 7605(c).7 The IRS correctly contends
that 7605(c) is not applicable in the examination of such bank records.
21
Section 7605(c) contains two limitations. The first requires that no examination
of the "books of account of a church " shall be made to determine whether such
organization is engaged in the carrying on of an unrelated trade or business or
may be otherwise engaged in "taxable activities"8 unless the IRS gives the
church written notice of such audit; the second limitation requires that such
examination must be restricted to the extent necessary to determine the amount
of tax imposed upon an unrelated business activity of the church. Paragraph (c)
was added to Section 7605 by the Tax Reform Act of 19699 as an
administrative provision in connection with an amendment to Section 511 of the
Code, which made the unrelated business income tax provisions of the Code
applicable to churches.10 The purpose of Section 7605(c) was to protect
churches from the administrative burden of "unnecessary tax audits" so as not
to interfere with the internal financial matters of the church.11 This section,
therefore, imposes some restriction, but it does not preclude examination of
church records.
22
22
23
24
Conclusion
25
26
Signature cards
Bank Statements for the period beginning January 1, 1973 through January 31,
1977
Deposit slips
Savings statements for periods beginning January 1, 1973 through January 31,
1977
The district court noted that although the church's objection was couched
partially in "establishment clause" language, the claim was in essence grounded
The church argues that the notice required by 7605(c) was not given. As we
hold 7605(c) not applicable to this summons, appellee's claim is not pertinent
Here the IRS summons was limited to (1) specified types of documents, (2) on
which the taxpayer-minister had signature privilege, (3) for a restricted time
span. Compare the broad scope of documents requested by the summons
directed to the church itself in Holmes, 614 F.2d at 987 n.3, and by the
summons in Citizens State Bank, 612 F.2d at 1093 n. 3. Furthermore, the court
in Citizens State Bank indicated a more limited summons would be
enforceable, emphasizing that "our decision will only rarely serve to limit the
reach of an IRS summons." Id. at 1094
Additionally the order of the district court recognized in footnote that "(u)nlike
the Church in Holmes, this Church has no option to limit IRS access to church
records by foregoing its tax-exempt status since the records are not requested
under a 7605(c) examination of the Church."
Churches are generally exempt from income taxes; however, 26 U.S.C. 511,
512 provide for tax on the unrelated business income of charitable
organizations, including churches
Section 7605(c) was added by Sec. 121(f), Tax Reform Act of 1969, Pub.L.
No. 91-172, 83 Stat. 487 (1969)
10
Section 511 was amended by Sec. 121(a), Pub.L. No. 91-172, 83 Stat. 536
(1969)
11
12 U.S.C. 7605(b)
(b) Restrictions on examination of taxpayer. No taxpayer shall be subjected to
unnecessary examination or investigations, and only one inspection of a
taxpayer's books of account shall be made for each taxable year unless the
taxpayer requests otherwise or unless the Secretary or his delegate, after
investigation, notifies the taxpayer in writing that an additional inspection is
necessary.