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United States v. Bible Study Time, Inc.

United States District Court, D. South Carolina, Spartanburg Division

March 13, 2018

UNITED STATES OF AMERICA, Petitioner,
v.
BIBLE STUDY TIME, INC., Respondent.

          OPINION AND ORDER STAYING PETITION TO ENFORCE SUMMONS

          CAMERON MCGOWAN CURRIE, SENIOR UNITED STATES DISTRICT JUDGE

         This matter is before the court on Petition of the United States of America (“Government”) to enforce a summons (“the Summons”) issued by the Internal Revenue Service (“IRS”) to Bible Study Time, Inc. (“BST”). BST opposes enforcement on multiple grounds including the underlying church tax inquiry (“Inquiry”) and, by extension, church tax examination (“Examination”), were not properly initiated under 26 U.S.C. § 7611 (“Section 7611”).[1]

         Summary of Argument. BST's argument focuses on whether the IRS satisfied Section 7611's requirement that an “appropriate high-level Treasury official reasonably believes (on the basis of facts and circumstances recorded in writing)” that one of several prerequisites exists before initiating an Inquiry (“Section 7611 Determination”). 26 U.S.C. § 7611(a)(2). BST contends this requirement was not satisfied because the official who signed the Inquiry Notice, the Director, Exempt Organizations (“DEO”), holds too low a rank to qualify as an “appropriate high-level Treasury official.” See 26 U.S.C. § 7611(h)(7) (defining “appropriate high-level Treasury official” as “the Secretary of the Treasury or any delegate of the Secretary whose rank is no lower than that of a principal Internal Revenue officer for an internal revenue region.”). BST also argues the Government may not rely on any participation in the Section 7611 Determination by the Commissioner, Tax Exempt and Government Entities Division (“TE/GE Commissioner”) to cure this deficiency for two reasons: (1) the IRS did not disclose the TE/GE Commissioner's participation prior to filing the Petition; and (2) the TE/GE Commissioner holds too low a rank to qualify as an appropriate high-level Treasury official. Addressing a related issue raised by the court, BST argues authority to make the Section 7611 Determination was never properly delegated to either official even if one or both hold sufficient rank to satisfy Section 7611(h)(7). The Government, in contrast, argues authority to make the Section 7611 Determination was delegated to both the DEO and TE/GE Commissioner, both hold sufficient rank, and both made the Determination.

         Summary of Ruling. Having fully considered the parties' arguments on these issues, the court holds as follows:

(1) authority to make the Section 7611 Determination was delegated to the TE/GE Commissioner by Delegation Order 193 (Nov. 8, 2000) and such delegation was permitted by Section 7611(h)(7) (infra Discussion § II);
(2) any purported redelegation of authority to make the Section 7611 Determination to the DEO was neither allowed by Delegation Order 193 nor effective because the DEO holds too low a rank to qualify as an “appropriate high-level Treasury official” (infra Discussion § III); and
(3) there has not been substantial compliance with the notice requirements of subsections (a) or (b) of Section 7611, requiring this matter be stayed pursuant to Section 7611(e) until all practicable steps to correct the noncompliance have been taken (infra Discussion § IV).

         BACKGROUND

         I. Government Petition and Attachments

         A. Petition

         The Petition was filed September 8, 2017. ECF No. 1. It seeks to enforce the Summons served on BST on June 29, 2017, in furtherance of the IRS's “examination of the tax-exempt status and income tax liability of BST for the tax year ended December 31, 2013.” ECF No. 1 ¶¶ 3, 5, 14. The Petition alleges “[a]ll administrative steps required by the Internal Revenue Code for the issuance of a summons have been taken, including the procedures required to initiate a church tax inquiry and examination with respect to any organization claiming to be a church under 26 U.S.C. § 7611[.]” Id. ¶ 21.

         The Petition describes the steps required and taken as follows:

27. 26 U.S.C. § 7611(a)(1) provides that the Secretary [of the Treasury] may begin a church tax inquiry only if the reasonable belief requirement of paragraph (2) and notice requirements of paragraph (3) have been met. 26 U.S.C. § 7611(a)(2) provides that an appropriate high-level Treasury official must reasonably believe that the church may not be exempt under 26 U.S.C. § 501(a) or may be carrying on an unrelated trade or business or otherwise engaged in activities subject to tax under the Internal Revenue Code.
28. On May 25, 2016, the [DEO], Tamera Ripperda, and [TE/GE Commissioner], Sunita B. Lough, signed the IRC Section 7611 Church Case Time Limits and Approval[s] Cover Sheet for approval of the issuance of Notice of Church Tax Inquiry to BST. . . .
29. The approval of the notice of church tax inquiry of BST by [the DEO], acting with the concurrence of the TE/GE Commissioner, satisfies the reasonable-belief requirement of 26 U.S.C. §§ 7611(a)(1)(A) and 7611(a)(2)[.]

ECF No. 1 ¶¶ 27-29.

         The Petition alleges the required Inquiry Notice was sent to BST on June 15, 2016, and Examination Notice was sent to BST on September 1, 2016. Id. ¶¶ 30-32. Both were signed by the DEO. Id. It alleges BST did not request a pre-examination conference despite being offered that opportunity. Id. ¶ 33; but see ECF Nos. 10, 19 (BST memoranda challenging Government's characterization of events including whether BST requested conference).

         The Summons addressed by the Petition was served roughly nine months later, on June 30, 2017. ECF No.1. ¶¶ 14, 15.[2] BST did not appear in response to the Summons, leading to the present Petition. Id. ¶ 16.

         B. Gagnon Declaration

         The Petition is supported by the Declaration of Revenue Agent Russell Gagnon (“Agent Gagnon”). ECF No. 1-1 (“Gagnon Declaration”). Agent Gagnon describes his involvement, dating back to January 2015, in investigating BST's 2013 Form 990 (Return of Organization Exempt from Income Tax). Id. ¶ 2. He avers BST did not claim church status on its 2013 Form 990, though it did claim to be a tax exempt entity under Internal Revenue Code § 509(a)(2). Id. ¶¶ 5, 6.

         Agent Gagnon describes a variety of concerns raised by BST's 2013 Form 990, which led to the initial investigation. Id. ¶¶ 6-9. He avers he contacted BST in February 2015, seeking to conduct a field examination in April 2015. Id. ¶ 17. In March 2015, BST responded by claiming church status. Id. ¶ 19.

         The IRS “initiated procedures to determine whether to authorize a church tax inquiry” on April 14, 2015. Id. ¶ 20. A little over a year later, “[o]n May 25, 2016, the [DEO] signed the ‘IRC Section 7611 Church Case Time Limits and Approval[s] Cover Sheet'” (“Approvals Cover Sheet”). Id. ¶ 21. The TE/GE Commissioner signed the same form on the same day. Id. ¶ 22.[3]A few weeks later, on June 15, 2016, the DEO signed an Inquiry Notice listing the grounds for the Inquiry, which was sent to BST by certified mail. Id. ¶¶ 23, 24. BST advised the IRS it would not respond to the Inquiry Notice, prompting the IRS to send an Examination Notice on September 1, 2016. Id. ¶¶ 25, 26. This notice was also signed only by the DEO. Id.

         II. BST Opposition

         A. Pre-Petition Correspondence

         Through its opposition memorandum, BST fills in details of its communications with the IRS and argues the underlying examination was neither properly authorized nor the TE/GE Commissioner's participation in the Section 7611 Determination disclosed. ECF No. 10 (response); see also ECF No. 19 (sur-reply). BST attaches multiple letters supporting its characterization of events. ECF No. 10-8 through 10-13 (discussed below).

         BST Letters. BST's first two letters to the IRS were sent after the Inquiry Notice issued on June 15, 2016, and before the Examination Notice issued on September 1, 2016. See ECF No. 10-8 (June 29, 2016 letter from BST's certified public accountant (“CPA”)); ECF No. 10-10 (August 9, 2016 letter from BST's attorney). Both letters rely on United States v. Living Word Christian Ctr., 2008 WL 5456381 at ** 4-6 (D. Minn. 2008) (“Living Word, R&R”), adopted 2009 WL 250049 (D. Minn. 2009) (“Living Word, Order”) (collectively “Living Word”), in challenging the DEO's authority to make the Section 7611 Determination. ECF Nos. 10-8, 10-10. As explained in these letters, Living Word held the Director of Exempt Organizations, Examinations (“DEOE”), an official one step below the DEO, held too low a rank to make the Section 7611 Determination. Living Word, R&R at ** 12, 13; Living Word, Opinion at *4.[4]

         BST's third letter is dated March 27, 2017, well after the Examination Notice issued on September 1, 2016, but before the Summons was served on June 30, 2017. ECF No. 10-13 at 5 (letter from BST attorney). As in BST's earlier letters, this letter argues the Examination was not properly authorized because the official who made the underlying Section 7611 Determination held too low a rank, though it does not identify the DEO as the official who took this action or cite Living Word. Id. The letter states BST is willing to participate in a conference without waiving its objection to the legitimacy of the Examination. Id. BST's attorney made essentially the same points in two subsequent letters dated after the Summons was served. See ECF No. 10-13 at 15, 20 (letters dated July 10, 2017, and July 19, 2017).

         IRS Letters. BST submits four letters from the IRS. One expressly addresses the DEO's authority, distinguishing Living Word as addressing an official of lower rank and arguing the DEO holds sufficiently high rank to make the Section 7611 Determination and sign the Inquiry Notice. ECF No. 10-9 (August 4, 2016 letter signed by an Exempt Organizations Area Manager). BST also attaches the subsequent Examination Notice (signed by the DEO) and two letters, none of which address the issue of the DEO's authority.[5]

         B. BST's Arguments

         As in the pre-Petition letters summarized above, BST argues the DEO lacks authority to make the Section 7611 Determination or sign the Inquiry Notice and Examination Notice because she holds too low a rank. BST asserts the IRS should not be allowed to rely on any participation by the TE/GE Commissioner because her participation in the Determination was not disclosed at any point before the Government filed its Petition. ECF No. 10 at 15 (characterizing Petition's assertion both the DEO and TE/GE Commissioner “signed” the Approvals Cover Sheet as a “carefully worded allegation” and noting “the IRS has never disputed [the DEO] is the [official] who purported to authorize the inquiry”). BST notes the absence of support for any claim either the DEO or TE/GE Commissioner took the steps required to make the Section 7611 Determination. It also argues the TE/GE Commissioner holds too low a rank to satisfy Section 7611(h)(7), even if her participation is considered.

         III. Government's Reply

         Through its Reply, the Government offers Declarations of both the DEO and TE/GE Commissioner. These Declarations address these officials' responsibilities, places in the organizational chart, and roles in approving the BST Inquiry. Using nearly identical language, both declarants aver they reviewed listed materials, made a Section 7611 Determination based on that review, and indicated their Determination by signing the Approvals Cover Sheet.[6]

         IV. BST's Sur-Reply[7]

         BST argues the Government should be estopped from claiming the TE/GE Commissioner made an independent Section 7611 Determination because this claim was first disclosed in the Government's Reply and attached Declaration of the TE/GE Commissioner. See ECF No. 19 at 3, 4. In contrast, the Petition alleges only that the TE/GE Commissioner “signed” the Approvals Cover Sheet and refers to her “concurrence” with the DEO's Determination as sufficient. Id.

         DISCUSSION

         To obtain judicial enforcement of an administrative summons, the Government must make a prima facie showing of four factors: (1) the investigation is being conducted for a legitimate purpose; (2) the inquiry may be relevant to that purpose; (3) the IRS does not currently possess the information sought; and (4) the administrative steps required by the Internal Revenue Code have been followed. United States v. Powell, 379 U.S. 48, 57-58 (1964) (addressing Petition to enforce summons issued to corporate taxpayer); see also Living Word, R&R at **3, 13 (applying Powell in recommending denial of petition to enforce summons issued in support of church tax examination). Though not so limited, BST's opposition to enforcement focuses on the fourth Powell factor.[8]

         To determine whether the IRS satisfied the fourth Powell factor, the court must resolve three subordinate issues: (1) whether authority to make the Section 7611 Determination was delegated (or purported to be delegated) to the DEO, TE/GE Commissioner, or both; (2) if delegated to one or both, whether these officials satisfied the “high-rank” requirement of Section 7611(h)(7); and (3) whether there has been substantial compliance with the notice requirements of Section 7611.

         As explained below, resolving these issues is complicated by multiple factors including reorganization of the IRS between 1998 and 2000 to eliminate the regional structure that allowed clear application of Section 7611(h)(7)'s identification of the lowest ranking official to whom authority to make the Section 7611 Determination could be delegated. Infra Discussion § I.A.2. It is further complicated by the following: (1) the Secretary of the Treasury's use of broadly-worded Delegation Order 193 to delegate multiple responsibilities from one set of officials to another set of officials (infra Discussion § I.A.3); (2) the IRS's inconsistent prior interpretation of Delegation Order 193 as it relates to the official authorized to make the Section 7611 Determination, failed attempts to adopt a regulation vesting authority in the DEO, and recently adopted Internal Revenue Manual (“IRM”) provisions purporting to make a hybrid delegation of authority to the DEO “who acts in concurrence with the TE/GE Commissioner” (infra Discussion §§ I.A.4, 5); (3) the Government's failure in this action to advance a position consistent with current IRM language (infra Discussion § I.B (discussing Government's litigation arguments); and (4) the IRS's failure to disclose any participation by the TE/GE Commissioner prior to filing the Petition either through the Notices or in response to BST's subsequent communications challenging the DEO's authority (infra Discussion §§ I.B, II.B, IV).

         I. Section 7611 Requirements and Delegation

         A. Statutory Requirements and History of Delegation

         1. Statutory Requirements

         In 1984, Congress enacted the Church Audit Procedures Act (“CAPA”), now codified as 26 U.S.C. § 7611. Section 7611 requires special procedures be followed when the IRS seeks to conduct a church audit. See generally Living Word, R&R at **4-6 (addressing CAPA purpose and history).[9]

         The following procedures are critical here: (a) Restrictions on inquiries -

(1) In general. - The Secretary may begin a church tax inquiry only if -
(A) the reasonable belief requirements of paragraph (2), and
(B) the notice requirements of paragraph (3), have been met.
(2) Reasonable belief requirements. - The requirements of this paragraph are met with respect to any church tax inquiry if an appropriate high-level Treasury official reasonably believes (on the basis of facts and circumstances recorded in writing) that the church -
(A) may not be exempt, by reason of its status as a church, from tax under section 501(a), or
(B) may be carrying on an unrelated trade or business (within the meaning of section 513) or otherwise engaged in activities subject to taxation under this title.
* * *
(h) Definitions. - For purposes of this section -
* * *
(7) Appropriate high-level Treasury official. - The term “appropriate high-level Treasury official” means the Secretary of the Treasury or any delegate of the Secretary whose rank is no lower than that of a principal Internal Revenue officer for an internal revenue region.

26 U.S.C. § 7611(a), (h).

         Remedies for violation of Section 7611 are limited. Most critically, Section 7611(e) provides as follows:

(1) In general. - If there has not been substantial compliance with -
(A) the notice requirements of subsection (a) or (b), [or]
(B) the conference requirement described in subsection (b)(3)(A)(iii),
* * *
with respect to any church tax inquiry or examination, any proceeding to compel compliance with any summons with respect to such inquiry or examination shall be stayed until the court finds that all practicable steps to correct the noncompliance have been taken. The period applicable under paragraph (1) or subsection (c) shall not be suspended during the period of any stay under the preceding sentence.
(2) Remedy to be exclusive. - No suit may be maintained, and no defense may be raised in any proceeding (other than as provided in paragraph (1)), by reason of any noncompliance by the ...

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