Note: This is a companion piece to the question and answer session Tony Ortega and I had at the Underground Bunker.
What would it take to get the IRS to commence an investigation into the revocation of the Church of Scientology’s 1993 tax exemption?
At the minimum, it would take an IRS Regional Commissioner to call for a revocation hearing. Unfortunately, the position of Regional Commissioner was eliminated by Congress in the IRS Restructuring and Reform Act of 1998 (enacted July 22, 1998), an act implemented between 1999 and 2000. During this implementation period, the existing Regional Commissioners retired or were transferred to other positions.
Because the IRS has no Regional Commissioners, the IRS is effectively barred from undertaking any civil audits of churches.
Why is this?
It is the result of a disastrous loophole unintentionally created by the US Congress. IRS Code (IRC) Section 7611 mandates that the IRS cannot initiate a civil audit of a church — or an organization claiming to be a church — without the express approval in writing of a Regional Commissioner. However, when Congress passed the IRS Restructuring and Reform Act of 1998, it made no provision for a substitute church audit process under section 7611. This created a loophole big enough for any church to drive through.
How was such a mistake allowed to occur?
The IRS and its sprawling bureaucracy is a part of the US Department of the Treasury. The US Congress held hearings on the IRS in 1996 and 1997. As a result of these hearings, it was determined that Congress needed to restructure the IRS and update the ways in which the IRS operates. Hence, the IRS Restructuring and Reform Act of 1998. For whatever reasons, the issue of church audits was either overlooked or was just not on the radar of the Congress or the US Department of the Treasury. Indeed, the IRS itself did not discover the problem until 2009.
Bottom Line: Because the issue is one of statutory language, it cannot be remedied by Treasury regulations or other non-statutory guidance. What is needed is for Congress to amend the IRS Restructuring and Reform Act of 1998 to address this loophole.
A few IRS audits of churches were started but were quickly closed when the IRS’ lack of authority to conduct such audits was challenged in court. A landmark example of such a challenge is the case United States of America vs. Living Word Christian Center (Civil No. 08-mc-37 ADM/JJK) This case was tried in the US District Court of Minnesota. In its ruling the Court specifically bound the IRS to the loophole in the IRS Restructuring and Reform Act of 1998. This is important and well worth reading to educate yourself:
In April 2007, the Internal Revenue Service (“IRS”) began investigating Living Word Christian Center (“LWCC”) after receiving reports that LWCC may be engaging in conduct, including improperly conferring economic benefits on its senior pastor Reverend James M. Hammond, which may jeopardize its tax-exempt status.
The IRS sent LWCC a notice signed by Marsha A. Ramirez, the Director of Exempt Organizations, Examination (“DEOE”), that it was opening a church tax inquiry. LWCC responded to the notice, and its response caused the IRS to open a church tax examination of LWCC’s records. Before that examination could take place, LWCC asserted that the IRS’s notice was defective because it was authorized by the DEOE who is not an appropriate high level Treasury official. The IRS then issued an administrative summons to LWCC asserting that it needed the information sought in the summons to determine whether LWCC’s tax-exempt status as a church is legitimate. When LWCC refused to comply with the summons, the IRS petitioned the Court for an order directing LWCC to comply in full. After a thorough examination of the issues and two rounds of briefing, Judge Keyes denied enforcement of the summons because the DEOE is not an appropriate high-level Treasury official to make the “reasonable belief” determination required before an examination of a church’s records can occur.
A. Standard of Review
In reviewing an R&R [Report and Recommendations], the district court “shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made.” 28 U.S.C. § 636(b)(1)(C); see also D. Minn. LR 72.2(b). A district judge “may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge.” Id. To obtain judicial enforcement of an administrative summons, the Government must establish a prima facie case by demonstrating that (1) the IRS investigation is being conducted pursuant to a legitimate purpose; (2) the inquiry may be relevant to that purpose; (3) the IRS or Commissioner does not currently possess the information sought; and (4) the administrative steps required by the Internal Revenue Code have been followed. See United States v. Powell,379 U.S. 48, 57-58 (1964). The Internal Revenue Code specifies a church tax inquiry may begin only after notice and if:
an appropriate high-level Treasury official reasonably believes (on the basis of facts and circumstances recorded in writing) that the church . . . may not be exempt by reason of its status as a church, from tax . . . or . . . may be carrying on an unrelated trade or business . . . or otherwise engaged in activities subject to taxation under this title.
26 U.S.C. § 7611(a)(1), (2). An “appropriate high-level Treasury official” is defined 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.” 26 U.S.C. § 7611(h)(7). Upon the enactment of this statute and following a formal notice and comment period, the IRS determined that an appropriate high-level Treasury official was a “Regional Commissioner (or higher Treasury official).” Treas. Reg. § 301.7611-1T, Q&A (1).
The difficulty in applying the statute to this case was created by the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 1001(a), 112 Stat. 685 (1998), which eliminated the position of Regional Commissioner. Congress did not amend the definition of “appropriate high-level Treasury official,” and the IRS has not, in the ensuing years, undertaken any rule-making procedures to amend its own definition. Instead, the IRS delegated authority to other IRS officials to assume the former responsibilities of the Regional Commissioners. See Delegation Order 193 (Rev. 6) (last revised November 8, 2000). In the instant case, the DEOE was the individual who made the reasonable belief determination required by 26 U.S.C. § 7611. See Internal Revenue Manual § 22.214.171.124 (June 1, 2004).
Because the enforceability of the summons turns on the IRS’s interpretation that the DEOE is an appropriate high-level Treasury official, the Court must make a determination of the level of deference afforded to that interpretation. Judge Keyes determined that Skidmore deference applies, and the Government does not contend otherwise…
Judge Keyes ultimately found that the IRS’s interpretation was not persuasive and thus not entitled to deference. Instead, he found that an important constitutional interest underlies the requirements of a church tax inquiry—First Amendment protections against the Government’s possible intrusion into religious affairs. R&R at 25. Congress created § 7611 to balance the rights of legitimate churches with the need for the IRS to investigate and eliminate church tax avoidance schemes. Id. Judge Keyes found that given the balancing of the constitutionally protected rights, the person responsible for determining “reasonable belief” should have broad responsibility and experience and have a high-profile position that would make it likely she has a heightened understanding the political and policy interests at stake. Id. Prior to the 1998 reorganization, the designated person was the Regional Commissioner, an official only one management level removed from the Commissioner of the IRS. Id. at 28. Judge Keyes reasoned that the DEOE, on the other hand, is four management levels removed from the Commissioner of the IRS and therefore is not the “high-level Treasury official” envisioned by Congress to properly serve the balancing function. Id. at 29. The nearest equivalent to the Regional Commissioner under the current IRS organization is the Commissioner Tax Exempt and Government Entities (“TEGE”). Id. at 27.
Given the loophole, the IRS is virtually powerless to do anything about the Church of Scientology or any other church. The one caveat is that the only church audits not governed by Section 7611 are civil fraud and criminal cases. Thus, if evidence of civil fraud or criminal activity is discovered and exposed by a whistleblower, a Scientology Sea Org member, or a Scientology parishioner, the IRS can address these matters. So can the IRS Criminal Investigation Division, the FBI, the Department of Justice and other agencies.
Three government officials who can call for an investigation into Scientology’s tax exemption are:
- The Commissioner Tax Exempt and Government Entities Ms. Sunita Lough
- IRS Commissioner Mr. John Koskinen
- US Secretary of the Treasury Mr. Steven Mnuchin
Raising public awareness is necessary. The public should definitely contact these officials and demand that they open an investigation into the Church of Scientology’s 1993 tax exemption. And keep filing Form 13909 complaints against the Church of Scientology as a record against the day when the IRS opens, or is ordered to open, an investigation against Scientology. Easy and quick instructions on how to file a Form 13909.
Finally, one question lingers for the IRS. In its 1993 Closing Agreement with the Church of Scientology, the Final Draft of which was leaked by the Wall Street Journal in 1997, the IRS included this stipulation:
There are legitimate questions of fraud and misrepresentation of material fact by the Church in its 1991 1023 application for 501(c)3 tax exemption. Most notably, the Church represented that there was a system of corporate checks and balances in the Scientology when, as so many have alleged and shown, David Miscavige has collapsed these checks and balances and become the sole managing agent of Scientology and therefore pierced the corporate veils.
- United States of America vs. Living Word Christian Center (Civil No. 08-mc-37 ADM/JJK) — Memorandum Opinion and Order:
- United States of America vs. Living Word Christian Center (Civil No. 08-mc-37 ADM/JJK) — Report and Recommendation:
The Scientology Horribleness Law: The longer Scientology has its tax exemption the more its horribleness increases: