U.S. v. Church of Scientology of California

• Decision Date: 26 June 1975
• Docket Number: No. 74-1487,74-1487
• Citation: 520 F.2d 818
• Parties: 75-2 USTC P 9584 UNITED STATES of America, and Robert H. Cluberton, Internal Revenue Agent, Internal Revenue Service, Petitioners-Appellees, v. CHURCH OF SCIENTOLOGY OF CALIFORNIA and Henning Heldt, Vice President, Respondents-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 818

520 F.2d 818

75-2 USTC P 9584

UNITED STATES of America, and Robert H. Cluberton, Internal Revenue Agent, Internal Revenue Service Petitioners-Appellees, v. CHURCH OF SCIENTOLOGY OF CALIFORNIA and Henning Heldt, Vice President, Respondents-Appellants.

No. 74-1487.

United States Court of Appeals Ninth Circuit.

June 26, 1975.

James Q. Fisher (argued), Encino, Cal., for respondents-appellants.

Alfred S. Lombardi, Atty. (argued), Tax Div., U. S. Dept. of Justice, Washington, D. C., for petitioners-appellees.

OPINION

Before DUNIWAY and ELY, Circuit Judges, and JAMESON, ^* District Judge.

DUNIWAY, Circuit Judge:

The Church of Scientology of California appeals from the district court's order enforcing a summons issued by an Internal Revenue Service agent under § 7602 of the Internal Revenue Code of 1954, 26 U.S.C. § 7602, and denying the Church's request for pre-enforcement discovery. We reverse and remand for further proceedings.

I. Facts.

On February 8, 1973, agent Cluberton of the Service's Audit Division issued a summons to Henning Heldt, then vice president of the Church of Scientology of California, requiring Heldt to appear on February 20, 1973, to testify and to produce for examination certain records of the Church bearing on its federal income tax liability for 1968 and 1969. Heldt appeared at the appointed time, apparently willing to testify, but without the required records. Heldt said that he was no longer an officer of the Church and that he had neither control nor possession of the records because he had resigned as director and vice president of the Church four days earlier, on February 16, 1973. The agent noted Heldt's appearance but did not examine him. In the course of two years of negotiations preceding the issuance of the summons, Heldt had consistently held himself out to the agent as the representative of the Church in charge of its books and records, and never stated that he was contemplating resigning.

On September 5, 1973, the Service petitioned the district court to enforce the summons against Heldt and the Church under 26 U.S.C. §§ 7402(b) and 7604(a), both of which somewhat redundantly gave the district courts jurisdiction "by appropriate process" to compel compliance with such summonses. The district court issued an order requiring Heldt and the Church to show cause why they should not be required to comply with the summons.

Heldt and the Church then filed a notice of taking depositions of agent Cluberton and two other Service officials and a demand for the production of Service files relating to the Church. The Service moved to quash this discovery. Then Heldt and the Church responded to the order to show cause by alleging, inter alia, that the Service had issued the summons for the bad faith purpose of harassing the Church. More specifically, the Church asserted that the instant summons was part of a concerted nationwide Service strategy to harass various churches of Scientology, which are in the Church's words "doctrinal cousins" but separate entities. According to the Church, the Service has followed a pattern of initiating investigations and administrative and judicial proceedings, but nonetheless resisting definitive determination of the tax exempt status of those churches all, the Church alleges, for the purpose of applying pressure to the churches to settle the issue of their claimed tax exemptions and of eliminating Scientology organizations. The Church sought to take the depositions of Service officials to attempt to uncover evidence to support these allegations.

The district judge held a hearing on the order to show cause and on the Service's motion to quash discovery, listening to oral argument by counsel, but without the presentation of testimony or other evidence other than affidavits already on file. Concluding that the "allegation of harassment is not supported by the record," the judge entered orders (1) quashing the notice of taking of depositions and (2) enforcing the summons against the Church. At the request of the Church, the judge stayed enforcement of the summons pending appeal, on the condition that the Church deposit with the court all of the books and records sought by the summons. The Church did so, filling 23 trunks with records, and brought this appeal.

We have jurisdiction under 28 U.S.C. § 1291. Reisman v. Caplin, 1964, 375 U.S. 440, 449, 84 S.Ct. 508, 11 L.Ed.2d 459; D. I. Operating Co. v. United States, 9 Cir., 1963, 321 F.2d 586.

II. Summons Enforcement Proceedings in General.

We begin with a review of a few basic, settled principles.

An internal revenue summons is "administratively issued but its enforcement is only by federal court authority in 'an adversary proceeding' affording the opportunity for challenge and 'complete protection to the witness.' " Donaldson v. United States, 1971, 400 U.S. 517, 525, 91 S.Ct. 534, 539, 27 L.Ed.2d 580; Reisman v. Caplin, 1964, 375 U.S. 440, 446, 84 S.Ct. 508, 11 L.Ed.2d 459. The Federal Rules of Civil Procedure apply to a summons proceeding. Fed.R.Civ.P. 81(a)(3); United States v. Powell, 1964,379 U.S. 48, 58, n. 18, 85 S.Ct. 248, 13 L.Ed.2d 112; Martin v. Chandis Securities Co., 9 Cir., 1942, 128 F.2d 731, 734. But the Civil Rules are not inflexible; a district court may limit their application in a proceeding to enforce a summons which is intended to be a summary proceeding, so long as the rights of the party summoned are protected and an adversary hearing, if requested, is made available. Donaldson, supra, 400 U.S. at 528-29, 91 S.Ct. 534.

The Internal Revenue Service need not meet any standard of probable cause to obtain enforcement of its summons; it must show only (1) that the investigation will be conducted pursuant to a legitimate purpose; (2) that the inquiry may be relevant to the purpose; (3) that the information sought is not already within the Service's possession; and (4) that the administrative steps required by the Internal Revenue Code have been followed. United States v. Powell, supra, 379 U.S. at 57-58, 85 S.Ct. 248.

However, as the Court explained in Powell, 379 U.S. at 58, 85 S.Ct. at 255 (footnotes omitted):

This does not make meaningless the adversary hearing to which the taxpayer is entitled before enforcement is ordered. At the hearing he "may challenge the summons on any appropriate ground," Reisman v. Caplin, 375 U.S. 440, at 449, 84 S.Ct. (508), at 513 (11 L.Ed.2d 459). Nor does our reading of the statutes mean that under no circumstances may the court inquire into the underlying reasons for the examination. It is the court's process which is invoked to enforce the administrative summons and a court may not permit its process to be abused. Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation. The burden of showing an abuse of the court's process is on the taxpayer, and it is not met by a mere showing, as was made in this case, that the statute of limitations for ordinary deficiencies has run or that the records in question have already been once examined.

These principles were reaffirmed by the Court in Donaldson v. United States, 1971, 400 U.S. 517, 526-27, 91 S.Ct. 534, 27 L.Ed.2d 580, and more recently in United States v. Bisceglia, 1975, 420 U.S. 141, 146, 95 S.Ct. 915, 43 L.Ed.2d 88.

III. The Alleged Abuse of Process.

The four criteria for enforcement set out in Powell were satisfied in this case. The principal question on appeal is whether the district court erred in enforcing the summons without allowing discovery and without taking evidence on the alleged abuse of the court's process. We conclude that the court should have held a limited pre-enforcement evidentiary hearing.

A. The Allegation of Bad Faith IRS Harassment.

We first consider the Church's allegations and the support for them that appears in the record.

Attached to the Church's memorandum in opposition to enforcement of the summons is a "Summary of Administrative and Judicial Proceedings involving the Church of Scientology and its Parishioners," which the Church says reveals a pattern of bad faith IRS harassment. This summary lists eleven proceedings involving various churches of Scientology. With respect to the California Church, the summary states that the Service retroactively revoked the tax exempt status of the California Church in 1968 and that questions of the Church's tax liability for 1964 through 1967 were pending at the appellate conference level when the summons was issued. Also appended to the memorandum are the affidavit of Heldt and certain correspondence between the Church and Service officials in which the Church asked the Service, and the Service refused, to defer the examination for 1968 and 1969 while examinations for earlier years were pending.

The pendency of proposed assessments for the earlier years, however, does not in itself indicate bad faith on the part of the Service. Under § 501(c)(3) of the Code, determination of tax exempt status for a given year depends upon the financial operation of the Church for that year. See Church of Scientology of Hawaii v. United States, 9 Cir., 1973, 485 F.2d 313, 319 (Koelsch, J., dissenting). Moreover, the gross receipts of the California Church for 1968 and 1969 were markedly higher than those for 1964 through 1967. It was not unreasonable for the Service to investigate the different periods separately but simultaneously.

The Church also cites our Church of Scientology of Hawaii case, supra, and another case now pending on appeal to this court, Handeland v. Commissioner, 519 F.2d 327, as evidence of an alleged bad faith "harass and moot" strategy in which the Service repeatedly imposes assessments on churches of Scientology but stops short of litigating the merits of the churches' tax exempt status by refunding...