U.S. v. Church of Scientology of Boston, Inc.

• Decision Date: 05 February 1991
• Docket Number: No. 90-1900,90-1900
• Citation: 933 F.2d 1074
• Parties: -1095, 59 USLW 2754, 91-1 USTC P 50,279 UNITED STATES of America, Petitioner, Appellant, v. CHURCH OF SCIENTOLOGY OF BOSTON, INC., et al., Respondents, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1074

933 F.2d 1074

67 A.F.T.R.2d 91-1095, 59 USLW 2754, 91-1

USTC P 50,279

UNITED STATES of America, Petitioner, Appellant, v. CHURCH OF SCIENTOLOGY OF BOSTON, INC., et al., Respondents, Appellees.

No. 90-1900.

United States Court of Appeals First Circuit.

Heard Feb. 5, 1991.

Decided May 29, 1991.

Rehearing Denied Aug. 9, 1991.

John A. Dudeck, Jr. with whom Shirley D. Peterson, Asst. Atty. Gen., Gary R. Allen, Charles E. Brookhart, Attys., Tax Div., Dept. of Justice, and Wayne A. Budd, U.S. Atty., were on brief for petitioner-appellant.

Michael Lee Hertzberg, with whom Eric M. Lieberman, Hillary Richard, Rabinowitz, Boudin, Standard, Krinsky & Lieberman, P.C., New York City, Earle C. Cooley, and Cooley, Manion, Moore & Jones, P.C., were on brief for respondents-appellees.

Before BREYER, Chief Judge, and CAMPBELL and TORRUELLA, Circuit Judges.

BREYER, Chief Judge.

The Internal Revenue Service, investigating the 1985, 1986, and 1987 tax liability of the Church of Scientology of Boston, has asked the district court to enforce a summons for church records. The district court refused to enforce the summons because, in its view, 1) the church records were not "necessary to determine the [church's tax] liability," 26 U.S.C. Sec. 7611(b)(1)(A), and 2) the IRS had not issued the summons for a proper purpose. 739 F.Supp. 46. The IRS now appeals the district court's refusal to enforce the summons. After reviewing the record, we agree with the district court that the IRS has not shown that the church records requested are "necessary" to its investigation. And, we affirm the district court's refusal to enforce the summons for that reason.

I The Basic Issue

A special provision of the Internal Revenue Code ("Code"), entitled "Restrictions on Church Tax Inquiries and Examinations," provides the governing legal standard. It says that the IRS may examine "church records" only "to the extent necessary to determine" the church's tax "liability." 26 U.S.C. Sec. 7611(b)(1). The basic issue in this case concerns the words "to the extent necessary to determine." Do those words impose a rather high preliminary legal hurdle, as the word "necessary" seems to suggest? Or, as the IRS argues, does careful analysis show the standard they impose is really no greater than one of "relevance?"

The answer to this question determines the outcome of this appeal. That is because the record makes clear that the IRS summons before us cannot satisfy any standard higher than simple "relevance." The summons, set forth in the Appendix, is detailed and calls for the production of a massive amount of material, but it does not explain how or why compliance is "necessary" to determine the church's possible tax liability. An affidavit of an IRS agent accompanies the summons. However, the affidavit merely states a conclusion, namely that compliance is "necessary to determine" the church's tax liability; it does not explain in any detail how or why the documents for which it calls are "necessary" either. The prior history of IRS/Scientology dealings, contained in the record, consists of lists of questions that the IRS asked and that the Church answered (in detail). Nothing in that history explains to us how or why the particular documents that the summons lists are "necessary" to the investigation. The church has challenged the IRS's claim that the documents are "necessary" and the IRS primarily argues that it has shown the summons to be "necessary" because "necessary" means "relevant." Thus, we shall assume that the summons itself, read in light of the record, demonstrates that the documents it seeks may be relevant to the IRS tax inquiry, but we hold, giving particular attention to the district court's identical conclusion, see United States v. Coates, 692 F.2d 629, 634 (9th Cir.1982), that the summons fails to meet any more exacting standard. And, we shall turn to the question of whether a showing of simple relevance satisfies the statutory test.

To understand the specific legal question, the reader must understand the basic legal tests applicable to the typical IRS summons, a summons that is not aimed at church documents. In a case called United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964) the Supreme Court held that the IRS is entitled to court enforcement of a summons for documents as long as it shows: (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 Commissioner's possession," and (4) "that the administrative steps required by the Code have been followed." Id. at 57-58, 85 S.Ct. at 255 (emphasis added). As the IRS points out, this test, and, in particular, the "relevancy" requirement (which we have underlined) is not very difficult to satisfy. Indeed, the Ninth Circuit has said that to do so, the government need show only that the summoned documents "might throw light upon the correctness of the taxpayer's returns." United States v. Ryan, 455 F.2d 728, 733 (9th Cir.1971) (emphasis added).

The special "Church Tax Inquiries and Examination" provision of the Code, however, governs the summons before us. That provision offers churches special protections. It says that, even to begin an investigation of a church's tax liability,

[A]n appropriate high-level Treasury official [must] reasonably believe[ ] (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 ... or [is] otherwise engaged in activities subject to taxation under this title.

26 U.S.C. Sec. 7611(a)(2). The same section adds that the IRS may

begin a church tax examination only if [the reasonable belief requirements just mentioned are satisfied] and such examination may be made only--

(A) in the case of church records, to the extent necessary to determine the liability for, and the amount of, any tax imposed by this title and

(B) in the case of religious activities, to the extent necessary to determine whether an organization claiming to be a church is a church for any period.

26 U.S.C. Sec. 7611(b)(1) (emphasis added).

The critical legal question that the IRS raises concerns the meaning of the underlined language--"to the extent necessary"--in relation to the "may be relevant" test of Powell. In particular, the IRS argues "that no showing beyond that required under Powell is needed in church summons cases." If the IRS is right in its view of the meaning of this phrase, it is entitled to enforcement of the summons; otherwise (given the record before us), it is not.

II

The Meaning of "to the Extent Necessary"

In trying to show that the word "necessary" in context means no more than "may be relevant," the IRS faces several formidable obstacles. The words of the statute itself, "to the extent necessary to determine liability," do not seem on their face to mean that the IRS can obtain church documents by showing only a possible relevance to an inquiry or that they "might throw light upon" the correctness of a church's return. Moreover, a 1969 predecessor statute used these same words, stating

no examination of the books of account of [a church] ... shall be made other than to the extent necessary to determine the amount of tax imposed by this title.

26 U.S.C. Sec. 7605(c), repealed by Section 1033 of the Tax Reform Act of 1984, Pub.L. No. 98-369, 98 Stat. 494, codified at 26 U.S.C. Sec. 7611. And, the federal courts uniformly interpreted these words to mean what they said. See United States v. Church of World Peace, 775 F.2d 265, 267 (10th Cir.1985) ("IRS examination of church records may only be made to the 'extent necessary' "); United States v. Coates, 692 F.2d 629, 634 (9th Cir.1982) (affirming district court application of the "necessity" standard); United States v. Dykema, 666 F.2d 1096, 1102 (7th Cir.1981), cert. denied, 456 U.S. 983, 102 S.Ct. 2257, 72 L.Ed.2d 861 (1982) ("the examination of books of account must be limited to that which is necessary to determine the amount of the tax imposed"); United States v. Life Science Church of America, 636 F.2d 221, 224 (8th Cir.1980) (same); United States v. Holmes, 614 F.2d 985, 988 (5th Cir.1980) ("The second prong of the Powell test was pruned back by Congress in 1969, ... when it added [Sec. 7605(c) ] ..."). Further, when Congress, in 1984, reenacted this same 1969 language, the bill's sponsors said that they expected the courts to continue to interpret these words as they had done in the past. See 130 Cong.Rec.S. 4486 (daily ed. April 12, 1984) ("[T]o be certain churches are protected from unfounded examinations [the Bill] limits the inspection of church records to those necessary to determine the tax liability of a church ... As under present law, the IRS may examine the religious activities of an organization claiming to be a church ... only to the extent necessary to determine if the organization actually is a church.").

Faced with these obstacles, and perhaps recognizing the counter intuitive nature of its claim, the IRS makes four arguments. First, it asks us to read the statutory provision with the emphasis on the words "tax imposed by this title." Thus, according to the IRS we should say that the statute limits an examination of church books "to the extent necessary to determine the liability for, and the amount of, any tax imposed by this title." The statute, so read, would use the word "necessary" in order to forbid the IRS to look at church books for purposes of determining liability for some other tax, or for purposes of determining whether the church was breaking some totally different law, or perhaps just for fun. But, assuming the IRS restricted its examination to the right purpose, then, says the IRS, it can look at whatever books, or documents, or records are "relevan...