U.S. v. Dykema, 80-2750

• Decision Date: 09 December 1981
• Docket Number: No. 80-2750,80-2750
• Citation: 666 F.2d 1096
• Parties: 81-2 USTC P 9814 UNITED STATES of America and Henry Graner, Exempt Organizations Specialist of the Internal Revenue Service, Petitioners-Appellants, v. Dale K. DYKEMA, as Pastor of Christian Liberty Church, and Christian Liberty Corporation d/b/a Christian Liberty Academy and/or Church of Christian Liberty, Respondents-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1096

666 F.2d 1096

81-2 USTC P 9814

UNITED STATES of America and Henry Graner, Exempt Organizations Specialist of the Internal Revenue Service, Petitioners-Appellants, v. Dale K. DYKEMA, as Pastor of Christian Liberty Church, and Christian Liberty Corporation d/b/a Christian Liberty Academy and/or Church of Christian Liberty Respondents-Appellees.

No. 80-2750.

United States Court of Appeals Seventh Circuit.

Argued Sept. 21, 1981.

Decided Dec. 9, 1981.

Karl P. Fryzel, Dept. of Justice, Washington, D. C., for petitioners-appellants.

John W. Whitehead, Manassas, Va., for respondents-appellees.

Before CUMMINGS, Chief Judge, and PELL, Circuit Judge, and DUMBAULD, ^* Senior District Judge.

DUMBAULD, Senior District Judge.

Before us for review is an order of the District Court denying enforcement under 26 U.S.C. § 7604(a) of an Internal Revenue summons under 26 U.S.C. § 7602. The summons was directed to Dale Dykema, pastor of an autocephalous church known as the Christian Liberty Church, ¹ located at 3675 N. Calhoun Road, Brookfield, Wisconsin, and called for fourteen comprehensive categories of records belonging to the church. The stated purpose of the request was to enable a determination to be made by the IRS whether the church was an exempt organization under 26 U.S.C. § 501(c)(3), and hence a proper recipient of deductible contributions under 26 U.S.C. § 170(c)(2), whether the church was liable for any tax on unrelated business income under 26 U.S.C. §§ 511-514; and whether Dykema individually was liable for any tax. (The individual liability of John H. Vouga, apparently an assistant pastor, is also under investigation.)

Insofar as the pastor's individual tax liability is concerned, the case is clear. His tax liability is to be investigated and established in the same manner as that of any other taxpayer. And in that connection records of other parties, including his employer, even though it be a church, may be examined if they are such as to throw light on his individual tax liability. U. S. v. Grayson Co. Stage Bank, 656 F.2d 1070, 1076 (C.A.5, 1981); U. S. v. Krilich, 470 F.2d 341, 350 (C.A.7, 1972). Such examination is subject only to the usual requirements "that the investigation (has) a legitimate purpose, that the inquiry may be relevant to the purpose, that (the IRS does not already have) the information sought, and that the administrative steps required by the Code have been followed." U. S. v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 254-55, 13 L.Ed.2d 112 (1964). ² These requirements have been met in the case at bar. Nor would such investigative authority of the IRS be diminished even if excessive and unreasonable payments from church funds to the pastor disclosed "inurement" to him, a circumstance which is of importance with respect to the exempt status of the church, as will shortly be seen.

The District Court in the case at bar departed from the Powell standard of relevance by imposing a stricter requirement that the information sought must be "truly necessary" to enable the IRS to perform its statutory functions. This view is apparently based on the language of 26 U.S.C. § 7605(c) that examination of the books of account of a church shall be made only "to the extent necessary" to determine the amount of tax on unrelated business income.

But this provision of the statute relates only to the topic of unrelated business income. It does not restrict the scope of examination with respect to other issues for determination by the IRS when investigating an allegedly exempt organization, e.g. whether the organization is in fact an exempt organization by reason of its being engaged in activities of the sort which Congress specified as proper for conferring exempt status, or whether part of the organization's net earnings inures to the benefit of any private shareholder or individual, or whether it engages in propaganda to influence legislation or participates in political campaigning on behalf of any candidate for public office.

Indeed § 7605(b) itself expressly permits examination even of the religious activities of such an organization to the extent necessary to determine whether the organization is entitled to exempt status by reason of being a church.

Hence the District Court's application of a "truly necessary" standard is error. The Powell standard of relevance is appropriate to the inquiry as to the existence vel non of exempt status.

The exempt status of an organization depends on several factors, and is more complicated than the situation with regard to the individual tax liability of the pastor or other church employees.

In pertinent part, the tax exempt status defined in 26 U.S.C. § 501(c)(3) is granted to "Corporations ... organized and operated exclusively for religious ... purposes, ... no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation ... and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office."

Thus the subsidiary topics concerning which the IRS is entitled to inform itself ³ in investigating the tax exempt status of an organization include the following:

1. Is the organization properly organized, with a corporate structure suitable for carrying out religious purposes?

In this connection the church's certificate of incorporation would be relevant and material. Apparently the IRS has already been furnished this document. Although perhaps issued at an earlier date than the tax years under investigation, the IRS should be able to determine without difficulty whether the charter had been revoked for any reason or was still in force during the pertinent period.

2. Is the organization operated exclusively for religious purposes?

In connection with this inquiry, it is necessary and proper for the IRS to survey all the activities of the organization, in order to determine whether what the organization in fact does is to carry out a religious mission or to engage in commercial business. Such a survey could be made by observation of the organization's activities or by the testimony of other persons having knowledge of such activities, as well as by examination of church bulletins, programs, or other publications, as well as by scrutiny of minutes, memoranda, or financial books and records relating to activities carried on by the organization.

Typical activities of an organization operated for religious purposes would include (a) corporate worship services, including due administration of sacraments and observance of liturgical rituals, as well as a preaching ministry and evangelical outreach to the unchurched and missionary activity in partibus infidelium; (b) pastoral counseling and comfort to members facing grief, illness, adversity, or spiritual problems; (c) performance by the clergy of customary church ceremonies affecting the lives of individuals, such as baptism, marriage, burial, and the like; (d) a system of nurture of the young and education in the doctrine and discipline of the church, as well as (in the case of mature and well developed churches) theological seminaries for the advanced study and the training of ministers.

Objective criteria for examination of an organization's activities thus enable the IRS to make the determination required by the statute without entering into any subjective inquiry with respect to religious truth which would be forbidden by the First Amendment. U. S. v. Ballard, 322 U.S. 78, 86-88, 64 S.Ct. 882, 886-87, 88 L.Ed. 1148 (1944). ⁴ Likewise there is no "establishment of religion" involved in determining that entitlement to tax exemption has been demonstrated vel non. ⁵ As well said by Chief Justice Burger in Walz v. Tax Commission, 397 U.S. 664, 675, 90 S.Ct. 1409, 1414, 25 L.Ed.2d 697 (1970): "There is no genuine nexus between tax exemption and establishment of religion." Indeed, it should be emphasized that no real questions regarding "religion" as referred to in the First Amendment ⁶ are involved in the case at bar at all; the word "religious" concerns us merely in its statutory meaning as a description of a type of organization which Congress chose to exempt from taxation, believing that such relief from the tax burden would be beneficial and desirable in the public interest. ⁷

The term "religious purposes" is simply a term of art in tax law, just like "collapsible corporation" or "Section 306 stock." ⁸ In that connection it must be remembered that more than 20 other types of exempt organizations, besides those for religious purposes, are listed in 26 U.S.C. § 501(c). The IRS has the same monitoring function with respect to all these groups, namely to determine whether their actual activities conform to the requirements which Congress has established as entitling them to tax exempt status. ⁹

Since Biblical times it has been recognized that taxation belongs among "the things which are Caesar's." As narrated by an ex-tax collector:

Shew me the tribute money. And they brought unto him a penny.

And he saith unto them, Whose is this image and superscription?

They say unto him, Caesar's. Then saith he unto them, Render therefore unto Caesar the things which are Caesar's; and unto God the things that are God's. (Matthew 22:19-21. See also Mk. 12:15-17; Lk. 20:24-25.)

3. Does any part of the organization's net earnings inure to the benefit of any private shareholder or individual?

This is the third question which must be addressed by the IRS in determining exempt status under § 501(c)(3). As previously indicated, if the pastor, for example, received an unreasonable or excessive salary ¹⁰ out of the net earnings from the operation of the church, the organization is not entitled to exempt status.

In connection with this factor,...