U.S. v. Grayson County State Bank

• Decision Date: 21 September 1981
• Docket Number: No. 80-1892,80-1892
• Citation: 656 F.2d 1070
• Parties: 81-2 USTC P 9680 UNITED STATES of America, Plaintiff-Appellant, v. GRAYSON COUNTY STATE BANK and Lloyd Butts, Defendants-Appellees, First Pentecostal Church, Etc., Intervenor-Appellee. . Unit A
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1070

656 F.2d 1070

81-2 USTC P 9680

UNITED STATES of America, Plaintiff-Appellant, v. GRAYSON COUNTY STATE BANK and Lloyd Butts, Defendants-Appellees, First Pentecostal Church, Etc., Intervenor-Appellee.

No. 80-1892.

United States Court of Appeals, Fifth Circuit.

Unit A

Sept. 21, 1981.

Janet Hellmich, Asst. U. S. Atty., Tyler, Tex., Joseph W. Clark, M. Carr Ferguson, Asst. Attys. Gen., Tax Div., Michael L. Paup, Chief, Appellate Sect., Charles E. Brookhart, R. Russell Mather, John F. Murray, Attys., Dept. of Justice, Washington, D. C., for plaintiff-appellant.

Johnson, Bromberg, Leeds & Riggs, Michael P. Carnes, Dallas, Tex., for intervenor-appellee.

Appeal from the United States District Court for the Eastern District of Texas.

Before CHARLES CLARK, TATE and SAM D. JOHNSON, Circuit Judges.

TATE, Circuit Judge:

The United States appeals from an order denying judicial enforcement, see 26 U.S.C. § 7604(b), of an Internal Revenue Service (IRS) administrative summons previously issued, see 26 U.S.C. § 7602, to the Grayson County State Bank, which had failed to respond. By the summons, in connection with the investigation of the tax liability of an individual taxpayer (the minister of the church), the IRS sought production of certain bank records pertaining to a church, as to which the taxpayer (the minister) had signature privileges or trustee assignment. Having permitted the church to intervene, the district court granted its motion to quash the summons. In so doing, the district court held: (1) granting the IRS the discovery of bank records so sought would impair the free exercise of religion by laying open to governmental examination the church's financial history; and (2) that 26 U.S.C. § 7605(c), which restricts IRS examination of "the books of account of a church," applied so as to restrict the IRS examination of the bank records of a church. The government appeals, contending that the district court erred in both holdings. We agree and, therefore, reverse.

Factual Context

Section 7602 of the Internal Revenue Code of 1954, 26 U.S.C. § 7602, grants the Internal Revenue Service the power to summon books and records, and to take the testimony of any individual for the purposes, inter alia, of ascertaining the correctness of a tax return and determining a taxpayer's correct tax liability. Section 7604 of the Code, 26 U.S.C. § 7604 grants authority to the federal district courts to issue orders compelling, through their powers of contempt, compliance with the IRS summonses.

Pursuant to Section 7602, the IRS in November 1978 issued a summons to Grayson County State Bank in connection with an ongoing investigation into the income tax liability of the minister of the First Pentecostal Church in Sherman, Texas for the years 1973, 1974, 1975, and 1976. The taxpayer had produced his personal financial records, but he refused to produce certain church records requested by the IRS. Officials of the church also refused to allow revenue agents to inspect any church records. The Grayson County State Bank through Lloyd Butts was ordered to appear before an IRS special agent to give testimony and produce certain specified taxpayer-related books and records "on (or on behalf of) the First Pentecostal Church, 601 N. Harrison, Sherman, Texas for the years 1973, 1974, 1975, and 1976 on which (the minister-taxpayer) has signature privileges and/or trustee assignment (See attachment)." ¹

On refusal of the bank to provide said records the IRS applied to the federal district court for enforcement of the administrative summons under Section 7604. A motion to intervene as defendant was granted to the First Pentecostal Church which filed a motion to quash the summons as constituting excessive governmental interference or entanglement with church affairs and because its enforcement would allegedly have a "chilling effect" on the free exercise of religion by church members.

The district court, as earlier noted, denied judicial enforcement of the IRS summons and quashed the summons on the grounds that (1) it violated the First Amendment free exercise of religion rights of the intervening church and (2) that the summons was not an authorized examination of church records because it was not conducted pursuant to 26 U.S.C. § 7605(c), ² a provision restricting examination of such records.

I. The First Amendment Issue

In denying the IRS's application for enforcement and quashing the summons, the district court found that the summons in this case sought documents which would "lay open to government examination the entire financial history including the manner in which the Church raises, invests, and spends funds from all accounts that the Church's minister has signature privileges or trustee assignment" and that such disclosure would be a "burden upon the free exercise of the religious belief of (the church's) members." The district court found this clearly raised a substantial question that judicial enforcement of the summons would be an abusive use of the court's process that thus required the IRS to show some reason to justify its request. The court further found that, since civil tax liability for the years had prescribed, the government must come forward and show some interest by way of tax fraud, which it had not done; in this respect, the court pointed out that the government had produced no showing of probable cause to suspect that the minister had committed tax fraud.

The legal principles applicable are not in substantial dispute. In enforcement of an IRS summons under Section 7602 when the summons authority is necessary for "the effective performance of congressionally imposed responsibilities to enforce the tax code, that authority should be upheld absent express statutory prohibition or substantial countervailing policies." United States v. Euge, 444 U.S. 707, 711, 100 S.Ct. 874, 878, 63 L.Ed.2d 141 (1980). "A defense against disclosure based upon religious objections can find First Amendment support only if the disclosure either serves to establish religion or impedes the free exercise of sectarian conviction. U.S.Const. Amend. 1. Government action can violate the establishment clause ... if the end result is an excessive entanglement with religion." United States v. Holmes, 614 F.2d 985, 989 (5th Cir. 1980). ³ Free exercise of religion embraces two concepts: (1) freedom to believe, which is absolute; and (2) freedom to act, which conduct, however, is subject to regulation for the protection of society. Cantwell v. Connecticut, 310 U.S. 296, 303, 60 S.Ct. 900, 903, 84 L.Ed. 1213 (1940). (As the district court recognized, the present issue might arise only under the second concept, as the church and its members are unimpeded in their beliefs.)

Initially, the issuance of an IRS summons must meet a test of good faith as formulated in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). The IRS must show that: (1) the investigation will be conducted pursuant to a legitimate purpose, (2) the inquiry may be relevant to the purpose, (3) the information sought is not already within the IRS's possession, and (4) the proper administrative steps have been followed. Powell, supra, 379 U.S. at 57-58, 85 S.Ct. at 255; United States v. Holmes, supra, 614 F.2d at 987-88.

Appellee's argument that the IRS did not meet the Powell test is easily rejected: A valid purpose was established, namely, to investigate the correct tax liability of the minister; the records sought were limited only to those "on which (the taxpayer had) signature privileges and/or trustee assignment" for the applicable years, indicating relevance of the inquiry; the church has not claimed that the IRS is in possession of this information; and notice of the summons was provided to the taxpayer and the church as required by 26 U.S.C. § 7609 (1976). ⁴

Once a prima facie case for enforcement is shown, the burden shifts to the taxpayer to show enforcement would be an abuse of the court's process. Powell, supra, 379 U.S. at 58, 85 S.Ct. at 255; Holmes, supra, 614 F.2d at 988.

As the Supreme Court held in Powell the Government need make no showing of probable cause to suspect fraud unless the taxpayer raises a substantial question that judicial enforcement of the administrative summons would be an abusive use of the court's process, predicated on more than the fact of re-examination and the running of the statute of limitations in ordinary tax liability.

379 U.S. at 51, 85 S.Ct. at 251.

The church, citing United States v. Citizens State Bank, 612 F.2d 1091 (8th Cir. 1980), contends that the enforcement of the summons would result in a "chilling effect" upon the free exercise of the religious beliefs of its members. In Citizens State Bank the government issued a summons to the bank requesting all bank records relating to the accounts of the taxpayer in question and of the organization of which he was president. The Eighth Circuit found that the appellants met their initial burden by making a prima facie showing of an arguable First Amendment infringement. Id. at 1094. In the instant case, the church's reliance on Citizens State Bank is misplaced. The organization there in question was "a voluntary association of citizens who were opposed to the current operation of the IRS and who made efforts to bring about changes in the United States taxation system." Id. at 1093. The conclusion that an IRS summons of this organization's records would produce a "chilling effect" on membership is readily apparent. ⁵ However, allowing the IRS access to information to determine the correct tax liability of the taxpayer, the church's minister, does not restrict the church's freedom to espouse religious doctrine nor to solicit members or support. United States v. Holmes, 614 F.2d at 989. Furthermore, the church has presented no evidence that enforcement of this summons would restrict the religious activities of its members. ⁶

Further, even if the...