United States v. Coates

• Decision Date: 19 November 1981
• Docket Number: Civ. No. S-80-603 MLS.
• Citation: 526 F. Supp. 248
• Court: U.S. District Court — Eastern District of California
• Parties: UNITED STATES of America and Charles W. Brown, Revenue Agent, Petitioners, v. Edwin R. COATES, as Representative of Church of Reflection, Inc., Respondent.

526 F. Supp. 248

UNITED STATES of America and Charles W. Brown, Revenue Agent, Petitioners, v. Edwin R. COATES, as Representative of Church of Reflection, Inc., Respondent.

Civ. No. S-80-603 MLS.

United States District Court, E. D. California.

November 19, 1981.

Michael H. C. Chun, Trial Atty., Tax Division U. S. Dept. of Justice, Washington, D. C., for petitioners.

John M. Youngquist, San Francisco, Cal., for respondent.

OPINION

MILTON L. SCHWARTZ, District Judge.

The tax investigation giving rise to this action to enforce an Internal Revenue Service ("IRS") summons commenced sometime prior to December 1, 1978. On that date the IRS District Director, by letter, requested respondent Edwin R. Coates, as representative of the Church of Reflection, Inc. ("Church"), to provide the IRS with the following items: 1) a copy of the annual financial reports of the Church for the years 1976 and 1977; 2) a description of the number, nature and place of religious meetings held during the three months prior to December 1978; 3) a description of "any other activities undertaken during the same period"; and 4) a list of names and addresses of all officers, leaders, and paid employees of the Church, including a description of each person's duties and qualifications for the position held.

Respondent Coates did not provide the IRS with the items requested. Accordingly, the District Director made a second request for the materials by letter dated January 4, 1979. In addition, the District Director requested that respondent submit a copy of the annual financial report of the Church for the year 1978 and describe the number and nature of religious meetings held by the Church during the preceding four, rather than three, months.

In March 1979 respondent provided the IRS with some of the requested documentation. At the end of March IRS Agent Daniel F. Brown advised respondent Coates that the Service had not yet decided whether to proceed with an examination of the Church's tax exempt status.

Respondent heard nothing further from the IRS until he received a letter dated June 6, 1979 from Regional Commissioner Thomas A. Cardoza. The Commissioner advised respondent, in pertinent part, as follows:

In letters to you dated December 1, 1978, and January 4, 1979, the San Francisco District Director attempted to obtain information necessary to an examination of your organization. However, the information supplied does not sufficiently answer the inquiries.

Therefore, in accordance with the procedures set forth in Treasury Regulation 301.7605, I believe it is necessary to examine your books of account and other financial information as well as examine your religious activities. Accordingly, I have authorized the San Francisco District to make an examination of your books and your religious activities under the provisions of Sections 7602 and 7605(c) of the Internal Revenue Code. It may also be necessary to examine other records and documents in your possession or control that may be relevant to the inquiries described above, and also determine your compliance with any filing requirements imposed on you by the Code. For the examination, it will be necessary for you to have available all books, records, papers or other information including, but not limited to: your books of account, bank records, minutes of your meetings, correspondence files and lists of substantial contributors.

Respondent, through counsel, vigorously objected to the examination authorized by the Regional Commissioner, and considerable correspondence passed between counsel and the IRS. However, the Service remained firm in its position that it is entitled to examine the books of account of a church, upon proper notice, for the purpose of reviewing the church's tax exempt status as well as for the purpose of determining the presence and amount of any unrelated business income, and that it is entitled to examine the religious activities of a church, without notice, for the purpose of reviewing the church's tax exempt status.

On August 17, 1979 the IRS issued the summons here in dispute. The summons is directed to respondent Coates as representative of the Church of Reflection, Inc. and requested his appearance before IRS Agent Daniel F. Brown on September 4, 1979 for the purpose of testifying and producing the following items:

1. All records pertaining to cash receipts and disbursements including but not limited to bank statements, deposit slips, cancelled checks, balance sheets and other financial statements of the Church of Reflection Inc. covering the years 1976, 1977 and 1978.

2. All documents related to the organizational structure and history of the Church of Reflection Inc. including articles of organization, by-laws, charter, and all amendments thereto.

3. All minutes of any meetings held by the officers, directors, trustees, or ministers of the Church of Reflection Inc. during the period of January 1, 1976 to December 31, 1978.

4. Documents reflecting any sacerdotal functions performed by any person representing the Church of Reflection Inc. during the period of January 1, 1976 to December 31, 1978.

5. All documents reflecting any prerequisites or actions necessary for membership in or ordination by the Church of Reflection Inc.

6. All records reflecting the names and addresses of any and all employees, associates, directors, trustees, officers, and ministers of the Church of Reflection Inc. during the period of January 1, 1976 to December 31, 1978.

Respondent refused to comply with the summons.

Finally, on July 23, 1980, the government petitioned for judicial enforcement of the summons. 26 U.S.C. §§ 7402 and 7604. The matter was set for hearing and was orally argued on October 24, 1980.

Respondent filed voluminous opposition to enforcement of the summons. He argued therein and at the hearing that: 1) the IRS had failed to comply with 26 U.S.C. § 7605(c); 2) the applicable treasury regulation, 26 C.F.R. § 301.7605-1(c), conflicts with and exceeds the provisions of 26 U.S.C. § 7605(c) and, therefore, is invalid; 3) the applicable treasury regulation, 26 C.F.R. § 301.7605-1(c), is unconstitutional on its face and as applied; 4) activity by the IRS pursuant to 26 U.S.C. § 7605(c) and 26 C.F.R. § 301.7605-1(c) violates principles of administrative law because the Service has failed to establish internal administrative guidelines to govern its conduct under these sections; 5) enforcement of the summons would lead to "excessive entanglement" of the government in the religious affairs of the Church; 6) the IRS is proceeding against the Church in "bad faith"; 7) the summons is impermissibly overbroad; and 8) the items sought by the Service are protected from disclosure by a "clergy-communicant" privilege.

The court ruled from the bench at the October 24th hearing and rejected all of respondent's arguments except that addressed to the government's compliance with 26 U.S.C. § 7605(c). Section 7605(c) provides in pertinent part:

No examination of the books of account of a church ... shall be made to determine whether such organization may be engaged in the carrying on of an unrelated trade or business ... unless the Secretary ... believes that such organization may be so engaged and so notifies the organization in advance of the examination.

The court concluded that the letter from Regional Commissioner Cardoza, dated June 6, 1979, did not sufficiently evidence a "belief" by the Commissioner that the Church may be "engaged in the carrying on of an unrelated trade or business" so as to entitle the IRS to examine the books of account of the Church for the purpose of determining the presence and amount of any unrelated business income. The court pointed out that neither the letters dated December 1, 1978 and January 4, 1979 nor the letter dated June 6, 1979 advised respondent that the proposed examination concerned unrelated business income. Rather, the three letters referred only to an examination of the Church's tax exempt status. Thus, the letter from Commissioner Cardoza differed significantly from the letter at issue in United States v. Miller, 609 F.2d 336 (8th Cir. 1979). In Miller the Regional Commissioner advised the respondent, a director and trustee of the Basic Bible Church of America, that the proposed examination was for the purpose of reviewing the church's tax exempt status and for the purpose of "determining the amount of tax, if any, imposed by the Code on your organization." Id. at 339.

Accordingly, the court ruled that until the IRS issued a letter comparable to that in United States v. Miller, supra, it was precluded from examining the books of account of the Church for the purpose of determining the presence and amount of any unrelated business income. However, the court did not preclude the IRS from examining the books of account of the Church for the purpose of reviewing its tax exempt status. See United States v. Freedom Church, 613 F.2d 316, 324 (1st Cir. 1979).

In light of the court's ruling, the IRS declined to engage in any examination of the books of account of the Church until the Commissioner issued a letter sufficient to permit a dual examination into tax exempt status and unrelated business income. The Service maintained that it would be virtually impossible to limit its examination of the Church's books of account to those items bearing solely on exempt status. Accordingly, the court did not order even partial enforcement of the summons. Instead, the matter was continued for further hearing in order to afford the IRS an opportunity to serve respondent Coates with proper notice.

Prior to the second hearing, respondent obtained new counsel, John M. Youngquist. Mr. Youngquist appeared at the second hearing on January 16, 1981 and argued persuasively that respondent should be allowed a second opportunity to oppose enforcement of the summons. A briefing schedule was established and the matter was calendared for further oral...