UNITED STATES of America and Melvin Blough, Internal Revenue Agent, Internal
Revenue Service, Petitioners,
CHURCH OF SCIENTOLOGY FLAG SERVICE ORG., INC., and Mary Story, Secretary and
United States District Court, M.D. Florida, Tampa Division.
Dec. 15, 1989.
CASTAGNA, District Judge:
*1 This is a petition brought by the Internal Revenue Service to enforce a
tax examination summons directed against the Church of Scientology Flag Service
Org., Inc., and Mary Story, the Church's Secretary and Director. The Court has
duly considered the issues presented by the parties, and has determined that
this matter may be considerably streamlined by settling the several issues of
law over which the parties sharply disagree. The arguments presented by the
lengthy memoranda in the court file may be organized into six categories of
dispute, and the Court will address each in turn.
I. Inquiry Notice
Under the Church Audit Procedures Act, I.R.C. s 7611 (1988), the IRS may
begin a tax inquiry of a church only after it has complied with the requirement
of inquiry notice. Inquiry notice is written notice to the church of the
beginning of the tax inquiry, and must include an explanation of the concerns
which gave rise to the inquiry, the general subject matter of the inquiry, and
the applicable law. I.R.C. s 7611(a)(3) (1988). Respondents contend that
the inquiry notice sent in this case failed to adequately explain, in
sufficient detail, the subject matter of the inquiry or the concerns giving
rise to the inquiry. Respondents also argue that the notice itself must
demonstrate that the Service has before it evidence sufficient to support a
reasonable belief that the church may not be exempt.
The church tax inquiry letter sent to the Church, a copy of which is in the
record, complies fully with the requirements of the Code. The letter indicates
that the Service believes that the Church of Scientology Flag Service Org.,
Inc., may not be a tax exempt entity under I.R.C. s 501(c)(3) because of the
Church's substantially commercial purpose and because it may be operated for
the personal inurement of private parties. The letter thus sufficiently
apprises the Church of the subject matter of the inquiry and the reasons
therefore. The subject matter of the inquiry is clearly stated to be to
determine whether the Church is not tax exempt, and two possible grounds for
nonexemption are given.
The notice sent also adequately apprises Respondents of the concerns giving
rise to the inquiry. Respondents are informed by the inquiry that the Service
has information that the Church is party to various agreements regarding
certain trademarks, copyrights, patents, and trade names; and that these
agreements require the Church to operate in a manner inconsistent with exempt
status. The inquiry notice further allows that the Service has information
supporting a reasonable belief that the Church is operated for a substantial
nonexempt purpose, and that it is operated for the personal inurement of
private persons. The notice makes reference to other Court cases as being part
of the information from which the Service's beliefs are derived. The inquiry
notice fully complies with the requirements of the Code.
II. Reasonable Belief
Respondents desire that this Court reexamine the reasonableness of the
Service's determination that the Church may not be exempt. The Code clearly
provides to the contrary. I.R.C. s 7611(e)(1)(2) allows a church to
litigate only the Service's noncompliance with the notice requirement, the
conference requirement (discussed below) or the approval requirement (which
does not apply here). Other than these, "[n]o suit may be maintained, and no
defense may be raised in any proceeding ... by reason of any noncompliance by
the Secretary with the requirements of this section." Id. As the Code
unambiguously provides that churches may not challenge the reasonableness of
the Services belief that a tax examination is appropriate as a defense in any
proceeding, the Court need not consider this question.
III. Conference Requirement
*2 The Service must also offer to have a conference with the church "in
order to discuss, and attempt to resolve, concerns relating to such
examination...." I.R.C. s 7611(b)(3)(A)(iii). The Service made the
required offer in the notice of examination sent to the Church after the
inquiry notice, as mandated by the Code. Id. The record also reflects that
a conference was held. Respondent's claim that the Service did not participate
at the conference in good faith, but instead were merely going through the
motions rather than engaging in a meaningful attempt to resolve their concerns.
Whether or not Respondent's factual claims are accurate, the Code does not
impose any good faith or sincerity requirement on the Service. The Service
offered a conference. A conference was held. The law requires nothing more.
It is for the Congress, and not the Courts, to impose any further duties on the
Service regarding the conference requirement.
IV. Scope of the Summons
The Service may examine church materials only to the extent necessary to
determine the Church's tax status. I.R.C. s 7611(b)(1) (1988). Absent a
finding that each of the items sought in the summons is necessary for the
Service to determine the tax status of the Church, the Court cannot enforce the
summons. United States v. Holmes [80-1 USTC P 9328], 614 F.2d 985 (5th
Cir.1980). See also, United States v. Church of World Peace [89-2 USTC P
9428], 878 F.2d 1281 (10th Cir.1989). The question of whether each of the
items sought is necessary will be referred to the United States Magistrate for
V. Discovery By Respondent
The parties also disagree as to whether the Respondents should be allowed to
depose various members of the Service in preparation of showing that the
Service has initiated this tax examination in bad faith as part of a nationwide
conspiracy to discredit and destroy the Scientology movement. This question
will also be referred to the United States Magistrate.
VI. Constitutional Claims
Respondent's complain that constitutionally protected free association and the
Establishment Clause would be violated by requiring the information sought to
be turned over. These complaints are without merit.
If the Service shows that the information sought is necessary to determine the
Church's tax status, this would constitute a compelling interest sufficient to
override any competing interest the Church or its members may have in keeping
such information away from the government. Respondent's related claim that
turning over information necessary to determine tax status constitutes
excessive entanglement has been rejected by the courts. Holmes, 614 F.2d at
It is ORDERED:
1. This cause is referred to the United States Magistrate to resolve whether
the items sought by the Service are necessary to determine the Church's tax
status, and whether the Church should be allowed discovery to show that the
Service is proceeding in bad faith. All other questions which have been raised
by the parties are resolved as provided in this Order.
*3 2. The show cause hearing, scheduled for December 20, 1989, is canceled.