OPERATION CLAMBAKE: SCIENTOLOGY COURT FILES

Part of a public library containing court papers related to lawsuits involving Scientology in some way. Collected to help lawyers and critics of Scientology in future lawsuits from or against this cult. Please report back if this has been of help, or send new contributions to the collection. Thanks. Andreas Heldal-Lund (heldal@online.no)




                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.
  Internal Revenue Service (IRS) petitioned for enforcement of summons issued
 to church as part of inquiry into church's tax-exempt status.  The
 United States District Court for the District of Massachusetts, Joseph L.
 Tauro, J., 739 F.Supp. 46, denied petition.  IRS appealed.  The Court of
 Appeals, Breyer, Chief Judge, held that IRS failed to show that church records
 were necessary to determine church's tax liability.
  Affirmed.

 INTERNAL REVENUE
 Under provision of Internal Revenue Code pertaining to church tax inquiries,
 Internal Revenue Service's (IRS) summons which called for production of massive
 amounts of church's material did not show that records were "necessary" to
 determine church's tax liability, and thus, could not be enforced;  summons
 could not satisfy any higher standard than simple "relevance."  26
 U.S.C.A. s 7611(b)(1).
  *1075 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. s 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. s
 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
 *1076 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. s 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. s 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 *1077 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. s 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. s 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 [s 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 "relevant," or would "cast some light upon," potential
 liability.  That is to say, any examination relevant to determining the right
 sort of liability is a "necessary" examination.
  The problem with this ingenious argument is that the rest of the statute
 belies it.  The first provision of the "Church Tax Inquiry" provision, which we
 quoted at the outset of this opinion, says that the IRS cannot even begin its
 investigation until it "reasonably believes" the church has the relevant
 liability.  The "tax examination" section says that, to examine books, the IRS
 must meet these "reasonable belief" requirements and it must also meet the
 "extent necessary" requirements.  The IRS's interpretation would basically make
 the "and" (and the entire "extent necessary" section) redundant.  Regardless,
 we find its interpretation strained, contrary to the view set forth in the
 cases we have cited above, and in conflict with the statements in the
 legislative history just quoted.
  Second, the IRS says that two cases support its position, including one
 from this circuit, United States v. Dykema, 666 F.2d 1096 (7th Cir.1981)
 and United States v. Freedom Church, 613 F.2d 316 (1st Cir.1979).  We do not
 agree, however, with the IRS's reading of these two cases.  Both of them
 involved different issues.  The 1969 statute imposed special restrictions upon
 tax investigations of a church, but it did not make clear which kinds of tax
 investigations *1078 it meant to limit.  In particular, there was a dispute
 as to whether the restrictions applied 1) only when the IRS investigated to see
 if a church had unrelated business income, see 26 U.S.C. s 513, or 2)
 also when the IRS investigated whether a claimed church was really a church.
 See 26 U.S.C. s 501(c)(3);  26 C.F.R. s 1-511-2(a)(3)(ii).  The Dykema
 court, like several other courts, held that the statute applied its
 investigatory restrictions only when the IRS investigated to see if the church
 had unrelated business income, and not otherwise.  But, in respect to
 investigations within the statute's scope, the word "necessary" means what it
 says.  Indeed, on the relevant issue, Dykema seems to hold against the IRS,
 for the court said that
   "the examination of corporate books of account [for the purpose of
 determining unrelated business income] must be limited to that which is
 necessary to determine the amount of the tax."
  Dykema, 666 F.2d at 1102 (emphasis added).
  In Freedom Church the issue raised was whether the 1969 statute prohibited
 all examinations of "books of account" to determine whether an organization is
 in fact a church.  In the course of the opinion this court wrote that the
 Powell "may be relevant" standard applied to a church-related investigation,
 but the parties did not dispute that matter;  the meaning of the words "to the
 extent necessary" was not at issue in the case.  Freedom Church, 613 F.2d at
 319 (appellant only objected that "membership and contribution lists ... are
 not relevant to an investigation of tax exempt status").  Thus, we do not
 consider this court's affirmance of the application of the relevance standard
 controlling on the meaning of "necessity" as used in s 7611.
  Third, the IRS makes a logical argument that rests upon Powell itself.  It
 notes that a different statute, relevant to all tax investigations, says that
 "no taxpayer shall be subjected to unnecessary examination."  26 U.S.C. s
 7605(b) (emphasis added).  It adds that Powell, in saying that the IRS could
 examine whatever material was "relevant," must have meant that an examination
 of "relevant" material was not an "unnecessary" examination.  Therefore,
 Powell must have meant that an examination of relevant material was a
 "necessary" examination.  Consequently, "to the extent necessary" means "to the
 extent relevant."
  This argument sounds logical, but it is not.  In ordinary English there is a
 "middle" set of circumstances that "necessary" and "unnecessary" do not
 completely distribute between them.  For example, it is necessary that my car
 have gas if I am going to drive it;  it is unnecessary that it have a new paint
 job;  but, it is neither "necessary" nor "unnecessary" that I clean the
 windshields--to do so would simply be a wise precaution.  Similarly, an
 investigation of whatever documents "might throw light" on the matter is not
 an "unnecessary" investigation, but neither can one conclude that it is
 "necessary."  It might, for example, simply be somewhat helpful.
  Fourth, and perhaps most important, the IRS says that the words "to the
 extent necessary," if read naturally, would hamper tax investigations
 significantly.  How can the IRS possibly know whether the examination of a
 certain set of books, for example, is "necessary" to show liability unless and
 until it can see the books?  It is absurd to expect the IRS to be able to prove
 liability before it starts an investigation.  Thus, Congress cannot have meant
 courts to read this language literally.  As the IRS puts it, imposing this
 higher standard on the IRS "would place an impossible burden on the IRS with
 respect to any organization that claims to be a church.  Such a construction of
 the statute, which would nullify the summons authority of the IRS, is to be
 avoided."
  The answer to this argument, however, is that the words do not say "to the
 extent necessary to show liability."  They say "to the extent necessary to
 determine liability," i.e., to decide whether or not there is liability.  The
 IRS must show that the material is "necessary" to the investigation, not
 necessary to prove liability.  The statute focuses the court's attention on the
 needs of a competent investigator, not the *1079 needs of a prosecutor.  It
 requires the IRS to explain why the particular documents it seeks will
 significantly help to further the purpose of the investigation.  As so read, we
 do not believe that the standard, while stricter than "may be relevant," will
 impose upon the IRS unreasonably strict standards of proof when it seeks
 material that it needs for investigatory purposes.
  In sum, we reject the IRS's argument that the Powell relevance standard
 applies to an examination of church documents.  And, we hold that the present
 summons does not meet the stricter necessary-to-the-investigation standard.
                                       III
                                     Purpose
  The district court also held that the IRS failed to show it was proceeding for
 a proper purpose, namely to determine whether or not the church had tax-exempt
 status in the tax years in question.  Since we have already held that the
 court's decision not to enforce the subpoena was legally proper, we need not
 decide whether or not the district court's decision about lack of purpose was
 legally correct.  The IRS has argued forcefully, however, that the district
 court is wrong;  and, it may fear that the district court's "purpose"
 determination would bind it in another case, say, a renewed effort to enforce a
 revised summons against the church.  Because particular record-based
 circumstances may determine the outcome of this issue, because a new proceeding
 would likely involve different circumstances, and because we need not decide
 the question now, we shall not do so.  But we shall state that the district
 court's holding on this point, not necessary to its (or our) decision, does not
 have any binding effect and that the court may reconsider the legitimacy of the
 IRS's purpose in any future proceeding.
  The judgment of the district court is
  Affirmed.
                                 *1080 APPENDIX


 

                                     *1081

 

  *1082 It will be necessary to provide all documents in your
 possession, custody or control relative to the Church of Scientology of Boston,
 Inc., during the period beginning January 1, 1985, and ending December 31,
 1987, (unless otherwise stated) as more specifically described below.  If all
 or part of the summoned accounting and/or financial records are maintained
 within an automated data processing system, then provide copies of the disks,
 magnetic tapes, or other machine-sensible records on which the data is stored,
 as well as documentation that provides a complete description of the automated
 data processing portion of the accounting system and those files that feed into
 the accounting system;  documentation as to the scope of the operations
 sufficient to indicate:  a) the application being performed, b) the procedures
 used in each application, and c) the controls used to ensure accurate and
 reliable processing;  and, for all files, documentation regarding:  1) record
 formats (including the meaning of all "codes" used to represent and retrieve
 information);  2) flowcharts (systems and program);  3) label descriptions;  4)
 source program listings of programs that created the files;  and 5) charts of
 accounts for the periods involved.  If the information is not maintained within
 an automated data processing system, then provide the paper records and
 documents.  Documents which were furnished by the Church of Scientology of
 Boston, Inc. in support of Form 1023, Application for Recognition of Exemption,
 need not be provided in compliance with this summons.  However, any document
 which has been revised or amended since the Church of Scientology of Boston,
 Inc. was granted exempt status in 1975, is to be produced in compliance with
 this summons.
  In the following description of the information sought by this summons, "CSBI"
 means Church of Scientology of Boston, Inc.  In addition, each request for
 documents and records that follows includes, but is not limited to, all
 pertinent Scientology Scriptures, directives and orders.
  1. All documents including, but not limited to, charters, articles of
 incorporation, agreements, by-laws and organizational charts, which describe
 the purpose and organizational structure of the CSBI.
  2. All documents including, but not limited to, by-laws, position
 descriptions, annual reports and brochures, which describe the responsibilities
 and duties of the officers, directors and trustees of the CSBI.
  3. All documents which identify those persons who served as an officer,
 director or trustee of the CSBI, including their names, addresses and social
 security numbers.
  4. All documents relating to the compensation, remuneration, and financial
 benefits received by officers, directors and trustees of the CSBI.
  5. All documents which describe those activities engaged in by the CSBI,
 including but not limited to statements as to whether the CSBI operates
 autonomously or under the supervision or control of any other entity.
  6. All documents which identify and describe the activities of organizations
 other than the CSBI, which use any property owned, leased or otherwise
 possessed by the CSBI, including the property at 448 Beacon Street.
  7. Original copies of any and all brochures, flyers, pamphlets and
 advertisements printed and distributed to members of the CSBI and/or the
 general public.
  8a. All documents which list or otherwise identify all of the various
 publications, devices or equipment which were provided free of charge to CSBI
 members or the public through the CSBI.
  8b. All documents relating to the various publications, devices or equipment
 sold through CSBI including, but not limited to, contracts, agreements,
 invoices, minutes of meetings, which list or otherwise show:  1) purchase
 prices, 2) sales prices, 3) quantities purchased and sold, 4) methods of sale
 and distribution, such as through book stores or mail order, and 5) methods for
 establishing purchase prices and sales prices.
  9. The original minutes of all meetings held by the governing body of the
 CSBI, *1083 and/or by other similar bodies or boards having authority for
 the Boston Church's ecclesiastical, financial, and/or corporate affairs for the
 calendar years ended December 31, 1983;  December 31, 1984;  December 31,
 1985;  December 31, 1986;  and December 31, 1987.
  10. All original books of account and records of the CSBI which report assets,
 liabilities, receipts and disbursements including, but not limited to, the
 following:
   A. General ledger
   B. General journal
   C. Accounts receivable ledgers
   D. Accounts payable ledgers
   E. Cash disbursement book
   F. All subsidiary ledgers
   G. Cash receipts book
   H. Supporting vouchers and invoices
   I. Check register and cancelled checks
   J. Purchases journal
   K. Sales journal
   L. Bank statements--savings and checking (domestic and foreign), single,
 joint or nominee
   M. Investment accounts (domestic and foreign), single, joint or nominee
   N. Certificates of deposits, single, joint or nominee
   O. Financial reports prepared by or under the supervision of any Financial
 Banking Officer including, but not limited to, the Flag Banking Officer.
  11. All original financial reports--weekly, monthly, quarterly and annually--
 internal audit reports, and management letters.
  12. Copies of Forms 941E, Employment Tax Returns;  copies of Forms W-4,
 Employees Exemption Allowance Certificate;  Forms W-3 and W-2, Annual Wage and
 Tax Statements;  and Forms 1096 and 1099, Information Reports, (Service
 completion awards, commissions, etc.).
  13. Original agreements, contracts, and leases relating to any service or any
 tangible or intangible property including, but not limited to trademarks,
 copyrights, space (either as a lessee or lessor), employment, and equipment
 that the CSBI, owned or used, during 1985, 1986, and 1987.  This would include
 licensing agreements, including Film Trust agreements, ecclesiastical
 management agreements, ecclesiastical management services agreements, including
 agreements with Church of Scientology International;  ecclesiastical trust
 agreements;  agreements or copyrights;  patents;  trademarks;  trade names;
 service marks;  religious marks;  equipment;  advices, directives, orders,
 policy letters and documents used by the church.
  14. All documents which describe the schedule of charges for various
 levels of auditing and training and all records which reflect the names,
 addresses, social security numbers and the amounts paid by each individual who
 participated in the auditing and training sessions.
  15. Copies of all Scientology Scriptures which set forth financial management
 and recordkeeping procedures.
  16. All documents executed by parishioners whereby they agreed to perform
 services for or on behalf of the CSBI.
  17. Records which show the commissions paid by or on behalf of the CSBI,
 including amounts paid to or on behalf of individuals, directly or indirectly,
 as well as documents which explain how and by whom amounts were determined and
 whether such amounts were reported on Forms 1099 and/or W-2.
  18. Records which show the Church's financial relationship to all other
 entities in the Scientology hierarchy and to other Scientology churches and
 organizations.
  19. Any agreements signed by parishioners of the CSBI, whereby they agreed not
 to assert legal claims against the Church and/or other individuals or entities
 in the Scientology hierarchy.
  20. All documents relating to the furnishing of training/auditing/consulting
 services by other Scientology-related organizations to individuals connected
 with or referred by CSBI.
  21. All documents relating to the furnishing of training/auditing/consulting
 services by CSBI to individuals connected with *1084 or referred by other
 Scientology-related organizations.
  22. All documents relating to payments made to or received from other
 Scientology-related organizations for management services, advice, guidance,
 penalties or fines.
  23. Copies of all documents including, but not limited to Scientology
 Scriptures which set forth procedures by which reserve accounts were maintained
 by the Church of Scientology of Boston, Inc.
  24. Copies of all documents including, but not limited to Scientology
 Scriptures which set forth how amounts of distributions from CSBI reserve
 accounts were determined.
  25. Copies of all documents including, but not limited to, Scientology
 Scriptures which set forth how amounts of contributions made to CSBI reserve
 accounts were determined.
  26. Copies of all documents including, but not limited to, Scientology
 Scriptures, correspondence, memorandums, books, records, journals and/or
 ledgers which describe the anticipated needs for which the CSBI maintained
 reserve accounts.
  27. Copies of all documents including, but not limited to, Scientology
 Scriptures, correspondence, memorandums, books, records, journals and/or
 ledgers which set forth how and by whom the anticipated needs for which the
 CSBI maintained reserve accounts were determined.
  28a. All Books of account, ledgers, journals and records which reflect amounts
 contributed to the Church of Scientology of Boston reserve accounts.
  28b. All records which identify the contributor and the amount, date and
 purpose of each contribution made to CSBI reserve accounts.
  29a. All Books of account, ledgers, journals and records which reflect
 amounts distributed by the CSBI reserve accounts.
  29b. All records which identify the distributee, and the amount, date and
 purpose of each distribution made from the CSBI reserve accounts.
  30. Statements of account, ledgers, journals, books and records necessary to
 determine the opening and closing balances in all CSBI reserve accounts during
 each month.
  31. Bank signature cards for all CSBI reserve accounts held in banks or
 financial institutions.

End of file...