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United States v. Living Word Christian Center: US District Court : TAX | CIVIL PROCEDURE | 1ST AMENDMENT - IRS not having fixed its rules, official four levels below Commissioner not high enough

United States of America,
v. Civil No. 08-mc-37 ADM/JJK
Living Word Christian Center,
Robert E. Fay, Esq., United States Department of Justice, Washington, D.C. for Petitioner.
Walter A. Pickhardt, Esq., Faegre & Benson LLP, Minneapolis, MN for Respondent.
This matter is before the undersigned United States District Judge for consideration of
Petitioner United States of Americas (the Government) Objections [Docket No. 23] to
Magistrate Judge Jeffrey J. Keyes Report and Recommendation (R&R) [Docket No. 21]. The
R&R recommends that the Governments Petition to Enforce Internal Revenue Summons
[Docket No. 1] be denied because an appropriate high-level Treasury official has not made the
necessary reasonable belief determination required by Congress before a church tax inquiry
and examination of a churchs records can occur. 26 U.S.C. 7611(a)(2) and (h)(7). For the
reasons set forth below, the Governments Objections are overruled and the R&R is adopted.
The procedural and factual background, described in the R&R, is incorporated by
reference for review of the Governments Objections. In April 2007, the Internal Revenue
Service (IRS) began investigating Living Word Christian Center (LWCC) after receiving
reports that LWCC may be engaging in conduct, including improperly conferring economic
benefits on its senior pastor Reverend James M. Hammond, which may jeopardize its tax-exempt
status. The IRS sent LWCC a notice signed by Marsha A. Ramirez, the Director of Exempt
Organizations, Examination (DEOE), that it was opening a church tax inquiry. LWCC
responded to the notice, and its response caused the IRS to open a church tax examination of
LWCCs records. Before that examination could take place, LWCC asserted that the IRSs
notice was defective because it was authorized by the DEOE who is not an appropriate highlevel
Treasury official. The IRS then issued an administrative summons to LWCC asserting that
it needed the information sought in the summons to determine whether LWCCs tax-exempt
status as a church is legitimate. When LWCC refused to comply with the summons, the IRS
petitioned the Court for an order directing LWCC to comply in full. After a thorough
examination of the issues and two rounds of briefing, Judge Keyes denied enforcement of the
summons because the DEOE is not an appropriate high-level Treasury official to make the
reasonable belief determination required before an examination of a churchs records can
A. Standard of Review
In reviewing an R&R, the district court shall make a de novo determination of those
portions of the report or specified proposed findings or recommendations to which objection is
made. 28 U.S.C. 636(b)(1)(C); see also D. Minn. LR 72.2(b). A district judge may accept,
reject, or modify, in whole or in part, the findings or recommendations made by the magistrate
judge. Id.
To obtain judicial enforcement of an administrative summons, the Government must
establish a prima facie case by demonstrating that (1) the IRS investigation is being conducted
pursuant to a legitimate purpose; (2) the inquiry may be relevant to that purpose; (3) the IRS or
Commissioner does not currently possess the information sought; and (4) the administrative
steps required by the Internal Revenue Code have been followed. See United States v. Powell,
379 U.S. 48, 57-58 (1964). The Internal Revenue Code specifies a church tax inquiry may begin
only after notice and if:
an appropriate high-level Treasury official reasonably believes (on
the basis of facts and circumstances recorded in writing) that the
church . . . may not be exempt by reason of its status as a church,
from tax . . . or . . . may be carrying on an unrelated trade or business
. . . or otherwise engaged in activities subject to taxation under this
26 U.S.C. 7611(a)(1), (2). An appropriate high-level Treasury official is defined as the
Secretary of the Treasury or any delegate of the Secretary whose rank is no lower than that of a
principal Internal Revenue officer for an internal revenue region. 26 U.S.C. 7611(h)(7).
Upon the enactment of this statute and following a formal notice and comment period, the IRS
determined that an appropriate high-level Treasury official was a Regional Commissioner (or
higher Treasury official). Treas. Reg. 301.7611-1T, Q&A (1).
The difficulty in applying the statute to this case was created by the Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 1001(a), 112 Stat. 685
(1998), which eliminated the position of Regional Commissioner. Congress did not amend the
definition of appropriate high-level Treasury official, and the IRS has not, in the ensuing
years, undertaken any rule-making procedures to amend its own definition. Instead, the IRS
delegated authority to other IRS officials to assume the former responsibilities of the Regional
Commissioners. See Delegation Order 193 (Rev. 6) (last revised November 8, 2000). In the
instant case, the DEOE was the individual who made the reasonable belief determination
required by 26 U.S.C. 7611. See Internal Revenue Manual (June 1, 2004).
Because the enforceability of the summons turns on the IRSs interpretation that the
DEOE is an appropriate high-level Treasury official, the Court must make a determination of the
level of deference afforded to that interpretation. Judge Keyes determined that Skidmore
deference applies, and the Government does not contend otherwise. See Skidmore v. Swift &
Co., 323 U.S. 134 (1944); see also R&R at 15-20; Objections at 3-4. Under Skidmore:
[t]he fair measure of deference to an agency administering its own
statute has been understood to vary with the circumstances, and
courts have looked to the degree of the agencys care, its consistency,
formality, and relative expertness, and to the persuasiveness of the
agencys position. . . . The weight [accorded to an administrative]
judgment in a particular case will depend upon the thoroughness
evident in its consideration, the validity of its reasoning, its
consistency with earlier and later pronouncements, and all those
factors which give it power to persuade, if lacking power to control.
United States v. Mead Corp., 533 U.S. 218, 228 (2001) (quoting Skidmore, 323 U.S. at140
Judge Keyes ultimately found that the IRSs interpretation was not persuasive and thus
not entitled to deference. Instead, he found that an important constitutional interest underlies the
requirements of a church tax inquiryFirst Amendment protections against the Governments
possible intrusion into religious affairs. R&R at 25. Congress created 7611 to balance the
rights of legitimate churches with the need for the IRS to investigate and eliminate church tax
avoidance schemes. Id. Judge Keyes found that given the balancing of the constitutionally
protected rights, the person responsible for determining reasonable belief should have broad
responsibility and experience and have a high-profile position that would make it likely she has a
heightened understanding [of] the political and policy interests at stake. Id. Prior to the 1998
reorganization, the designated person was the Regional Commissioner, an official only one
management level removed from the Commissioner of the IRS. Id. at 28. Judge Keyes reasoned
that the DEOE, on the other hand, is four management levels removed from the Commissioner of
the IRS and therefore is not the high-level Treasury official envisioned by Congress to
properly serve the balancing function. Id. at 29. The nearest equivalent to the Regional
Commissioner under the current IRS organization is the Commissioner Tax Exempt and
Government Entities (TEGE). Id. at 27.
B. Objections
The Government argues that Judge Keyes failed to give appropriate weight to the IRSs
reasonable interpretation. Objections at 4. It explains the result of Congresss 1998 mandated
reorganization was a shift from geographical regional directors to directors based on areas of
expertise. As a result, no single official has the areas of responsibilities previously assigned to
the Regional Commissioners. Thus, it is argued, the added expertise of the DEOE in tax exempt
areas makes her a better candidate to initiate a church tax inquiry. The Government, however,
fails to explain how the DEOE has the background to satisfy the broader view of the
political/policy balancing role possessed by the Regional Commissioners. The Court agrees with
Judge Keyes that the DEOE does not constitute an appropriate high-ranking Treasury official.
The Government next argues that by not comparing 7611(a) and 7611(f), Judge
Keyes overlooked evidence that Congress considered national perspective and exemptorganization
expertise more important than the rank and command chain in initiating church tax
inquiries. Objections at 6. Section 7611(f) protects churches from unnecessary repeated
inquiries if the first inquiry does not result in either (1) a revocation of tax-exempt status or (2) a
request for a change in the churchs operational practices. Prior to the 1998 reorganization, a
second inquiry could only be approved by the Assistant Commissioner for Employer Plans and
Exempt Organizations (EP/EO), a person three levels from the IRS Commissioner. The
Government then argues that because the requirements for a second inquiry are more stringent,
and Congress allowed a lower ranking member to conduct this more sensitive review even after
the 1998 reorganization, Congress valued expertise over rank.
The Court disagrees that the procedure for a secondary review provides insight into
Congresss intention with regard to initial church tax inquiries. If the inference is that Congress
intended to value expertise over national perspective and political accountability because of the
sensitive nature of secondary inquiries, this inference overlooks that at the time of the first
review, a politically accountable Regional Commissioner balanced the First Amendment rights
of the church with the IRSs need for an inquiry. There is no indication that a second inquiry
initiated by a person with more expertise demonstrates that Congress shifted its priorities in
terms of requiring the first inquiry to be initiated by a person with a high level of political
The Governments next argument is that to the extent Judge Keyes determined that the
DEOE did not have the broad scope of authority and array of duties that the Regional
Commissioner had, the Commissioner TEGE also does not have a similar broad scope of
authority and array of duties. Judge Keyes did not state that the Commissioner TEGE had the
same broad array of duties as the Regional Commissioner. Instead, he found that the
Commissioner TEGEs responsibilities, rather than the DEOEs responsibilities, are more
closely aligned with those of the Regional Commissioner.
The Governments final objection is that Judge Keyes failed to adequately credit the
IRSs expertise and inappropriately took into account the IRSs lack of formal rule making in his
determination. While expertise is one factor a court should consider under Skidmore deference
principles, Judge Keyes found that the level of deference was not as great because the
interpretation in question does not require the IRSs technical tax expertise. R&R at 22-23.
The Government maintains that Judge Keyes failed to consider the IRSs expertise in tax
administration. However, the IRSs expertise in tax administration is not the type of expertise
entitled to deference on an issue that requires the balancing of First Amendment issues. Finally,
Judge Keyes critique of the IRSs failure to conduct formal notice-and-comment rule making
does not necessarily mean the interpretation was accorded less weight under Skidmore
deference. This Court also ultimately finds the IRSs interpretation unpersuasive and adopts
Judge Keyes determination that the IRSs summons be denied because it was not authorized by
an appropriate high-level Treasury official. The IRS may choose to reinitiate an inquiry
subject to a review by an appropriate high-level Treasury official consistent with this Order.
Based upon the foregoing, and all of the files, records and proceedings herein, IT IS
1. Petitioners Objections [Docket No. 23] are OVERRULED;
2. The R&R [Docket No. 21] is ADOPTED;
3. Petitioners Petition to Enforce Internal Revenue Summons [Docket No. 1] is
4. This action is DISMISSED.
s/Ann D. Montgomery
Dated: January 30, 2009.


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