A federal appeals court ruled that the revocation of a church’s tax-exempt status by the IRS could not be challenged.

Church Law and Tax2000-11-01


Key point 6-03.5. The Church Audit Procedures Act provides churches with a number of important protections in the event of an IRS inquiry or examination. However, there are some exceptions. Church Records

A federal appeals court ruled that the revocation of a church’s tax-exempt status by the IRS could not be challenged on the ground that the IRS’s “examination” of the church exceeded the two-year limit imposed by the Church Audit Procedures Act. A church was started by an evangelist and recognized as tax-exempt by the IRS in 1981. In 1996, the IRS revoked the church’s exempt status on the ground that the church was so closely operated and controlled by and for the benefit of its founder that it enjoyed no independent existence; that the church was formed and operated by its founder for the principal purpose of willfully attempting to defeat or evade federal income tax; and that the church was inseparable from its founder, and failed to operate for exclusively charitable purposes. The church challenged the revocation of its exempt status because of the IRS’s failure to comply with section 7611(c)(1)(A) of the Church Audit Procedures Act, which requires that a church tax examination take no more than two years to complete. The IRS initiated its church tax inquiry of the church in 1989 by sending a “Notice of Church Examination,” and the “Final Adverse Determination” letter revoking the church’s exempt status was not issued until 1996. As a result, the inquiry took over six years. Even with a one-and-a-half-year delay that may have been agreed to by the parties, the inquiry into the church’s exempt status exceeded the two year limitation by nearly three years. A federal district court rejected the church’s argument, and the church appealed.

The appeals court noted that section 7611(e)(2) of the Church Audit Procedures Act provides: “Remedy to be exclusive. No suit may be maintained, and no defense may be raised in any proceeding … by reason of any noncompliance by the [IRS] with the requirements of this section.” The court noted that the entire Church Audit Procedures Act is set forth in section 7611 of the tax code, and therefore the reference to the word “section” in section 7611(e)(2) refers to all of section 7611. The court concluded:

Thus, by the plain language of the statute, a suit may not be maintained, nor may a defense be raised based on the violation by the IRS of subsection 7611(c)(1) [the two-year limit on church tax examinations]. Accordingly, we must acknowledge the clear intention expressed by Congress, that there is to be no judicial remedy for the IRS’s failure to comply with any of the requirements in section 7611 …. Congress cannot have intended, therefore, that subsection 7611(c)(1) set forth a mandatory two year time limit; accordingly, we conclude that subsection was intended to be goal-oriented, or precatory in effect …. [T]here is to be no judicial remedy for IRS violation of any of the church examination procedures … IRS failure to comply with any of these requirements may not be raised as a defense or an affirmative ground for relief in any judicial proceeding including, but not limited to, a summons proceeding to gain access to church records; a declaratory judgment involving a determination of tax-exempt status; or a proceeding to collect unpaid tax.

The court also rejected the church’s argument that allowing the IRS to proceed with revoking the church’s exemption despite the fact that its “examination” had exceeded the two-year limit would “eviscerate all of the critical protections which Congress-in light of the requirements of the First Amendment-intended to give churches under [section 7611].” The court agreed that Congress, in enacting the Church Audit Procedures Act, “intended to convey benefits to churches in connection with their IRS affairs.” But it insisted that Congress did not give churches the ability to “convert IRS lapses into anti-enforcement swords.” As a result, the church could not “assert a violation of a requirement of section 7611 as a defense or as the basis of a declaratory judgment.” The court did acknowledge that the church could assert any defense or remedy that is available to an ordinary taxpayer under the Administrative Procedure Act for a violation of a requirement of section 7611. The Administrative Procedures Act states that “a person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof.” 5 U.S.C. 702. Few taxpayers ever obtain relief under this provision. Music Square Church v. United States, 2000-2 USTC ¶50,578 (Fed. Cir. 2000).

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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