Opinion ID: 393258
Heading Depth: 1
Heading Rank: 2

Heading: The Section 7605(c) Issue

Text: 20 The second issue presented on appeal is whether the court below erred in holding that the IRS, in its attempt to obtain and examine bank records pertaining to the church, is limited to an examination under Section 7605(c) of the Internal Revenue Code, 26 U.S.C. § 7605(c). 7 The IRS correctly contends that § 7605(c) is not applicable in the examination of such bank records. 21 Section 7605(c) contains two limitations. The first requires that no examination of the books of account of a church  shall be made to determine whether such organization is engaged in the carrying on of an unrelated trade or business or may be otherwise engaged in taxable activities 8 unless the IRS gives the church written notice of such audit; the second limitation requires that such examination must be restricted to the extent necessary to determine the amount of tax imposed upon an unrelated business activity of the church. Paragraph (c) was added to Section 7605 by the Tax Reform Act of 1969 9 as an administrative provision in connection with an amendment to Section 511 of the Code, which made the unrelated business income tax provisions of the Code applicable to churches. 10 The purpose of Section 7605(c) was to protect churches from the administrative burden of unnecessary tax audits so as not to interfere with the internal financial matters of the church. 11 This section, therefore, imposes some restriction, but it does not preclude examination of church records. 22 Here, however, the summons sought to be enforced by the IRS is directed at records of the Grayson County State Bank, not at books of account of the First Pentecostal Church. 23 In interpreting paragraph (b) of Section 7605, 12 which prohibits a second inspection of a taxpayer's records absent written notice to the taxpayer, the courts have narrowly construed the analogous language taxpayer's books of account. The courts have consistently found that Section 7605(b) is a limitation upon the examination of a taxpayer's books of account  and does not apply to an examination of books of account of a third person. Geurkink v. United States, 354 F.2d 629, 631 (7th Cir. 1965); Hall v. Commissioner of Internal Revenue, 406 F.2d 706, 710 (5th Cir. 1969). See also: United States v. Krilich, 470 F.2d 341, 350 (7th Cir. 1972), cert. den. 411 U.S. 938, 93 S.Ct. 1897, 36 L.Ed.2d 399 (1973); Hinchcliff v. Clarke, 371 F.2d 697, 700 (6th Cir.) cert. den. 387 U.S. 941, 87 S.Ct. 2073, 18 L.Ed.2d 1327 (1967); United States v. Howard, 360 F.2d 373, 380 (3rd Cir. 1966); Bouschor v. United States, 316 F.2d 451, 457 (8th Cir. 1963); Application of Magnus, 299 F.2d 335, 336 (2d Cir.), cert. den. 370 U.S. 918, 82 S.Ct. 1556, 8 L.Ed.2d 499 (1962). This prohibition applies by its express terms only to the taxpayers' records; it did not prevent the appellants from seeking information from other sources, such as the bank, regarding the taxpayers' possible liability. DeMasters v. Arend, 313 F.2d 79, 86 (9th Cir. 1963); the statutory restriction against second examinations applies only to the taxpayer's own records, and not to records of third parties like the Bank. United States v. Chemical Bank, 593 F.2d 451, 458 (2d Cir. 1979). 24 In the instant case the IRS investigation is being conducted in order to determine the correct tax liability of the taxpayer-minister, not to determine whether the church is engaged in unrelated, taxable activities. Under consistent judicial interpretations of comparable provisions, the records sought by the IRS are not books of account of the church. Therefore, Section 7605(c) is not applicable and does not preclude enforcement of the summons against the present bank records pertaining to the church.