Monday, August 3, 2009
In proposed regulations to appear in the August 5, 2009 issue of the Federal Register, the Internal Revenue Service proposes that the term "appropriate high-level Treasury official" as used in IRC 7611(h)(7) is the Director, Exempt Organizations. The proposal, if adopted should satisfy the reasoning behind the ruling in United States v. Living Word Christian Center. In short, the Minnesota District Court ruled that the Director, Exempt Organizations, Examinations was too many steps (four) removed from the Commissioner's Office to be a "high level treasury Official." The Director is only two levels removed, though other parts of the opinion might still be used to challenge her designation as sufficiently high level. In any event, here is a summary of all the proposed changes.
Explanation of Provisions
These proposed regulations eliminate references to the positions of Regional Commissioner and Regional Counsel under the existing regulations and give responsibilities formerly assigned to these now defunct positions to the Director, Exempt Organizations and the Division Counsel / Associate Chief Counsel, Tax Exempt and Government Entities, respectively. In addition, these proposed regulations eliminate references to the position of Assistant Commissioner (Employee Plans and Exempt Organizations) under the existing regulations and give responsibilities formerly assigned to that position to the Commissioner, Tax Exempt and Government Entities or the Deputy Commissioner, Tax Exempt and Government Entities.
Reasonable Belief and Inquiry Notice Requirement
With respect to the initiation of the church tax inquiry process, Treas. Reg. §301.7611-1 Q1-A1 provides that a "Regional Commissioner (or higher Treasury official)" is the appropriate high-level Treasury official for purposes of this reasonable belief requirement. Similarly, Treas. Reg. §301.7611-1 Q7-A7 states, "Repeated (two or more) failures by a church or its agents to reply to routine requests ... will be considered by the appropriate Internal Revenue Service Regional Commissioner to be a reasonable basis for commencement of a church tax inquiry under the church tax inquiry and examination procedures of section 7611." In addition, Treas. Reg. §301.7611 Q9-A9 requires a Regional Commissioner to provide written notice to the church of the beginning of an inquiry.
These proposed regulations eliminate references to the Regional Commissioner and instead provide that the Director, Exempt Organizations is the "appropriate high-level Treasury official" for purposes of the reasonable belief and inquiry notice requirements of Treas. Reg. §301.7611-1 Q1-A1, Q7-A7, and Q9-A9. The Director, Exempt Organizations is a senior executive who reports to the Commissioner / Deputy Commissioner, Tax Exempt and Government Entities Division, and who is responsible for planning, managing, directing and executing nationwide activities for Exempt Organizations. See IRM §18.104.22.168 for a comprehensive description of these activities.
Examination Notice Requirement
Under section 7611(b)(2) and Treas. Reg. §301.7611-1 Q10-A10, a church tax examination cannot be commenced without first providing written notice of such examination to the church and to the "appropriate Regional Counsel" at least 15 days before the IRS begins the church tax examination. The regulation allows the Regional Counsel to file an advisory objection to the examination within this same 15-day period.
These proposed regulations amend Treas. Reg. §301.7611-1 Q10-A10 by substituting Division Counsel / Associate Chief Counsel, Tax Exempt and Government Entities, for each occurrence of Regional Counsel. These proposed regulations further specify that before the notice of examination is provided to the church, a copy of the notice must be provided to the Division Counsel / Associate Chief Counsel, Tax Exempt and Government Entities.
Revocation of Exemption or of Church Status
Section 7611(d)(1) and Treas. Reg. §301.7611-1 Q11-A11 require the Regional Counsel to approve, in writing, certain final determinations that are within the scope of section 7611 and adversely affect the tax-exempt status or increase any tax liability of a church. Further, prior to such adverse action, section 7611(d) requires Regional Counsel to determine, in writing, that there has been substantial compliance with the requirements of section 7611, when applicable.
These proposed regulations amend Treas. Reg. §301.7611-1 Q11-A11 by providing that the Division Counsel / Associate Chief Counsel, Tax Exempt and Government Entities, is the official responsible for complying with the written determination and approval requirements of section 7611(d)(1).
Limitations on Period of Assessment
Section 7611(d)(2) and Treas. Reg. §301.7611-1 Q15-A15 provide special limitation periods for church tax liabilities. These special rules are not to be construed to increase an otherwise applicable limitation period. Treas. Reg. §301.7611-1 Q15-A15 states that, for purposes of section 7611(d)(2)(A), that is, the statute of limitations applicable to liabilities arising from church tax examinations, a church is determined not to be a church exempt from tax when the appropriate Regional Commissioner approves, in writing, the completed findings of the examining agent that the organization is not a church exempt from tax for one or more of the three most recently completed taxable years ending before the examination notice date. The regulation also states that the Regional Commissioner cannot delegate this approval to a subordinate official. Further, the completed findings of the examining agent, which are approved by the appropriate Regional Commissioner, are not considered a final revenue agent's report (defined in section 7611(g)).
These proposed regulations substitute the Director, Exempt Organizations for the appropriate Regional Commissioner for purposes of Treas. Reg. §301.7611-1 Q15-A15.
Consistent with the language of section 7611(f)(1) prior to enactment of RRA 1998, Treas. Reg. §301-7611-1 Q16-A16 provides that the Assistant Commissioner (Employee Plans and Exempt Organizations) is responsible for providing the written approval necessary to begin a second inquiry or examination of a church. These proposed regulations provide that the Commissioner, Tax Exempt and Government Entities or the Deputy Commissioner, Tax Exempt and Government Entities is responsible for approving second inquiries and examinations under section 7611(f).
Remedies for Violation of Section 7611
Section 7611(e) and Treas. Reg. §301.7611-1 Q17-A17 provide that, if there has not been substantial compliance with certain requirements in section 7611, including the notice requirements of section 7611(a) and (b), the exclusive remedy for such noncompliance is a stay in an enforcement proceeding to compel compliance with a summons with respect to the inquiry or examination. The stay continues until the court finds that all practicable steps to correct the noncompliance have been taken. Treas. Reg. §301.7611-1 Q17-A17 further states that failure of the Regional Commissioner to approve an inquiry may not be raised as a defense or as an affirmative ground for relief in a summons proceeding or any other judicial proceeding other than as specifically set forth in the regulation.
These proposed regulations amend Treas. Reg. §301.7611-1 Q17-A17 to replace each reference to Regional Commissioner with Director, Exempt Organizations.