Wednesday, April 10, 2024

Tenth Circuit Affirms Church Audit Procedures Don't Apply to Third Party Summons

God's Storehouse – Topeka

Last year we reported that a magistrate held that the Church Tax Audit Procedures did not apply to the Service's third party summons to obtain bank records pertaining to God's Storehouse Topeka Church.  The case revolves around the Service's inquiry into whether the Church violated 501(c)(3)'s prohibition against campaign intervention.  The Service issued a summons to a bank in pursuit of the Church's bank records.  Presumably, the Service wants to determine whether Church funds were spent in support of the pastor's successful campaign for a seat in the Kansas Senate.  A magistrate held that the Church Tax Audit Procedures under IRC 7611 did not apply to a third party subpoena issued under IRC 7609.  The District Court adopted the Magistrate's holding and the Tenth Circuit affirmed in a ruling released yesterday.

Richard Kloos, the pastor, successfully ran for the Kansas State Senate using signs highlighting his association with the Church. That and other circumstances precipitated the IRS investigation into whether the Church financially supported his campaign.  Here's a nice primer on Church tax audits.  Here are some of the facts from the Tenth Circuit's opinion in God's Storehouse Topeka Church v. United States:

Richard Kloos is a pastor at [God's Storehouse Church, Topeka] (GSH); GSH paid gross wages to both Klooses in 2019 and 2020. GSH’s tax forms demonstrate that, during that two-year period, it withheld employment taxes from the wages of other employees but did not withhold any taxes from the gross wages of the Klooses.  In November 2020, Richard Kloos was elected to the Kansas State Senate.

During his run, his campaign purchased yard signs that included the words “Founder of God’s Storehouse” below his name. The State of Kansas Governmental Ethics Commission vetted and preapproved those signs. According to Richard Kloos, GSH did not “create, purchase, display, distribute, or in any way contribute to any yard signs associated with” his campaign. Kloos further claims GSH did not “intervene in or support [his] campaign for Kansas Senate.”  In February 2021, IRS assigned Kesroy Henry to investigate whether it should initiate a church tax inquiry into GSH for the 2019 and 2020 tax years. In June, Henry issued a Notice of Church Tax Inquiry (“Inquiry Notice”) to GSH after he secured approval from the TE/GE Commissioner. The Inquiry Notice informed GSH of four concerns: (1) it potentially operated as a thrift store instead of a church, (2) it may have improperly intervened in a political campaign, (3) its coffee shop may incur liability for unrelated business income tax, and (4) the wage payments to the Klooses may incur liability for unpaid employment taxes. Although the Inquiry Notice also requested GSH’s responses to a series of questions, it did not request any documents. Nevertheless, GSH responded to the questions and provided copies of documents.

GSH’s responses and documents did not assuage Henry’s concerns about GSH’s tax-exempt status and potential tax liability. Accordingly, in September of 2021, he obtained approval from the TE/GE Commissioner to initiate a church tax examination. Henry then issued to GSH a Notice of Church Tax Examination (“Examination Notice”). The Examination Notice informed GSH about IRS’s continued concerns. It also described church records and activities Henry might need to examine and offered to conduct a pre-examination conference. The following month, GSH’s representative met with IRS personnel for the pre-examination conference. Because that conference did not resolve IRS’s concerns, IRS notified GSH it would move forward with an examination. Consistent with this determination, a few days later, Henry sent GSH a request for documents, including copies of its bank statements for a two-year period. GSH objected to producing those statements on the ground the request was overly broad. Although GSH did not provide the requested bank statements, it did provide an extensive list of documents.

In December 2021, IRS notified GSH it intended to contact third parties and informed GSH of its right to request a list of people IRS contacted. In February 2022, IRS issued a § 7609 third-party summons to Kaw Valley. IRS requested bank records for all accounts in GSH’s name for the period January 1, 2019, to December 31, 2020. IRS also served a copy of the summons on GSH.

darryll k. jones

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