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God’s Storehouse Topeka Church v. United States.

No. 23-3063. 4/9/2024. D.Kan. Judge Murphy. Not-for-Profit Corporation—Church Records—Employment Taxes—26 USC § 7609—26 USC § 7611—Independent Neuropsychological Evaluation—Cost Reimbursement.

April 9, 2024

Richard and Pennie Kloos founded God’s Storehouse Topeka Church (GSH) in 2009. The next year, Richard and two other individuals incorporated GSH as a Kansas not-for-profit corporation, declaring GSH a church under 26 USC § 508(c)(1)(A). GSH did not apply to be recognized as exempt from taxation pursuant to 26 USC § 501(c)(3). GSH operates a thrift store that sells donated items to the public and a coffee shop that sells coffee to the thrift store’s patrons at cost. Richard is a pastor at GSH, and GSH paid gross wages to both Klooses in 2019 and 2020 but did not withhold any taxes from the Klooses’ gross wages yet withheld employment taxes from the wages of other employees. In November 2020, Richard was elected to the Kansas State Senate. His campaign incorporated yard signs that included the words “Founder of God’s Storehouse” below his name, but Richard claims that GSH did not support his campaign.

In 2021, the Internal Revenue Service (IRS) began investigating whether it should initiate a church tax inquiry into GSH for the 2019 and 2020 tax years. The IRS issued a Notice of Church Tax Inquiry (inquiry notice) to GSH, with approval from the Tax Exempt and Government Entities Commissioner (commissioner), informing GSH of IRS concerns that GSH could be engaging in an unrelated trade or business or otherwise engaging in activities that may be subject to taxation. The inquiry notice requested GSH’s responses to a series of questions, and GSH responded to the questions and provided copies of documents. The IRS investigator subsequently obtained approval from the commissioner to initiate a church tax examination and issued a Notice of Church Tax Examination (examination notice) to GSH. As part of the examination, the IRS notified GSH in December 2021 that it intended to contact third parties and informed GSH of its right to request a list of people the IRS contacted. In February 2022, the IRS issued a 26 USC § 7609 third-party summons to Kaw Valley Bank (Kaw Valley) seeking bank records for accounts in GSH’s name. GSH claimed the summons was invalid because, before its issuance, the IRS failed to satisfy the 26 USC § 7611 requirements applicable to church tax inquiries and examinations. GSH petitioned the district court to quash the third-party summons issued to Kaw Valley, and the IRS moved for summary denial. A magistrate judge ruled that the third-party summons the IRS issued to Kaw Valley was not subject to the heightened requirements set out in § 7611 and that, based on United States v. Powell, 379 U.S. 48 (1964), the IRS issued the third-party summons to Kaw Valley in good faith. The magistrate judge recommended that the district court deny GSH’s petition and grant IRS’s motion for summary denial. Over GSH’s objection, the district court adopted the magistrate judge’s report and recommendation.

On appeal, GSH argued that the IRS failed to meet the requirements of 26 USC § 7611 before summonsing Kaw Valley because the IRS failed to obtain the required authorization from an appropriate high-level US Department of the Treasury official. Section 7611(h)(4)(B) makes clear that records obtained pursuant to a § 7609 third-party summons are not included in the definition of church records, so the requirements in § 7611 for initiating church tax inquiries and examinations do not apply to a third-party summons, even if summonses are issued in connection with such inquiries and examinations. Instead, the IRS must satisfy the § 7609 requirements, as incorporated into and analyzed by Powell, when it summonses materials from a third party in this context. Here, the IRS satisfied the § 7609 requirements and Powell, and the summons to Kaw Valley does not implicate the provisions of § 7611, so the district court properly denied GSH’s petition to quash. Accordingly, the Tenth Circuit did not have to decide whether the commissioner is an appropriate high-level Treasury official.

The judgment denying GSH’s petition to quash and granting the IRS’s motion for summary denial was affirmed.

Official US Court of Appeals for the Tenth Circuit proceedings can be found at the US Court of Appeals for the Tenth Circuit website.

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