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Chron File, August 1983-September 1983
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Chron File, August 1983-September 1983
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Ronald Reagan Presidential Library
Digital Library Collections
This is a PDF of a folder from our textual collections.
Collection: Barr, William: Files
Folder Title: Chron File, August 1983-September 1983
Box: 16
To see more digitized collections visit:
https://reaganlibrary.gov/archives/digital-library
To see all Ronald Reagan Presidential Library inventories visit:
https://reaganlibrary.gov/document-collection
Contact a reference archivist at: [email protected]
Citation Guidelines: https://reaganlibrary.gov/citing
National Archives Catalogue: https://catalog.archives.gov/
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
August 15, 1983
FOR:
ROGER B. PORTER
FROM:
STEPHEN H. GALEBACH
SHS
SUBJECT: Request for Clearance of Statement Concerning
School Prayer Amendment
The Christian Broadcasting Network has requested that I give
them a short statement about the "silent prayer" constitutional
amendment.
CBN has been one of the most effective supporters of the
President's school prayer amendment, and they would like to
inform their followers why a silent prayer amendment is not
necessary. Deputy AG Schmults has already testified in Congress
against the silent prayer amendment.
If there is no objection, I would like to give CBN the
following statement for use in their newsletter:
"The President's school prayer amendment would allow vocal
prayer by students in public schools, which has been prohibited
by Supreme Court decision since the early 1960s. An amendment
for silent prayer is unnecessary, because the Supreme Court has
never ruled against silent prayer in the schools. Such an
amendment would mean a great deal of effort to produce little or
no progress toward the goal of returning freedom of religious
expression to the schools."
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
August 17, 1983
FOR:
DAVID R. GERGEN
FROM:
STEPHEN H. GALEBACH
SHE
SUBJECT: Request for Clearance of Statement Concerning
School Prayer Amendment
Roger Porter has approved the attached statement summarizing
our reasons for preferring the President's school prayer
amendment to a silent prayer amendment, and he asked that I get
your okay before sending it to CBN.
Could we please have your response by COB August 18. Thank
you very much.
CC: Roger Porter
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
August 15, 1983
FOR:
T. KENNETH CRIBB, JR.
FROM:
WILLIAM P. BARR
SUBJECT: Appointment History to Civil Rights Commission
As you requested this morning, I have attached the three
memos done to date on the history of CRC appointments.
1. July 22 memo -- Among the pertinent points in this paper
are:
When President Kennedy took office, all the members of
the Commission submitted their resignations.
When President Johnson assumed the Presidency in 1963,
again all the Commissioners submitted their resignations.
When Johnson was elected President in '64, he requested
all the Commissioners to submit their resignations. Five
of the six did so, with Father Hesburgh holding out
because he thought compliance with the President's
request would acknowledge that the Commission was not
independent.
The election of Nixon was the first change in
Administration in which all or most of the members of the
Commission did not tender their resignations. However,
it was also the first test of the President's authority
to involuntarily remove a sitting member:
-- Nixon demanded Hesburgh's resignation, and Hesburgh
complied.
-- Nixon appointed Manuel Ruiz to replace Hector Garcia
(a Johnson recess appointee). (See Compilation of
CRC Meetings.)
Nor is President Reagan the first President to use his
appointment power to change the character of the
Commission. Kennedy's nominations in 1961 radically
transformed the body from bipartisan "neutrality" to the
liberal civil rights position.
2. July 5 memo -- This memo provides additional background
information supplementing the June 22 paper.
-2-
3. Compilation of Civil Rights Commission Meeting References
to Independence -- An interesting point here is that nominees
were invited to participate in Commission meetings prior to
their confirmation. It would seem that Pendleton would have the
ability to extend such an invitation to our nominees for the
September meeting.
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
August 16, 1983
FOR:
ROGER B. PORTER
FROM:
WILLIAM P. BARR
WPB
SUBJECT: Status of Immigration Legislation
Legislative Posture
The Senate bill (S.529) passed by a vote of 76-18 on May 18.
Major provisions of the bill include:
-- employer sanctions with civil and criminal penalties;
-- establishment of secure identification system within 3
years;
-- legalization of aliens who entered the U.S. as of 1/1/80;
-- prohibition of federal benefits to legalized aliens for 3
years;
-- uncapped block grant to cover state welfare costs;
-- transition worker program;
-- budget impact 1984-88: $8 billion.
House Judiciary Committee vooted out H.R. 1510 on May 5,
1983. Major provisions of the bill include:
-- employer sanctions with civil and criminal penalties but
including several loopholes: citation only for first
violation; voluntary compliance with employment
eligibility verification requirements; and waiver of
verification requirements for 24 hours which effectively
exempts day labor;
-- no requirement for secure identification system;
-- legalization of aliens who entered the U.S. as of 1/1/82;
-- full reimbursement of state and local welfare costs and
education assistance for legalized aliens;
-- prohibition of benefits for 5 years except for Medicaid
and SSI in cases of the aged, blind and disabled and in
the interest of public health or serious injury;
-- transition worker program more loosely constructed than
Senate version;
-- budget impact 1984-88: $11.5 billion.
Three House Committees (Agriculture, Education and Labor, and
Energy and Commerce) marked up the bill in June. Major
amendments would:
-- eliminate loopholes in employer sanctions;
-- prohibit employment discrimination based on alienage;
-2-
-- establish a special counsel and U.S. Immigration Board,
modelled after the NLRB, to hear employer sanction and
discrimination cases; thereby avoiding district court
review;
-- tighten terms of H-2 temporary worker program and restore
reg authority to DOL;
-- establish new temporary worker program for perishable
agriculture;
-- require 100% reimbursement of public health programs and
exempt additional public health and social service
programs from 5-year denial of elibility for benefits.
Claude Pepper, (Chairman, House Rules) has admonished the
Chairmen of the Judiciary, Education/Labor, Agriculture and
Energy/Commerce Committees to reach agreement on their various
amendments to H.R.1510 so that he could schedule a rule on the
bill and avoid a fight before the Rules Committee. He has
tentatively set the week of September 19 for Rules consideration.
House Committees at Loggerheads
The Committees, after several meetings, remain at an impasse.
Each committee has pride of authorship and is unwilling to
support the others. Education and Labor would likely oppose the
bill in its current form.
There are several substantive issues at stake which account
for the divergence of the Judiciary and Education/Labor
Committees.
Enforcement. The Education/Labor amendment strikes all
of the enforcement loopholes now in H.R.1510. Justice
would agree that the Education/Labor amendments
strengthen the bill but the Judiciary Committee questions
Education/Labor's jurisdiction for the extensive
revision.
Discrimination. Education/Labor prohibits employment
discrimination on the basis of alienage and establishes
an appeal process for judicial review of complaints.
They claim the measure, is necessary to address the civil
rights concerns raised by Hispanics and hence to ensure
their support for the bill. Justice, however, does not
believe that the bill will result in discrimination and
is unwilling to introduce a new concept of alienage into
civil rights law.
-3-
Judicial Review. Education/Labor proposes a judicial
review process through a Special Counsel in connection
with the U.S. Immigration Board, fashioned after the
NLRB, for adjudicating employer sanctions and
discrimination cases. Education/Labor argues that the
Judiciary bill is flawed because appeals to the district
court would become de novo cases and hence indefinitely
delay litigation of employer sanctions, whereas the
Education/Labor amendment would only allow appeals to the
U.S. Immigration Board and the Court of Appeals. Justice
opposes the loss of control that would result from this
amendment.
Agricultural Labor. The Education/Labor Committee
amendments tighten employment standards of the H-2
temporary worker program and maintain reg authority with
the Secretary of Labor. The growers oppose such
provisions and strongly support the Agriculture Committee
amendments which include a new temporary worker program.
The Administration is on record, through the Attorney
General's July 27th letter to Rodino, as opposing H.R.1510 unless
amended to address budget concerns generated by legalization
provisions and to tighten enforcement provisions. While the
Education/Labor amendments address and solve the enforcement
problems, the legalization budget concerns have not been
addressed.
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
August 18, 1983
FOR:
ROGER B. PORTER
FROM:
STEPHEN H. GALEBACH
SHY
SUBJECT: Administration Position on Church Audit Procedures Act
You have asked for a report on the Church Audit Procedures
Act, sponsored by Cong. Edwards as H.R. 2977, and by Senator
Grassley as S.1262.
I have summarized the existing state of the law and the
changes that would be made by the Church Audit Procedures Act in
Attachment A. Attachment A includes comments on the advantages
and disadvantages of the various provisions, and compares these
proposals to existing regulatory provisions.
In general, I believe this act is a rather modest and
basically responsible way to address a thorny problem. The
problem is that IRS needs to be able to investigate fraudulent
claims of church status, while not encroaching upon legitimate
churches in ways that would infringe First Amendment rights.
This problem is aggravated by the fact that many churches are
small, with such limited financial resources that merely having
to defend against an IRS investigation is often crippling.
Politically, a broad spectrum of the religious community has
become concerned in recent years over several cases in which the
IRS placed heavy burdens on small churches which turned out to be
legitimate churches after costly and lengthy proceedings. As a
result of the widespread public concern -- ranging from the
liberal National Council of Churches to the conservative National
Association of Evangelicals -- there are now 62 co-sponsors for
the House bill.
The bill does have a number of problems, as indicated in the
comments in Attachment A, that require some fine-tuning. But the
basic concept of protecting legitimate churches while allowing
IRS investigation of fraudulent ones, is a worthy objective and
deserves our support.
I believe our best position is to offer general support for
the concept of the bill, while working with Senator Grassley and
Cong. Edwards to alleviate any problems that IRS and Treasury may
see in the bill. Senator Grassley's staff are flexible on the
details of the bill.
Senator Grassley has scheduled hearings for September 30 on
the issues covered by this bill, in his Oversight Subcommittee of
the Senate Finance Committee.
-2-
Unfortunately, IRS has sent comments on this bill to Senator
Grassley without going through the OMB clearance process.
Attachment B, which was sent to Senator Grassley by IRS with a
cover letter dated July 7, adopts a strongly negative and hostile
tone. The letter exaggerates the problems in the bill, shows no
sensitivity to the basic concerns underlying the broad support
for the bill, and shows no willingness to work constructively
toward solving whatever problems do exist in the bill.
We need to correct the damage done by the IRS letter and come
to a reasoned, Administration-wide position on the bill.
Recommendations
O
Have IRS retract the letter they sent to Grassley without
clearance.
Convene a meeting of interested persons from IRS,
Treasury, OMB, and OPD, to discuss the pros and cons of
the various provisions in the bill.
0
Arrive at an Administration position in time to give
testimony in Grassley's subcommittee by September 30.
Note: A similar bill was introduced last session by Cong.
Edwards, H.R. 7128, but we took no position on it.
Summary and Comment on Church Audit Procedures Act
The Church Audit Procedures Act, introduced by Congressman
Edwards as H.R.2977 and by Senator Grassley as S.1262, expands
the protection that existing law gives to churches in audits by
the IRS.
Existing Law
Section 7605 (c) - Restriction on Examination of Churches -
provides as follows:
O
In determining whether a church is subject to unrelated
business income tax, the IRS may not examine the books of
a church unless the regional commissioner believes that
the organization in question may be engaged in activities
subject to the tax and so notifies the organization in
advance of the examination.
-- The IRS may examine the religious activities of a
church only to the extent necessary to determine
whether the organization is in fact a church.
-- The IRS may examine the books of account of a church
only to the extent necessary to determine the amount
of tax due.
(This provision was added to the Code in 1969, at the same
time that Congress amended the Code to make churches subject
to tax on unrelated business income.)
Church Audit Procedures Act
The new act is drafted as an amendment to Section 7605(c),
adding the following provisions:
O
The IRS may not investigate a church to see if it is
subject to unrelated business income tax or to see if it
is truly a church, unless the regional commissioner
"possesses evidence which leads him to reasonably
believe" that such church is subject to tax.
COMMENT: The IRS believes this to be a "radical change,"
because it makes the commissioner satisfy a sort of
probable cause standard. Existing law already requires,
however, that the regional commissioner "believe" that
the church may be engaged in taxable activity -- to
require that this belief be reasonably based on some
evidence does not seem to be a radical departure from
existing law. Senator Grassley's staff say they are open
to fine-tuning this provision, and there may well be room
to reach an accommodation. The general goal of
Attachment A
-2-
requiring IRS to have some grounds before putting
churches through an often costly procedure is a good
objective, provided it can be achieved without
hamstringing IRS's legitimate enforcement activities.
IRS may not commence an investigation unless it first
gives written notice to the church, including:
-- the sections of the Code under which IRS is
authorized to proceed;
-- an explanation of the constitutional and other
procedural rights of the organization;
-- an explanation of the concerns which give rise to the
investigation;
-- description of evidence available to IRS to date;
-- statement of facts that IRS hopes to discover by
holding the investigation.
COMMENT: Existing IRS regulations require written
notice, and it is IRS's practice to give 30 days' notice,
but without the details specified in this section. The
first three above-listed items appear to be a positive
step, since many churches could not afford skilled legal
counsel to learn these items on their own. The last two
items, however, may compromise the ability of IRS to
conduct investigations -- this point needs to be further
explored.
Before conducting an investigation, IRS must obtain
concurrence of regional IRS counsel.
COMMENT: It would probably be better to rest on the
judgment of the IRS regional commissioner, rather than
giving review authority to an officer who is the regional
commissioner's subordinate.
Before conducting an investigation, IRS must offer to
meet with the church and discuss the issues at stake.
COMMENT: This appears to be a good provision, analogous
to the conciliation proceedings required in other
administrative contexts.
-3-
IRS must give 15 days' notice before conducting an
examination of records, and must include in the notice a
description of those church records and activities the
IRS seeks to examine.
COMMENT: IRS already gives 30 days' notice, and this
provision does not appear burdensome. There is a
possibility that courts could step in to exclude any
evidence gained from records and activities beyond those
described by IRS in the notice -- but this problem could
be alleviated by more specific legislative drafting.
IRS may only investigate religious activities of an
organization claiming to be a church to the extent
necessary to determine whether the organization is in
fact a church, and IRS may investigate church records
only to the extent necessary to determine the amount of
tax imposed by this title.
COMMENT: This appears to be a reasonable limitation,
similar to that already contained in Section 7605(c).
IRS must complete its investigations of churches within
one year from the time it gives notice that it is
commencing an investigation.
COMMENT: Some time limit seems appropriate, but whether
one year is the appropriate figure depends on further
information we will want to check with IRS.
For claims that IRS has violated the provisions of this
act, churches may go into federal district court to
obtain an injunction to prevent the Secretary from
further action.
COMMENT: Prohibitory injunctive relief of this sort
appears to be the most appropriate remedy, but the
section should be carefully drafted to avoid giving
excessive power to federal courts to control IRS
investigations.
Churches that prevail in actions against the Secretary
will be entitled to attorneys fees.
COMMENT: We need to check with IRS to learn the possible
budgetary impact of this provision.
Three-year statute of limitations on actions by IRS to
collect back taxes owed by churches.
-4-
COMMENT: This is a reasonable provision. There is
generally a three-year statute of limitations for tax
collection cases. The statute of limitations is waived
if the taxpayer failed to file a return. Churches are
not required to file returns. They should be given the
three-year statute of limitations that applies to
everyone else, rather than being treated the same as
persons who are delinquent in failing to file returns.
Waives requirement for exhaustion of administrative
remedies.
COMMENT: More information is needed to assess whether
this provision is necessary to afford appropriate relief
for churches when the IRS violates procedural provisions.
Re: H.R. 2172 Church Audit Procedures Act of 1983
Current Law
Section 7605(c) of the Code currently provides that the Service
cannot examine the books of account of a church (or a convention or
association of churches) for the purpose of determining the
organization's liability for unrelated business income tax, unless a
Regional Compissioner believes that the organization is engaging in
unrelated business activities and notifies the organization in-
advance of the examination. Section 7605(c) further provides that
no examination of the religious activities of such an organization
shall be made except to the extent necessary to determine whether
the organization is a church or a convention or association of
churhes. Also, no examination of the books of account of the
organization shall be made other than to the extent necessary to
determine the amount of tax imposed by the Code.
Section 7605(c) was added to the Code by the Tax Reform Act of
1969, which extended the unrelated business income tax to churches.
Section 7605(c) was intended to protect churches from unnecessary
tax audits and the concomitant government intrusion into the
internal financial matters of churches. See S. Rep. No. 91-552,
1969-3 C.B. 468.
Section 301.7605-1(c)(2) of the regulations liberally expands
the bare statutory protections of section 7605(c). The regulation
requires Regional Commissioner approval and notification prior to
any examination of the "books of account" of any organization which
is or claims to be a church. or a convention or association of
churches. Unlike the statute, the regulation's prior approval and
notification requirement is not limited to UBIT examinations of
church "books of account". This again was a deliberate action taken
by the Government to limit any intrusion into church affairs to the
extent specifically approved by the Regional Commissioner The
regulation's requirement applied to examinations of church books of
accounts for any purpose, e.g., determining charitable, estate and
gift deductions, 501(c)(3) tax exempt status, verifying payments
made to third-parties, and determining any other tax liability under
the Code. The regulation requires that the Service must make at
least two "pre-examination" contacts in writing to obtain the
necessary information from the books of account. It is at this
point that the Regional Commissioner must determine whether the
examination is necessary because the information cannot be
satisfactorily obtained in this manner. The Regional Commissioner
then notifies the organization in writing at least 30 days in
advance of the examination.
Attachment B
- 2 -
Proposed Bill
Section 2(a) of H.R. 2172 proposes to revamp the current section
7605(c) examination scheme.
Proposed section 7605(c)(1) would I revent the Service from
commencing any investigation or proceeding (preliminary to a
"formal" examination) to determine if a church (or a convention or
association of churches) is liable for UBIT or does not qualify for
exemption, unless the Regional Commissioner "possesses evidence"
that leads him to reasonably believe that the church is engaging in
unrelated business or is no longer exempt. This is a radical change
from current standards, which are intended to secure inform ation in
the least intrusive manner, and would seriously hanstring the
Service's ability to conduct necessary investigations. H.R. 2172's
new evidentiary standard for church examinations would seem to
preclude any traditional investigatory work done on the basis of
allegation or third-party information and would preclude
authorization for any church examination unless the Service
possessed hard evidence establishing a prima facie case. (Although
the bill does not spell out the new evidentiary standards, we assume
that they are the ordinary standards used in court, because we
perceive the thrust of this bill as the creation of several new,
judicially reviewable standards for church examination.)
Presumably, not meeting the new evidence standard would not only
preclude authorization for church examination but also void an
examination "improperly" authorized, regardless of the merits of the
case.
Proposed section 7605(c)(2) would require the Service to notify
the organization before any investigation is begun. This notice
must include an explanation of the reasons for the investigation and
a statement of the facts the Service hopes to determine from the
investigation. It is probably the bill's intent to limit the
investigation to the material set out in the notice. For example,
if the notice states that the Service expects to find an unrelated
business income liability, and the investigation unexpectedly
uncovers evidence of inurement, the Service would not be allowed to
use this evidence to revoke the organization's exempt status.
Proposed section 7605(c)(3) provides that no examination of
church records or religious activities may be made unless the
Regional Counsel concurs in the examination. The concurrence must
follow the notification described in proposed section 7605(c)(4).
This provision would give the Regional Counsel a veto over the
Regional Commissioner's actions and would be inconsistent with
current Service lines of authority.
-3-
Proposed section 7605(c)(4) requires a second notification if
the Service wishes to examine any church records or religious
activities. It is important to note that the proposal uses the
words "church records" in lieu of the words "books of account"
contained in the current law. This constitutes a significant
expansion of the type of records subject to these special rules, and
could be construed to include all third-party records, such as bank
records. In addition, this second notice must contain a list of
concerns which gave rise to the investigation, the legal and factual
issues relevant to the case, and a description of all the evidence
discovered to date. We believe that this last requirement would be
particularly harmful to the Service's ability to conduct any fraud
investigations involving church activities. It would seriously
inhibit the Service's ability to develop criminal cases against
mail-order ministries, tax protestor groups using a claim of church
status as a shield, and cases where church organizations are being
used as covers for illicit drug operations. Releasing evidence to
such groups, or even acknowledging the existence of an
investigation, could undermine the ability of the Service and other
law enforcement agencies to prosecute such cases. As part of the
second notice, the Service must offer the organization a conference
to discuss the allegations in the notice. It is unclear from the
proposed law who is required to hold the conference. However, the
bill could be read as requiring the Regional Commissioner to
personally hold the conference, since he is personally required to
send the notice.
Proposed section 7605(c)(5) requires that if the Service still
intends to proceed with an examination after Regional Counsel
review, a third notice must be sent informing the organization of
this fact. This third notice is a final notice of examination.
Proposed section 7605(c)(6) restates the last sentence of
current section 7605(c). This provision indicates that the Service
cannot examine churches except to the extent necessary to determine
the amount of taxes imposed by the Code.
Proposed section 7605(c)(7) requires the Service to make a
decision on the merits within 365 days after the date of the first
notification of Investigation described above. This period is
extended for any time during which the organization initiates a
judicial proceeding to challenge the investigation, or during which
the organization refuses a reasonable request for records. Given
the three-notice requirement of the law, the possible
pre-examination conference, and the requirement that both the
Regional Commissioner and the Regional Counsel approve the
examination, we do not feel that the Service could complete a
complicated church examination within the 365-day period without
affecting the quality of the examination and the technical review of
the issue. The time limitation would create particularly serious
problems in cases referred for criminal investigation. The bill
could result in making investigations (and subsequent examinations)
practically impossible. Further, the bill is unclear whether the
period will be suspended if the Service is forced to litigate to
enforce a surmons. Arguably, if the court determined that any
request in the summons is not reasonable, the period would not be
suspended. In addition. the law fails to make any provision for the
Service and the organization to agree to. extend the 365-day period.
If this is the case, the rule could well force the Service to resort
to its jespardy assess nt powers against an organization where the
365-day period was comi-8 to a close and there was need to protect
the government's interest on a tax due.
Section 2(b) of H.R. 2172 provides a special statute of
limitations rule for ct rches. Under the rule, any tax imposed
under the Code, not just unrelated business income tax, must be
assessed within three years of the due date of the return, whether
or not any return is actually filed. This has great potential for
abuse since churches are not required to file any information
returns on their tax exempt status and only a small percentage of
all churches file unrelated business income tax returns.
Finally, section 2(c) of H.R. 2172 would amend section 7428(b)
to allow a church to seek a declaratory judgment as soon as the
Service notifies it that the Service intends to revoke its church
status. This provision is probably intended to cover revocations of
section 501(c)(3) exempt status also. Section 7428 currently
provides that an organization can seek declaratory judgment when the
Service revokes its section 501(c)(3) tax exempt status or modifies
or denies its status as a church. The right to this procedure comes
only after the organization has exhausted all of its administrative
rights. While this amendment fails to define what type of notice is
intended, arguably, the initial notice of an examination for the
purpose of developing information to revoke exemption might satisfy
this requirement. Theoretically, we could never complete an
examination and the appeal procedure before judicial review. The
act also seems to add UBIT to the issues subject to declaratory
judgments.
Conclusion
In sum, we view H.R. 2172 as an attempt to prohibit most church
investigations and examinations, and to severly limit the Service's
ability to pursue the few examinations permissible under the
proposal. We think that the intent of the bill is to insulate
churches from reasonable Service review of their compliance with the
tax law. We cannot agree with that goal. In addition, we believe
that the unintended result of H.R. 2172 would be a virtual license
(due to the Service's inability to investigate) for mail-order
ministries and tax protestors to use church status as a shield for
their tax evasion activities.
DOCUMENT NO.
140615
PD
OFFICE OF POLICY DEVELOPMENT
STAFFING MEMORANDUM
DATE: August 15
ACTION/CONCURRENCE/COMMENT DUE BY:
cob August 18
SUBJECT: ADMINISTRATION POSITION ON H.R. 2977, CHURCH AUDIT
PROCEDURES ACT
ACTION FYI
ACTION
FYI
HARPER
DRUG POLICY
PORTER
TURNER
BARR
D. LEONARD
BLEDSOE
OFFICE OF POLICY INFORMATION
BOGGS
HOPKINS
BRADLEY
PROPERTY REVIEW BOARD
CARLESON
OTHER
DENEND
Strice Frieil
GALEBACH
X
GARFINKEL
GUNN
B. LEONARD
LI
McALLISTER
MONTOYA
ROPER
SMITH
SWEET
UHLMANN
ADMINISTRATION
REMARKS:
Edwin L. Harper
Please return this tracking
Assistant to the President
sheet with your response
for Policy Development
(x6515)
THE WHITE HOUSE
WASHINGTON
August 15, 1983
MEMORANDUM FOR STEPHEN H. GALEBACH
FROM:
ROGER B. PORTER
R&P
SUBJECT:
Administration Position on H.R. 2977, Church Audit
Procedures Act
As the attached memorandum from M. B. Oglesby indicates,
Congressman Mickey Edwards has requested Administration support
for his legislation, H.R. 2977. I would appreciate very much if
you would determine what the current procedural requirements are,
how this legislation would alter those requirements, and what you
see as the principal advantages and disadvantages, if any, in the
Administration supporting this legislation.
I would also appreciate your determining whether or not any
similar legislation has been introduced in the past, and if the
Administration has taken any position on it.
I would like to have this analysis by close of business on
Thursday, August 18. If this is not possible, please let me
know.
Attachment
THE WHITE HOUSE
WASHINGTON
August 1, 1983
3AUB 1300
MEMORANDUM FOR ED MEESE
THRU:
KEN DUBERSTEIN
FROM:
M. B. OGLESBY, to
SUBJECT:
Administration Position On H.R. 2977,
Church Audit Procedures Act
Congressman Mickey Edwards (R-Oklahoma) has requested
Administration support for this legislation. Senator
Grassley (R-Iowa) has introduced similar legislation,
S. 1262, in the Senate. This legislation is supported
by the National Association of Evangelicals, the
National Council of Christians and Jews, the National
Council of Churches, etc.
Mickey explains that these procedural requirements for
the IRS are consistent with our philosophy and Edwards
urges that the Administration consider supporting his
proposal.
Guidance, please.
CC: Roger Porter
Joe Wright
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
September 23, 1983
FOR:
JOHN A. SVAHN
FROM:
MICHAEL M. UHLMANN
SUBJECT:
Church Audit Procedures Act
We have a good opportunity here to get out front on a bill
that has strong support from the President's religious
constitutency. Unless there is prompt action by the White House,
however, Treasury and IRS will testify against the bill next
Friday.
The attached memo of September 19 from Oglesby and Duberstein
gives a quick summary of the legislative situation. I have
confirmed that the bill does have strong and enthusiastic support
from religious groups, especially those who most favor the
President. The bill has 70 cosponsors in the House. There does
not seem to be any organized political opposition. Politically,
it makes no sense to testify against the bill.
I understand that Ed Meese is inclined, tentatively at least,
to support this legislation. Ken Cribb is likely to schedule
this topic for a meeting early next week -- probably the 8:30
meeting on Monday.
To bring you up to speed on the legal considerations involved
here, I have attached a memo Steve Galebach prepared last month
in response to an earlier query from Legislative Affairs.
22 SEP 1983
THE WHITE HOUSE
WASHINGTON
September 19, 1983
MEMORANDUM FOR JAMES A. BAKER
EDWIN MEESE
MICHAEL DEAVER
DAVE STOCKMAN
FAITH WHITTLESEY
THRU:
KENNETH M. DUBERSTEIN for D.
FROM:
M. B. OGLESBY, JF
the
SUBJECT:
Church Audit Procedures Act
On May 11, 1983, Congressman Mickey Edwards (R-OK), with a group
of bipartisan co-sponsors, introduced H.R. 2977, the Church
Audit Procedures Act. The legislation amends the Internal
Revenue Code to improve IRS procedures concerning investigations
and audits of churches. The bill is supported by such diverse
groups as the National Conference of Christians and Jews, the
National Association of Evangelicals, the New York Civil Lib-
erties Union (ACLU-affiliate), the Moral Majority and Christian
Voice.
Congressman Edwards has been seeking an Administration
endorsement of this legislation. The office of Tax Policy at
the Treasury Department has recommended Administration op-
position to H.R. 2977. Treasury officials are scheduled to
testify before the House Ways and Means Committee on September
30, and will convey the position developed by the Office of Tax
Policy unless the decision is reversed prior to that time.
The Church Audit Procedures Act has the endorsement of many
conservative supporters of the President and of his core
constituency in the conservative movement. Interestingly, the
bill also has the support and has been co-sponsored by Members
as liberal as George Crockett (D-MI) and Ron Dellums (D-CA).
Because this legislation is supported by such diverse groups and
by Members from all parts of the political spectrum, I hope that
we can review our position and avoid the probable adverse
reaction from some of our friends in the Congress.
Gindonce, pls.
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
August 18, 1983
FOR:
ROGER B. PORTER
FROM:
STEPHEN H. GALEBACH
CHAS
SUBJECT: Administration Position on Church Audit Procedures Act
You have asked for a report on the Church Audit Procedures
Act, sponsored by Cong. Edwards as H.R. 2977, and by Senator
Grassley as S.1262.
I have summarized the existing state of the law and the
changes that would be made by the Church Audit Procedures Act in
Attachment A. Attachment A includes comments on the advantages
and disaivantages of the various provisions, and compares these
proposals to existing regulatory provisions.
In general, I believe this act is a rather modest and
basically responsible way to address a thorny problem. The
problem is that IRS needs to be able to investigate fraudulent
claims of church status, while not encroaching upon legitimate
churches in ways that would infringe First Amendment rights.
This problem is aggravated by the fact that many churches are
small, with such limited financial resources that merely having
to defend against an IRS investigation is often crippling.
Politically, a broad spectrum of the religious community has
become concerned in recent years over several cases in which the
IRS placed heavy burdens on small churches which turned out to be
legitimate churches after costly and lengthy proceedings. As a
result of the widespread public concern -- ranging from the
liberal National Council of Churches to the conservative National
Association of Evangelicals -- there are now 62 co-sponsors for
the House bill.
The bill does have a number of problems, as indicated in the
comments in Attachment A, that require some fine-tuning. But the
basic concept of protecting legitimate churches while allowing
IRS investigation of fraudulent ones, is a worthy objective and
deserves our support.
I believe our best position is to offer general support for
the concept of the bill, while working with Senator Grassley and
Cong. Edwards to alleviate any problems that IRS and Treasury may
see in the bill. Senator Grassley's staff are flexible on the
details of the bill.
Senator Grassley has scheduled hearings for September 30 on
the issues covered by this bill, in his Oversight Subcommittee of
the Senate Finance Committee.
-2-
Unfortunately, IPS has sent comments on this bill to Senator
Trassley without going through the OMB clearance process.
3, which was sent to Senat or Grassley by IRS with a
over letter dated July 7, adopts a strongly negative and hostile
The letter ex ggerates the problems in the bill, shows no
insitivity -0 the sic concerns underlying the brcad support
r the bill, and shows no willingness to work constructively
toward solving whate er problems do exist in the bill.
We need to correct the damage done by the IRS letter and come
to a reasoned, Administration-wide position on the bill.
Recommendations
Have IRS retract the letter they sent to Grassley without
clearance.
Convene a meeting of interested persons from IRS,
Treasury, OMB, and OPD, to discuss the pros and cons of
the various provisions in the bill.
Arrive at an Administration position in time to give
testimony in Grassley's subcommittee by September 30.
Note: A similar bill was introduced last session by Cong.
Edwards, H.R. 7128, but we took no position on it.
Summary and Comment on Church Audit Procedures Act
The Church Audit Procedures Act, introduced by Congressman
Edwards as H.R.2977 and by Senator Grassley as S.1262, expends
the protection that existing law gives :0 churches in audits by
tie IRS.
Existing Law
Section 7605(c) - Restriction on Examination of Churches -
provides as follows:
o
In determining whether a c: arch is subject to unrelated
business incote tax, the IRS may not examine the books of
a church unless the regional commissioner believes that
the organizati on in question may be engaged in activities
subject to the tax and so notifies the organization in
advance of the examination.
-- The IRS may examine the religious activities of a
church only to the extent necessary to determine
whether the organization is in fact a church.
-- The IRS may examine the books of account of a church
only to the extent necessary to determine the amount
of tax due.
(This provision was added to the Code in 1969, at the same
time that Congress amended the Code to make churches subject
to tax on unrelated business income.)
Church Audit Procedures Act
The new act is drafted as an amendment to Section 7605(c),
adding the following provisions:
o
The IRS may not investigate a church to see if it is
subject to unrelated business income tax or to see if it
is truly a church, unless the regional commissioner
"possesses evidence which leads him to reasonably
believe" that such church is subject to tax.
COMMENT: The IRS believes this to be a "radical change,"
because it makes the commissioner satisfy a sort of
probable cause standard. Existing law already requires,
however, that the regional commissioner "believe" that
the church may be engaged in taxable activity -- to
require that this belief be reasonably based on some
evidence does not seem to be a radical departure from
existing law. Senator Grassley's staff say they are open
to fine-tuning this provision, and there may well be room
to reach an accommodation. The general goal of
Attachment A
-2-
requiring IRS to have some grounds before putting
churches through an often costly procedure is a good
objective, provided it can be achieved without
hanstringing IRS's legitimate enforcement activities.
IRS may not commence an investigation unless it first
gives written notice to the church, including:
-- the sections of the Code under which IRS is
authorized to proceed;
-- an explanation of the constitutional and other
procedural rights of the organization;
-- an explanation of the concerns which give rise to the
investigation;
-- description of evidence available to IRS to date;
-- statement of facts that IRS hopes to discover by
holding the investigation.
COMMENT: Existing IRS regulations require written
notice, and it is IRS's practice to give 30 days' notice,
but without the details specified in this section. The
first three above-listed items appear to be a positive
step, since many churches could not afford skilled legal
counsel to learn these items on their own. The last two
items, however, may compromise the ability of IRS to
conduct investigations -- this point needs to be further
explored.
Before conducting an investigation, IRS must obtain
concurrence of regional IRS counsel.
COMMENT: It would probably be better to rest on the
judgment of the IRS regional commissioner, rather than
giving review authority to an officer who is the regional
commissioner's subordinate.
Before conducting an investigation, IRS must offer to
meet with the church and discuss the issues at stake.
COMMENT: This appears to be a good provision, analogous
to the conciliation proceedings required in other
administrative contexts.
-3-
IRS must give 15 days' notice before conducting an
examination of records, and must include in the notice a
description of those church records and activities the
IRS seeks to examine.
COMMENT: IRS already gives 30 days' notice, and this
provision does not appear burdensome. There is a
possibility that courts could step in to exclude any
evidence gained from records and activities beyond those
described by IRS in the notice -- but this problem could
be alleviated by more specific legislative drafting.
IRS may only investigate religious activities of an
organization claiming to be a church to the extent
necessary to determine whether the organization is in
fact a church, and IRS may investigate church records
only to the extent necessary to determine the amount of
tax imposed by this title.
COMMENT: This appears to be a reasonable limitation,
similar to that already contained in Section 7605(c).
IRS must complete its investigations of churches within
one year from the time it gives notice that it is
commencing an investigation.
COMMENT: Some time limit seems appropriate, but whether
one year is the appropriate figure depends on further
information we will want to check with IRS.
For claims that IRS has violated the provisions of this
act, churches may go into federal district court to
obtain an injunction to prevent the Secretary from
further action.
COMMENT: Prohibitory injunctive relief of this sort
appears to be the most appropriate remedy, but the
section should be carefully drafted to avoid giving
excessive power to federal courts to control IRS
investigations.
Churches that prevail in actions against the Secretary
will be entitled to attorneys fees.
COMMENT: We need to check with IRS to learn the possible
budgetary impact of this provision.
Three-year statute of limitations on actions by IRS to
collect back taxes owed by churches.
- -4-
COMMENT: This is a reasonable provision. There is
generally a three-year statute of limitations for tax
collection cases. The statute of limitations is waived
if t'e taxpayer failed to file a return. Churches are
not required to file returns. They should be given the
three-year statute of limitations that applies to
everyone else, rather than being treated the same as
persons who are delinquent in failing to file returns.
Waives requirement for exhaustion of administrative
remedies.
COMMENT: More information is needed to assess whether
this provision is necessary to afford appropriate relief
for churches when the IRS violates procedural provisions.
Re: H.R. 2172 Church Audit Procedures Act of 1983
Current Law
Section 7605(c) of the Code currently provides that the Service
cannot examie the books of account of a church (or a convention or
assuciation of hurcher) for the purpose of determining the
organization's liability for unrelated business income tax, unless a
Regional Compissioner ielieves that the organization is engaging in
unrelated business activities and notifies the organization in
advance of the exarination. Section 7605(c) further provides that
o examination of the :-ligious activities of such an orgarlzation
rall : e made except to the extent necessary to determine whether
the cigarization is a church or a convention or association of
chaires. Also, no exar ination of the tooks of account of the
organization shall be rose other than to the extent necessary to
determine the amount of tax imposed by the Code.
Section 7605(c) was added to the Code by the Tax Reform Act of
1969, which extended the unrelated business incore tax to churches.
Section 7605(c) was intended to protect churches from unnecessary
tax audits and the concemitant government intrusion into the
internal financial matters of churches. See S. Rep. No. 91-552,
1969-3 C.B. 468.
Section 301.7605-1(c) (2) of the regulations liberally expands
the bare statutory protections of section 7605(c). The regulation
requires Regional Commissioner approval and notification prior to
any examination of the "books of account" of any organization which
is or claims to be a church. or a convention or association of
churches. Unlike the statute, the regulation's prior approval and
notification requirement is not limited to UBIT examinations of
church "books of account". This again was a deliberate action taken
by the Government to limit any intrusion into church affairs to the
extent specifically approved by the Regional Commissioner The
regulation's requirement applied to examinations of church books of
accounts for any purpose, e.g., determining charitable, estate and
gift deductions, 501(c)(3) tax exempt status, verifying payments
made to third-parties, and determining any other tax liability under
the Code. The regulation requires that the Service must make at
least two "pre-examination" contacts in writing to obtain the
necessary information from the books of account. It is at this
point that the Regional Commissioner must determine whether the
examination is necessary because the information cannot be
satisfactorily obtained in this manner. The Regional Commissioner
then notifies the organization in writing at least 30 days in
advance of the examination.
Attachment B
- 2 -
Proposed Bill
Section 2(a) of H.R. 2172 proposes to revemp the current section
2605(c) examination scheme.
Proposed section 7605(c)(1) would prevent the Service from
commencing any Investigation or proceeding (prelirinary to a
furnal" examination) to determine if a church (or a convention or
association of churches) is liable for LBIT or does not qualify for
exemption. L-1ess the Fegional Conrissioner "possesses evidence"
: st leads 'im to reascrably believe that the church is engaging in
intelated burdress == is no longer exempt. This is a radical ( arge
from current standards, which are intended to secure infor stion in
e least intrusive -ander, and would seriously harstring the
Service's ability to conduct necessary investigations. H.R. 2172's
-tw evidentiary standard for church oxarirations would SECD to
preclude any traditional investigatory work done on the basis of
allegation or third-party information and would preclude
authorization for any church examination unless the Service
pressess hard ovidence establishing a pri-a facie case. (Although
the bill does not spell out the new evidentiary standards, be assume
that they are the ordinary standards used in court. because we
perceive the thrust of this bill as the creation of several new,
judicially reviewable standards for church examination.)
Presurably, not meeting the new evidence standard would not only
preclude authorization for church examination but also void an
examination "improperly" authorized, regardless of the merits of the
case.
Proposed section 7605(c)(2) would require the Service to notify
the organization before any investigation is begun. This notice
must include an explanation of the reasons for the investigation and
a statement of the facts the Service hopes to determine from the
investigation. It is probably the bill's intent to limit the
investigation to the material set out in the notice. For example,
if the notice states that the Service expects to find an unrelated
Business income liability, and the investigation unexpectedly
uncovers evidence of inurement, the Service would not be allowed to
use this evidence to revoke the organization's exempt status.
Proposed section 7605(c)(3) provides that no examination of
church records or religious activities may be made unless the
Regional Counsel concurs in the examination. The concurrence must
follow the notification described in proposed section 7605(c)(4).
This provision would give the Regional Counsel a veto over the
Regional Commissioner's actions and would be inconsistent with
current Service lines of authority.
-3-
Proposed section 7605(c)(4) requires a second notification if
the Service wishos to examine any charch records or religious
activities. It is important to note that the proporal uses the
words "charch secords" in lieu of the words "Looks of account"
contained in t e current law. This constitutes a significant
expansion of the type of records subject to these special rules, and
could be construed to include all third-party records, such as bank
records. In addition, this second notice must contain a list of
concerns which gave rise to the investigation, the legal and factual
issues relevant to the case, and a description of all the evidence
discovered to date. We believe that this last requirement would be
particularly harmful to the Service's ability to conduct ar.y fraud
investigations involving church activities. It would seriously
inhibit the Service's ability to develop crir!nal casis against
mail-order rinistries, tax protestor groups using a claim of church
status as a shield, and cases where church organizations are being
used as covers for illicit drug operations. Releasing evidence to
such groups, or even acknowledging the existence of an
investigation, could undermine the ability of the Service and other
law enforcement agencies to prosecute such cases. As part of the
second notice, the Service must offer the organization a conference
to discuss the allegations in the notice. It is unclear from the
proposed law who is required to hold the conference. However, the
bill could be read as requiring the Regional Cormissioner to
personally hold the conference, since he is personally required to
send the notice.
Proposed section 7605(c)(5) requires that if the Service still
intends to proceed with an examination after Regional Counsel
review, a third notice must be sent informing the organization of
this fact. This third notice is a final notice of examination.
Proposed section 7605(c)(6) restates the last sentence of
current section 7605(c). This provision indicates that the Service
cannot examine churches except to the extent necessary to determine
the amount of taxes imposed by the Code.
Proposed section 7605(c)(7) requires the Service to make a
decision on the merits within 365 days after the date of the first
notification of Investigation described above. This period is
extended for any time during which the organization initiates a
judicial proceeding to challenge the investigation, or during which
the organization refuses a reasonable request for records. Civen
the three-notice requirement of the law, the possible
pre-examination conference, and the requirement that both the
Regional Commissioner and the Regional Counsel approve the
examination, we do not feel that the Service could complete a
complicated church examination within the 365-day period without
affecting the quality of the examination and the technical review of
the issue. The time Iimitation would create particularly serious
problems in cases referred for criminal investigation. The bill
-4-
could res_lt in making investigations (and subsequent exarinations)
prestically imposible. Further, the bill is unclear whether the
jeriod -111 : e suspended if the Ser.ice is forced to litigate to
enforce subtons. Arguably, if the court determined that any
request in t'e curriss is not reasonable, the period would not be
ded. in addition. the law fails to make any provision for the
Service and the organization to agree to. extend the 365-day period.
if this is the case, tie rule could well force the Service to resort
to 1:8 16.76. dy assess- it powers against an organization where the
365-day I-ried was com!-g to a close and there was need to protect
the government's interest on a tax due.
Section 2(b) of H.R. 2172 provides a special statute of
limiterions rule for ct :ches. Under the rule. any tax imposed
sider : e Code, not just unrelated business income tax, must be
assessed within three years of the due date of the return. whether
or not any return is actually filed. This has great potential for
abuse since churches are not required to file any information
returns on their tax exempt status and only a small percentage of
all churches file unrelated business income tax returns.
Finally, section 2(c) of H.R. 2172 would amend section 7428(b)
to allow a church to seek a declaratory judgment as soon as the
Service notifies it that the Service intends to revoke its church
status. This provision is probably intended to cover revocations of
section 501(c)(3) exempt status also. Section 7428 currently
provides that an organization can seek declaratory judgment when the
Service revokes its section 501(c)(3) tax exempt status or modifies
or denies its status 85 a church. The right to this procedure comes
only after the organization has exhausted all of its administrative
rights. While this amendment fails to define what type of notice is
intended, arguably, the initial notice of an examination for the
purpose of developing information to revoke exemption might satisfy
this requirement. Theoretically, we could never complete an
examination and the appeal procedure before judicial review. The
act also seems to add UBIT to the issues subject to declaratory
judgments.
Conclusion
In sum, we view H.R. 2172 as an attempt to prohibit most church
investigations and examinations, and to severly limit the Service's
ability to pursue the few examinations permissible under the
proposal. We think that the intent of the bill is to Insulate
churches from reasonable Service review of their compliance with the
tax law. We cannot agree with that goal. In addition. we believe
that the unintended result of H.R. 2172 would be a virtual license
(due to the Service's inability to investigate) for mail-order
ministries and tax protestors to use church status as a shield for
their tax evasion activities.
DOCUMENT NO.
PD
OFFICE OF POLICY DEVELOPMENT
STAFFING MEMORANDUM
DATE: August 15
ACTION/CONCURRENCE/COMMENT DUE BY:
cob August 18
SUBJECT: ADMINISTRATION POSITION ON H.R. 2977, CHURCH AUDIT
PROCEDURES ACT
ACTION FYI
ACTION
FYI
HARPER
DRUG POLICY
PORTER
TURNER
BARR
D. LEONARD
BLEDSOE
OFFICE OF POLICY INFORMATION
BOGGS
HOPKINS
BRADLEY
PROPERTY REVIEW BOARD
CARLESON
OTHER
DENEND
Strice Frieil
GALEBACH
X
GARFINKEL
GUNN
B. LEONARD
LI
McALLISTER
MONTOYA
ROPER
SMITH
SWEET
UHLMANN
ADMINISTRATION
REMARKS:
Edwin L. Harper
Please return this tracking
Assistant to the President
sheet with your response
for Policy Development
(x6515)
THE WHITE HOUSE
WASHINGTON
August 15, 1983
MEMORANDUM FOR STEPHH : H. GALEBACH
FROM:
ROGER . PORTER
REP
SUBJECT:
Administration Position on H.R. 2977, Church Audit
Proced res Act
As the attached memorandum from M. B. Oglesby indicates,
Congressman Mickey Edwards has requested Administration support
for his legislation, H.R. 2977. I would appreciate very much if
you would determine what the current P' ocedural requirements are,
how this legislation would alter those equirements, and what you
see as the principal advantages and disadvantages, if any, in the
Aiministration supporting this legislation.
I would also appreciate your determining whether or not any
similar legislation has been introduced in the past, and if the
Administration has taken any position on it.
I would like to have this analysis by close of business on
Thursday, August 18. If this is not possible, please let me
know.
Attachment
THE WHITE HOUSE
WASHINGTON
August 1, 1983
3 AUB 1300
MEMORANDUM FOR ED MEESE
THRU:
PEN DUBERSTEIN
&
FROM:
N. B. OGLESBY, to
SUBJECT:
Administration Position On H.R. 2977,
Church Audit Procedures Act
Congressman Mickey Edwards (R-Oklahoma) has requested
Adrinistration support for this legislation. Senator
Grassley (R-Icwa) has introduced similar législation,
S. 1262, in the Senate. This legislation is supported
by the National Association of Evangelicals, the
National Council of Christians and Jews, the National
Council cf Churches, etc.
Mickey explains that these procedural requirements for
the IRS are consistent with our philosophy and Fdwards
urges that the Administration consider supporting his
proposal.
Guidance, please.
CC: Roger Porter
Joe Wright